THE DAY THE EARTH WAS CHEATED!!
The first thing I would like to mention in this article is that it is “Not against any particular economy”. It just explores the “HISTORY OF ECONOMICS “and gives a brief account of the causes of the current recession (within the limits of my knowledge).The roots of this recession lie in the economic situation of the world from 1980.
THE RISE OF CAPITALISM
Before 1980, the government was considered the best tool for distribution of money. Slowly, Marxism took over as the main form of economics in countries throughout the world in which need was considered as the main tool for wealth distribution. After 1980’s the role of the government started undergoing a transformation and communism started to fail .During late 1980’s and the start of 1990’s , many events such as the breaking of the Berlin wall, disintegration of the USSR marked the end of the communist theories of economics and capitalism took over.
Thus then was the time when Marx had failed the government and the markets had failed communism. Thus, most of the developed economies of that time started practicing capitalism. Not only did the countries practice capitalism but they wanted to make their model a role model for the rest of the world.
"THERE IS A CRISIS!"
Hence, most of the discussion at every level (political, media, intellectual) during the 1990’s till 2001 was on economics. After 9/11, the discussions shifted from economics to terrorism. And till 2007, terrorism dominated the news, politics etc. After the early 2008, the discussion has again shifted, this time to an amalgam of terrorism and economics because the recession period points at great danger in the form of the total collapse of the financial architecture of the world. Hence there’s confusion. The extent of confusion is such that even the best of the minds of the world are able to reach a consensus on only one thing... that “THERE IS A CRISIS”! Beyond that they are not able reach any consensus on the cause of the recession. Some say it’s the banks, some say it’s the society or consumers….. .
THE FOLLY OF CAPITALISM
As we are talking about the developed economies and since US is considered as the most developed economy, our discussion will also be limited to it. The two most important points in the free market capitalism in 1990’s were that 1) the stock market was the most endured tool of wealth creation and 2) the consumers spent a lot as a consumer spending driven economy was the most sustained from of economy.
Therefore a huge amount of consumer spending and a huge hype created in the stock market marked the US of that time. Thus, the consumers spent beyond their needs and the wealth ( not only of consumers, but organizations and corporations) was spent in the us stock market. And since US was booming at that time, they began exporting this strategy (and the countries who adopted this are the biggest victim of this economic crisis). Till the late 1990’s, the Silicon Valley was booming and t-stocks attracted the maximum investments.
Then in 2001 the .com bubble burst, the market capitalization had failed and much of the investors wealth was reduced to 0.And post 9/11, the business confidence in the US hit a new low and this changed and transformed the economic downturn into a crisis.
DAMAGE CONTROL - From .com bubble to housing bubble!
So, Some damage control was required by the US because their model could survive only if the people were encouraged to 1)spend as they spent earlier and 2) be closely associated with the stock market .But, business in US was almost synonymous with the stock market and it was impossible to separate business from the declining stock market. Thus, a new model was needed within the framework of the old mindset as there could be no economic activity without investment from the people and US had to give people a new portfolio of investment. Thus, we a shift of investment from the stock market to the real estate market.
Suppose someone had bought a house for 1 million $ and now the cost of the house was 5 million $ and hence the person had a passive investment of 4 million $ lying waste. So, the banks decided to give a loan of 4 million with that house as collateral to encourage people to spend. This resulted in more spending and people started buying new houses from the 4 million loans assuming that the value of the house would reach 10 million in the next 10 years. Thus a housing bubble was formed. But the problem was that the asset creation was illusionary (i.e. the banks never had a collateral of 5 million with them, it was just a house that was “assumed“to be marked at 5 million) and the loans on that house were real. When the housing bubble burst, the value of the asset fell but the value of the loans never fell down, they were still 5 million. Hence there was economic trouble in the US.
But then this crisis should’ve stopped in the US only. How did it transcend boundaries and reach the other countries.
GLOBALIZATION OF THE CRISIS
Here the real culprit is considered Allen Greenspan who started sallying these loans to other banks abroad and Banks like Lehman Brothers (which filed for bankruptcy) and others started selling these loans to other banks. They took a group of these loans, packaged them as CDO’s (Collateral Debt Obligations) and exported them to other banks. Moreover, These CDO’s were given AAA rating by rating companies such as Moody in 30 sec because they got commission for that. Ironically, In India it takes 3-4 months time just to get a load of 1 crore but then trillions and trillions of dollar worth packages were rated the best in just 30 sec. And these were sold to banks in Europe, Australia, newzeland etc. Thus there was a complete disconnect between the original borrower (somewhere in US) to the final lender (somewhere across the pacific). Thus his created a ripple effect and the recession transcended boundaries and took over the whole world.
(* that is why the revival package in the US is some 800 million dollars, the revival package for the EU s 4 trillion dollars).
This irritated a lot of economies and particularly those of the European Union. And recently the German finance minister and French president in their speeches, pointed to the same fact, on the same day as though connected by telepathy that…
“THE UNITED STATES OF AMERICA HAD CHAETAED THE ENTIRE WORLD”