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So last night, I let my mom talk me into going to a lecture on The Economic Crisis after class, on the theory that maybe it would make The Economic Crisis make sense (it didn't). It ran really long, and by the time we started out, it was dark, and also pouring.

As I drove home, I was thinking, "This sucks. I hate driving in the rain. I hate driving on the freeway at night. I really hate driving on the freeway, at night, in the rain. This could not suck any worse if it tried."

At the moment I thought that -- proving that my car has developed both sentience and a sense of comic timing -- my left rear tire blew out.

It has been a long week, y'all.

Current Mood: tired

Flat | Top-Level Comments Only

From:

quincunx.livejournal.com

I have a thing that about the causes of the economic crisis. It was written about two months ago, so some of the stuff in there is no longer topical or accurate. I'd like to stress that this is rre-bailout again, so if that's what you're looking for it might not help. What it does do, pretty well, in my opinion, is address why this happened and what it might mean.

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It's a perfect storm scenario:

1) The big one right now is that the housing market is melting down, and it turns out that huge sections of our economy were based entirely on the housing market booming forever. Well, the laws of gravity reasserted themselves (as they always do), and the damage keeps spreading and magnifying. Loss of jobs in housing/construction/real estate. Failures of housing companies and mortgage companies. Foreclosures and defaults skyrocket, the value of peoples' houses plummets. Banks suddenly have a ton of money lent out that will never be paid back on collateral that is suddenly worth a lot less than it was. Banks run out of liquidity, creating a credit crunch. Large chunks of the stock market tank, creating a bear market. There's a lack of confidence as nobody knows what anything is worth and the various rating agencies go out of business or have zero credibility. New investment dries up, large chunks of the economy screech to a halt simultaneously (in Silicon Valley, not a single VC-funded firm went IPO last quarter [not year]. Not one. And tech is one of the few economic bright spots!). Now, Fannie Mae, Freddie Mac, and lots of other foundation-stone too-big-to-fail entities are teetering.

2) The other side of that is with consumer spending. Our economy has been propped up for the last decade by those soaring home values. People borrowed zillions of dollars out of their home equity and pumped it into consumption. How do you think people were able to afford all those SUVs and HDTVs and iPhones in an environment where real wages were flat or declining? They were pre-spending the sale price of their homes. Well, the values of the homes have collapsed and that money spigot is shut off. So suddenly car dealers are seeing their sales collapse. So are chain restaurants. So is Starbucks. There's been a big shift in spending from national brands to blue-label store brands. And so on. Consumers have suddenly tightened their purse strings.

3) The fall off in consumer spending, along with the collapse in multiple sectors (see 1 above), leads to a desperate job market. Starbucks closes stores, GM lays off workers and closes plants, Indymac lets half its workers go. Hours are cut, benefits are cut, and nobody complains because they're just happy to have a job.

Can you see the magnifying feedback loops here? The value of houses goes down, so consumers stop spending money like they used to, so jobs are lost, and those unemployed people can't make their house payments, so they default on their house, so the bank has even more bad debt, which makes the market stagger some more and tightens lending, so there's no new investment or jobs being created, so sales forecasts are flat, so business lay off workers and cancel plans to expand, and round and round and round and round. Usually, Uncle Sam steps in to clear out bad debt, restore confidence, and prime the pump to keep the economy humming. But...

From:

quincunx.livejournal.com

4) The government and the Fed don't have a lot of options. Interest rates are so low, that they can't be cut any more. We've been running $300 billion/year deficits for the last 6 years to pay for the war and "stimulus" tax cuts, so there's not much more economic stimulus to be pumped into the system. We've run up an enormous amount of debt, which we've financed by selling promissory notes overseas (China mostly), which has led to a collapse in the dollar, which is making the price of government borrowing rise even higher. And states are reeling from the loss of property tax revenues, so they're going to be cutting spending and payments and new projects just when they need to start spending on that stuff to stimulate their economies and deal with increased welfare loads.

5) [note: point 5 is now completely untrue; all commodities are way, way down, but their values are very volatile right now, so this may change sometime soon] All of that is bad enough, but we're also going through a period of elevated supply costs, which makes everything more expensive. Energy costs have doubled, seemingly permanently, resulting in huge disruptions (and they can still go up!) and raising the price of everything. Food costs are skyrocketing, too - because of energy costs, environmental degradation, biofuel diversion, and shifting weather patterns (see 7 below). And lots of other basic commodities are running low - check out the price of copper, or even weird metals with critical industrial uses like tantalum or niobium.

6) [note: the dollar is no longer worthless relative to other currencies, but only because the economic problems we were experiencing have gone global. To put it another way, we have succeeded temporarily in taking everyone down with us. What happens with the relative value of the dollar depends on a lot on how other nations decide to react to this problem] Bad policy plus worthless dollars plus spiking commodity costs = inflation. Most of you aren't old enough to remember pre-1982 America, when inflation was last a problem but I gotta tell ya: it sucked. The only thing worse was the cure, which was the early Reagan recession that had national unemployment at 10%. [note: this part is less true than it was a few months ago, because indicators of inflation have been indicating that the dollar is holding steady, but again, due to market volatility, this could change at any time] Also, this inflationary risk really constrains the Fed's ability to act. Hope you like your economic slumps long-lasting!

From:

quincunx.livejournal.com

7) And there are a whole bunch of long ignored but worsening problems that are coming due soon. The climate crisis is real, and it's worsening faster than the consensus projections indicated. The peak oil people are being proven right. Water supplies are becoming a huge problem worldwide. We've underinvested in decades in infrastructure - public transit, sewage, water, electrical grid, schools, you name it. Medical costs keep skyrocketing 5-10% a year, every year, with no end in sight. Oh, and the boomers are going to start retiring in about 18 months. And the number of undropped shoes grows exponentially as you stare into the future. What are we gonna do if global fisheries collapse completely, or we can't get this honeybee disease situation under control? What if a chain of hurricanes leaves Florida devastated? What if the long-predicted avian flu pandemic finally arrives? The problems are global, and economic and ecological crises will lead to all sorts of political and military and economic disruptions that could spell the end of the long peace we've had since the end of the Cold War. Think of the 1930s: unstable countries, masses of refugees, charismatic opportunists casting about for scapegoats, dwindling resources - fun!

Add it up, and it's bad. Real bad. I get a distinct 1970s vibe from the whole thing - from the supply shocks of the early years to the stagflation of the Carter era. And I think it has a great possibility to get worse rather than better. It took Japan 15 years to dig itself out of the hole the 1989 collapse of their property bubble caused them, and their society was at least socialized enough to provide a safety net for people so they wouldn't be pensionless or homeless or without medical treatment.

And what really has me depressed is the collapse in my faith in our institutions - political, economic, cultural, media - to deal with these problems. You think the American people are capable of making hard choices? You think the media is capable of presenting the problems and the solutions in a way that leads to the right options being supported? How long do you think it's going to take for it to sink in - REALLY sink in - that people's houses are never going to be worth what they were five years ago, that the price of gas is never going to go down below $4/gallon, that the stock market might be flat or declining for the next decade (again, like the 1970s)? When are we going to get policy decisions that aren't just selling magic beans like increased offshore drilling or opening ANWR or coal liquifaction or hydrogen or one-shot stimulus checks or gas tax holidays or (lord help us) more capital gains tax cuts?