Being American Means You Don't Have to Suffer

Recently there has been a lot of finger pointing going around about who is to blame for the crisis. A lot of people point to the Wall St. banks, but this is ridiculous in so many ways. I will address it in another post. Suffice it to say they are the victims of this crisis just as much, if not moreso than anyone. Some say it was the bond rating agencies, who mispriced the risk in order to get deals, or the predatory lenders, who gave mortages to people who couldn't afford them. While no doubt, they both had more than a little to do with this, they are probably more a symptom than the actual problem. Then there are the people who claim it was Greenspan, in a sense they are right. As far as individual people go, the blame resides more with Greenspan than anyone else, but ultimately the blame falls upon the American consumer and American society.

The United States was founded on the principles of the enlightenment. Chief among the aims of the enlightenment was to eliminate suffering through the use of reason. The Enlightenment grew out of the backdrop of 18th Century Europe, a continent that had been savaged by religious wars between Protestants and Catholics since the start of the 30 years war in 1618. America was founded as a reaction to the brutality and intolerance found in Europe during the 18th Century. A land of democracy, where all would be equal. This has worked pretty well to this date. Sure there have been hiccups along the way, Civil Wars, Great Depressions and such, but the ingenuity and the individualism that this system fostered gave birth to a great country. Around the 1980s, however, Americans view of what it meant to be an American became perverted.

American society up until that point was one, which demanded prudence and self sacrifice, but with the coming-of-age of the self-indulgent baby boomer generation, America shifted from being a society where the merit of a man was judged by his moral integrity and steadfast character, to one where the merit of a man was based upon his possessions. Perhaps more importantly, though, the baby boomers had grown up in a period of unprecdented stability. Despite the Vietnam War and the Oil Shock of the late 1970s, Baby Boomers never suffered the World Wars, Civil Wars or massive depressions of their predecessors. Additionally, they were born in the late-1940s and 50s, the birth of the era of convenience.

The Cultural Wars of the 1980s added a degree of moral ambiguity to American society, which had never before been present before. As a result, many Americans abandoned the pursuit of the "moral path" and searched for affirmation in more material things. As the society of consumption developed and won out over traditional American values, competition between neighbors was fostered over who had the newest gizmo, the nicest house, the biggest TV. The warped perception was born that a nice car and a big house were a birthright of every American. In short, being American began to mean never having to suffer. If a person failed to meet up to this standard, they had somehow failed their patriotic duty. Convenience became the other order of the day. Rather saving and striving for goals, Americans demanded all their wishes fulfilled right now.

To fund this new life style, banks began making credit cards more readily available. "If I can't pay for it now, I'll pay for it tomorrow," became the battle cry. While credit cards when used with discretion are certainly an extremely valuable financial innovation, in the hands of an undisciplined holder, they can spell financial death. As a result, Americans began comitting financial suicide for the dream of the new house and that nice, shiny Mercedes. However, rather than trying to check these practices, from 1987 onward the Federal Reserve would merely encouraged irresponsible spending, ultimately sending us down the road to the financial disaster that we see today.

In 1987, Alan Greenspan became Chairman of the Federal Reserve, succeding the Paul Volker, one of the greatest and most pragmatic central bankers in the history of the US. Within only 2 months of taking office, Greenspan would face his first crisis on Black Friday, August 11, 1987, when the Dow Jones Industrial Average plunged 22.7% in one day. To try to prevent further deterioration of the economy, Greenspan acted by lowering interest rates and pumping liquidity into the economy, a move that would become his trademark. The Greenspan Put.

Monetary policy is one of the trickiest, least understood, but most vital aspects of economics. The Federal Reserve was designed to serve as a politically neutral moderator of the US economy, ensuring that the economy never grew too quickly, resulting in nasty asset bubbles and inflation, nor suffered a too severe recession. On both these accounts Greenspan failed miserably. The Fed Reserve's chief weapons in their arsenal are control of the nations interest rates and money supply. By lowering interest rates and increasing money supply, the Federal Reserve allows banks access to more money at cheaper rates in times of economic hardship. These banks in turn are able to lend this money out to more consumers (through mortgages, consumer loans and credit cards) and more businesses (through traditional business loans and corporate bonds) at lower rates, resulting in greater consumer spending and more capital expenditure, thus reviving the economy. In times when economic growth and inflation are too high and unsustainable, the Federal Reserve can raise interest rates, thus slowing down the flow of money to banks and cooling down an overheating economy, thus preventing the formation of asset bubbles.

Throughout Greenspan's 17 year tenure, many hailed him as the patron saint of the United States' economy. Whenever the US economy was at risk, Greenspan would slash interest rates and let the money supply faucet roar, providing cheap credit. To salvage the US economy, Greenspan would effectively pump debt into the economy at cheap rates to encourage spending. The cheap credit available, whenever the US economy came into a recession merely encouraged America's addiction to debt. Whenever America would be teatering on the edge of a recession, Greenspan would bring it back from the precipice ensuring a soft landing.

One of the key things Greenspan misunderstood was the usefulness of a recession. Whenever an economy goes through a period of rapid growth, asset bubbles form as resources are misallocated. Additionally, many business practices that are not sustainable in the long term thrive. In a recession, however, many of the indulgences of the previous period of growth come to an end, and the economy is forced to rebuild itself in a more sustainable fashion. During recessions the seeds for the next boom are sewn as people are forced to get creative. Nevertheless, by constantly propping the economy up whenever America was facing a slowdown in growth, Greenspan failed to let economics take its natural course. He failed to let the markets right the wrongs of inefficient businesses and he encourced asset bubbles, most notably the current credit bubble we are seeing today. Rather he loaded the economy with debt to delay the inevitable. Like so many of his time, Greenspan was failed by the illusion that being American meant never having to suffer.

The straw that broke the cammel's back came in 2001 with the deflation of the internet bubble. For the better part of the 90s, computers were hailed as the greatest revolution in human history, and they were certainly revolutionary. Seeking to cash in on this new wonder, many investors wrongfully allocated resources to firms that had at best dubious prospects. Naturally in 2001, the bubble burst and many investors lost money. The United States entered into a fairly minor recession, as the economy corrected the overindulgences. Rather than letting the economy take its natural course, however, Greenspan lowered the Fed Funds rate to 1%, a ridiculously low level and kept it there for a year. Additionally, he encouraged banks and consumers to invest in housing, a quite bullish sector that had been left unscathed by the deflation of the internet bubble. In doing so, Greenspan ensured the growth of the current housing bubble and it's eventual bursting, leaving us with the crisis we have today. To merely call this a housing bubble misses the point here, though. This was a credit bubble. The issues were not with Wall St. Greenspan's easy money led Wall St. banks to load up on debt to ridiculous levels, something they are paying greatly for now. As the credit bubble is deflating it has been taking Wall St. with it. If it hadn't been housing and the over-leveraged financial sector, it could have just as easily been an over leveraged corporate sector. The issue is the amount of debt in the American economy and the fact that Greenspan made it too easy for too long, resulting from the belief that being American means you don't have to suffer.