The Bigger Picture
Published on June 18th in Metro Éireann By Charles Laffiteau
A few weeks ago I expressed a belief shared by other Americans that the worst of the global financial meltdown was now behind us, even though I still think America’s rates of unemployment and home foreclosures will continue to rise in the coming months. So today I want to conduct a post-mortem on this economic crisis by discussing both its origins and the dangers that still lie ahead for America, Ireland and the rest of the world.
Based on most news media reports, many people want to blame either greedy US bankers, risky sub-prime mortgage lending practices, a lack of government regulations or some combination of these three for precipitating the current global recession. But I view these as symptoms rather than the real causes of this unprecedented economic meltdown. The United States rightly deserves much of the blame though because the real roots of the problem do lie both with American business institutions and with American consumers.
You might also recall that when the current financial mess first began to unfold in the states, most European and Asian business and government leaders expressed a cocky confidence that their respective economies had “outgrown” their reliance on America as the world’s economic engine. “These are America’s problems; not the EU’s.” But as we have now seen, various EU officials’ once optimistic economic prognostications have since proven to be wildly off the mark. Like it or not, as the world’s largest economy, when America catches a cold, the rest of the world still sneezes.
As for the “real” root causes of the current global economic downturn, instead of railing against greedy bankers people need to take a look a bit closer to home. Much like successful “con artists”, those greedy bankers’ financial success was also based on their ability to take advantage of equally greedy consumers. That’s right; we need to begin by pointing the finger at ourselves before we start pointing it at others.
American consumers started and sustained the global economic boom of the past twenty five years by living beyond their means instead of within them. Personal savings by the average American consumer dropped from 11.2% in 1983 to its lowest point in our nation’s history at 0.4% in 2005. Since America was also producing less and less of the goods it was consuming that meant lots of jobs and export led economic growth for countries in Europe and Asia. Unfortunately though, when someone lives beyond their means they will eventually face a day of reckoning when those bills come due. In the United States that day has now arrived and the rising tide of unemployment and home mortgage foreclosures is the unpleasant consequence of years of economic profligacy.
Nor was the American consumer alone in this regard. While there has been much attention paid to sub-prime mortgage lending by banks to American consumers who had neither the financial resources nor the business acumen needed to become a home owner, that is only one part of the problem. Another less publicized part is that many credit worthy homeowners in America, Ireland, the UK and the rest of Europe bought bigger and more lavish homes than they could actually afford. Some others also bought second homes and investment properties thinking they could profit from the real estate boom.
In America and many other countries, including Ireland, it is mortgage loans on these homes and loans to the real estate developers who catered to these more credit savvy consumers that are now going into default. Sure it was way too easy to get credit to take these kinds of real estate gambles but let’s be honest here; no one pointed a gun at their heads and made them take these kinds of monetary risks. No, these consumers and real estate developers did so because they were every bit as greedy as those bankers they now want to see hung by their thumbs. So don’t pin the blame on sub-prime mortgages.
As for a lack of financial regulation the real cause in America wasn’t so much a lack of it, rather it was the ability of financial institutions to shop around and choose who they wanted as their regulator. The worlds largest insure AIG, as well as the two largest bank failures in the US, Indy Mac and Washington Mutual, all chose to be regulated by the Office of Thrift Supervision, which has now admitted it failed to do its job, instead of agencies like the FDIC that had a reputation for more stringent regulatory oversight.
But the real culprit behind all the easy credit available in the US and Europe was the three major global bond rating companies, Standard and Poor’s, Moody’s and Fitch. When AIG and other financial institutions put together those “securities packages” that included sub-prime mortgages and credit card accounts, they rated them as AA or AAA investment grade bonds when they were anything but “safe” investments. Banks in the US, Ireland, the rest of Europe and around the world then bought these bonds and made ever more risky loans because they thought these bonds were safe and solid assets. Not!
While I’m in agreement that the worlds’ governments had to step in and clean up this financial mess, the dangers I see ahead of us are that President Obama and other government leaders don’t yet have any realistic plans for spending within their means and eliminating the huge budget deficits they are running up.
In America, 7 percent of the estimated $1.2 trillion annual deficit for the next 4 years comes from the stimulus bill that President Obama signed in February and only 3 percent comes from the President’s health care, education and energy agenda. But 33% of those deficits are thanks to Bush’s irresponsible tax cuts and Medicare prescription drug benefit with another 20% linked to Bush’s Iraq war and Obama’s middle-income tax cuts.
I think erasing these huge deficits will become the biggest political issue of the coming decade in the US and Europe.