Built to Fail: Key Lessons from the Financial Crisis

[marmar]

from Minyanville:



Built to Fail: Key Lessons from the Financial Crisis
Satyajit Das Jun 16, 2009 9:10 am



The key lessons of the global financial crisis (GFC) may be that the current economic order is "built to fail."

The ability to sustain high rates of economic growth, decreed by governments and central bankers, is questionable. The aggressive increase in debt globally resulted in a sharp increase in sustainable growth rates, wherein $4 to $5 of debt was required to create $1 of growth. Approximately half the recorded growth in the US over recent years was driven by borrowing against the rising value of houses (mortgage equity withdrawals). As the level of debt in the global economy decreases, attainable growth levels also decline.

The world used debt to accelerate its consumption. Spending that would have taken place normally over a period of many years was squeezed into a relatively short period because of the availability of cheap borrowings. Business over-invested -- misreading demand and assuming that the exaggerated growth would continue indefinitely -- creating significant over-capacity in many sectors.

The nouveau Jeffersonian trinity -- "whoever dies with the most toys wins," "shop till you drop," and "if it feels good, do it" -- has proved to be unsustainable.

Growth in global trade and capital flows was also built to fail. It was built on a financing model where sellers of goods and services indirectly financed the purchase. When the buyer is unwilling or unable to pay, the seller suffers doubly -- sales fall and the money advanced to the buyer falls in value. ..........(more)

The complete piece is at: http://www.minyanville.com/articles/economy-debt-Japan-GROWTH-keynes-GFC/index/a/23116

[OHdem10]

1. In plain words, any observer will know in the future to beware when

and if once again--you see Wall Street roaring like lion
while the American Workers are losing jobs, losing wages
small towns drying up.

This whole Wall Street binge had nothing to do with Productivity.

Healthy Main Street = Healthy Wall Street. Otherwise, you
know the Casinos are open and a whole lot of gambling going
on.

[Turbineguy]

2. One of the things the article does is diffuse the blame from

where it belongs. On the Bush Administration/Republicans. Sure, lots of people were involved, but if you go against the tide, you lose. And the direction of the tide was de-regulation under the guise of free markets. A free market however only works when all the players are equal. Regulation serves to correct the fact that some have advantages that others don't.

Usually proponents of unfettered free markets like them because of the advantage they give to predators and financial cannibals. In theory the laws of supply and demand work. In practice, less so.

Gordon Gekko was right. Greed is good. It's what gets many people up in the morning and on their way to work to make the system run. But greed is destructive too. It is that part where regulation comes into play making things work better for everybody.

For the Bush Administration the important thing was that things looked good so that the economic destruction that was being wrought would not be noticed or be overlooked. In the end, they ran out of time and the system collapsed on them. It was supposed to hold up for a few more years.

In an economic system where all participate there have to be rules just like there are speed limits on highways.