Mike Shedlock over at Minyanville says that the ongoing credit crunch will eventually dwarf the savings and loan crisis of the 1980s. While Shedlock concedes that there won’t be as many bank failures, he insists that today’s woes are worse, because they go beyond the narrower problems of institutional finance, and involve a global economic dimension as well:
What was largely an institutional crisis in the 1980’s is now a huge consumer crisis as well as a huge institutional crisis. In the 1980’s the consumer was not tapped out. Today’s consumer is so tapped out that many are walking away from their homes. Others are voluntarily choosing bankruptcy. The Fed can add liquidity now, but it cannot dictate where it goes. This poses a huge problem for the serial bubble blowers at the Fed because, from a jobs creation standpoint, housing was the bubble of last resort.
In other words, whereas the S&L crisis was limited to institutions, today’s crisis involves institutions and a fundamentally overextended consumer. The entire global economic system, Shedlock argues, is built on debt and exotic derivatives and securities, and there’s nothing the Fed, or anyone else, can do to address the fundamental issues. There’s too much debt, and too many exotic contracts based upon said debt:
No matter what the Fed does now, it is not going to spur jobs creation. On the other hand, Fed action may further stimulate commodity speculation, the very last thing the Fed wants… Furthermore, what was a US crisis in the 1980’s is now a global problem. Property bubbles are busting in the US, Spain, Ireland, Australia, Canada, and other places. What was a US S&L crisis before is now an international credit bubble crisis… Finally, the Fed is facing additional problems of a falling U.S. dollar, global wage arbitrage, and an economy at the mercy of hundreds of trillions of dollars worth of derivatives with suspect counterparties. Those derivatives dwarf the entire world’s economy. This is all happening at a time when the world is increasingly less dependent on the US and is therefore less likely to bend to every whim of the Fed.
Shedlock isn’t wrong, but he does exaggerate the problem. It’s true that . It’s one thing to say that the financial system is clogged with byzantine securities and derivatives. It’s another to suggest, as Shedlock does, that the system is now destined for collapse.
Financial markets will continue to evolve and develop new instruments, contracts, and products. Allowing them to do so is vital to economic growth. There will be turmoil along the way–and this is how the system grows and improves itself. Everytime the system stumbles, there will be those who foresee collapse. But inevitably, the financial world picks itself back up and continue its long journey up and to the right.
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