The Implosion Of The Real Economy  

Gilles at Swans is theorising that the financial crisis is a product of the end of the credit and real estate booms (combined with rising energy and food costs), rather than the reverse - Blips #75: From The Martian Desk .

I AM NOT ENOUGH OF A MACHIAVELLIAN to understand the motivations of these powerful people. All I know, sense, feel, is that everything may or may not contain a seed of reality. But there is something else I sense, beside the possible fabrication of this crisis: It may well be an upside-down story, after all. We all are under the impression -- lavishly pushed by the media and the actors at play -- that the financial crisis was triggered by the housing bubble and if not contained is going to have a direly negative effect on the "real" economy and lead to a deep recession (forget the D-word). But what if it were the other way around? Indeed, what if the financial crisis was triggered by the demise of the "real" economy?

THERE'S SOMETHING FUNNY about referring to the economy as the "real" economy, as though there was an "unreal" economy, a "casino" economy exemplified by the financial markets. The word economy comes from the Greek oïkos (house) and nomos (law). It means the management of one's house, budget, small businesses -- the reasonable actions taken by people to handle their own affairs and those of their community. It characterizes the values of many an American: living within one's means, spending as you go, being industrious, honest, civil, helpful to your neighbors and compatriots. It has to do with prudence, the careful consideration of risk taking, the appreciation of yesterday and tomorrow, of parents, grandparents, children and grandchildren. It has little or nothing to do with algorithms, computer models, and the creation of vaporous wealth through worthless commercial papers, endless speculations, and pies in the sky, the "unreal" casino economy, which is Las Vegas on steroids.

BUT HERE IS THE STINKER: The "real" economy has been on its deathbed for a decade or more (even before Bushie boy got into the Oval Office). It was kept under tight control on life support courtesy of Greenspan & Co. (Bush Sr., Clinton, Rubin, Bush Jr., Paulson, Bernanke, etc.). Lacking real producing endeavors, the economy was pimped up through snake oil of old -- debt, more debt, and all the get-rich stratagems that have littered the story of hubris over the ages, whether in the U.S. or in Europe. Capitalism, remember, is all about rate of profits. The housing bubble burst on or about May 2006, right about the time Goldman Sachs's Baldie got confirmed in his Treasury position. The game was over, whether or not they knew it (I think they did -- or not only are they incompetent they are truly idiots, as Andrew Lahde intimated). The economy was tanking -- and all serious indices (not the CNBC ones) were indicating the trend. By the spring of 2006 all bets were off. There, hence, was the time to move to Plan B. There was no Plan B, however. The charade continued.

THE "REAL" ECONOMY had become unreal. There was no profit generated. Capitalists moved to the next step, creating profit out of a tanking "real" economy by betting on the banks. They succeeded. Forty percent of profits in the U.S. came from vaporware. Meantime, the "real" economy dug deeper into debt to keep the "lifestyle" going. It was built on IOUs to the horizon and beyond. But it was a castle of cards. As profits dwindled, credits exploded. Fortunes were made in the process as the whole was quickly falling into disrepair. Go back and read Zola.

IT'S THE ECONOMY, STUPID, that we have to confront. It's an economy that is dead and does not answer the four pylons of humane subsistence: Food, housing, education, and health (add some free time for thinking, further learning, and simply decompressing from day-to-day stresses). It's an economy that disregards the natural realm and is most willing in an oblivious Palin aspect to keep disregarding reality in the name of idiotic memes and myths that have been proven wrong again and again. It's all about, to repeat history, rehashing the same old paradigm: The rich will gleefully eat on top of the modest and the poor's scalps.

LOOK CAREFULLY: There is no financial crisis except one created by the "real" economy. Once the housing market plateaued in early 2006 and tipped in the spring the great binge was over. Households could no longer refinance or take equity loans. They kept going with plastic for a few months but could no longer afford big items (cars, houses, etc.). A handful of financial sharks saw it coming and began short selling (e.g., John Paulson) subprime mortgages. The over-indebted consumers, their credits maxed out, reduced their purchases as they began to receive angry letters from lenders and saw interest rates going higher. Investors got worried. Add the cost of the wars, the budget and trade deficits, the energy and food inflationary trends to the equation and by the beginning of 2007 the snowball was rolling down hill at an increased speed. So, again, to answer my curious reader, I have yet to fully figure out the mayhem, but I can assure you, the financial crisis is not the cause of the economic turmoil. The economic havoc created the financial crisis, which in turn is deepening our economic predicaments. And there are more shoes waiting to fall in corporate America. As the saying goes, hope for the best, prepare for the worse.