world trade fell 31 percent in January 2009. To varying degrees,
recession and depression gripped globally.
outlook for global consumption remains bleak. Exports are likely
to remain lackluster until global consumers regain their appetite
for consumption, wrote Jing Ulrich, managing director at
JPMorgan in Hong Kong, in response to the dire data.
and make practical use of trends requires critical analysis of
not only the data but also of the interpretations arising from
the data. This becomes particularly essential when interpretations
express a virtual media consensus. Whenever you find that
you are on the side of the majority, it is time to pause and reflect,
advised Mark Twain.
A case in
point: On the surface, Ms. Ulrichs assessment above does
not seem unreasonable. It is a theme expressed, with minor variations,
by a majority of economic analysts reported by the media. But
that assessment rests upon a set of false or questionable assumptions.
assumption was that all consumers need to do is regain their
appetites for exports. But it has nothing to do with appetites.
Consumers were broke. They were no less hungry for products
they just didnt have the money to buy them.
assumption was that once consumers started consuming again exports
would regain luster. Implicit in this statement was that as exports
grew, economies would rebound and everything would go back to
normal. This normal refrain was endlessly repeated,
not only by economic analysts, but by politicians and business
was not only the inevitability, but also the virtue and desirability
of a return to normal. What was normal?
to The Greatest Depression, meant unchecked over-consumption
and over-development made possible by the availability of cheap
money and easy credit.
On the consumer
end, normal was a death wish, shop ’til you
drop an obsessive compulsion by the profligate many
to spend money they didnt have but had to borrow. The spending
spree extended to buying expensive new cars rather than affordable
used ones. It had people building extensions and making home improvements
when neither were necessary. It meant buying a McMansion when
a Cape Cod would do. Splurging on expensive vacations, elaborate
weddings and extravagant bar-mitzvahs to impress family and friends.
money financed a major lifestyle upgrade that otherwise could
not have ever been imagined, but that corresponded to what most
people considered the American Dream. Borrow to the
limit now, and pay sooner or later was normal.
On the commercial/financial
end, normal was also the obsessive compulsion to endlessly
acquire, not merely upgrade. Borrowed billions, lots of leverage
and little collateral provided financiers and developers with
the power to acquire ever more money, assets and prestige
through mergers and acquisitions, building developments, equity
market speculation and predatory business practices that gobbled
up or drove out the competition.
Give or take
a bit of regulation and self-restraint, this was the normal
the popular new President promised to return to.
us to the third assumption, and arguably the most important, which
was that the crisis inability of banks to lend and businesses
to borrow was mainly responsible for the economic disaster.
As President Obama put it, Our goal is to quicken the day
when we restart lending to the American people and American business,
and end this crisis once and for all.
You see, the flow of credit is the lifeblood of our economy.
The ability to get a loan is how you finance the purchase of everything
from a home to a car to a college education; how stores stock
their shelves, farms buy equipment, and businesses make payroll.
doesnt it? Ease the flow of credit. Make it
easier to get a loan.
the President meant and did not say was
take on more debt,
borrow more money.
Turn back the clock. Remember the advertisements at the start
of the decade encouraging Americans to take out home equity loans,
to buy new cars, to move up from a starter home into the dream
house? With interest rates at 46-year lows and credit flowing,
the public were suckered into betting on their futures with borrowed
money they could only pay back as long as they had jobs, could
make payments and the economy didnt collapse.
they lost their jobs, they couldnt make payments and the
economy began to collapse. Total unemployment (including discouraged
workers and those with part time jobs looking for full time) was
nearing 15 percent. In the fourth quarter of 2008, the net worth
of American households fell by the largest amount in more than
a half-century of record keeping. By February 2009, the foreclosure
rate was up 30 percent from February 2008.
Obama promised as the solution was, and had been, the problem.
The country was already overwhelmed with debt
it couldnt pay back. In what way could incurring more debt
end this crisis once and for all?
It was a
plain fact; the flow of easy credit produced a torrent of debt.
In 2009, private sector credit market debt was 174 percent of
GDP. Household debt-service ratio was at an all-time high. US
households had 39 percent more debt than income. (In 1962, consumers
had 37 percent less debt than income.) To promote policies encouraging
people to take out more loans and sink still deeper into debt
was abnormal, not normal. The abnormal had been renamed
encouraging people to live within their means, cut back, save
money, and distinguish between wants and real needs,
the official policy was to turn on the credit tap and flood the
world with more debt.
of the policy was never in question. Arguments raged only over
the quickest and most effective way to turn on the money spigot.
was looking for someone, somewhere, for rescue, and most eyes
were turned to the United States. Even though the US was blamed
for the flagrant economic abuses that brought on the crisis, given
its economic clout and Superpower status, America was still looked
to for the leadership needed to pave the way to recovery.
globally popular new president, hopes ran high that American know-how
would know how to fix the problem
as though it were an
intellectual exercise that could be solved by applying the correct
No such formula
existed. Yet so desperate was the world that it placed its hopes
on the very people responsible for the deregulation of the financial
industry largely blamed for the crisis. The deregulators now occupied
key positions within the cabinet of that globally popular new
investor Warren Buffett added a military dimension, dubbing the
meltdown an economic Pearl Harbor. Buffett called
on Congress to unite behind President Barack Obama, comparing
the economic crisis to a military conflict that needed a commander-in-chief.
Patriotic Americans will realize this is a war, he
If it was
an economic Pearl Harbor, the enemies were Fannie Mae, Freddie
Mac, A.I.G., Countrywide, Bank of America, Merrill Lynch, Citigroup,
Bear Stearns, and all the other banks, brokerages, speculators,
insurance companies, hedge funds and leverage buyout specialists
that had launched the sneak attack on the American economy.
It had nothing
to do with patriotism, unless being a Patriotic American
meant appeasing and rewarding the enemy with trillions of dollars
of taxpayer money and not being allowed to know where the money