Surviving Global Economic Collapse

The world is experiencing drastic changes that are leading to a feeling that the apocalypse is near. Here is my take on the global economic collapse and what can be done to prevent it.

Introduction

In the year 2007, the housing bubble burst in America leading to an enormous hit on America’s financial institutions[1]. The banks and companies that hold these mortgages could not financially take the hit of massive defaults and foreclosures. The properties were being sold to individuals who could not realistically afford them and the values of the properties were greatly inflated by years without a correction in the housing market[2]. For years home prices in America had always been on the rise; buying a house was seen as the most secure investment for the average American. Suddenly, the market corrected itself as many people could no longer afford their homes. This created a crisis where home values in many cases were much lower than the actual amount owed on the mortgage, prompting many people to simply walk away from the homes and file bankruptcy, further exacerbating the problem. This is the background for the largest global recession since the late 1920’s and the implications would reach across oceans and borders worldwide.

As some of America’s oldest and most trusted financial institutions begun to collapse, people quickly rushed to point a finger, to place the blame somewhere. Was it predatory lending? What it legislation that forced banks to lend to unworthy debtors? Was it too little government regulation, or perhaps too much? Washington scrambled to try to solve a problem that everyone saw coming and no one prepared for. For years people knew the housing market bubble would eventually burst, they had predicted the outcome with various degrees of success but there was simply not enough political will to do anything about it in Washington. To make matters worse, the intense borrowing and spending culture of Washington had created a national debt crisis that was beginning to rival the spending and debt crises faced by America’s largest trading partner: The European Union[3]. As the United States scrambled to plug the holes in the sinking financial market, Europe had begun to feel the effects. As goes America, so goes the world. The plummeting value of liquidity of securities in the US tied to the real estate market sent shockwaves around the world and sent markets into a tailspin. The result was worldwide damage to financial institutions.

Debate arose in America as to how to ethically solve the problem avoiding total collapse of the financial system. Should the government bail out the financial institutions and was it true some firms were “too big to fail”? This was at its core a question of whether or not America would stick to its capitalist roots and let institutions that acted irresponsibly fail or if the government would get into the business of picking winners and losers in the economy. Sticking to principle and not bailing out the banks would likely lead to economic collapse. America has a history of bending its principles in a crisis and the TARP (trouble assets relief program) was put into play which would provide the funds to bail out the banks. The central banks around the world had begun lowering interest rates. They injected more and more money into the world economy, to soften the blow. The United States Senate issued the Levin-Coburn Report which stated “that the crisis was not a natural disaster, but the result of high risk, complex financial products; undisclosed conflicts of interest; and the failure of regulators, the credit rating agencies, and the market itself to rein in the excesses of Wall Street.”[4] Economic collapse had been prevented, but for how long and at what cost? What did the world learn from this lesson and what should the response be to a similar event in the future? Many economists predict the world is not yet out of the murky financial waters that led to the global recession. New problems are arising and new solutions are being drafted around the world.

Explanation of the Global Economic Recession

In 2011 the United States finds itself left with many of the after effects of the severe global economic recession. The U.S. has persistent high unemployment rates, a continuing decline in home values, an escalating national debt crisis, inflation and soaring gas and food prices. All of this paired with extremely low consumer confidence leads to a very negative view of the future and keeps people from spending the necessary sums of money to grow the economy again.

All of this is the result of the bankruptcy heard round the world; the failure fourth largest investment bank in America, Lehman Brothers. The U.S. government did not announce any plans to save the failing company and Lehman Brothers desperately scrambled to try to sell off assets and ultimately sell the entire company. The company had been using “cosmetic accounting” to make its financials look more stable than they were in reality until market conditions eventually exposed this flaw by sending the stock shooting down. The company was heavily invested in the subprime mortgage industry which is believed to be a major factor in the global recession[5]. Lehman Brothers eventually collapsed sending the stock market down dramatically and beginning the chain of events that would lead to the global economic recession. It also got the folks in Washington scrambling to figure out what to do the crisis. It became daily news to hear of a bank failure as things became worse and worse. Initially each bank that failed was a major story, and then it just became a story to report the total number of banks that failed that day. The housing markets collapse, falling home values and the vast lost of liquidity to the banks, which were so heavily invested in these securities, was creating a financial downward spiral. Huge sell offs on Wall Street followed as investors started wildly removing their money and diversifying it into anywhere it would be protected.

