Monday, October 13, 2008

The Financial World is Going to Shit Before Our Very Eyes

And it’s all happening so fast. A spark ignited in the US has turned into a world-engulfing wildfire. I was surprised at the ferocity at which it attacked European banks, who I assumed were less insanely greedy while subject to greater public restraint, but it seems they either bought into America’s toxic assets directly or copied the same shenanigans. They’ve also been hit with declining property markets – 16 of the world’s developed nations still have overvalued real estate – resulting in far less equity than they had assumed and the need to hoard resources.

Rising property values create a lot of ready cash. Until the financial system recently began to unravel, largely from declining real estate values, Americans kept their economy humming by borrowing vast amounts of cash against their properties – many of which now have mortgages greater than their house’s value. It would seem totally legitimate to borrow against equity in order to make long-lasting improvements to the house, but a lot of people essentially took out 30 year mortgages for purchases like luxury vehicles that they expected to have a less than a decade lifespan. About five percent of all property changes hands each year so a lot of money is also created simply through a rising market.

Well now, that money spigot has completely dried up. And you can bet that even when the mortgage money does starts to flow again, borrowers will have to come up with hefty down payments; which is exactly as it should be. Obviously, it has ominous portents for the real economy, since Americans will have to live within their means and actually save to be able to consume. While some will say this retrenchment couldn’t come at a worse time, it’s never fun to pay off old debts or cut back on the “Good Life”.

One way or another recession, or the scary “d” word, depression is inevitable. The capitalists are manically, frantically rushing around trying to save their asses with public money, but while they may stave off paralysis or bankruptcy in the banking system, nothing is going to change the fundamentals: the old economy is screwed and finished.

The credit system is currently frozen, banks aren’t lending to each other because they don’t trust each other, they’re afraid they won’t be paid back. However, after six months maybe a year, the money will start to move again and a new economy created from the ashes of the old. Certainly, there’s no way it can ever be the same, at least not for generations.

Thankfully, the US Treasury is moving toward purchasing stakes in troubled banks, as the UK is planning to do, rather than carelessly throwing money at them. As long as they are in some way nationalized people will not fear for their deposits. That should keep most from going under which in the end would cost a lot more than keeping them alive.

Every day it seems a new rescue plan is announced which is supposed to restore confidence in the markets. Each one is touted as the magic bullet that will bring stability and the speedy return of growth and prosperity. Forget it: pure wishful thinking.

The one thing, above all, that needs to change is the endless growth mindset. The entire world economic system is in thrall to a theoretical impossibility. It is unadulterated fantasy which cannot possibly outlive reality. By any sustainable standard, people in the developed world, but especially Americans, have been consuming far too much. Now’s the perfect opportunity to give the planet a rest, to develop an economic philosophy capable of providing a comfortable, if much less profligate, lifestyle.

While I applaud this calamitous economic correction, I don’t in any way wish to downplay its significance for the lower rungs of society: this is going to hurt. But the poor have always suffered, so they will take it in their stride. They haven’t even had more than the barest representation in government for a long time: What politician would ever propose a War on Poverty today? Yet that will be their biggest challenge in the coming years. Increased unemployment benefits, food stamps, general welfare, make work programs: the new New Deal is inevitable.

Meanwhile, even according to a former community organizer, soon to be our next president, the middle class now goes all the way up to $250,000 per year – and need a tax cut in the midst of spectacular deficits. They won’t suffer in the same way but they sure will have their dreams and aspirations severely truncated, not to mention have difficulty supporting their mcmansions and long distance gas-guzzler commutes.

Falling energy prices will provide a little respite but not for long. Within a year or two, China, India and other developing world economies, which will continue to barrel ahead, albeit a bit more slowly, will replace the demand that’s currently dropping in the developed economies. It’s still a finite resource in an expanding world; a world in which growth-forever economics will remain the Gospel.

All in all, it’ll be fun to watch.

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