The Crash of 2008 (Part One)
We are in the mist of an almost unprecedented financial crash. Though others have preceded it throughout history (including the Tulip Bubble in Holland, the 19th – century Panics in America, and the Great Depression), this one seems about to dwarf all others. The enormous amounts of money involved, the global scope of the crisis, and the numbers of people and companies already affected, or likely to be so, surpass anything we have seen before.
In this article and one to follow, I propose to look briefly at the causes and possible consequences of this disaster, and then to suggest some ways to cope with the troubles that are beginning to befall us.
Any event as vast as this one must have multiple, and complex, causes. Not being an expert, I can only list a few of the more obvious ones:
- Greed, arrogance, and fraud in the business, and especially, banking sector.
The collapse of Enron some years ago alerted us to the widespread use of dishonest accounting procedures in many of America’s greatest corporations. Now we are finding out just how endemic this corruption has been. Balance sheets have been rendered meaningless by inflated numbers and “notional values” that hide massive exposure to unbacked obligations. Not only so, but CEOs and CFOs have led their firms into crooked policies of various sorts, including drawing upon pension funds to finance operations.
Meanwhile, financial whiz kids have developed investment “instruments” that resemble a Ponzi scheme or a casino more than a rational strategy to steward other people’s money and make a decent profit for oneself. Greed and pride have created the derivatives monster that threatens to devour us.
On the train a couple of weeks ago, I sat next to a lady whose son-in-law works for a hedge firm. This young man describes his colleagues in the field as “incredibly arrogant.” The son of another friend of mine has a boss who made one billion dollars last year; his own income exceeds a million dollars.
According to some analysts, there is evidence that the precious metals markets are manipulated, with the full knowledge of those who are supposed to prevent such abuses. Only time will tell if that charge is true.
- Government intervention in markets
Beginning with the Clinton administration, the U.S. Government put enormous pressure upon banks to extend loans to people with poor credit, thus sowing the seeds of the devastating melt-down in sub-prime mortgages. The semi-governmental behemoths, Freddie Mac and Fannie Mae, were given advantages that effectively skewed the housing market and contributed greatly to the current crisis, with the encouragement of the government. (We shall not discuss what appear to have been criminal acts by the executives of these highly-regulated companies.)
The Federal Reserve Bank, nominally independent of the U.S. Government but in fact a close partner with the Treasury (as recent events have shown), allowed first the dot.com and then the housing bubbles to expand by creating easy credit and huge increases in the money supply.
In the past year, the Fed and now the Treasury, abetted by Congress, have alternately bailed out failing enterprises and allowed others to collapse, creating uncertainty among investors and great doubts as to the fairness and competence of those making decisions. The 700-billion dollar rescue plan, which the markets declared virtually dead-on-arrival, will haunt us for years to come by multiplying both government debt and intervention into the private sector. More of the same comes from Washington with each successive lurch towards virtual integration of the state and the private sector.
- Corporate and private debt
One common theme runs throughout almost every news analysis of the crisis: Debt. Companies and households cannot pay their debts.
Most people may not know that such reliance upon borrowing is relatively recent in American history, only beginning in the first decades of the 20th century. People used to save and then use cash; now they spend and rely on credit. We are thus all caught in the web of debt.
“The borrower is the lender’s slave,” says the Bible – a sober fact of which we are now becoming painfully aware.
Much of this comes from our self-indulgence and covetousness. We are not content with what we have, and put our future in hock to purchase present pleasure.
- Economic collapse, accompanied by massive unemployment, seems unavoidable.
- Millions have lost their savings for the future; retirement has become a forgotten dream.
- Government intervention and control have drastically altered the nature of our political and economic system. A Republican President signed the rescue plan, despite his avowed free-market convictions. Actually, he had earlier significantly raised the government’s profile by the prescription-supplement to Medicare, along with the No Child Left Behind legislation for education, not to mention the Patriot Act. The Federal government now has full legal powers to act in peacetime (war not having been formally declared) that exceed even those used by Lincoln, Wilson, and Franklin Roosevelt.
Both presidential candidates have enunciated policies that will increase government participation – and control – in the economy. One of them has proposed measures that many economists believe will kill hopes for recovery and lead to a great reduction in almost everyone’s living standard. His anti-capitalist rhetoric at times has resembled that of the ruler of Venezuela.
Therefore, regardless of which man wins the presidency, we can expect more government intervention in the nation’s economy. Ironically, at a time when nominally “Communist” China has done its best to promote a free market economy, and has thereby lifted hundreds of millions of people out of poverty in just a few short decades, the United States appears to be going the way of proven failure.
One consequence of America’s financial fall has been a rapid loss of worldwide influence. The U.S. military has begun to find expensive weapons programs hard to fund, and will soon be hard pressed to pay its troops. The U.S. dollar may lose its position as the world’s reserve currency. U.S. hegemony is a thing of the past. Humiliation is upon us, big time.
There is no cure. At least, not for the next five, ten, or twenty years. We are in this for the long haul. The Wall Street Journal opined recently that we are in a secular bear market that could last as long as 14 years.
If you have any money left, I recommend that you follow the advice of Martin Weiss in the Safe Money Report (I have no connections with Weiss, but have found him and his team very accurate over the past decade.).
In the next part of this article, I shall offer suggestions on how to cope with this crisis, and how we may enjoy inner peace in the midst of the storm.