Financial institutions were afraid to lend money which led to reduced growth and further stoked the economic recession’s flames. Many of the weaknesses of a fractional reserve banking system were exposed by the damage caused when banks lent more money than they could realistically afford to. The United States Treasury took over mortgage giants, Freddie Mac and Fannie Mae and injected them with 200 billion dollars to give them a buffer against all of the foreclosures on houses and defaults on loans. The government began drafting legislation to bailout these failing giant institutions to the dismay of many Americans.

The economic virus had already begun to infect Europe and Asia due to the fact that when America sneezes, the world catches a cold. The European Union and India started drafting their own legislation to inject large sums of money into failing enterprises to try to stabilize the market place. The conditions caused by Americas financial industries irresponsibility and market factors threatened to bring down the entire global financial system because many of the companies and institutions weaknesses had been cleverly disguised through accounting tricks and a reliance on steady economic growth. Risky lending and investment by financial institutions that had become a common practice were exposed to market conditions they were not capable of handling. Financial weakness was being exposed around the globe and it sent the speculators and investors scrambling to get out of the market. This was the worst financial crisis since 1929.

Analysis through Different Political Perspectives

Realism

From a Realist perspective, the economic collapse could easily be avoided by protectionism and a more nationalist international finance policy that incorporated aspects of protectionism and national strength. The interconnectivity and economic cooperation between countries has made them weaker by making them too reliant on one another and beholden to each other’s economies. The push for closer, friendlier relations based on trade have made all of the participants weaker economically because a downturn in one economy brings them all down. It is naïve to tie the life blood of a nation, its economy, to foreign actors that are acting in their own economic interests. The benefits of the free trade between the nations are notable, but the side effects negate the benefits in terms of national security.

The financial crisis of 2008 was a perfect indicator of such a scenario. The government was not strong arming Wall Street enough and not regulating the wild speculation with force like it should have been to ensure strength and growth. The concept of leaving everything to the market was naïve without the proper regulations; it did not protect each individual actor from the irresponsibility and recklessness of other actors in the global economic financial system. The laissez faire attitude of modern governments rewarded them with stock markets spiraling ever further down. If the international community wants to get serious about addressing the looming global financial collapse, nations need to start worrying about their own interests in an honest, predictable manner because their self interest will benefit the larger world economy as a whole.

Liberalism

From a liberal perspective, the global economic meltdown was the result of a never ending intrusion of government into the free market. The government forces banks to lend to people who have insufficient credit to buy a home under the guise of “helping” them. It is exactly the type of government social engineering that got us to this mess in the first place. What makes matters worse is that once all of the financial markets star collapsing, governments crack down on their financial institutions even harder and start issuing massive amounts of regulations that make it more difficult for lenders to lend to responsible debtors. The result has been a situation where the economic wounds of the world can never be healed because they keep being reopened by government. Another issue that has led to this crisis is that we do not have true free trade; we have managed trade by agreements which are never really “free”. In this way, economics and free trade are used as a bargaining chip and a tool of coercion.

If the world really wanted to solve this global financial crisis, they would stop with the pessimistic realist views of the past and open their minds to peace, commerce and honest friendship with one another. Let this situation be the catalyst that allows a truly free, market based global economic system to develop out of the ashes of the failed government manipulated model and all nations can chart their course to a more prosperous future by staying out of their nations markets. This would ensure that competition would fuel the marketplace instead of regulation and governments picking winners and losers in the financial market.

Personal Opinion

In a thorough analysis of the global economic crisis of 2008, I have determined that a variety of factors influenced the catastrophe and that the various world governments’ responses to the issue have been extremely reactionary and brash. The United States rushing to craft the ill conceived TARP and Stimulus plans showed the absolute panic on the part of both the Bush and Obama administrations as well as members of the legislative branch. Printing massive amounts of money and spending, on credit, money that the treasury does not have that rightfully belongs to the American taxpayer in such a brazen way was reckless. It was the equivalent of applying a band-aid to a bullet wound. Nothing was “fixed” it was crony capitalism at its finest, large banks received ungodly sums of money because they were “too big to fail” and they spent the money they received buying up smaller failing banks. The end result was that the “too big to fail” crowd grew even bigger with free loans from the American taxpayer.

This action is touted as saving the financial system, but all it did was further monopolize and weaken it. If every time the market contracted, government stepped in to protect the big companies they would eventually own ALL of the small companies and this speaks volumes for the fact that no true monopoly has ever existed without government manipulation. Capitalism does not in and of itself lead to monopolies because no true monopoly can exist forever because eventually a monopoly that is producing a product at an inflated price will be challenged by competitors. This rings true in the financial sector as well.

