What You Should Think About This Economic Crisis

October 7, 2008

“The Chinese use two brush strokes to write the word ‘crisis.’  One brush stroke stands for danger; the other for opportunity.  In a crisis — be aware of the danger, but recognize the opportunity.”

–John F. Kennedy

Frenzies of risky speculation on an increasingly popular Wall Street left much of the nation heavily invested in dishonest schemes. Woefully lax regulations on credit resulted in unsustainable debt loads for many American households and businesses.  Ecological insensitivity in the hunger for economic growth raised the specter of an environmental catastrophe likely to unfold. Years of jingoistic proclamations coming from Republicans in the White House overpowered alarms raised by economic realists.  All the while, the federal government engaged in unprecedented deficit spending.

In hindsight, it is not so surprising that The Great Depression followed from the situation in the United States almost eighty years ago.  With any sort of working sight at all, it should be obvious that so many striking parallels exist between then and now.  Though global warming is a wild card compared to the Dust Bowl; we still have the very same Wall Street, the very same Republican Party, and disturbingly similar problems with every level of debt. It would be nice to think that wise national leadership could spare us such a dark chapter in future history.  It would be foolish to deny that national leadership up to now has spared us none of the crucial precursor conditions.

In the early 20th century, automation displaced many forms of labor.  Even myriad skilled trades were rendered obsolete by refinements to industrial processes.  While making it more and more difficult for American workers to find opportunity, this trend made it relatively easy for wealthy American investors to turn small fortunes into great fortunes.  Karl Marx predicted rising economic tensions would bring about political revolutions in which ownership of the means of production would be broadly distributed among workers.  Instead, a peaceful transition of power paved the way for comparatively modest upheavals like Social Security and the Tennessee Valley Authority.

The situation today is different more in style than in substance.  Instead of growing pains caused by the rise of workplace automation, the 21st century U.S. faces challenges related to the rise of free trade.  Competition not only poses threats to high wages for many forms of productive endeavor in the United States, but American business operations are lured abroad by lax environmental standards, inhumane workplace safety standards, government hostility toward labor unions, etc.  As with the roaring 20s, the 80s and 90s saw mounting pressure on all layers of the economy except the top.  Replacing American workers, be it with foreigners or machines, has always tended to enrich those initially rich enough to bankroll the change.

Of course it is ultimately a good thing that handcrafting is no longer part of the process of manufacturing for many basic products.  I suspect, from a multigenerational perspective, abandoning protectionist trade policies will also tend to promote overall prosperity.  Yet even if one grants that global free trade is desirable (or merely inevitable,) there remains no sensible reason to ignore the suffering, losses, and inefficiencies that are side effects of the transition.

For all his failings, Karl Marx did a much better job articulating facts and predicting future events than any of his most prominent critics.  Legitimized by everything up to and including a string of Nobel Prizes, the Chicago School of economics offered the promise of a different path.  To greater or lesser degrees, their economic dignitaries advocated tax cuts, business deregulation, and trade liberalization based on the idea that enriching the already rich would cause opportunity to spill down on those Americans who are not heirs to a corporate fief.  These thinkers’ apparent intellectual heft gave credence to theories that justified all manner of irresponsible plutocratic policies.

In fairness, most of those Nobel Laureates did not endorse trickle-down economics in its entirety.  Most of them also understood Marxism as a legitimate and useful theoretical perspective.  Still, they and their students were all too willing to associate strong academic credentials with ideas and analysis that never deserved more respect than the ravings of bombastic partisan pundits.  This highly effective smoke screen provided cover for a wide range of downright destructive behaviors by investment professionals and corporate executives.  So long as people believed the cover story about “job creation,” what was actually happening could remain concealed.

The media was almost entirely unhelpful in this regard. What began as partisan propaganda festered into an almost universal tendency toward Pollyanna economics.  Every surge on Wall Street was a triumphant achievement of capitalism.  Every dip was a ballyhooed buying opportunity.  Ridiculous fantasies, like the idea that reducing already reasonable rates of taxation on large personal incomes would somehow actually increase the amount of revenue collected to fund the government, were almost never exposed to appropriate criticism.

Legitimate financial analysts became less popular than talking heads willing to characterize every situation as an economic boom sure to be followed by an even more wonderful economic boom.  The audience for honest informed voices dwindled dramatically.  Public officials also got into the act, spinning false narratives about the successes of voodoo economics even as some of its biggest failures were being repackaged and resold in transactions increasingly arcane yet entirely unhelpful.

This shuffling of paper concealed fundamental problems with our national economy.  It also facilitated the bloating of our financial sector into a true abomination.  There are many ways an economic parasite can draw a comfortable lifelong salary.  Yet no others offer such astronomical paydays.  Investment bankers took bonus after bonus after bonus for work product that lacked any identifiable connection to the creation of real value.  Even many local mortgage brokers enjoyed premium compensation for the decidedly unproductive act of encouraging aspiring homeowners to borrow far beyond their means of repayment.

Yet all is far from lost.  The very same know-nothings now producing news items that warn of a potential new depression jumped off the “everything is peachy” bandwagon no earlier than a year ago.  In fact, many came to recognize these dire straits only after a period of vocal uncertainty.  “Economics is for the experts,” was the cry of reporters and pundits ranging from the most astute to the most clueless.  Certainly the discipline has some legitimate technical depth, but the same could be said of diplomacy or warfare.  Should the media shrug and avoid deep coverage of those subjects as well?

If not, then there are some sources of hope to include in all that coverage.  Artificially low interest rates, underregulated capital markets, and an entrepreneur’s wet dream of a tax environment have conspired to prop up many unsound businesses.  In the years ahead, efficiency, productivity, and even employment should tend to rise as so many overdue reckonings occur.  Human and natural resources will be liberated from unhealthy situations.  The result would be a flood of real opportunities for newer and better businesses to emerge.

If public attention remains strong, fair and effective regulatory schemes could alleviate all manner of harms not only in the realm of financial services, but across the gamut of business practices.  While three agonizing years passed between the October 1929 stock market crash and Franklin Roosevelt’s first Presidential victory, George W. Bush’s successor will be selected within weeks of the current freefall in capital markets.  Also, the same modern information technology that contributed so much to the past decade of irresponsible speculation now offers swift command and control methods to institutional leaders working to mitigate the damage.

For the title of this piece, I simply referred to “this economic crisis” because it would be premature to put a name to the ongoing phenomenon.  Whether we are facing a full scale depression or at the bottom of a short-lived economic shock, it is sound advice for almost all Americans to suggest generating conventional income deserves more time and attention than generating income through the pursuit of capital gains. With any best case that stops short of fantasy or fluke, market investments are merely icing on the cake of wealth that was already conserved.

On the other hand, this very month may be the ideal time to embark on the pursuit of capital gains.  Claptrap about buying opportunities after every little dip of the past few years deters many investors from recognizing the real buying opportunities apparent today.  If a full economic depression awaits us, selections from the menu of mainstream investments are all unlikely to fair well.  However, if today’s supersensitive markets respond swiftly to new ideas and new leadership, investors getting started today will likely find themselves making gains right alongside those who have been building portfolios and/or home equity since Bill Clinton left the White House.

My personal opinion is that capital markets and home values will start trending soundly upward again at some point in 2009.  No honest analyst can claim certainty.  Yet the enormity of the corruption is already reflected by appropriately enormous losses.  Perhaps the best parting note I can offer on this subject is another tidbit of ancient wisdom — measure twice, cut once.