« New Column Kicks Off | Main | One Model for a New World Economy »

The New World

It's not often that we get to see a historical catalyst in action.

This is no mere "bad recession." All of the assumptions we have about fundamental elements of the economy, from finance to trade to efficiency, are increasingly coming under scrutiny. The shape of the global economy at the end of this period of economic transformation will likely be unrecognizable to those stuck in the previous paradigm.

What will this new economy look like? Good question -- I don't think anyone knows yet. But it won't just be 2005 plus a few more regulations, or even 1939 with a digital upgrade. It will very likely be something entirely new, something that will take some time to understand or even characterize. I have a very tentative guess, but I'll post that tomorrow.

The scale of this situation is clear from the language we use. Mere "depression" doesn't seem to capture the sense of danger. Bruce Sterling catalogued a few examples in mid-March, with "Econopalypse" and "Collapsonomics" of particular note; I wouldn't be surprised to see "Financeageddon" show up at some point, too. (Sign of how my mind works: the first term that popped into my head was "Cha-chingularity." I doubt anyone will pick that one up.)

I'm not deeply trained in economics, so much of my thinking about this situation has been focused on getting a better understanding of what's happening. I suspect that some of you are in a similar state, so let me pass along some of the better pieces I've found over the past few months. Links and excerpts in the extended entry.

In December, 2008, Michael Lewis (author of the book that summed up the 1980s, Liar's Poker) wrote "The End" for Portfolio. This offers a bit of history, as well as a useful exploration of just who was in a position to spot what was happening.

This was what they had been waiting for: total collapse. “The investment-banking industry is fucked,” Eisman had told me a few weeks earlier. “These guys are only beginning to understand how fucked they are. It’s like being a Scholastic, prior to Newton. Newton comes along, and one morning you wake up: ‘Holy shit, I’m wrong!’ ” Now Lehman Brothers had vanished, Merrill had surrendered, and Goldman Sachs and Morgan Stanley were just a week away from ceasing to be investment banks. The investment banks were not just fucked; they were extinct.

Matt Taibbi's piece for Rolling Stone, The Big Takeover, is also useful. Taibbi starts to outline the extent to which the financial industry has captured the US government (and, more generally, wester post-industrial governments in general). This is a vicious telling of how this came about, with an emphasis on understanding the politics of the situation -- not in a partisan sense, but in a power sense.

In essence, the bailout accelerated the decline of regional community lenders by boosting the political power of their giant national competitors.

Which, when you think about it, is insane: What had brought us to the brink of collapse in the first place was this relentless instinct for building ever-larger megacompanies, passing deregulatory measures to gradually feed all the little fish in the sea to an ever-shrinking pool of Bigger Fish. To fix this problem, the government should have slowly liquidated these monster, too-big-to-fail firms and broken them down to smaller, more manageable companies. Instead, federal regulators closed ranks and used an almost completely secret bailout process to double down on the same faulty, merger-happy thinking that got us here in the first place, creating a constellation of megafirms under government control that are even bigger, more unwieldy and more crammed to the gills with systemic risk.

Paul Krugman probably gives the best frequently-updated analysis of the situation, in both his New York Times column and his blog. His latest piece for the newspaper, "The Market Mystique," takes a sharp jab at the notion that the financial market will eventually self-correct.

Underlying the glamorous new world of finance was the process of securitization. Loans no longer stayed with the lender. Instead, they were sold on to others, who sliced, diced and puréed individual debts to synthesize new assets. Subprime mortgages, credit card debts, car loans — all went into the financial system’s juicer. Out the other end, supposedly, came sweet-tasting AAA investments. And financial wizards were lavishly rewarded for overseeing the process.

But the wizards were frauds, whether they knew it or not, and their magic turned out to be no more than a collection of cheap stage tricks. Above all, the key promise of securitization — that it would make the financial system more robust by spreading risk more widely — turned out to be a lie. Banks used securitization to increase their risk, not reduce it, and in the process they made the economy more, not less, vulnerable to financial disruption.

Reading these pieces readies you for Simon Johnson's "The Quiet Coup" in the May issue of The Atlantic. Johnson is a former chief economist for the International Monetary Fund, and he makes clear that he sees in what's happening in the United States (and, to a lesser extent, Europe) as the same thing he saw in developing nations pushed to the brink of economic collapse: financial oligarchies running the show. And he has a clear prescription: root them out.

In my view, the U.S. faces two plausible scenarios. The first involves complicated bank-by-bank deals and a continual drumbeat of (repeated) bailouts, like the ones we saw in February with Citigroup and AIG. The administration will try to muddle through, and confusion will reign. [...]

Our future could be one in which continued tumult feeds the looting of the financial system, and we talk more and more about exactly how our oligarchs became bandits and how the economy just can’t seem to get into gear.

