21st Century Global Economics

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  21st Century Global Economics:The Decline of the U.S., the euro andthe dominant Western Democracy by: Mary Huber   This is my first attempt to write anything substantive regarding Economics. As an avid reader of noted finance journalists and authors like Michael Lewis and Andrew Ross Sorkin, I hope that I can do the world of high finance some bit of justice in what follows. I have become increasingly consumed with how readily whole nations and economies can rise and fall based on the high risk bets that investment bankers and hedge fund managers are willing to make based on the poor economic choices of the greater population. What occurred between 2006 and 2008 as a result of the mortgage meltdown in the United States will be an event for the history books, to be studied for generations to come. And we will likely see a repeat of such calamity in Europe, where Lehman-like collapses are in the works.There has also been considerable speculation about a catastrophic meltdown in regards to student loan programs in the United States. Whether we are looking at our financial prospects here at home or those of our European counterparts, it is a fascinating time for the study of global Economics and an appropriate time to dedicate due attention to the decisions we make tomorrow regarding the monetary and fiscal policies of all Western democracies alike  –  before, like a chain of dominoes, we all tumble further down. Looking back at the last century, what are the fiscal decisions that havehad the most significant historical impact? What choices have driven whole  economies forward? What choices have left whole nations mired down indebt, desperate and deleveraged? Can any, one monetary policy be enoughto make or break the well-being of an entire population? Consider Glass-Steagall. The creation of the Federal Reserve. The policies of FDR amidst TheGreat Depression. The Volcker Rule. Dodd-Frank. Sometimes economicchanges are merely the result of scientific and technological advancement, anatural progression to new forms of creating and growing wealth. And thenthere are those times it is not policy decisions at all, but the creation of newand savvy financial tools by profit-seeking investment bankers, hence theonset of the mortgage and junk bond phenomena and the introduction of credit default swaps in the latter half of the 21st Century. The last ten yearsalone have seen significant changes in the economic outlook of all Capitalistsocieties, and we seem on the verge of a new world order in regards tomoney and finance. So to limit the wealth of information that any one personmust be tasked to absorb and process, the focus will remain on the lastdecade, more or less – focusing primarily on the subprime market collapse inthe United States, as well as the introduction of the euro, the creation of theEuropean Central Bank and the subsequent decline of the EU, as of recent. These events, not withstanding countless others over the past onehundred years, have brought us to where we stand today – facing possibleeconomic ruin at the turn of another century. You’ve seen the reverberations. They are spanning countries, continents, worldwide - the pulse of nations slowing, flat-lining alongside thepulse of the markets. From the flames in the streets of North London to anever-increasing presence growing on Wall Street and in the streets of everymajor American city, nation-wide - the anger is palpable. The outlook is bleak.Many are calling to question the fate of Capitalism and the future of theruling Western Democracy. So, let us begin at the beginning - looking toward the home front, to the birth of more than just a “Crisis of Confidence,” if you will. In regards to the events in and around 2008, that began the United  States’ descent into The Great Recession, it is not the goal here to discuss the exact mechanics of what occurred and where things went wrong, though abrief outline is necessary. It’s difficult to say where it all began. Sometime during the Clinton Administration it became a priority that every American own a home, carvingout their own piece of the American dream. The requirements to obtainmortgages became very lax, and millions of young men and women began toborrow money without the hope of ever being able to pay it back. Somefinanciers saw an opportunity in this phenomenon and began to bundletogether mortgages and purchase new financial instruments called creditdefault swaps, with the belief that they could make bundles of money on thebacks of struggling homeowners. With the housing market on a continual rise,most did not see the catastrophe in the works until it was right on top of them. As two-year teaser interest rates suddenly doubled, millions of borrowers found themselves unable to pay their mortgages and countlesshomeowners went into default. The fall of the housing market that many hadguaranteed could never occur was now fully in the works. And banks thatfound themselves the owners of billions of dollars of bad assets (in the formof credit default swaps) were deleveraged and desperately fighting to savethemselves by engaging in giant mergers and seeking out capital to injectinto their dying empires. On September 15, 2008, Lehman Brothers declaredChapter 11 bankruptcy and became the first and only true martyr to thesubprime mortgage crisis. The markets began to bleed, and the governmenttook immediate action, instituting bailouts of some of the largest financial institutions in the world, those that were deemed “too big to fail.” The American financial market could not withstand another Lehman. And soensued the Troubled Asset Relief Program, more famously known as TARP,srcinally intended to buy up the bad assets from the books of major financialinstitutions. Instead, it took a trillion dollars and injected it directly into theinstitutions themselves – virtually accomplishing nothing. TARP was followed  by QE1, QE2, and QE3. One Administration was ushered out the White Housedoors and a new one back in, and still our unemployment rate sits at 9% andeconomic growth hovers around an anemic 1%. So, what did we learn? Moreimportant than the actual events themselves are what we can glean from theirhappening, what they reveal to us about the nature of modern economics.First and foremost, there is a disease of misinformation in the financialmarkets. Hernando deSoto, writing for Bloomberg Businessweek, made light of this disease in his article “The Destruction of Economic Facts,” declaringthat “over the past twenty years, Americans and Europeans have quietly goneabout destroying [economic] facts,” (deSoto 60). Markets have outgrownthemselves. “Mortgages have been granted and recorded with such i nattention that homeowners and banks often don’t know and can’t provewho owns their homes,” (deSoto 60). Securities, in their vast complexity, have been sold around the world without any clear understanding of how they arevalued or who holds the risk. There is no accountability. Second, the government’s reaction to the 2008 financial crisis has allowed for the existence of moral hazard. Moral hazard can be understood as the tendencyfor financial institutions to engage is risky behavior with the belief thatsomeone will always be there to rescue them – that the government isstanding on the sidelines, ready to bail them out. It would seem that this isthe case. But a simple glance at the U.S. debt clock should be enough toscare financial casinos to their senses. The U.S. government doesn’t have the money to save not one more failing institution. Tell that to the teachers andfirefighters that have lost their jobs or their pensions, while JP Morgan Chaseand Goldman Sachs have declared record profits in the midst of a global shit-storm. Finally, and most importantly, modern economics are globaleconomics. The old saying, a butterfly flaps its wings in Canada and it rains inChina – or however it goes – is exactly true to the nature of moderneconomics. U.S. markets influence European markets influence Japanesemarkets, etc. The U.S. financial catastrophe had devastating effects worldwide.
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