Having come of age in the Central Pennsylvanian section of the Allegheny Plateau, which is to say, in the Eastern part of the rustbelt, and having known firsthand the comforts and relative security which marked the exceptionally prosperous "Golden Age" of American capitalism, I can only watch with awe and dread the downfall of America's great financial firms. A debauched currency is a prelude to hard times if not to the installation of a dictatorship.
I attribute my awe to history's ponderous density and force, which the financial crisis has made obvious. Daily we can witness grand economic processes toying with and then crushing the self-styled "masters of the universe." My dread issues from my knowing that life will continue after the catastrophe. But this new life will be much different than the preceding one.
How different? Experience tells me that the landscape in New York and elsewhere will eventually bear the scars marking America's absolute economic decline. Buildings will empty and land will lie fallow. The country's infrastructure will slowly crumble, and may never be repaired. The jobless and inflation rates will climb as a negative multiplier effect consumes America's productive capacity, including the capacity residing in its citizens. The newly homeless will tend to migrate to the cities, where they will congregate in makeshift slums. The mere presence of these ghetto inhabitants will threaten the moneyed core. Local famines and epidemics will become common enough, and will partially diminish this threat by incapacitating and culling the homeless and starving mass. Obviously, civil society will be far less civil than it once was for most Americans. The better- and well-off, fearing for their property and safety, will demand a more vigorous and efficient police to discipline the excess population. Political society should affirm this demand since it will have no use for this surplus. Law enforcement will thus remain an economic growth sector. Gated communities, currently sanctuaries for the paranoid and snobs with a bit of money, will harden into class-based Bantustans.
A dystopian fantasy? Time will tell. Traces of this feasible future have already appeared.
How might one characterize the negative multiplier? Mike Whitney's depiction of America's future seems apt:
When the net foreign purchases of US financial assets begin to slow; the game is over. The Fed will be forced to raise interest rates to attract foreign capital which will put downward pressure on the economy and accelerate the housing crash. Paulson's decision to provide unlimited capital to Fannie and Freddie, will stack more and more debt atop the faltering dollar and US Treasuries. It is the equivalent of lashing the greenback to an anvil and tossing it overboard. Paulson's attempts to stave off a systemic banking crisis ensures that the federal government will undergo an unprecedented funding crisis sometime in the near future. There will be higher taxes for the battered middle class and higher interest rates for businesses and consumers. This will trigger a protracted economic slowdown and weaker growth. Credit will get tighter, banks will default, unemployment will soar and GDP will shrivel. A negative feedback loop will develop from the faltering financial system to the real economy; a vicious circle ending in massive layoffs, weakening demand, falling stock prices, and withering consumer confidence. Welcome to Soup kitchen United States [sic].
The failure of Lehman and Bear Stearns does not reflect the breakdown of a particular kind of corporate culture. As noted, the two firms embodied radically diverse views of corporate culture. What took both firms down, rather, is a sudden break in the chain of expectations between the present and the future. Today's savers no longer can have any confidence that they will earn enough to fund their retirements by putting money at risk. They have discovered that in one form or another, their investments have fed a securities market bubble rather than the creation of value.
Market participants are responding by running away from risk, as well they should. That is the stuff out of which great crashes are made. The bouncing-ball pattern of declining stock markets was marked by bear market rallies each time the American and other governments stepped in to bail out the latest victim. The US government's ability to influence events, however, seems exhausted. The Treasury and Federal Reserve can't bail out everyone. After Lehman, the insurer AIG and Washington Mutual may be next to fail, followed by several regional banks.
I see no solution except to allow American households to begin the painful process of rebuilding their balance sheets, which implies a slowing economy for the next two years. It is too late to stop the Great Crash of 2008. The question remaining is how best to pick up the pieces.