The second scenario begins more bleakly, and might end that way too. But it does provide at least some hope that we’ll be shaken out of our torpor. It goes like this: the global economy continues to deteriorate, the banking system in east-central Europe collapses, and—because eastern Europe’s banks are mostly owned by western European banks—justifiable fears of government insolvency spread throughout the Continent. Creditors take further hits and confidence falls further. The Asian economies that export manufactured goods are devastated, and the commodity producers in Latin America and Africa are not much better off. A dramatic worsening of the global environment forces the U.S. economy, already staggering, down onto both knees. The baseline growth rates used in the administration’s current budget are increasingly seen as unrealistic, and the rosy “stress scenario” that the U.S. Treasury is currently using to evaluate banks’ balance sheets becomes a source of great embarrassment.

Under this kind of pressure, and faced with the prospect of a national and global collapse, minds may become more concentrated.

The New World emerges from the ashes of the old.


Among other things, the Seattle (and global) anti-IMF/WTO protests were very much about private banks and organizations controlled by globe straddling mega corporations - forcing wages down, attacking, jailing and in some cases labor and environmental organizers and dismantling environmental protections.

They can't do that here, so perhaps, crashing the dollar will do the trick faster.

What are we being sold if not 'austerity' measures?

I wonder why Americans think they are different or 'exceptional' in this regard.

There is certainly more to it, but at least more folks understand why the people in Seattle were so pissed off. They understood this process.

I recommend folks go out and rent a film called Life and Debt, and while they are at is pick up a copy of Diary of an Economic Hit Man.

Also as much as a scumbag as Madoff is I am not sure why people think he is exceptional or anything but a traditionally deployed scapegoat.

Yes the layer of fancy new money making vehicles that came out of the deregulatory framework, but the global collapse was well on it's way long before that... How could anything lasting be built on frozen wages and ridiculously easy to get - high interest credit. Nothing but collapse of THAT system was in the cards.

I just don't get why people are surprised. I've been expecting it for most of my adult life.

“Capitalism is the astounding belief that the most wickedest of men will do the most wickedest of things for the greatest good of everyone.”

John Maynard Keynes

The indispensable follow-up article to the ones mentioned here is James Galbraith's This Crisis Is Way Bigger Than Dead Banks and Wall Street Bailouts. He gets to first base, recognizing that there is a systemic problem, and restoring things to the way they were is insufficient, but then also goes further, providing a rich field of history (mainly based on Depression and New Deal) and analysis for radical (getting to the root) thinking and innovation (how do we re-invent our financial systems?).

This is where the explosion of work on open money (complementary currencies + platforms for multiple currencies + social networking software + distributed mobile devices = open money). Open money can be counter-cyclical, and not debt-based: rather, based on the actual commodities and valued resources that are the basis for wealth as "forward days of survival" (thanx, Bucky!).

The "Rake-In-Reaction">
The Pyramid Collapse?
Vampires Caught In The Sun?
Economy Unplugged?

My guess is those who take decissions will act very cautious, which will mean europianization of global economics. THis is laying the foundations of a systemtic instability that will unfold quite close to an actual Singularity, a few decades from now.

I think everyone rational now accepts that this is another depression, though governments wont say it. Of course there is still a lot of denial and rationalisation why it isn't so going on.

I haven't seen anything yet to see why it wont have some of the same outcomes.

With the US and EU adopting seemingly opposite policies we are going to get the worst possible financial outcome (again); unless the improbable happens and the G20 come together this week.

Retirement economics will not fare well. The concept of fixed retirement age, while health care constantly increases life expectancy, was always fallacious.

I'm not a trained economist either, so I can't honestly say I saw the crash coming: my instinct as an historian told me the "boom" couldn't last forever, but it went on so long that my instinct gradually got dulled.

What I did see clearly, back last summer when things were starting to unravel, was that pouring more fiat money into the black hole to try to restore the status quo ante was either madness or piracy. But I'm not a trained economist, so nobody was listening to me... It's interesting to see the highly-trained economists coming round to my view now the damage has been done.

I have a graduate degree in economics. I never used it professionally, because I think it's mostly bunk: sophistry masquerading as science. Economics provides few insights that wouldn't be obvious to a reasonably bright 16-year-old with a grasp of calculus. To diagnose and solve our current situation, sure, take a look at economics - but then consider the insights of systems science, the structure of networks, futurism, ecology and forms of whole-systems thinking. Otherwise, we're going to blow it.

Post a comment

All comments go through moderation, so if it doesn't show up immediately, I'm not available to click the "okiedoke" button. Comments telling me that global warming isn't real, that evolution isn't real, that I really need to follow [insert religion here], that the world is flat, or similar bits of inanity are more likely to be deleted than approved. Yes, it's unfair. Deal. It's my blog, I make the rules, and I really don't have time to hand-hold people unwilling to face reality.


Creative Commons License
This weblog is licensed under a Creative Commons License.
Powered By MovableType 4.37