We live in interesting times. NPR recently aired an excellent segment on the credit crisis, which touches on a number of issues, namely the issues of what unregulated "free markets" mean at this day, what it means to be informed in a global economy, and how global economic develop affects us in America.
I highly recommend that you listen to the entire program. You can listen to a short 12 minute version of the program on the NPR website here: NPR - Global Pool of Money Got Too Hungry
You can download the entire one hour program from This American Life here however: TAL - 355: The Giant Pool of Money
Here is what I took away from this segment. Even though our government and high level financial analysts had some understanding of what was happening around 2002-2007, they never passed that information on to the public. Secondly, even though there was some concept of what was going on at high levels, due to the lack of information sharing, very few people, even the high level financial analysts, understood the big picture. Why wasn't economic information being shared? Because in a free market capitalist system information is power, thus there was, on top of everything else, information hoarding. There was also an irrational faith in the power of unregulated "markets".
But what exactly are we talking about here? What we are talking about here is that between the year 2000 and the year 2006 the total amount of liquid assets in the world doubled. As the segment states, the "global pool of money" was about $36 trillion in 2000. This "global pool of money" took hundreds of years to be amassed. This is the pool of liquid assets that accrued throughout the world during basically the entire history of civilization. Between 2000 and 2006 that pool of money doubled. Why did it double so quickly? Largely because of increased economic development in emerging economies, namely China and India. Not only did emerging economies contribute to exponential global economic growth, but people in those developing countries were also big savers, often putting as much as 50% of their incomes into savings. These savings then became a part of the global pool of assets seeking investment.
So, while the American economy was on a slight downturn and while Americans were going deeper and deeper into debt, the rest of the world was rapidly accruing assets and banking huge levels of collective savings. As American savings dipped into the red, the rest of the world was going heavily into the black. As this happened, the rest of the world looked to America as a safe place to invest their savings. For the past 100 years America has been seen as one of the safest places in the world to invest your money. In order to meet the demand for American investments, American bankers and financial organizations basically started creating very "sophisticated" investment securities, bonds, to sell to these foreign investors. What were these bonds? These bonds were created out of American debt, largely home mortgage debt, but really all kinds of debt.
So, between 2000 and 2007 interest rates went very low and credit issuers were falling all over themselves to give Americans loans because they were then packaging these loans into bonds that they sold to foreign investors, who assumed that America was a safe place to invest. So here Americans, people living in the richest country in the world, were effectively borrowing from some of the poorest people in the world. Now, the thing about all of this is that none of this was ever really explained to Americans in the first place. The credit was flowing freely, loans were going out like water, people were spending like crazy and buying houses at every higher prices, and it was never explained exactly why this credit was flowing so freely. Furthermore, Americans were brainwashed by the American myth. In America people believed that this economic explosion in the middle of poor economic fundamentals was due to "American hard work", or "the power of the American economy," etc. In reality none of this really had anything to do with America, other than our reputation as a safe place to invest. But, in fact America was not a safe place to invest. In fact, the underlying economics were bad and getting worse every day. This huge infusion of cash, all borrowed from the "global pool of money" fed the America delusion of economic superiority.
Now, how did all of this happen? Two things contributed heavily to the problems. 1) Lack of regulation and government oversight. 2) Free market competition.
It's no surprise that there was lack of government oversight during the Bush administration. A number of crisises in America have occurred during the Bush years due to lack of oversight. The airline safety problems due to lack of FAA oversight, problems in the pharmaceutical industry due to lack of FDA oversight, problems with tainted beef due to lack of FDA oversight, problems in the military due to lack of oversight, and problems in credit, finance, and banking due to lack of oversight. Let's not forget that some of this also began on Clinton's watch, with lack of corporate oversight leading to the Enron and related scandals. So, what we have a is systemic pattern of lack of oversight with real, significant, and costly consequences.
But lack of oversight isn't the whole story. The other ingredient is free-market competition. Lack of oversight wasn't enough to drive thousands of businesses to make bad decisions. No, it required free-market capitalism to do that. A one point in the segment there is a discussion of how one lending company was "forced" to make loans that it didn't want to make and that it knew made no sense.
