Financial Crisis and American Decline?

Is the current financial crisis an indicator of the long term decline of American power? When I wrote Bound to Lead in 1989, the conventional wisdom was that the United States (and its economy) were in decline. I did not believe it then, and do not believe it now. I was in Paris last week, and spoke with a prominent French economist. He urged that we pass the legislative package quickly because, in his words, " you have a financial crisis, but the real American economy is still strong." There has certainly been a lot of schadenfreude on the part of Putin, Chavez, and even Lula da Silva. Hugo Chavez skipped the opening of the UN to visit China saying that Beijing was now much more relevant than New York. Russian President Dmitry Medvedev said the crisis was a sign that America's global economic leadership leadership was drawing to a close. Putin blamed non-Russian causes for Russia's stock market collapse of more than 50%. But as noted in the New York Times after the failure of Congress to act last Monday, "In only a few days, Latin American leaders have gone from schadenfreude to fear." New York and Washington are still more important than other capitals. Certainly, Wall Street and Washington have made a mess with their hubris and failure to regulate, and a painful recession is likely. They deserve the criticism they are receiving. However, assuming that we accept the pain of recovering from the bubble promptly (avoiding the Japanese trap of prolonged bailouts), and remain open to the rest of the world, the American economy still has impressive long term strengths that are reflected in our productivity. But we may pay a price for the recent debacle in our soft power. The seeming effectiveness of our capital market institutions provided an important source of attraction to the United States. Will we recover that or will it be a case of "once burned, twice shy?" Let's hope that an Obama victory next month will start the recovery of both the economic and soft power that the Bush Administration has squandered over the past eight years.

Comments

[DuganS1]

I was around in 1989 and I never heard a single person in private, on TV, or on radio say that American was in decline. I did hear that a lot, however, in the late 70s and running into the 1980 election.

[Henry]

In 1987 the FSLIC (federal sav and loan ins corp) knew that the hole in the Savings & Loans was approx $1 billion and that the china syndrome was losing an approx $30 mil per day until 1989 when the Geroge Sr admin bailed the FSLIC effectively nationalizing the loss that would otherwise have had to occur. Hint...the regulators knew, yet did nothing. Heard of patriotism?

[Henry]

oops... the $1 bil figure above was typo, should have been $100 bil. (a billion is pocket change for these boys). The point is that these losses do not develop over a couple of months, the sav & loans crisis and the current wreckless hedgie derivative binge which used the securitizations as a vehicle to leverage their ill deeds.

[Zeje]

Productivity? What do Americans produce? US has become a "service" economy -- based almost entirely on financial services -- those no-good junk bonds that Wall Street sells overseas as AAA. Paulson and his pals would like to start it up again (selling junk), but they won't be able to. Foreign investors now know.

[swift goat pet for truth]

weapons. instruments of de ath and dest uct ion.

[Chavez08]

What "services" do we have anymore???? We've had nothing but credit based consumption the last 20 years and now we just have slavery since the credit has run dry.

...while the University of Chicago polishes the monument of Friedman.

[schoolmaster]

0k

[Chavez08]

The consolidation of capital is the cause of most of our problems. Capitalism, without checks and balances, created the allure for "teaser rates" in the housing market by first taking our incomes/jobs away then raising inflation on things that matter so we can barely survive then coming back to the disenfranchised American workers and saying; "Look, we both know you're poor now but you can keep your house if you play this game with us,..sign here!".

There are two economies in play here, - one for the rich and one for the slaves. The only reason you're even blogging is because the rich men no longer have American workers to scr-e-w and now they turned on eachother and your portfolio isn't as laminate-worthy as it was a year ago.

Until the relentless consolidation of wealth and the subsequent global slavery is reversed, most Americans won't be concerned with your "rich mans" economy. Most of us hope you get knocked down to the fire pit with us so we can all suffer Capitalist oppression together.

In the meantime, I'm sure the establishment and their parrots will continue trying to make the tens of millions of us homeless, disenfranchised Americans disappear from the radar like Rudy did with the New York homeless.

All that being said, - we're not hoping for a comeback of Free Market Capitalism. We're waiting for a leader to organize us to fight against it.

