George Soros, the billionaire Republicans hate with that special white-hot intensity reserved only for true class traitors, offers up a cogent summary of the financial mess the United States has gotten itself into in Wednesday's Financial Times. But Soros argues that the collapse of the U.S. housing market signifies something more than your average boom-bust bubble pop. "The current crisis," he writes, "is the culmination of a super-boom that has lasted for more than 60 years."
Sixty years takes us all the way back to the end of World War II, and it is disconcerting to note how frequently we are beginning to see that landmark event being referenced in the coverage of current financial troubles. When, just a year ago, How the World Works was muttering dire thoughts about the possibility of a recession arriving in 2008, I felt a little out of step with mainstream financial coverage -- even predicting a mild downturn seemed to be at the far end of the pessimism spectrum. But the parameters have shifted. The biggest Fed rate cut in 20 years, the hugest losses ever recorded by some of Wall Street's biggest banks, the worst housing bust in living memory -- all the data underlines the unprecedented nature of the economic status quo. We don't know what's going to happen, we have no firm benchmarks to understand what is going on right now, and so we are beginning to reassess decades of economic history. And those with a penchant for gloom and doom are pushing their downbeat expectations to new depths.
The 60-year super-boom, writes Soros, has been fueled by a steady expansion of credit availability to individuals and institutions.
Every time the credit expansion ran into trouble the financial authorities intervened, injecting liquidity and finding other ways to stimulate the economy. That created a system of asymmetric incentives also known as moral hazard, which encouraged ever greater credit expansion. The system was so successful that people came to believe in what former U.S. president Ronald Reagan called the magic of the marketplace and I call market fundamentalism. Fundamentalists believe that markets tend towards equilibrium and the common interest is best served by allowing participants to pursue their self-interest. It is an obvious misconception, because it was the intervention of the authorities that prevented financial markets from breaking down, not the markets themselves. Nevertheless, market fundamentalism emerged as the dominant ideology in the 1980s, when financial markets started to become globalized and the U.S. started to run a current account deficit.
After a brief tour of the various factors contributing to the current credit crunch, Soros argues that a recession in the developed world is inevitable. But then he proposes a version of the "decoupling" theory, which holds that the developing world is no longer joined at the hip to the developed, when he suggests that China, India "and some of the oil-producing countries are in a very strong counter-trend." This is a debatable point, and you can expect to read more about the decoupling thesis soon in How the World Works.
But suppose he is right.
So, the current financial crisis is less likely to cause a global recession than a radical realignment of the global economy, with a relative decline of the U.S. and the rise of China and other countries in the developing world.
The danger is that the resulting political tensions, including U.S. protectionism, may disrupt the global economy and plunge the world into recession or worse.
What's worse than a global recession? Depression and war. Military superpowers do not go gentle into that good night. They burn and rave at the close of day.
How the World Works does not, yet, subscribe to a level of pessimism that sees the current turmoil in financial markets as the precursor of a global maelstrom of doom. But every now and then, a contemplation of history sends shudders rippling. For those of us born decades after World War II and the Great Depression, those events have the patina of ancient history. We like to think we've learned from our mistakes, and are progressing toward some higher, more enlightened, more equitable state of being. But we are often wrong.