The current economic collapse due to covid-19 shows many parallels with the economic collapse in 2008 called the Great Recession. Namely, (1) the signs were there but the experts ignored them; (2) people questioned the government’s wisdom in supporting the fat cats in business; (3) the government was dishing out money it didn’t have. The answer I gave my son to his related question is just as relevant today as it was more than a decade ago. You can fill in the blanks.
My take on the current (2008) economic situation is that a few people were able to manipulate a major part of the U.S. economy, and President Bush, unknowingly, colluded with them. Specifically, they created a system to allow mortgages to people who had little chance of servicing their debt, let alone paying back any of the principle. Bush, from his perspective, welcomed increased home ownership in America. So, the number of mortgages went up as did the value of shares of the mortgage companies and the commissions of the brokers ($20 million in one case). A number of people saw the rapid build-up of a shaky financial house of cards and sent out the warning signals. But when people are raking in the dough, it is far too easy to keep on the good ride. They shouted down the nay-sayers. The card stack inevitably collapsed when too many people could not meet their minimum mortgage payments.
The need for a bailout is because in an emergency we have to respond to deal with the short term. If someone is suffering from a heart attack, we apply CPR; we do not say: “We told you before you were eating too much!” Nor do we start reciting a list of preferred foods to the writhing man on the floor, because that solution is not appropriate to the emergency of the moment. Responsible governments are there to help care for situations and not let things collapse to find their own level. The time and cost, both financial and social, to recover from a total meltdown would itself be a greater disaster.
It is not that there is no more money in the economy, it is that there is no more margin of error in the economy. Transferring it to your own personal finances, imagine that your salary will be cut off for three months. You might survive a few days, a few weeks, but not a lot of months. Yet if you owned a house and a car, their value would not also suddenly disappear; it is only the margin and room to maneuver that has disappeared. As for excessive spending, the government cab finance whatever it wants with money it doesn’t have by borrowing from tolerant lenders, of which there are many.
This economic problem is directly linked to one source – irresponsible lending for housing. It is a case where we clearly know the cause and now are starting to clear up the mess. (I believe that because we understand the source, the clean-up will be more rapid than anyone is currently suggesting1.) It has been exacerbated by the trillion-dollar U.S. debt for the Iraq war and hence its lack of short-term cash.
The issue has a global significance because (a) the U.S. represents 1/3 of the world’s total economy and (b) international lenders were seduced into a request for loans/investments from U.S. sources (not carefully checking out the shakiness of the support behind it all).
So, back to your personal finances. If you are without money and the mortgage payment is due on your house, you turn to Dad or a good friend, to see you through, till your paychecks start rolling in again. You do not say: “The hell with my house. I deserve this misery. I will not borrow more; I prefer to let my house go.”
- (Current note: General Motors, one of the fat-cat recipients of government handouts, paid back its government debt fully and months ahead of schedule.)
The excesses in the financial picture are irritating but that is the human dimension. Excesses in TV advertising mean inane ads that appear far too often when watching a favorite TV program. If the book you were reading had an ad on every second page, you would throw it out. Excesses in telephone usage mean telephone solicitations arrive till you start to hate the ringing of your phone. Excesses on the Internet mean more spam than actual real email. Excesses in movies mean shows with unrealistic heroes achieving unreal accomplishments, and unreal violence instead of clever, intricate plots. Excesses in radio mean 100 pop stations for every classical one, etc., etc. When the excesses go too far for the public, they are rejected (in politics too) as the public body responds to this newfound, unpleasant, parasite. So, the market corrects itself. And if you had the flu, the solution is not to kill yourself, but to get through the illness crisis and start all over again.
At least that is what it looks like from where I sit.
Love
Dad
From: Anthony Caswell Pérez [mailto:[email protected]]
Sent: December-04-08 3:56 PM
To: Bill Caswell
Subject: Economic stimulus
Hey Daddy,
Ever since this “economic crisis” became fashionable, I’ve been wondering if my thinking has made sense or if I’m wrong and all these packages, “bailout”, “stimulus”, and otherwise, do make sense.
Basically, as I understand it, the economic problems are due to having spent more money, real and imagined, than exists, real and imagined. This is based on speculation that growth is permanent, and the magical world of a stock exchange is real. But now a lot of people have realized there seems to be no more money, and that there may have been some irresponsible spending, both in government and in the private sector.
So the idea is to use more money to make more money. So where do they get this new money from if in the first place there is no money? Isn’t this like adding a negative amount to another negative amount and what you get is a larger negative amount?
I think at most, this just puts off the inevitable. Which I believe is the collapse of this economic system. Which makes sense if you consider that in reality economics is a system through which basic needs for survival are satisfied and currently the rate of “satisfaction” exceeds that capacity for the planet to sustain it.
But then again, I’m not an economist and perhaps bailouts and stimulus make sense.
Let me know what you think. I really look forward to knowing it.
Anthony
Conclusion
The covid-19 economic collapse shows parallels to the economic collapse of the Great Recession, namely: (1) the signs were there but the experts ignored them; (2) people questioned the government’s wisdom in supporting the fat cats in business; (3) the government was dishing out money it didn’t have. From this comparison, we can see that the general population appears not to have learned much over the past dozen years. Hopefully, you as one of the community’s leading thinkers, have.
Bill