[KillTheMessenger]

The US has been in intellectual freefall at least since you gave Carter the shaft. So of course you would not notice a difference since 1989. Nothing has changed since then. We are still in freefall, except that we have been accelerating a lot since then. But according to the laws of physics that will go completely unnoticed in any local frame of reference. You need to learn how to see with the eyes of an outside observer and then it becomes all too obvious.

[Yermammy]

Oooooo... that's some good drugs! What do that call that on the streets? (Amy Poehler from "Baby Mama").

Keep dreaming, pal. Meanwhile, we'll bear witness to what's really going on.

Bring charges up and convict Paulson. Impeach his bosses. Then charge them with first degree murder.

[Christian]

Mr. Nye, I would like to know if you consider the views of Andy Gauss to be accurate, and if so what can we do about it. From what he says we have an elite class that has control of our money to do what they wish, that they have been in control since the Johnson era. I hope all of you will listen to this interview on our current crises. When I heard it, it struck home with the sound of truth and if so, it's time for a little blood letting on Wall street, off with their head where all can see. This small group has hurt millions. If you rob me of 5 bucks on the street you will go to jail, but these guys have put hurt and stress on people across the globe. They say there is plenty of time to lay blame, we should accurately place that blame before we give out money.

www.projectcamelot.org/andy_gauss.mp3

[cylindar]

Obama will be able to do little. The Republicans have totally trashed the US economy and no one man can bring it back. Things will have to play out, people will suffer, and hopefully learn the valuable lesson of never ever voting for a Republican as long as they live.

[Erdgeist]

It really isn't that difficult to restore the economy if you ignore much of the gibberish about free trade (in essence, labor arbitraging) and the importance of financial markets which, historically, have only made recessions, and depressions.

I have studied Hamilton, Clay and Raymond, not to mention John Rae. These men really understood national economics: that what is good for the nation comes first--not Wall Street. They would find our modern economy to be capable of making huge amounts of debt but little else.

To cut to the chase, we need to bring back the revenue tariff which could generate upwards of 800 billion a year (40% on all imports including oil), and the protective tariff so that we can rebuild a "productive economy" not a service sector economy (which doesn't make so much as a toothpick). Perhaps just as important, we need a scrupulously regulated financial market bringing it back to entrepreneurism--not speculation.

[larry278]

Whatever. There is work to do. Play the blame game after we stop the melt-down. This is the time for sweat, not sophistry.

[BillZBubb]

It is a peculiar trait of the right wing to always claim others are "playing the blame game" whenever they screw up--which is often. Talk about the party of personal responsibility and sophistry!

Actually, now is the time to put the blame squarely where it belongs: On George W. Bush, the Republican party, and those who supported them. The reason to put the blame where it belongs is clear--so that the same people who were so wrong in the past don't get to decide the future. The reason to put the blame where it belongs is so that the failed Republican economic philosophy is discredited before it can do more harm.

[ERICDEMOCRAT1]

I fully agree...I still believe that this so called "Bailout Bill" was a swindle. It's filled with pork. I still believe that the situation was not as dire as the Bush administration made us believe it was. This is a staging and a diversion from the McCain campaign, because he realizes he's losing.
Ya know at first I thought this was going to be a close election. Now I believe it may be the biggest landslide in history, yep..."You Betcha".

[cylindar]

A landlide for Obama, that is!

[WorkingClass]

............"the conventional wisdom was that the United States (and its economy) were in decline. I did not believe it then, and do not believe it now".

Believe it Mr. Nye. The United States of America is bankrupt. Insolvent. Broke. The combined debt of the American government and the American people is so great that it will NEVER be payed. The full faith and credit or the United States government (the ability to tax its citizens) is now worthless. As we speak the Fed is figuratively "printing money" as fast as it can in a futile response to try to stave off the inevitable collapse of our economy. The result will be a hyper-inflation that will impoverish us all. American workers will experience long days of idleness and fear that will become hunger and want. There will be lawlessness and disastrous internal migrations. Believe it Mr. Nye. We are in the finale stages of decline. Our constitution is a dead letter. Our rulers are beyond our reach and totally corrupt. We are regarded by the rest of the world with fear and loathing. Its midnight in America.

Fiat money is not the problem. Debt money is the problem.
Government is not the problem. Bad government is the problem.

