The Economy: So What's The Problem?

May 11, 2008

So what’s the problem?  The money machine proceeds from Wall Street’s personal printing press has produced arcane financial instruments in the form of computerized chicanery that has resulted in a false sense of prosperity that has tilted into “uncontrollable” gross excess.  Now global confidence in American securities has been shattered, the dollar debased, and the crown jewels of American industry put on auction to foreigners.  Work on solutions? Not so fast.  We are a country in denial as we continue the concealment that could cause the crisis to stretch out for years as financial and government leaders continue to downplay the problem.

The net result of cheap money has sucked out everything but the brine.  The money tsunami that has kept American markets afloat has also created a waterlogged world in its wake.  The American dollar is the world’s reserve currency. The United States has an obligation not to create liquidity in excess of world demand even if that means accepting slower growth at home. But, as the saying goes: “time flies when your having fun” and, after a quarter century of chipping away at government, the domestic public sector in the United States has been impoverished and corrupted, and now, we’re paying a price for it.

A couple years from now, when we’ve finished digging out from our financial markets debacle, we will need to restore some balance.  The very first priority should be to restore effective oversight over the finance industry.  The American regulatory scheme is based on the insight that government can best support financial markets by ensuring that investors get accurate information.  To manage the massive volume of American security issuance, the designers constructed a system that operates with a relatively small central staff, relying on the integrity of the accounting profession, the Securities and Exchange Commission as well as private rating agencies.  After a quarter century of anti-regulatory zealotry, however, and a parade of fiascos from the S&L crash through the Enron’s and WorldCom’s and now the housing market mess, the credibility of the system is at risk.

To put it simply, it’s time to take our heads out of the sand, face the problems, fix them and then move on to a better world. Won’t happen, so fasten your seatbelts and prepare yourself for the rocky road ahead.