I turned on the TV last night when I got home and learned to my amazement that the US House of Representatives had voted against the package of financial measures assembled by the Treasury Secretary, the nice Mr Paulson, to deal with the Credit Crunch. As news broke the US Stock Market fell and by its close was 7% down. Pundit after pundit appeared on the small screen offering opinions about why Congress had said no and what would happen next. The really scary thing is that it is clear that there is no Plan B.
Overnight, asian stock markets fell and this is sure to follow in Europe and especially in the UK where so many of the leading companies involved in the FTSE index are banks and other financial institutions. The FTSE index fell 5% yesterday, but it closed before the result of the US vote was known. This morning there is certain to be another drop, tearing a large hole in pension funds and putting even more severe pressure on the banks.
Much more of this and the entire economic system will be in pieces on the floor. And who will suffer? Pensioners, or those approaching retirement will see the immediate brunt but the knock-on effect for the working people in general could be catastrophic. Unless something is done quickly – and it could be too late already – we could be heading back to a Great Depression like that of the 1930s. The present situation is eerily reminiscent of the Wall Street Crash of 1929, and could even turn out worse owing to the complexity of the financial instruments now involved in trading and the speed at which panic can propagate through the digital economy.
I suppose one can’t really blame the politicians entirely. Some congressmen voted against it for understandable reasons, primary among them being that it was using taxpayers money to bail out the institutions responsible for making the mess.The Republicans, on the other hand, seem to have voted against it on the grounds that it was too much like “socialism”. Maybe it was, but it was also pragmatism. I’ll never have any time for any politician who is scared of doing something right because it has the wrong kind of name. In any case governments these days have little chance to really influence global capitalism, and that even goes for the USA. It was never clear the Treasury plan would work anyway. Any surge resulting from its approval could well have been no more than a stay of execution.
Looking at economics as a physicist is probably not a very useful thing to do. There are no conservation laws for money, for example. Otherwise it couldn’t have turned out that everyone is in debt to everyone else. But I do think that one identify in these events the character of a phase transition. For many years the financial markets have lived in a false equilibrium, and now they have reached a critical point and are about to collapse into a different state. After the 1929 crash, which overall amounted to a loss of 89% of the peak market value, it took until 1954 to recover (in cash terms). The parameters of the world order are about to change, but what is going to follow is anyone’s guess.
Regardless of the vote in the House of Representatives, some form of transition was inevitable. It was only ever a question of when. All the years of economic growth we’ve had based on housing bubbles and lax credit is about to turn into a major crash which could well lead to huge changes in the political arena too, just like it did in the 1930s. It may be many years before order can be restored.
But it’s our own fault. The industrialized nations have been living beyond our means for way too long.
We deserve it.