The history behind this recession

The great fueling of the US economy by Greenspan, Bush, and that external event called China

(Random thoughts about the storyline leading to today’s recession.)

I’m trying to analyze the events that led to our current economic recession.

When the tech bubble burst, both the fiscal policy side and the monetary side reacted very quickly and very sharply. The results, it seemed, were immediately palpable. Growth was sustained thanks in large part to the absence of inflation. The authorities took credit for their actions, but a larger effect on the rapid recovery came from one external factor of growing and gathering impact: China. The effect that China had on the world was known, but it wasn’t reflected through policy. Indeed, China provided a steady contribution to the US from the 1990’s onward. More pointedly, China was responsible for sweeping the US back onto it’s feet, providing cheap products to it’s consumers in return for business opportunities and a resurgence in certain sectors (notably mining, engineering).

Now these over laxive economic measures spurred and sustained consumer spending and the price of property. What went wrong with the american consumer? First, a housing bubble: price of property was ahead of itself. But this wasn’t quite as bad as some people thought: Prices of property have slowed and receded in the past years but not nearly as much as in 1992 (?). What went wrong had to do with the margin of error that buyers kept in financing their dream house. Interest rates were very low for too long. Savings levels were low throughout that period. Prices of bonds were out of wack with the normal healthy signs of an economy.

The overly optimistic house buyer was sustained and made more dangerous with the diffusion of debt through new financial products. In my opinion, the fault here is that risk was made an object of speculation. No matter how rational, educated, mathematicised the decisions on creating and then trading these risk assets, the fact that now many investors traded small parts of a huge debt that is ultimatelly redeemable only at one major bank or another, where the investor does not have the liability of the debt as a whole, but only for his share. This is a failure of markets. The market ran ragged, untamed by his master.

There was one alarming stat that got mentioned but maybe should have been acting upon: savings rate. America was fuelled by it's consumer spending spending spending.

Artificially created systems of enough complexity can have unintended consequences, and the global economic system is one of the most interesting living, artificially made system to study.

Now as soon as something else came up (rising gas prices, thanks in large part to China and to structural effects in the petrol industry), or for that matter, any other thing that happened, the house buyer with no savings couldn’t keep up. Sub prime loans started to bust, affecting their lenders and the trail of debt sharers financing them. Defaults on those were then so great that it brought housing companies to their knees, and then big banks. A credit shortage in that sector created shortage for all other sectors and now liquidity is sparse and problematic everwhere. Now we are seeing falling numbers in corporate investments.