[Henry]

There is a fundamental about banking that is not well understood. When a bank makes a loan it creates money. This brand new money finances economic activity either consumption or production. When an investment bank underwrites an IPO, it creates brand new money (by borrowing new money from a commercial bank) to "monetize" the slices of ownership of a here-to-fore nonliquid net worth of some corporation. This "creates" wealth and is the essece of investment banks. Instant millionaires (think of google's net worth monetized in their ipo viola)
When credit is expanding (loans are being made) the game is on. However when credit is contracting, of necessity so is economic activity. The big thing of the depression was stashing cash under mattresses and banks too too scared to lend. We are witnessing the same phenom right now. Why on earth would I buy a house today when I can wait until April 2009 and purchase at a price that will be 20% less??? This is the fundamentals at the local level. Think about this. So where are the IPOs? Where are the home purchases. This is the stuff that puts fuel (money) into the real life game of monopoly that we play?

[worrierqueen]

"There is a fundamental about banking that is not well understood. When a bank makes a loan it creates money. "

Not only a bank, every time you use your credit card to buy a bottle of milk you create money. This is known as the debt theory of money and is the system we have employed since we went off the gold standard during WWI. The main problem of the debt theory of money is that all interest must come out of the original money creation on repayment of the debt which is why this collapse is not only necessary, it is inevitable. To avoid these boom/bust cycles we need a new method of money generation that doesn't automatically create debt when the money itself is generated.

[rphillips4165]

What everyone hasn't figured out is that money is only a piece of paper with picture printed on it. It is only worth what someone else is willing to give you for it. That's what has been destroyed, peoples belief in what money is worth. The government cranking out more and more of it is only going to make what is out here worth less.

[Herrington]

Mr. Nye, when you wrote in 1989 the polemic was that socialism in the form of unions would be the destroyer of America. Now it is capitalism that has or will soon destroy America. But in comforting hindsight, none of it, not British Imperial rule, the excess of Robber Barons, WWI, WWII, Communism, terrorism, Neo-Con hubris, nor the vast right wing conspiracy has more than an outside chance at destroying America.

At the end of every day, in the dreams of every night, and on waking to a new day, what Americans hold dear and what is their solace and salvation is a moral and ethical certainty that the things for which we stand as a nation shall not perish. They shall not perish.

It is in our culture, literature, film making, schooling, Constitution, song and every repertoire. For what we stand is as imbued in us as breathing. Now if we could collectively bring that to our political thinking outside of eminent threat of destruction it would be nice.

[worrierqueen]

pt 3

Having run out of money long ago amidst the sands of Iraq flexing the neo-con's Pax Americana muscles in one last spasm, the US government has two choices described by Churchill as between the unpalatable and the unendurable; either go overseas cap in hand, tugging the forelock to beg for more foreign capital making them even more indebted to their strategic rivals, or print more US$ which will trash the currency and feed inflation. If the US was a company, it would be wound up for trading insolvent and all the good options are long gone. All that treasure accumulated under Clinton that was wasted on war could have been used to almost completely decarb the US economy and make the US energy independent by now. A complete and systemic failure of leadership for over a decade (Greenspan being originally hired by Clinton after all). And now grandpa and Barbie are riding into town on a bear to clean up Dodge city. You couldn't make it up.

If you want to hear an interesting debate between two US economists check this out http://www.abc.net.au/lateline/content/2008/s2378366.htm.

[Henry]

http://www.noblesoul.com/orc/bio/greenspan-time.html

Greenspan was originally appointed to the Fed by Ronald Reagan.

[worrierqueen]

pt 2.

Then putting Paulson from Goldman Sachs in charge of market regulation was putting the fox in charge of the chickens. He and his fellow travellers from the other investment banks along with Greenspan had set up this system and Paulson was going to police it? I don't think so. As soon as Cheney snapped at (then) Treasury secretary Paul O'Neill "Reagan proved deficits don't matter" on being warned of this looming financial crisis (its been a long time coming, and O'Neill resigned after Cheney's answer) and Bush told the American people to sacrifice in wartime by popping down to Wal-Mart, the writing has been on the wall.

The end result is pretty inevitable, and it appears that America is going through what Australia went through in 1992, the infamous "Recession we had to have" as Keating so eloquently put it so that we could "de-spiv the economy". We too had the Skase's, the Bond's, and "bottom line" Laurie Connell, to name just 3 of the white shoe brigade who were more flash than cash. But they are all long gone now.