November 3, 2008


Who was to blame for the credit crisis? (Sean O'Grady, 3 November 2008, Independent)

It took about 40 years for a reasonably consensual explan-ation of the Great Depression that could be rattled off in three minutes to emerge. Even with the perspective of today, that traumatic episode in economic history continues to generate some debate. (There are people out there who believe that Franklin Roosevelt caused the Great Depression, in case you were wondering). [...]

It may not take quite so long for us to get some sort of a grip on this crisis, or at least to develop an intellectual framework with which to analyse it. What is emerging is three schools of thought, or culprits if you like. These can be termed the "macroeconomic school"; the "regulatory school"; and the "banking school". The first, in effect, blames no-one and abstracts away minor consideration of institut-ional arrangements and political personalities to focus on the big picture. The scenario is quite simple, really. It starts from the well observed premise that much of the money that flowed into the western economies over the past decade came from China. ("China" here being shorthand for all the fast-growing, export-driven economies of the world, especially east Asia, and thus encompassing Malaysia, Korea, Indonesia and the like). That, in turn, originated in their large trade surpluses with us. In effect, we consumed more than we earned, and the Chinese lent us the money to carry on doing so.

And what did we do with the money? We created an asset bubble, an inflation in one particular type of investment. It happened, in the US and the UK, to be housing, but it need not have been. The money could have gone into any kind of asset, as it has before. Before the Great Crash of 1929, it was shares, as it was before the dotcom crash of 2000. The belief that the value of shares would only ever go up, that there was a "new paradigm" because of fantastic new technologies, fuelled these booms. In eighteenth century Europe, it was the South Sea Company's untold – and unreal – riches on the other side of the globe, the original speculative bubble.

In the 2000s, it was dream homes in Florida and semis in the English home counties that were the subject of a frenzy. It could have been classic cars, or antiques, or fine wines. It doesn't matter, except in the important sense that housing has a social aspect. Capitalism usually creates bubbles where there is a lot of cash swilling around, and no politician has ever, ahem, been able to abolish boom and bust. We will always have crashes, and it is foolish to suppose that we can prevent this sort of thing happening again.

Actually, no one blames FDR for causing the depression, just him, Hoover, and the Fed for making it Great, by pursuing deflationary policies during a deflation and not quickly undoing the missteps of the '20s: immigration restrictions and protectionism.

Mr. O'Grady, in turn, misapprehends the current slowdown, as witness the absurd notion that the difference between a house and a tulip bulb is social rather than a matter of capital.

Now, don't get me wrong, I have nothing against tulips--they're perfectly well-designed flowers. But the fact is that were every tulip in the world to disappear tomorrow it just wouldn't disrupt our lives one bit. On the other hand, were every house in the world to disappear we'd build one heck of a lot of new houses, no?

Now consider that, prior to the downturn, the population of the UK was set to increase by 4.4 million by 2016. And America is set to add 100 million by 2050. The appetite of these new Anglo-Americans for classic cars, hoity-toity wines and tulips remains to be determined, but this much we know: they're all going to require housing and we have an insufficient stock of said.

This, therefore, can be no more than a brief correction in housing prices unless we are so foolish (not to mention anti-human and un-Christian) as to take steps to arrest current demographic trends. We could seek to deepen the economic soft patch, in order to make out countries less attractive to immigrants. The 20s and 30s taught us how to do that: try to balance the budget; raise taxes; bar immigrants; protect trade; etc... The 40s and 70s added tools to our arsenal: mass deportations of "undesirable races;" genocide; abortion/contraception; etc... If we tried hard enough we could turn ourselves into East Germany and the wolves would roam the yards of our unoccupied houses.

But, as it happens, we're in the midst of a presidential election here in the States where both candidates promise (though you can feel free to doubt one or the other on certain aspects of their pledges): tax cuts; trade agreements; budget deficits in perpetuity; immigration amnesty; and even Barack Obama offers at least intermittent rhetorical opposition to abortion.

In short, the only way to permanently lower the value of housing capital is to decrease human capital, as Japan is doing. Because we are bent on increasing the latter instead, we can't help but increase/maintain the former.

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Posted by Orrin Judd at November 3, 2008 8:17 AM
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