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     May 31, 2008
The bubble of all US bubbles
By Max Fraad Wolff

Two great issues define this moment in America: war in Iraq and economic turbulence dominate debates, fears and campaigns. Optimistic pitches can be heard about the effectiveness of the "surge" in Iraq and policy responses to subprime-driven economic pain.

Many and influential voices loudly tout economic and military success. Public perception on both fronts lags pundit wisdom. Polling data suggests that more and more Americans oppose staying in Iraq and believe the US is already in recession. There is an unusual disconnect between general opinion, policy and


reality. All we can know for sure is that either the general public or leading voices are very, very wrong.

The "surge" in Iraq and the surge in interest rate cuts by the US Federal Reserve are very similar. Both involve heavily spun attempts by authorities to postpone pain and avoid responsibility for past miscalculation. Each policy offers as a cure more of what created the trouble in the first place. This can last a while, not forever.

Loose money and narcotic debt dreams fueled the housing crisis run-up. Fear of loss was contained by assurances of endless credit, increasing housing prices and omnipotent Federal Reserve management. The bottom dropped out of these dreams in late 2006 and we began to admit the long obvious truths in the spring of 2007. Before spring 2008 dawned, the Federal Reserve, Treasury Department and experts were massively intervening to slash rates, offer larger and longer loans to more institutions and assure that the genie was already being put back into the bottle.

A broke government was going to hand out magic checks - with borrowed money of course - to a broke public. This entailed trying something new. Deficit spending and expensive, impotent cash hand-outs are so alien to business-as-usual in America. The solution to a debt-fueled explosion was to offer more credit for less cost to a greater array of large and largely indebted financial firms.

The folks at home, some of them anyway, would be getting US$300-$1,200 a few months after lenders and investors received several hundred billion in new loans, lower costs and credit access. A bigger brassier credit and assurance surge would do what past credit provision and assurance failed to do. It has, so far. It has also left in many out in the cold. They are poorer, angrier and worse off then they were last year.

The troop "surge" in Iraq was much the same. In January 2007, President George W Bush announced a troop "surge" to stem violence in Iraq and violently falling US support for his policy there. In response to much mayhem and death, the administration announced plans to send more troops, extend the tours of many and increase the US military presence in Iraq. In March 2007, eerily almost exactly a year before the Fed economic surge, Bush and company decided to send a further "surge" of troops into Afghanistan and Iraq.

Why? US and coalition military "progress" in both nations was inadequate, public support was waning and more of past failed policy was just what was needed. Like the Fed and Treasury responding to economic crises, the Bush administration decided that more manpower and money - more of the same - was the best redress. Faced with falling house prices, slowing economic conditions and serious debt problems economic officials decided on a surge in Federal Reserve credit creation.

The similarities do not end here. Rapid shifts in press attention away from negative stories and toward details of surge action help to deflect attention and awareness. The surges of money and manpower become the story. Lost in the rush of new exciting details and minor strategy debates are the actual issues.

What caused the great housing bubble to inflate and burst? Why are our wars in Iraq and Afghanistan so profoundly bloody and unsuccessful? Might there be serious problems with our conduct and policy?

Nope, these questions are not even worth asking! Instead let's engineer perception by debating the details of surging increases in failed policy initiatives. This is very slowly working less and less well with the general public. Housing prices keep falling, inventories of unsold homes keep rising and the labor market remains weak. Gas, food and many other prices keep rising, the US dollar remains weak. Iraq remains bloody - if less so - and our young men and women keep being maimed and killed. The perception, particularly the perception of those least hurt by failures and most helped by surges, improves.

More and more surge and rhetoric is required to move fewer and fewer people's attitudes. More spending and spinning offers less and less return. This is how bubbles burst. More and more is required for less and less gain. So it was with the housing bubble and the war. Recent economic and war polling suggests that an increasing number of our fellow citizens have declining faith in surges and growing fears of impending realities.

Max Fraad Wolff is a doctoral candidate in economics at the University of Massachusetts, Amherst, and editor of the website GlobalMacroScope.

(Copyright 2008 Max Fraad Wolff.)

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(24 hours to 11:59 pm ET, May 29, 2008)



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