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The Current Economic Crisis: Causes & Cures (Cont’d)

February 19, 2009 by  


By Dr. A. S. Nakadar, CEO and Publisher of TMO

Last week I discussed the the Keynesian and supply-side economic theories. This week I will attempt to show the factors that have contributed to our current economic crisis.

These are multiple factors at work, rather than any single economic theory discussed earlier. Factors include the lack of financial accountability, a lack of understanding of the working mechanisms of economics, internal degeneration at a moral or socio-political level or at the economic level (corruption and greed) and external aggression, or wars.

Accountability

The classical example is the debacle of the Savings and Loan banks of the 1980’s. The S&L’s original purpose was to help homeowners obtain mortgages. As the interest rate rose in the late 70’s (following the Vietnam war) they could not afford to continue their prior commitments of low interest loans. To help the S&Ls, congress deregulated the industry by removing the restrictions on loans they could make. The scammers took over. Just over a decade later, at the end of the 80’s, the collapse was imminent and congress had to bail out the industry with taxpayer money. As the saying went, “Why rob a bank when you can own one.”

Another example is the uncounted billions spent on the Iraq and Afghanistan wars.

economy Lack of understanding of current economic situation

President Bush maintained till his last days in office that “The fundamentals of our economy are sound,” and this refrain was repeated by John McCain. When a giant century-old financial institution, Lehman Brothers, failed and filed for bankruptcy he said. “There is tremendous turmoil in our financial markets and Wall Street.”

People who bore the brunt understood how deep was the recession, with a precipitous decline in employment, business activity almost coming to a stop, falling housing market, and the overall situation pointing to a deep depression. Amazingly, it took a full year of economic distress, from December 2007, when economic activity last peaked, to declare that a recession had actually been taking place.

When Obama became president he realized the severity of the recession. That prompted him to say: “I didn’t know I was going to inherit this,” and he declared the economy would be his top priority. 

Internal Degeneration

Moral and socio-political degeneration is on rise. The recent episodes of NY’s Governor Eliot Spitzer’s prostitution scandal, or Portland’s Mayor Sam Adams affair with an intern are just the tips of the iceberg.

Unethical involvement of the two U.S. senators, Christopher Dodd, (Chairman of the banking committee), and Kent Conrad, (Chairman of the Budget and member of the finance committee), are also well known. They both are former cabinet members and the latter is a former ambassador to the United Nations. They received loans from financial institutions that waived fees, points, lender fees, etc; through a little known program for prominent people.

The recent corrupt practices of Governor Blagojevich and the Ponzi scheme run by Bernard Lawrence “Bernie” Madoff are still fresh in our minds. Madoff was once Chairman of the NASDAQ stock exchange and founded his Wall Street firm, Bernard L. Investment Securities LLC, in 1960. His investment fraud (about $8 billion) was carried out by a single person.

Greed of some of the executives of big corporations, like Enron, Lehman Brothers, Washington Mutual, Fannie Mae and Freddie Mac, AIG, Merrill Lynch and others have been equally guilty in corruptive procedures and greed by awarding themselves big payoffs, some even after receiving government bail outs. The greed of companies like Halliburton and Blackwater are inexcusable; they are only concerned with their profit, irrespective of human lives.

These are some of the examples of privileged people fighting hard to keep their privileges instead of privileges of the common people.  This kind of moral, degeneration on all its levels, is partly to blame for our present economic chaos.

Wars

The Roman Empire fell because their leader bankrupted it. Look at the red ink now! A huge national debt that has tripled since George W Bush took power. External wars of Roman Empire with Attila the Hun and other non-Roman barbarians started the empire’s decline in the 5th century.

The Ottoman Empire fought many wars with Russia. But it was the Crimean War that weakened the Empire.

From 1897 to 1907, the sun didn’t set on the British Empire. From 1899 to 1902, it fought a war against the independent Boer republic of South Africa. It was longer and costlier than Britain expected. Although the British won the “dirty little war,” it became so expensive in terms of finance and human resources that the war eroded its position in the world. That was the beginning of the sun set for that empire.

From 1965 to 1973, America fought a long and unpopular war in Vietnam. Apart from the human lives lost (58,000 Americans and appalling Vietnamese deaths) there was incalculable suffering and sorrow for millions. The financial cost was $1.5 billion; accounting for inflation it would be more.

This led to the monetary debacle of the late 70’s and early 80’s, with high unemployment, high inflation and productivity at a standstill, leading to “stagflation.” Rising oil prices added to the trade deficit, creating a situation in which the dollar had no value against the gold that supposedly backed it.  Because of this huge disparity, the US in 1975 floated the dollar with respect to gold and other currencies. This act signaled a loss of confidence in the dollar and consequently in the US. The price of gold rose from $35 an ounce in 1969 to $900 in 1980.

From 1979 to 1989, the Soviets invaded Afghanistan. This left the Soviet economy in tatters.  The ruble fell to its lowest point against other currencies and became worthless. It weakened the whole USSR, ultimately leading to its dismemberment.

The US invaded Afghanistan on October 7, 2001, and Iraq on March 20, 2003, on the pretext of removing WMD. What an irony, we used WMD to remove nonexistent WMD. Both wars have proved costly in money and lives. The US has spent over a trillion dollars to sustain its war machines. This has undermined our credibility worldwide and has weakened the dollar. Our national debt has tripled, almost surpassing $12 trillion.

In a recent article in the Wall Street Journal, a Russian professor Igor Panarin predicted the end of the US by the end of 2010. He says America will disintegrate into six countries. According to him a moral and an economic collapse will trigger a civil war and eventual breakup of the US (andrew.osborn@wsj.com).
We know it is nonsense but it does give you an insight of the world thinking and the magnitude of the problem we face.

Financial insecurity is most dreaded, especially in the developed countries, and yet no economist or politician dares to discuss the role of the Iraq and Afghan wars as primary reasons for our present economic mess.

Causes and Cures of our economic mess will continue next week. I will discuss the creation of the economic bubble, why it was necessary, and what caused it to burst. What, in my opinion, we should do to guard ourselves.

I hope you are reading Investment page of Bob Wood. If you have been following his advice, I am sure you have benefitted from it.

11-9

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