The Economy’s Hall of Mirrors

Dear Reader,

Help me understand what’s going on here.  Since the beginning of the year the S & P Index has lost nearly 50 percent of its value.  And it still seems like it’s only downhill from here.  How can this be?

I hate to echo the words of the failed Republican candidate John McCain, but I just have to.  Come on, honestly, aren’t the fundamentals of our economy strong — at least if those fundamentals primarily mean productivity?  Has the world’s productive capacities shrunk 50 percent in the course of a year?  Of course not. If stuff is being produced, and the people producing it are also consumers, aren’t there enough goodies to go around?  If consumers weren’t spooked, and if their credit wasn’t tightened, would they be any less acquisitive?  I think not. If we were in a drought or some other calamity and unable to produce, I’d understand the collapse, but fundamentally we still have the same amount of goodies and roughly the same relations of production as we had a year ago. So what gives?

I think there are three real reasons for the economic disaster: an economic system that betted on and built itself up on a lot of bad home loans, the caving of this system, and then the resulting credit crunch. All these problems seem to emerge from extreme carelessness in extending credit.  In the old days, the problem would have been localized, with irresponsible lenders holding the bag for having given credit to uncreditworthy borrowers.  But in a globalized and extremely intertwined economy, that problem exponentially reverberated throughout the whole system.

Still, isn’t the problem just that we have a lot of banks now holding a lot of houses, and yes houses that may have been overvalued?

It’s hard to say, though, what the proper value of anything is other than what people are willing to pay.  So I don’t really buy that all these subprime loans were a problem of a housing bubble.  If the loans had been made responsibly, there’s no reason that housing values wouldn’t have held and continue to increase.

It feels like the end of a boxing match, with both boxers having been so slammed around that they’re both delirious and sinking, when in reality all parties are really strong.

In the meantime, though everyone is spooked and everything keeps crashing.  Is the economy merely and only a mirage, a matter of perception, illusion, and fancy?  It seems like it doesn’t really matter that people have the resources to buy stuff and companies have the resources to produce the stuff that people want.  I’d really like a new Mac (the one I’m typing on is a few years old) and I do have the money in the bank to buy one, but damn if I’m going to.  And that’s only because everyone else if freaking out, so I do, too.

Perhaps the other problem is credit itself coupled with the push to buy as much as you can manage to borrow and the disincentive to sock the savings away.  Perhaps what we have is an unsustainable system coming home to roost. We have an economy that thrives when people buy beyond their means. But if they keep buying beyond their means and there’s a hiccup of any sort, the whole hall of mirrors splinters into fragments of glass.