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What happened? Well, it’s Complicated
(May 25, 2009) Our Recent Economic Unpleasantness cries out for a simple explanation. Unfortunately, its causes are many, and it would take the financial and economic history of the 20th century to explain them. So, let’s get started.
Comparisons, it is said, are odious. Whether 2008 was comparable to 1929, is a question best left to the ages. As for 2009, does it most resemble 1930, 1936, the fall of Rome, or the end of the world as we know it?

What we do know about modern economic and fiscal history is that, since at least the year 1972, which saw the severance of the US dollar from any gold measure, that dollar has been spiraling downward in value.

No other currency held the ubiquitous and historical dominance that the dollar did through most of the 20th century. Dollar holders and dollar earners were handed a great gift – the bounty of the world, from those who were happy to receive dollars. For decades, Americans enjoyed what Valery Giscard d’Estaing called the “exorbitant privilege” of the dollar. Our economic lives were vastly enhanced for it.

Nor did the dollar perform its magic unaided – the sheer brainpower of our best and brightest, for about two decades now, has been dedicated, not to science, manufacture, engineering, or education, but rather, to moving money around in creative ways. It is really no wonder that the world’s capital could not resist being drawn to our cleverly conceived, attractively marketed, and ostensibly ‘better’ financial mousetraps.

Our recent housing boom was built, in part, on such international largesse – hundreds of billions were invested so that vast swaths of renters could have the chance to buy overpriced homes under unbelievably favorable borrowing terms. But now the music has stopped, and the game is over.

Nick Paumgarten, in a 15-page essay in the New Yorker of May 18, 2009 entitled “The Death of Kings,” (Notes from a Meltdown), tackles the subject of our recent economic unpleasantness. He spoke with a sampling of Manhattan’s traders, money managers, and bankers, and touches on the whole sordid affair, from Bernie Madoff to Henry Paulson, Lehman Brothers to Goldman Sachs, J.P Morgan to Jim Cramer.

One paragraph stands out, eight sentences that provide a summarizing catechism for those in need of causal explanations. Commit them to memory, and you will never again find yourself tempted to over-simplify this complicated disaster:

“This crisis is the culmination of events and trends reaching back, depending on your perspective, four, seven, seventeen, twenty-two, twenty-seven, thirty-eight, sixty-five, or a hundred and two years. The subprime-mortgage meltdown, the subsequent collapse of the wider real-estate market and then of securities firms and funds holding those securities, and of the companies selling insurance against the failure of those firms, and, potentially, of the insurers’ counterparties, and so on: you could say that all this is merely the finale to a multi-decade saga set on Wall Street and Main Street, in Washington, Riyadh, and Tokyo. The causes are technological, mathematical, cultural, demographic, financial, economic, behavioral, legal, and political. Among the dozens of contributors and culprits, real or perceived, are the personal computer, the abandonment of the gold standard, the abandonment of Glass-Steagall, the end of fixed commissions, the ratings agencies, mortgage-backed securities, securitization in general, credit derivatives, credit-default swaps, Wall street partnerships going public, the League of Nations, Bretton Woods, Basel II, CNBC, the S.E.C., disintermediation, overcompensation, Barney Frank and Chris Dodd, Phil Gramm and Jim Leach, Alan Greenspan, black swans, red tape, deregulation, outdated regulation, lax enforcement, government pressure to lower lending standards, predatory lending, mark-to-market accounting, hedge funds, private-equity firms, modern finance theory, risk models, “quants,” corporate boards, the baby boomers, flat-screen televisions, and an indulgent, undereducated populace. All these factors, very few of them mutually exclusive, conspired to make possible skyrocketing leverage, misperceived risk, and spectacular collapse. To tell the story of them all, in the proper context and detail, will require an Edward Gibbon. The fall of Rome, by comparison, was a local event. Much abridged, a few familiar words will do: debt, greed, hubris.”

Paumgarten doesn’t specifically name the owners of the heads that some might righteously want to see on pikes, nor does he address the question, now what? He simply and entertainingly describes the financial events of the past few years, chiefly through the words of some of the players involved.

Going forward, and although it goes against the American grain to say this, the truth is that not every problem has a solution. Nor will a complex set of given problems necessarily respond predictably to a prescription pad of solutions, particularly when those solutions are based on assumptions drawn from past history, and filtered through the political process before being put in place.

Our current economic displacement is on a scale that simply has not been experienced within living memory. Sometimes clichés actually ring true: a series of Pandora’s boxes were opened, demons and, yes, black swans emerged, disaster ensued, and today we’re not really sure where we stand. A ‘black swan’ is by definition unforeseeable, the question of its existence never asked, because it was previously unknown.

Beyond the brief reprise of economic ‘green shoots’ that our consumer appetites will no doubt stimulate before too long, we are experiencing a long-term secular economic adjustment. The US is going to learn to make do with what we have, and do without much of what we once had.

Recovery is a hopeful word, one that hints at a resumption of a previously experienced state of health. And no doubt brighter days than these are ahead of us, sooner or later. It is, however, a certainty that we will not see the years 2000 (stocks), or 2006 (real estate), again.


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