In other words, everything that America is doing to solve the economic problems facing the country and the world are exactly what created the problems in the first place. Irresponsible use of credit by governments to continue to grow and expand to levels that are unsustainable has created a situation that, if not impossible, is unlikely to be solved. If normal everyday people spend on credit and finance lifestyles they simply cannot afford they will eventually lose everything due to interest. This is what the banks were encouraging, the government was encouraging and the government is still doing.

A major component of the crisis is the Federal Reserve. The Federal Reserve kept unrealistically low interest rates to enable more people to buy houses that they could not afford. In tandem with the government producing legislation requiring banks to make these loans, growth was kept up artificially by the government. These people, not being able to realistically afford these homes although they were advised otherwise, defaulted on these loans and their homes went into foreclosure. This rapid default was the straw that broke the camel’s back; the housing bubble had finally burst. This set off a chain reaction of other economic bubbles bursting because of the vast sums of money held by American financial institutions in the U.S. Real Estate sector.

While many would argue, particularly in academia that capitalism caused this recession, I personally believe the system we have is not true capitalism but corporatism. It is a sort of socialist-capitalist hybrid that is based on collectivism. Special interest groups are constantly lobbying for their interests and both American political parties receptive to it. As a result, the government plays a huge role in picking economic winners and losers and the large corporations pay lobbyists and candidates dearly to support their interests while labor unions force their members to pay dues that are used for political purposes. The same goes on in the financial sectors and the result is a never ending increase of spending by Washington in order to satisfy constituencies for re-election. All of this plays a role in the overall broken system in Washington which in turn affects the even more broken systems abroad.

In the current recession, spending declined because income and lending declined. Next income and lending declined because spending declined. It is a terrible cycle and it is a normal process in a market. This led people to believe the notion that the world governments could collectively “spend our way out of a recession”. The only problem is governments do not have money; they get their money from their citizens or foreign governments. I fully and whole heartedly disagree with the notion that the government, spending future uncollected tax dollars that are borrowed on interest can solve the problem of a lack of spending today. Particularly because the government does not spend how citizens who rightfully earn the money spend it. The government wastes massive amounts of money that private citizens, spending their own money, are simply more careful with. Even those citizens who spend their money wastefully have the moral right to do what they wish with their money. They earned it. The government gets its share no matter what its productivity or efficiency is. They also determine what that share will be and how they will collect it.

To solve this problem I would take the following measures:

1. Allow companies to fail. This country is based on a free market capitalist economy companies that act irresponsibly in their lending practices should be allowed to fail. The short term hardship will be made up by the long term gains of new entries into the financial market that will not make the mistakes of the past. Allowing companies to succeed that deserve to fail is un-capitalistic, un-American and foolish. It prohibits the market from working naturally and promotes crony capitalism. No average American’s business would be bailed out for acting irresponsibly so why should powerful financial institutions be granted this unfair advantage? The future would benefit from the present crops failures.

2. End the Federal Reserve. The Federal Reserve is not federal and it is not a reserve. It is a private enterprise of unelected officials that has enormous power over America and the world. It prints money and causes inflation, it is unconstitutional and it has stripped the constitutional right of congress to coin money. The Fed encourages the government to keep increasing debt through inflation which is essentially the ability to pay massive amounts of debt off by debasing the currency and making it less valuable. This enables politicians to create a nanny-state and it happens all over the modern world.

3. Reinstitute sound money. Money that is not backed by anything has the potential to become worthless. The never ending inflation in America is an invisible tax on people who saved responsibly, particularly the elderly. Banks offer less than 1% a year on interest in savings accounts and inflation goes up by 3% per year slowly draining the savings of hardworking Americans. If the currency was backed by some, or a mix of commodities it would have real value that could never be worth zero. Whether it be gold, silver, copper, food stock, oil or a combination some tangible commodity should have some effect on the dollar that cannot be erased by the printing of currency that does not have any backing in reality.

4. Promote saving money. People need to understand that saving money is a skill that all responsible adults in a free society need to possess. Social welfare programs like social security have limitations and a government will never be sustainable long term with these systems if the money is not protected. The American government has shown it is incapable of respecting the social security fund because it continuously grows and squanders the safety net of the people. Saving money for emergencies prepares people for economic crises. Governments have proven to be incapable of saving for crises they spend, spend, and spend until the coffers run dry then tap the citizenry until there is nothing left. Responsible citizens that save money have a cushion to protect themselves to make sure that they can handle an economic downturn without losing everything.

