The Consequences of Our Bad Economic Choices I wrote a recent note on what worries economists, suggesting the 2008 crash/recession was not really over yet because that crash/recession did not remove or eliminate the excesses and imbalances in the economy that lead to it, except housing prices did fall. Some interpreted me to say I favored a continued recession and the human hardship attending it. Not so. Let me explain more. Excesses and imbalances develop in our economy mostly because we fail to properly regulate and moderate economic activity which needs regulation and moderation. Banking excesses and excessive investment in the housing sector led to the housing bubble and the crash on Wall Street. The interest deduction, relaxed housing loan standards and the unregulated banking industry taking multiple wrongful advantages generated the 2008 crash/recession. We could have prevented it with good regulation of Wall Street, elimination of the interest deduction, more federal regulation of loan standards, regulation of derivatives and banking regulations controlling leverage ratios, loan practices and mortgage backed securities and their sale. We did nothing, except eliminate what banking regulation we had leading up to the mess. Excesses and imbalances developed and the system crashed. Washington then had a choice. 1) It could do nothing and let the crash/recession proceed, in the manner of the Austrian School of Economics. 2) It could throw liquidity at the situation in the form of bail out packages and stimulus programs to stop efforts of the economy to adjust so as to eliminate the excesses and imbalances, as the US did. or 3) It could have followed the Icelandic example and worked with the economy to eliminate the excesses and imbalances while limiting the damage to the population. Iceland put most of its big banks and many other companies through insolvency or bankruptcy reorganization proceedings and sold off the bad debt, eliminated the stockholders, kept the good debt and sold the much smaller banks and companies off to new owners. Iceland then implemented much new regulation. Iceland did well. We did badly and now we face the prospect of the economys renewed effort to address the excess and imbalances that the 2008 crash/recession was not allowed to correct. Round two is coming. We await The Next Financial Crash. It is not a question of whether, but only a question of when. Banks remain unregulated and out of control. The financial markets are bubbling with froth. Derivatives are bombs waiting to go off. $1.1 quadrillion worth worldwide. The Fed distorts the system with QE and its zero interest rate policy. Nothing is regulated. Leverage ratios are sky high. The banks hold more bad loans than before the 2008 crash. Excesses and imbalances abound. It is simply a question of time when the 2008 crash/recession returns with a vengeance. The UK is in the same boat and now faces a triple dip recession. We simply dont get it and think our economy of economic rents and overseas profits are just fine. We get matters all wrong at virtually every turn and are vary naive to expect good results.
Posted on: Mon, 05 Jan 2015 23:50:34 +0000
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