The 2008 financial crisis, and why it failed

The 2008 financial crisis, which actually started late in 2007, was a financial crisis that first manifested itself as an unsettling of the mortgage markets, which led to a bunch of dominoes being pushed over, and finally reached its climax in the failure of one of Wall Street's largest investment houses, Bear Stearns. After this, the Federal Reserve loaned out a bunch of money and tried to set everything up right, something that worked enough that the system didn't collapse, although the financial system is still in an uncertain state.

This is a very slipshod explanation, and I didn't take the trouble of researching and explaining what exactly caused the financial crisis, because I do not believe it matters too much. Finances are very arcane, while economics can be very simple. This is also why I say the financial crises failed, rather than saying it was a failure. I am perhaps inventing a new theory here, to explain a current event, something that is not always intellectually solid to do. However, with all that has been written about banking and mortgages, I notice that not a lot has been written about the fundamentals of the economics behind them. So I am attempting to draw some type of explanation. The basics of my theory is that finance and economics are two different things, and that the purpose of finance is to communicate and control the physical economy.

The finances behind the subprime mortage crisis are arcane, but the economics, at bottom, are simple. The actual physical economics behind it were this: the United States could refrain from manufacturing certain goods, because other nations, primarily in the Far East would devote more capital to producing those goods, so that the United States could focus on other things. The idea behind this process is that the United States would somehow forego producing these products so that we could in some way improve our infrastructure, public or private, and then be able to produce more goods to return to the nations that funded the capital improvements. This is one of the definitions of what a loan is.

What happened instead is that many of these resources went into a burst of home construction, among other things. All of the workers who were not working in plants producing, say, clock radios did not get job improving railroads so that the United States could produce more in the future. Instead, they built houses. Lots of houses. Big sprawling houses around artificial lakes with unnecessary roof angles and two car garages with two SUVs, and whatever other stereotypes of suburbia need to be thrown in. I am not trying to be trite and moralistic in condemning these things, I am simply pointing out that production wise, they were somewhat of a dead end.

So with all of the arcane finances taken out of the way, the economic problem was this: the United States was having certain parts of its economy subsidized by foreign nations, and when the first signs that this couldn't be sustained were received, through the communication line of finance, the financial system shuddered. This is not a bad thing. The financial system is supposed to shudder, and as long as it doesn't cause panic or misery, it is just a way to let the economic system know it is supposed to make adjustments. A clear analogy could be drawn with pain and injury. Pain is a good thing, because it helps us avoid injury. Only when pain makes people do things that injure themselves more, or leads to misery unassociated with actual injury, does it become a bad thing.

And this is the reason that I say the financial crisis "failed". The financial crisis was, I believe, the first sign that the United States economy had to somehow adjust away from the idea that Asian nations would keep on providing cheap labor, and Middle East nations would keep on providing cheap oil, indefinitely. And the United States economy has not yet adjusted to this. It was, of course, good sense for the Federal Reserve to try to smooth the markets, and perhaps even good sense for congress to pass its stimulus plan. These moves were like giving a shot of morphine to a person who had their arm trapped underneath a rock. They would stop the person from flailing around and injuring themselves more, but they don't change the fundamental difficulty. For all of these reasons, I think the current propping up of the financial system is only postponing needed economic change.

My own short description of this is perhaps wrong on several counts. First, while I said "finances are complicated, economics are simple", the world economy is far from simple. The international economy goes beyond the US profligately buying oil from Saudi Arabia and toys from China. The actual facts of investment in real capital would obviously involve a lot of research.

However, I do believe that the United States has fallen behind in actual economic resources, and that this fact is not generally realized by an elite who can't comprehend the United States as a debtor nation. I also believe that the difference between finances and economy are not well appreciated, and the fact that the economy needs to adjust to new realities is being enthusiastically denied.