5. Liquidate all debt. Citizens as well as government officials must understand that carrying large insolvent debt is a recipe for disaster. There is a reason most major religions forbid lending money on interest, because it is an evil game that can result in grave losses for everyone involved. Credit is the driving force behind capitalism but it must be handled responsibly. People must be encouraged to get rid of the debt they carry and stop carrying so much of it. Public schools need to educate children on credit and how it works and for adults they should get a tax incentive of reimbursement of interest on debt for paying off what they owe. Society as a whole must use credit responsibly and government should set the example. Carrying debt that is equal to the entire GDP of the nation is simply unacceptable and Washington needs a wakeup call. At the very least the citizens should prepare for the worst and get rid of all the debt they currently owe.

6. Ease regulations. Over regulation leads to more wasted capital than anything other than income taxation. Regulations make it difficult to start a business, to lend money, to understand taxes and to prepare for the future. They hurt economic confidence by making businesses less able to prepare for the future and they create a never ending quagmire of red tape for business development. For every good, honest and worthwhile regulation there are probably 1000 useless, bureaucratic nightmare regulations that stifle business and growth.

7. Cut government spending drastically. Every election cycle the two political parties in America come up with a list of ridiculous spending by the other party. It is usally a few million dollars, a literal drop in the bucket compared to the massive trillions hemoraging out of Washington on a yearly basis. The candidates will point to some bridge to nowhere project by the other party and call it pork. They all do it. In reality to realistically prevent economic collapse America needs to actually cut trillions of dollars. There are agencies that need to go, programs that need to go, grants that need to go, military bases that need to go and overseas spending that is absolutely unsustainable and unnecessary especially facing the looming debt crisis. The Democrats complain we need to cut our military spending overseas, the Republican’s claim we need to cut our entitlement spending and foreign aid and the truth is we need to cut it all. No one donates to charity on credit but America has no savings, the treasury pours money overseas it doesn’t have and continues to finance “good ideas” from politicians that we cannot afford but that will help them get reelected. Cut the spending until we have manageable debt and preferably forever.

These 7 steps will lead America back to the right track and have America start to permanently pull the world out of the cyclical, central bank fed mess it continually finds itself in.

Conclusion

The global economic collapse has begun. The 2008 financial crisis should be a wakeup call for everyone to see how fragile the global system actually is. It is too micromanaged by people who have no business micromanaging. The good thing about the crisis was it was a reminder to the middle class and average citizen of the civilized world that he is just a small fry, Main Street doesn’t get bailed out, and Wall Street does. They are more important than you. Speculators and Bankers are what is important, so much so that the government believes that it actually has an obligation to give them an interest free loan of taxpayer money as a bonus for failing to be responsible. I don’t think the average person who spent a little too much and got into debt or bought a house they were led to believe they could afford before they got laid off was bailed out. They were “too small to succeed” I guess.

The good news is if ever you are fortunate enough to become “too big to fail” than you can spend and invest recklessly with little regard to the future and government will come save you. A system cannot exist that proclaims to be capitalistic when things are good but then can break every principle it stands for to be socialistic to choice cronies when they start to fail. That is what gives capitalism a bad name, there cannot be an entry by new actors into a market if government believes that large companies cannot be allowed to fail for being reckless. It provides a hopeless example for the future when the same problems occur and get inevitably worse.

A person doesn’t need to be a prophet to understand that the problems that have occurred will occur again but much worse in the near future. There have been no solutions. The global financial ship has sprung a leak and it is plugged with bubble gum. The sad thing is the entire world economy hangs in the balance and the crop of politicians that is supposed to be principled and responsible with tax money squanders the American tax dollar on pork and entitlements that damage our future prospects for success.

We can only hope as Americans that we will stop trying to look to the same old tried and failed solutions to solve our economic woes. Global governments spending their way out of a recession is like us borrowing our way out of debt. I hope the world will get this message in time to prevent a global economic collapse. Unfortunately there are simply too many political obstacles, in the U.S. and abroad that make transformational change near impossible. People are only willing to try radical new things politically when they are desperate and unfortunately that is often when politicians push for giant spending increases to take advantage of the public panic. With any luck, America will lead the world out of the global recession and prove that nothing can stop the American entrepreneurial spirit and its uncanny ability to adapt. Together, we can lead the world back to prosperity and correct the flaws that got us into the abysmal mess, never to repeat it again.

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[5] “Global Financial Crisis: The Role of Subprime Mortgages in the Recession.” FindingDulcinea | Online Guides | Internet Library | Web Resources. Web. 08 Dec. 2011. <http://www.findingdulcinea.com/guides/Reference/Global-Financial-Crisis.pg_0.html>.