Thursday, September 18, 2008

Mad Scientists--or, How I Learned to Stop Worrying and Love the Worldwide Financial Meltdown

There is no doubt that our current financial downturn is worrisome, given the unprecedented and unexpected Perfect Storm of events that have occurred recently. Fractures have appeared in many vast and important segments of the economy, beginning with the subprime mortgage default crisis of 2007. Now it seems that the entire lending sector is in serious trouble, with many companies teetering on bankruptcy (these are the AIGs and Merrill Lynches we are hearing about right now), and the rest of the entire sector scared and definitely eager to hold on to their capital, therefore reducing lending (which puts pressure on interest rates to go up, which further exacerbates all of the problems in a marketplace sector that is wholy dedicated to lending money). Add to all of this the larger concerns we have had for our economy in the last 5 years--the price of fuel, the state of our airlines, the extremely wasteful spending by the government (which is now deeply, deeply in debt and in a poor position to help boost the economy)--and it is clearly a grave situation out there, especially for the little guy. This is as bad a financial crisis as our nation has seen since the Great Depression of the 1930s, which makes this definite gut-check time.

All of that said, however, we must be careful to not panic--and there are many reasons not to. For one, we must distinguish between finance and economics. Finance refers to money itself: distribution, investement and lending; economics refers to the study of choices made by people when faced with scarcity (scarcity is a universal principle appliable to any commodity...what resource isn't scarce when you come down to it)? The two overlap when we discuss macroeconomics, where money can be understood as liquid capital, but remain distinct at other levels.

One important distinction is the level of regulation employed by overseers (aka government) of the financial and economic markets. Economic markets are very much still free markets, free of regulation and red-tape (except in certain few sectors where it has been determined regulation is beneficial)--at a microeconomic level, it is still very easy, especially in America, for a single person to begin their business or develop their idea.

Financial markets, however, are very regulated. The Federal Reserve has a great variety of instruments at its disposal to regulate lending--exactly because the Fed itself is the largest lender in the nation, and sets important interest rates to the largest borrowers in the world. In other words, the financial markets have very active babysitters--and we all know this to be true, since in the last decade Alan Greenspan, former head of the Federal Reserve, somehow became a celebrity, and also because every 3 months for the last 10 years we have heard on the news the most minute shift in interest rates as set by the Fed.

In 1929, when the stock market crashed, these tools were not developed at all, not even close--understanding of all of finance and economics at that time was still in the dark ages, compared to what we know today. Information technology also helps the Fed react amazingly quick today. With the tools and the ability to quickly manipulate them, our nation is truly in an unprecedented position to help stabilize the lending sector.

Underscoring this strength is that governments and banks around the world have reacted to this crisis already, today sending a great influx of cash into strapped markets, thereby lowering interest rates and encouraging relaxed borrowing and lending. This may seem like a counter-intuitive thing to do, perhaps leading to inflation, but the truth of the matter is that in 1930 our government tightened lending policies--exactly when they should have relaxed them, encouraging the economy--and this is exactly what made the Depression so "Great." The fact that Federal Reserves the world over understand that this is a world crisis, and are acting in lockstep to react, shows how much strength we have, and how far we have come.

In the meantime, the overall economy shows mixed signals, as it largely has for the last 7 years. Greening the economy, finding renewable energy sources, and war-spending are still much greater long-term concerns. What we face now is a credit crunch--a HUGE one, but a credit crunch nonetheless. It will require some buckling down in borrowing, as lending giants and the government itself will need to rebuild capital before borrowing can be executed as swiftly as it was in the mid-to-late 1990s, but a careful and concerted effort by all Americans and by our next president will undoubtedly be able to keep our economy growing--if ever so slowly--over the next few years.

Mad Scientists, like that guy above, taking care of us one dollar at a time.


Kurd said...

We called Dixon, and in the course of conversation he mentioned the financial collapse. This spurred me to a furious 30 minute quest for information while Rowan finished her conversation. Five minutes later, I logged in to Facebook and noticed that you had posted this treatise. It summed up things quite well for me, since I had no clue this was going on, since we are not in the US and we haven't seen a TV in days. So thanks, Steve. If you get time, pop in some links, yo.

Steve said...

Good to hear I was helpful, Kurd. And while I hear you on the links, I must quote...

"What I really need, I think, is for people to believe me when I tell them things."

Right? Eh? Right?

But I will put some links up when I get some time.

Kurd said...

Yes, you are right. And I do believe you completely. I don't need verification, I need more! MORE! (Information, that is.) But you did sum up a giant pile of info, so again, good work.

thedg said...

How did this post not spawn a money themed mix? Pink Floyd - Money perhaps? Biggie and Puffy - Mo' Money, Mo' Problems? And obviously anything from Warrant's debut album "Dirty Rotten Filthy Stinkin' Rich"? Ok, a couple of those talk about HAVING money, but...

Steve said...

Hmm, I never even thought of that Dan! Maybe I'll get to that.

And maybe the theme here would really be "debt"?

thedg said...

A mix about debt would be half blues/country - the other half? The entire John Melloncamp catalog (post "Johnny Cougar" era). Sounds interesting though.

Steve said...

The dream is still alive
one day it might come true
And this country it belongs
to folk like me and you.

So let the voice of FREEDOM!
sing out through this land
This is our country.

Man, patriotism rocks!