This is now a national disaster for the United States. The centrality and
import of inexpensive and available credit to America's function is total.
We have moved well beyond a subprime crisis. We have moved well beyond a
financial industry crisis. The position of the US economy is in jeopardy and
the employment security and wealth of the nation is now very much in play.
Like the nations of East Asia in the aftermath of the Asian financial crisis of
1997-8, or Eastern Europe after the collapse of the Soviet Union in 1991, our
way of economic life - warts and all - is imperiled. No matter what happens as
the week comes to a close our lives have changed. Shock waves are emanating out
from the debt collapse ground zero. US$3.6 trillion in global stock market
wealth has evaporated this week. The job losses and macro effects are not far
Over the past 14 months one assumption after another has been proven unsound.
Why? We have been waiting and working toward a return of normality. The
normalcy of the past six years is illusion. Credit conditions designed to keep
the macro-economy and asset prices at peak levels filtered into balance sheet
leverage, government debt and consumer debt levels well beyond prudence. This
happened because credit easing does not and cannot substitute for earnings,
wages or tax revenues.
Well beyond the US's oft-discussed addiction to oil is its never-mentioned
addiction to foreign credit. In 2007, America imported 49% of total global
reported imported capital, the lowest US percentage in several years. Thus, our
25% reported share of oil consumption is much lower than our share in imported
capital. We became addicted to debt - especially foreign debt - and that
addiction becomes an illness in a credit constriction. Leading US banks and
financial firms grew large and reaped huge profits writing, packaging, trading
and rewriting, repackaging and retrading all that borrowed money. Thus, the
boom created the bust.
To move forward we need coherent national policy from leading firms, regulatory
agencies and pundits. We need to move forward toward lower debt, higher
earnings and sustainable government spending. We need drastic and proactive
reform of regulatory bodies. We have a patchwork of overlapping regulation in
some areas with giant gaps of under-regulation and absent regulation. This has
created a situation where actions are piecemeal and graceless in the midst of a
Regulation is inherently prophylactic and cannot be properly created in the
crises it seeks to prevent. Today calls for a single coherent and transparent
approach to falling house prices (destined to continue), asset write downs
(destined to continue) and liquidity crises (destined to continue). We simply
cannot have Sunday closed-door meetings deciding the fates of tens of thousands
of jobs, life and death for industries and billions in investor losses. Want to
see what that creates? Pick up a newspaper.
House prices must fall. We cannot keep them up at levels they should have never
reached, born of too-cheap and too-plentiful credit. We need to move interest
payments to the mature end of home loans. Payments need to generate equity
gains and put borrower skin in the game. This will hurt, sometimes very
unfairly. So does what we are doing now.
We will need to write down loan principle, where required, in orderly small
increments, on the order of 2.5% at a go. We need to look at government
spending to shore up jobs, tax revenues and ongoing survival of significant
businesses. We need a federal commission to evaluate and value the assets on
balance sheets and publicly report their findings.
Not all mortgage-backed securities are trash! This offers a chance to prevent
excess write-downs from destroying solvent firms, pensions and investments. In
short, it is time to move beyond blaming markets, regulators and borrowers
toward a coherent national strategy.
Max Fraad Wolff is a doctoral candidate in economics at the University of
Massachusetts, Amherst, and editor of the website GlobalMacroScope.