Why were they forced to make these loans? Because of market competition. Even though the owner of the company knew that the loans were a bad idea, he had to follow the market forces. If he didn't he would have been driven out of business right then and there. The story of the credit crisis is a story of herd mentality and the forces of competition pushing firms into greater and greater risk despite them not wanting to go there. New types of loans were devised in order to try and gain an edge on the competition, and as soon as a new type of loan, no matter how risky, was developed, everyone else had to follow suit or risk losing all of their business to others.
In fact it would be safe to say that many people in the business wanted government regulation, they were looking for someone to come in and bring sanity to the process, but that didn't happen. And that is the irony of this whole situation and the whole predicament of the American economy as a whole. Irrational "free-market" ideology is a religion that has overtaken the country and indeed the problems aren't even being driven by the people at the top. The irony is that many industries want government regulation, indeed historically industries have been leaders in bringing regulation upon themselves. The irony is that most real economists know that free-markets have pitfalls and need oversight. The irony is that it's not the wealthy who are most opposed to raising taxes on the rich.
The super-rich in America only makeup less than 1% of the population. The "well-off" makeup between 5% and 10% of the population depending on how you define it. It is impossible in an even remotely democratic country to arrive at the economic policies of the United States with only the support of the wealthy. It's not the wealthy who are voting for tax cuts for the rich and industry deregulation and corporate welfare, it has been the majority of Americans who have been voting for those things for the past 30 years. Many of America's wealthiest people have been campaigning for the past 10 years for increased taxation on the wealthy. That includes people like Warren Buffet and Bill Gates. A recent survey by Bloomberg found that the majority of investors say that increasing capital gains taxes would have no impact on their investing strategies.
See: Investors Say Tax Increase Wouldn't Alter Strategy
"Upper-income investors in the poll tend to side with the Democratic view."
There is a very strange irony in America, that is actually not so strange. Many of today's wealthy educated Americans want to make the economic system more fair and more level than many of the poorest Americans. Polls show that many wealthy Americans are very concerned about growing economic disparity in America. People talk about the fact that Barack Obama has a lot of support from well educated upper-income whites. Obama's economic polices are the most favorable toward the poor of any of the candidates, yet Obama's support is weakest among poor whites. It doesn't seem to make any sense. Obama's policies will certainly tax the wealthy more than any of the other candidates, yet he has the most support among the wealthy. Why is that? It's because the majority of wealthy people are well educated, and well educated people understand that we have some major fundamental problems in the American economic system right now and that the system is unbalanced and unfair and unsustainable and that the only way to fix it is to make the system more fair and to start investing more in our society and in our economy, and the only way to do that is to tax the people who can both afford to pay for it and who by definition receive the most benefits. Educated people understand this, and ironically it is uneducated poor people who are voting in large numbers in support of self-destructive economic policies that give more tax breaks to the rich and prevent necessary government regulation of industry.
The issues are obviously much more complex than this. There are social factors to take into consideration, and certainly there are wealthy well-educated people who are free-market advocates who push for lower taxes on the wealthy. But the point is that American economic policies wouldn't be what they are if they only had the support of the wealthy, because the wealthy really only make up about 5% of the population, and in fact many of those top 5% vote Democratic and favor higher taxes on the wealthy, higher taxes on capital gains, and more spending on social programs.
The problem in America is that the ideologies of the Cold War have become completely ingrained in the population and they permeate the thinking of people of all levels of education and all classes and of course the media. It is taken for granted that "free market capitalism" is good and that government regulation is bad, and these views are widely held even by those people which are hurt the most by these views. The average American citizen simply doesn't have any meaningful understanding of economics in general, much less the complexities of the changing global dynamics and how those changes impact America.
There is an interesting presentation that gives some idea of the changing dynamics of the world called Shift Happens. You can watch it below:
The website for the creators is here: http://shifthappens.wikispaces.com/
The point of all this I guess is that we are living in a highly complicated global economy. Most Americans today really have no concept of how this all works. The Cold War rhetoric about the "triumph of capitalism" and the virtue of "free-markets" really has no place in a meaningful discussion of economics anymore, yet that is still the propaganda that permeates American thinking, to our own demise.