After enjoying a period of general, relative economic calm and growth since the 60's (and certainly since the Great Depression and World War II), America might be heading for a time of unprecedented economic upheaval.
The Bush administration has done considerable damage to American institutions, values and underlying economic competitiveness. Our international reputation to lead the world is ruined. America is now saddled with the largest debt in its history, China has grown into a challenging world power, more jobs have been shipped overseas, Iraq costs us billions (not to mention the emotional costs), economic disparity is accelerating and more fundamental warnings are released weekly. We are teetering on an economic cliff and it won't take much (inflation? increasing unemployment?) to send us down a slippery slope.
America is at a cross roads and needs visionary leadership more then ever before. But, it still remains to be seen if the Democrats can unravel and help solve the current mess. Is it too late to regain American competitiveness and vision?
As many people commented on my last blog posting, we already seem to be heading into an economic depression --- for the middle class at least. Wages are down and personal debt is at an all time high. More and more of us are living paycheck to paycheck. This is all masked by a low unemployment rate, record corporate profits, a sky rocketing stock market and the main stream media focus on materialism and the wealthy.
The last attempt to reach the American dream of owning a house was to lunge for that final gold ring: the subprime mortgage.
The mortgage crisis is just another "Canary in the coal mine." While the middle class continues to scramble for scraps and callously criticize people for "being irresponsible" during the mortgage frenzy, the big boys are laughing their way to the bank.
Here is an excerpt from an interesting article by Jon Markman with one of the world's leading experts on credit derivatives, Satyajit Das.
The credit bubble is just starting to unwind, Satyajit says. And while U.S. borrowers are being blamed for the mess, they were really just pawns in a global game."Defaulting middle-class U.S. homeowners are blamed, but they are merely a pawn in the game," he says. "Those loans were invented so that hedge funds would have high-yield debt to buy."
Rather than joining the crowd that blames the mess on American slobs who took on more mortgage debt than they could afford and have endangered the world by stiffing lenders, he points a finger at three parties: regulators who stood by as U.S. banks developed ingenious but dangerous ways of shifting trillions of dollars of credit risk off their balance sheets and into the hands of unsophisticated foreign investors; hedge and pension fund managers who gorged on high-yield debt instruments they didn't understand; and financial engineers who built towers of "securitized" debt with math models that were fundamentally flawed.
According to Das' figures, up to 53% of the $2.2 trillion commercial paper in the U.S. market is now asset-backed, with about 50% of that in mortgages. When you add it all up, according to Das' research, a single dollar of "real" capital supports $20 to $30 of loans. This spiral of borrowing on an increasingly thin base of real assets, writ large and in nearly infinite variety, ultimately created a world in which derivatives outstanding earlier this year stood at $485 trillion -- or eight times total global gross domestic product of $60 trillion.
This credit crunch is just the beginning of an overall economic unravelling. And, the middle-class and poor are going to be the one who will suffer disproportionately... again. A society cannot continue to flourish as inequity continues to grow.
Almost half of the newcomers on Forbes Magazine's list of the 400 richest Americans made their millions in hedge funds and private equity investments. Innovators such as the Google founders have justifiably been rewarded for creating value; but these hedge fund traders and "investors" simply move money and debt around, take their huge piece and then leave the rest of us to deal with the aftermath.
I decided to ask my 92 year old Grandmother what she thinks about the current economic climate. As someone who lived through the Great Depression, she feels that our society is now technologically advanced enough to avoid another economic crash. "People are more educated and innovative these days," she explains. But can innovation and technological prowess save us before it's too late? And, maybe even more importantly, will Americans elect visionary leaders that can put us back on track?