- The 3 phases so far of the crisis.
- We have squandered the “golden hour.”
- What will happen in this third phase?
- The Election
The story to date, in three phases
(1) Collapse of the mortgage brokers, starting in December 2006 — met with laissez faire (indifference).
(2) Collapse of flawed financial institutions (Countrywide bank, Bear-Stearns, the government-sponsored enterprises) — met with massive intervention and bailouts.
(3) Contagion and failure of healthy institutions.
Note that the first two phases were characterized by confidence. Confidence that the problems were contained. Confidence that the government had the wisdom, knowledge,and power to solve these problems. Confidence that the worst was over. Happy talk by our leaders fueled this confidence.
Larger, sterner measures will be needed now, as confidence fades.
The golden hour
In emergency medicine doctors speak of the “golden hour”, a concept created by Dr. R Adams Cowley:
There is a golden hour between life and death. If you are critically injured you have less than 60 minutes to survive. You might not die right then; it may be three days or two weeks later — but something has happened in your body that is irreparable. (source)
Global leaders, both business and government, have squandered the golden hour — during which large and bold actions might have arrested the downcycle, or at least resulted in a controlled landing. Their actions have been reactive, incremental, and ineffective. Leaders take small steps in order to keep their options opened. That’s a delusion; time inexorably closes options. Their remaining options are both difficult and problematic.
The key error has been to address this as a series of unrelated interventions to help individual firms. A microeconomic response to a macroeconomic problem. As I have said so many times on this site, correct diagnosis must precede effective treatment.
How will phase 3 differ from the first two?
(1) We enter the third phase with considerable downward momentum.
(2) The credibility of business and government leaders has been expended, fruitlessly — and may be difficult to rebuild.
(3) Fear is appearing.
(4) Private sources provided much of the new capital to support ailing financial institutions; that will no longer be possible.
(5) The public policy tools used in phase one are exhausted — complex maneuvers with hidden costs (assurances to the public of a small price to pay): Fed loans, Fed purchases of junk assets, bailouts short of explicit nationalization, etc.
(6) The recession (US certainly, perhaps global) will become more severe, exacerbating the crisis.
Treatment of the financial system, not its parts, will be needed, IMO. This may come in phase 3, or be delayed to phase 4 — by which time the crisis will have grown more serious. What sort of actions might we see?
- massive fiscal and monetary stimulus programs,
- large scale and explicit nationalizations,
- coordinated central bank action to adjust relative currency values and control capital flows.
The change of Administration may halt or slow rescue operations at a critical point, esp. if there is a change of control in either or both Congress and the Executive branches.
Failure of the major nations to agree on a coordinated response to the crisis would have large and unpleasant consequences.
Unless its tenor changes soon, historians will marvel at the 2008 election. With so many great events taking place, the US public debates trivia. The major foreign and domestic issues of our time, immediate and pressing issues, remain almost invisible. I can recall no similar episodes in the past, either the US or other democracies. Does this mark our unfitness to govern ourselves?
Fortunately there is time. The election is our opportunity to influence these events, whose resolution might shape America’s destiny. Make your voice heard. Donate your time and money. Discuss these things with everyone you know, by every media at your command. The clock is running.
Update #1 — this is the glop both sides feed us
McCain speaking today (AP story):
“Our economy, I believe, still, the fundamentals of our economy are strong, but these are very, very difficult times, so I promise you: We will never put America in this position again. We will clean up Wall Street” … “The McCain-Palin administration will replace an outdated, patchwork quilt of regulatory oversight and bring transparency and accountability to Wall Street. We will have transparency and accountability and we will reform the regulatory bodies of government.”
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A few of the most important posts about this subject
A brief note on the US Dollar. Is this like August 1914?, 8 November 2007 — How the current situation is as unstable financially as was Europe geopolitically in early 1914.
The post-WWII geopolitical regime is dying. Chapter One, 21 November 2007 — Why the current geopolitical order is unstable, describing the policy choices that brought us here.
We have been warned. Death of the post-WWII geopolitical regime, Chapter II, 28 November 2007 — A long list of the warnings we have ignored, from individual experts and major financial institutions (links included).
Death of the post-WWII geopolitical regime, III – death by debt, 8 January 2008 – Origins of the long economic expansion from 1982 to 2006; why the down cycle will be so severe.
Geopolitical implications of the current economic downturn, 24 January 2008, – How will this recession end? With re-balancing of the global economy, so that the US goods and services are again competitive. No more trade deficit, and we can pay out debts.
- A happy ending to the current economic recession, 12 February 2008 – The political actions which might end this downturn, and their long-term implications.
- What will America look like after this recession?, 18 March 208 — The recession might change so many things, from the distribution of wealth within the US to the ranking of global powers.
The most important story in this week’s newspapers , 22 May 2008 — How solvent is the US government? They report the facts to us every year.
The World’s biggest mess, 22 August 2008 — A brillant ex pat looks at America from across the ocean.
“The changing balance of global financial power”, by Brad Setser, 22 August 2008
“The Coming US Consumption Bust”, by Nouriel Roubini, 6 September 2008
Treasury Secretary Paulson leads us across the Rubicon, 9 September 2008
To see the all posts on this subject, go to the archive for The End of the Post-WWII Geopolitical Regime.
Originally published at Fabius Maximus and reproduced here with the author’s permission.