September 25, 2008

I'm a strong believer in free enterprise. So my natural instinct is to oppose government intervention. I believe companies that make bad decisions should be allowed to go out of business. Under normal circumstances, I would have followed this course. But these are not normal circumstances. The market is not functioning properly. There's been a widespread loss of confidence. And major sectors of America's financial system are at risk of shutting down.
- George W. Bush, 24 September, 2008

(As a point of irony, I found it easiest to obtain the full text of this speech from the United Kingdom embassy to the United States website. Virtually all domestic media sources I searched were too concerned with interpretation and advertisements for someone who only wanted the text to be able easily to cut to the chase. Even the White House site proved more difficult to navigate.)

As it happens, the very fact that there has been a widespread loss of confidence means that the market is functioning entirely properly. The value of the market, or even money generally, has never been anything but trust. Why assume that trust should always exist unconditionally?
For more than a decade, a massive amount of money flowed into the United States from investors abroad, because our country is an attractive and secure place to do business. This large influx of money to U.S. banks and financial institutions -- along with low interest rates -- made it easier for Americans to get credit. These developments allowed more families to borrow money for cars and homes and college tuition -- some for the first time. They allowed more entrepreneurs to get loans to start new businesses and create jobs.
Let me get this straight. Foreign investment is good when it allows credit to expand the economy and give new opportunities to Americans, but makes a good scapegoat when the natural multiplication effect of credit works in the opposite direction?

Taking a step back: the nature of a credit market is designed to shift value into solely monetary terms -- in the process decoupling it from the resource value it is said to represent -- and then to multiply the effective value of circulating currency.

The real estate speculation market did nothing different. A fair bit of Bush's speech explains exactly that, in the sections that discuss mortgage-backed securities.

Nor was credit more easily accessible than at other points in history. Consider, for example, the housing leap which happened shortly after the end of World War II: a leap which did not come with a sudden deflationary pop at its end, even though people certainly profited from it within the first primarily consumption-focused free market ever known. (Unless third and fourth century Rome counts?) One countering argument is that in a dominantly consumption economy, current generations tend to try to get rich at the real expense of future generations. Another is that in this case, too many individuals tried to get too rich by assuming real estate should continue to rise in value at the same rate, especially during a period of multiple devastating storms across the United States, spikes in the monetary value of oil linked to this and other world events (see Russia, Iraq, Afghanistan, Nigeria), and two, still leading to three (and maybe four) seriously over-extended American-pursued wars, not counting American military and economic interests in near-war events elsewhere.
Easy credit -- combined with the faulty assumption that home values would continue to rise -- led to excesses and bad decisions.
But the primary assumption -- that the value of real estate ought to rise, and that by something close to the prime lending rate -- is not a wrong one: so long as the level of trust in an economy, and thus in its monetary symbology, remains constant.

It is only too obvious that it did not remain constant -- more, that the resource-value placed into the housing aspect of real estate had simultaneously and largely invisibly been stripped away under the veneer of superficial housing value. (In China's milk and pet food market, we were quick to call this "corruption".) It is also only too obvious that it was not only individuals who over-extended themselves, although it was in individual personal tragedies that the first ripples of this collapse first manifested, and it was in the dream of individual home ownership that it escalated. True to American values, these persons were left to their own devices: while it seems that shareholders and the greater financial institutions which support a decoupled economy might be bailed out after all.

(If they are, within an otherwise laissez-faire market, it will only postpone the greater misery -- which, I suppose, places me in direct disagreement with the current economic pundits, again. It returns to the opening quote, the assumption that companies which make bad decisions should be allowed to go out of business -- but nothing is said about individuals. Nothing is ever said about individuals. The time to have stepped and forestalled evaporated when the first round of mortgages was allowed to foreclose without intervention. At this point, there are precisely two choices: and the one being offered, the one which seems on the surface to have the least amount of pain attached to it, has some vicious consequences attached to it. Be warned.)

The deep irony here is that virtually all modern economic theory assumes at its core that values should continue to rise. The only remaining acceptable question is what amount of economic -- call it "growth", everyone else does -- is considered "safe". Lack of growth is seen as stagnation, while too much growth is called inflation. What is the happy medium which keeps trust humming away without any deep questioning? This is the question that keeps Ben Bernacke sleepless at night -- and wasn't he handed a load of hooey by his predecessor! For certainly the current situation was building for at least a decade even before that: but who is left to take the blame?

(I forgot to write it about Sarah Palin, but she was the first of the four major campaigners to have mentioned the Great Depression directly: and perhaps that should also tell us something about her. Just one day later, John McCain declared postponement of his campaign to deal with a Wall Street bailout. Then again, I have always felt that true emergencies outweighed entertainment value. It is not as though the substance of his platform were not already laid out in black and white for all to see -- or at least, all who wish to see.)

Terrifying as it already is, even with as many lives as have already been destroyed, this is still only the second round of failure: resulting directly from the first round of direct layoffs (as the construction industry falters) and the initial withdrawal of financial confidence in consumers by way of trying to restrict losses to the larger financial institutions. (Since economics is fundamentally trust-based, think about that one for a moment.) No matter what the decision of Congress, a third round is yet to come, and possibly a fourth.

However: if Congress does choose to step in, the largest, most federally-entangled institutions will be protected, at the expense of the individual. There is a name for this form of government, which is lightly tossed around in the various flame wars of the politised blogosphere. Know it as true socialism for when you see it in action: and remember the last time that a truly socialistic, militaristic government held a world level of power.

What I saw building, I shared with those who were genuinely curious, who didn't only want to have their own worldview reinforced. A few people followed my lead, and sacrificed a good two-thirds of their potential interest/dividends income in order to disentangle themselves from the "safe" speculation that is the nature of bubbles everywhere. I have chosen to own no packaged securities, of any nature, for over two decades now. (By the same token, I have also chosen not to "sell short".) Some would say that this makes me the partial cause of what is currently happening, in that the trust I place in any monetary system has been limited for as long in my life as I have really begun to think about the system within which I happen to live. Rather, I should have stayed the course, and accepted the infallibility of the bubble -- and crashed into the waiting iceberg with everyone else.

I hate the words "I told you so" a good deal more than the next person, especially since I usually don't want to be proven right. (Consider the nature of a good deal of what I foresee!) Should I feel thrilled that the first part of GWB's speech has finally stated directly part of what I have been trying to explain to people around me ever since I realised that some banks were lending interest-only mortgages?

So, please, could the determined blinkered assumptions of the economic world please stop forcing me to them?

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