(The tone of this blog so far has been generally silly, or occasionally reflective. I hope I'm not upsetting that trend by posting a little doom. As a friend to all of you, I feel compelled to share my growing concern for our collective future.)
Throughout my life as an adult, I've been a rather loud pessimist when it came to all things economic. This is the major contributing factor for those late night Ron Paul speeches that cost so many hours of your time. In the past year, I've had countless I-told-you-so moments with the world. I didn't actually say "I told you so" to anyone, (though you could argue I'm saying it now) but instead just mumbled it in the general direction of cnn.com on my screen. There's been a handful of mini-market crashes, huge spikes in oil prices and inflation, massive financial institutions falling left and right (Fannie Mae, Freddic Mac, IndyMac, Bear Stearns, Lehman Bros., Merrill Lynch, and now AIG), and it all continues to be patched up with unsound policies, and generally ignored by most people not in that business. The problem is that misfortune on Wallstreet of this magnitude (and it's going to get worse as I'm about to show you), gets down to all of us in the end. The Great Depression started with a few months of steady market decline and several financial instutitions closing, it took a year or two before that translated into massive unemployment and unaffordable food and medicine. I think there's a chance we're heading in a similar direction now.
Just last year, the five largest investment banks were Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Bros., and Bear Stearns. If you've been reading closely, three of those five institutions have collapsed. Here's how Merrill Lynch has looked the past year before dying this week:
Now look at the stock price of the two remaining financial giants for the past year:
Now look at the stock price of Bank of America and Wachovia for the past year:
(See that uptick in July? Read this
article.) Can you imagine what would happen if either of these banks went under? Think about trying to get your money back through the FDIC, which has already burned through a quarter of its insurance fund just to bail out IndyMac depositers.
If you're wondering why this has all happened, it's a combination of many factors. First start with the premise that we're a nation that is ridiculously in debt, both at a government level, and at the level of the individual. Second, add in inflationary policy, which discourages savings as the interest rate on savings is so small compared to the value your money loses each year, and the potential value of investing. Now add Democrat supported market intervention that keeps the cost of borrowing of money artificially cheap, creating artificial incentive to hand out stupid mortgages. Sprinkle on Republican conceived financial abuses that allowed for swapping to go unregulated (which means financial institutions can sell off mortgages/loans to other institutions as securities/investments without any sort of regulation or oversight - Warren Buffet called this financial WMDs). Throw in corporate greed and mismanagement, runaway government spending, and a glutenous population, and you have yourself our current situation.
Obama and McCain will both propose to prop up institutons and individuals in an attempt to keep things going as people are accustomed, but these politically motivated strategies will only buy us a little more time before the government is completely broke and we have to do one of the following: shutdown many functions of government (think entitlement programs, portions of defense, etc.), print huge amounts of money creating an inflation crisis on a level somewhere between post world-war Germany and 1980s Japan, or just let things naturally correct themselves (a bit like the Great Depression, without government handouts). In any case, I'm pretty convinced we're going to see massive changes in our lives in the next 5-10 years. We've had lots of economic close calls in our lifetimes - the savings and loan crisis of the early 90s, the dot-com bubble burst/9-11 combo which nearly brought us down, and now we're here enduring the fruits of the patch-jobs fixing those crises.
There's a solid chance things could right themselves. But there's a small, but signfiicant chance that this instability will spiral into something that will change the way we live. We may, at some point in our 20s or 30s, have to deal with extreme shortages in employment, food, or energy, and I think what we're seeing now is momentum in that direction. I encourage all of you to prepare yourselves for this time by getting yourself out of debt as soon as possible, and preparing yourself for possible lifestyle changes up ahead. (Also, if you happen to have mutual funds or a 401k or something, I'd get out of it as soon as possible) No need to panic this moment though. We probably have a couple of years before this all hits us in a tangible way.
