The Financial Crash: What’s Our Narrative?
It has been more than five years since the financial panic that began in 2008 and cascaded into a stock market crash and depression. How many efforts have been made to explain to the public what happened? I started counting books about the crash on Amazon, 10 per page, and got through six pages before I stopped. Want to try to count the articles and editorials?
Going on five years, and the polls indicate that roughly half of American adults believe that Wall Street, bankers, and corporate CEOs were the cause—the villains. Period. My own experience is that, when pressed, these people get more specific about the cause: greed. A movie not worth naming, playing not long ago in New York theaters, portrays an America destroyed by corporate greed until a committee of wise men restore control by sending out “bounty hunters” to kill corporate CEOs. Is that movie part of an emerging “folk wisdom” about the crash?
Quite simply, we have failed utterly to explain what really happened. Of course, some of those books made the problem worse, but books on the crash by Peter Schiff, Paul Volcker, and John Allison—to mention only two of many—were far from populist rabble rousing. I say that “we” have failed because I penned two long articles about causes of the crash and panic that were hailed only by a few dozen people who already agreed with me.
I think we have failed because we don’t have a story: a story as simple as the one that businessmen got carried away in a frenzy of greed and almost burned down the house.
Here, then, is our story and how to tell it.
Do not use any statistics, financial figures, or percentages when you tell this story. We all have more of those than we have money left in our 401Ks. Save them till you finish the story, save them for the question period.
You start the story by explaining that businessmen, bankers, and brokers have been greedy—that is, eager for profits—since caravans fought their way across barbaric lands to trade with China. Everywhere and always, the strong desire for profits—greed–motivates enterprise. Crucial point: You can’t explain a once-in-a-hundred years financial panic (the previous one was in 1907), a worldwide panic that almost burned down the house, by reference to a factor that always has existed. It isn’t logical. It’s dumb (but don’t say that).
For the cause of a once-in-a-century event, we need more than ancient and omnipresent greed. Why doesn’t greed, and its inevitable excesses, regularly burn down the house? Think of an old-fashioned fuse box.
Sometimes the current surges—sometimes bank lending gets sloppy and excessive, a new financial instrument becomes a craze, and greedy but incompetent investors start taking on excess leverage. But the surge blows the fuse.
Free markets are self-regulating.
Free markets are self-regulating. Where only private capital is available, it is always limited. As more and more is demanded by over-indebted businessmen and financiers, interest rates rise. Capital gets scarce. The higher rates render some lousy investments unsustainable; businesses fail, brokers get no bonuses, some homeowners default on their mortgages. In other words, the current surges and the fuse blows. There is no more capital to feed the excess. Businesses and even industries suffer; but the house does not burn down.
I trust you have your listener’s attention. Fuse, self-regulating, surges stopped early on, temporary blackout, but the house is saved. I know that by this point I had my wife’s attention, and I have been trying to explain this for five years.
So what happened leading up to 2008? Another source of current had been flowing into the house—an outside source. And that source of current was unlimited. That source of investment capital was unlimited because it came from government, which could create unlimited new money. From a Federal Reserve that kept interest rates low no matter what the demand. From two government enterprises, the biggest mortgage agents in the world—Fannie Mae and Freddie Mac—that with government backing and special dispensation to “leverage-up” poured new mortgage money into the system favoring new home buyers with the worst credit.
The government had removed the fuses from the fuse box and replaced them with pennies.
The government had removed the fuses from the fuse box and replaced them with pennies, which no amount of current melts. Why? Because the flow of current gave the appearance of unlimited power, unlimited profits, bright light, a booming economy—happy voters, electable politicians. Why let the current blow a fuse and suffer perhaps a minor recession, or loss of profits for some companies? Just pull out the fuses and let the current flow.
This actually built up for years, with at first an occasional recession (blown fuse); but each time the government responded by upping the current of capital and yanking more fuses.
By 2008, the permanent and unstoppable surge of current from the government—what we call “easy money,” “easy credit,” “monetary inflation”–had overloaded every appliance in the house, including some very shabby and flammable ones—and the house burst into flames.
The financial panic of 2008-2009, precipitating the stock market crash and depression, struck when the system was so distorted that no amount of new current—easy money—could keep it going and bankers, stockbrokers, and mortgage brokers flamed out. And in those flames, a huge amount of capital burned up.
And that is the story.
Bankers, brokers, financial speculators, and homeowners had a role in the crash. No one denies that. They took advantage of the endless capital, the low interest rates, the largesse of Fannie and Freddie. Greedy, as always. As you and I are greedy about getting paid as much for our work as we can—but encounter the inevitable market limits.
But ordinary greed, ancient greed, was enabled by government to soar to wild excesses. The self-limited mechanisms of the market, the fuse box, was incapacitated.
The house that burned down was the private financial system, but the cause of the fire was government intervention. You can blame the homeowner because his house burned down—and he played his part—but don’t call him the necessary and sufficient cause. The cause was government.
This story, stripped of all statistics, all detailed examples, is the sound skeleton of a new persona—the villain of the crash of 2008—that can be fleshed out with all our statistics, charts of money growth, historic context, and macro-economic analysis. That persona will rise and walk because it has a powerful skeleton.
This story has the virtue of being true, but also of stating our case in the most essential terms. Your barber will understand it. Even a senator or two or a Princeton economics might understand it.
I tell you that with confidence. Because when I finished telling this story to my wife, she did not say, as she has for five years, “You know I don’t understand all that stuff.”
She said, “How come people don’t see this?”
And, after a moment, she added: “You ought to write that, so people will get it.
First published in Financial Sense
About the Author: Walter Donway
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