The simple fact is that humans always want more than they have. This isn’t inherently bad, its simply something that society as a whole must recognize about itself and manage. How this behavioral tendency manifests in a free market economy is that investors seek ever growing returns. From savings to money market to CD to bond to stock to commodity to derivatives, the search for more return on your investment than you were getting yesterday is eternal. So how does this relate to the current situation? Well without diving too deeply into politics, the macroeconomic trends set in motion in the 80s lead to an explosive growth in the potential in credit markets and in real estate. Enterprising investment bankers, nearly free of any kind of responsible government regulation, found a brave new world of complex products based, essentially, on turning debt into a commodity to be bought, sold and swapped. The details of how these transactions look and work are really of no consequence. The important thing is the effect that their increasing popularity had on the economy,
Not surprisingly, when debt is an end in itself rather than a means to an end, financial institutions end up issuing a lot of credit they shouldn’t be issuing. The quickest and easiest way to create a giant pool of debt to play games with is to target consumer housing. After all, people want houses, are happy to behave irresponsibly and plead ignorance later, and the government has made home ownership a near guaranteed right for US citizens. The explosion of home sales, development and property values was dangerous and irrational to anyone with even a modicum of understanding of economics, but the masses are dumb and happy, to be blunt, and their masters were profiting wildly. Naysayers were shouted down and the government had an agenda of its own and seemed profoundly in denial. Most likely because most government officials are in the top one percent and were enjoying nice returns.
Of course the more artificial the rise the more meteoric the fall. As the loans that were providing the foundation for this shell game started to go into inevitable default due to lack of available funds on the part of the individuals that signed them, the insurance policies written against them started to get called in. The rabbit hole was shown to be near infinite as counter party called in counter party and the whole “swaps” infrastructure started collapsing. Just imagine a system where in order to pay back your buddy ten dollars he loaned you you borrow from ten other people who in turn are borrowing and you start to get the idea. This is how Bear Stearns collapsed as they were on the front line as a main counter party in a lot of this bad debt insurance.
So the effect today is we will have a return to something resembling a normal economy and probably face about 15 years of deflation occurring by 2011 or so. Credit is no longer flowing freely, so many industries that were essentially on credit life support systems due to totally unrelated factors (hello newspapers, airlines. brick and mortar retail and detroit) are now in big trouble. Builders used to insane and unsustainable growth are also in for a ton of hurt.
So yes. the situation is insane. BUT… I think the reaction I am seeing from individuals is more insane. An insane situation calls for a measured response and a return to normality. It does nothing to respond with hyperbole and disproportionate overreaction. I’ve spoken with people who are finding their business off by a point or two forecasting Armageddon and looking to stockpile food. I know people who haven’t even gotten a hint of a layoff assuming that we are heading for the Great Depression 2 (everyone’s favorite term now) and are in a permanent state of despair. Meanwhile the media and its monstrous yellow journalists gleefully fan the flames and profit from the misery by feeding the monster what it wants. In return they reap the profit of the increased traffic on their sites and pages. A story of a few retailers who should have been out of business for failure to adopt to the post internet retail environment filing for bankruptcy, and a holiday season off a few points is spun into a financial holocaust. The end is nigh! scream the irresponsible journalists and their audiences devour it. After all, everyone loves an unquestionable excuse to complain about “them” and wallow in some misery.
I’ve seen people out with a flotilla of kids eating at pricey spots like the Cheese Cake Factory moaning and groaning about how bad the economy is and cursing anyone who DARE question how “tough we have it”. Then they pay their $100 lunch tab and move on so the 2 hour waiting list can advance by one table. If this is the Great Depression. it sure is different than what my grandmother (may she rest) described….