WHEN BUBBLES BURST
Reality has a way of bursting bubbles, of bringing us all back to earth. Cash was plentiful and the housing market was way overbuilt and needed buyers. Devoid of any serious oversight and regulation, private-sector banks and other institutional lenders ( www.mcclatchydc.com/251/story/53802.html ) began offering more and more attractive introductory mortgages to a segment of the public hungry to own their own homes as a symbol of the American Dream; contractors and the Bush Administration joined the hype. The contracts, often arranged through predatory lenders, were loaded with arcane, small-print caveats that many either could not understand or chose to ignore, such as how and when the sub-prime rates would rise.
New home-owners figured they'd be able to refinance when those low initial rates went up in a few years because the rising equity value in their home would more than match the new mortgage costs. When that pattern of rising home values stalled, the economic bubble popped, and foreclosures began en masse when families were unable to afford the new mortgage rates.
It's possible that this economic downturn could have been absorbed by an
overall healthy economy, but other things were happening to help create a perfect storm of financial disaster. For one, greedy Wall Street investment houses -- again, virtually unregulated by government -- began inventing all sorts of sketchy derivative instruments ("bundled mortgages," "credit default swaps"), based on the supposed value of these real-estate mortgages, and sold them widely both in the U.S. and, ominously, to banks and other major players abroad. Huge portfolios worth trillions of dollars based on these instruments were, and for all we know are still, held by these institutions and individuals and thus can cause even more damage to the world economy.
These instruments and derivatives were, so to speak, little more than Ponzi schemes for making quick money, and were hyped by investment firms and hedge funds to those investors and institutions looking to place their available money in a steady wealth-producer based on "real estate." But there was little that was "real" about the "estates" supposedly behind those financial instruments. And when the foreclosures and abandoned homes began to litter city after city, development after development, the whole economic house of cards, built on greed and denial, came tumbling down.
The above analysis comes to you from someone whose graduate training was not in economics or finance. (My degrees are in government & international relations.) However, I think the analysis provides at least a partial explanation for how we Americans, along with the rest of the world, wound up in the catastrophic mess we're in today.
Veteran economists tell us that at some point in crash cycles, the bottom is reached and things start to turn around. I'm sure that's the case, but that doesn't take away the immediate pain most people are experiencing right now and will continue to experience for years in the U.S. and around the world. Despite what might happen on any day in the stock market, the value of personal assets for hundreds of millions of people worldwide might well be cut in half or more, governments will slash essential services, the poor will get more destitute, the middle class will be pushed further down the ladder with many winding up in bankruptcy and poverty, even many wealthy folks will take serious hits. And it will take many years for most societies to climb back out of this Great Depression pit.
In short, being at the locus of the disaster, we Americans are truly in for it, and the next few years ain't gonna be pretty. Just ask the generation that went through the previous Great Depression in the 1920-'30s.
THE POLITICS OF DEPRESSION
Everything changes now, including the current presidential campaign. John McCain certainly knows that. The chances of his assuming the presidency have virtually disappeared, since he was a key pusher of the Republican ideology of deregulation of business that helped lead to the debacle we're in today. Still, McCain fights on, claiming to rein in the worst aspects of the hate and fear his campaign has fomented, while continuing to circulate TV ads and comments, many from his running-mate, that rest on the fomenting principle that Barack Obama is someone voters should fear in the White House.
In short, McCain wants to have his cake and to eat it too -- to call in his rallies for calm and respect while Palin and the other campaign surrogates and TV ads continue painting Obama as a scary, somehow foreign presence in the body politic ("palling around with terrorists," "not one of us," etc).
A President Obama would certainly know that his administration would be financially unable to carry out many of his promised projects and would be able to do little more than preside over a greatly injured economy and start to repair the damage. Of course, an Obama election victory assumes that Karl Rove and his dirty-tricks minions can't successfully fiddle enough with the election totals in a Democratic landslide (and do you believe they won't try? what would dissuade them since they've never been punished for stealing earlier elections?), and also assumes that Bush would not attempt to declare martial law and rule by "emergency" decree during this current financial crisis.
In short, America is now paying the price for decades of denial, greed as state policy, and an unwavering adherence to the now-discredited philosophy of governmental deregulation. How we begin to climb out of this pit of Depression will determine the viability of the continuing American experiment. #
Bernard Weiner, Ph.D. in government & international relations, has taught at San Diego State University and Western Washington University, worked as a writer/editor with the San Francisco Chronicle for two decades, and currently serves as co-editor of The Crisis Papers (www.crisispapers.org). To comment:
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