Economic Collapse

Let's take a look at the growing financial catastrophe. (This was written in autumn 2008.) I find that there is an aspect of the collapse that is not being mentioned in the news. That aspect is the explosive growth of collection agencies in the U.S. during this decade.

We should have seen this collapse coming. What should it tell us when collection agencies, which buy bad debt at greatly reduced prices and call the debtor repeatedly demanding payment, are one of the greatest growth industries in the country? It should have told us that the economy is so unbalanced that the average person cannot afford to live.

The root cause of this collapse is millions of defaults on mortgages. About half the mortgages in the U.S. are bought by one of the two corporations created by the government to buy mortgages from banks and lending companies. These corporations are usually known by their nicknames based on acronyms, Fannie Mae and Freddie Mac. Mortgages are bundled into securities by the thousands and sold as bonds and other financial products. The idea behind this system is to get money to the lending institutions that can be loaned to other home buyers and thus increase home ownership in the country.

The trouble begins with the severe imbalance in the economy during this decade. The rich got richer at the expense of the average person. By one estimate, over 40% of the wealth in the U.S. is owned by the richest one percent of the population. Even though productivity in the U.S. has greatly increased in recent decades the wages of the average person, adjusted for inflation, have decreased.

So what happened is that while millionaires were becoming billionaires, the average person had great difficulty paying their mortgage. Since mortgage-backed securities are such an important part of the economy, this has brought the entire economic structure to the brink of collapse. The explosive growth of collection agencies since the beginning of this decade should have told us that this is coming. I wrote this in an email that circulated several years ago.

While the rich were getting richer, there were more and more articles about the "working poor", people who have jobs but must choose between paying the electric bill or buying food. Tens of thousands of people were working full time but living in homeless shelters because they could not afford to live on their wages. The basic agreement of civilization is that if a person works full time, that person will be able to afford to live. We have broken this agreement and now the result is this catastrophe.

The economic structure of society is shaped like a pyramid. It requires the spending of several hundred wage and salary earners and small business owners to support each millionaire in the economy. The upper reaches of the pyramid depends on the lower part for support, likewise the more money the average person has, the more secure the wealthy will be.

Suppose a ship is carrying a cargo of steel. The lower the center of gravity of a ship, the more stable it is, which is why ships carry ballast. Now suppose we take large amounts of the steel cargo and place it higher on the ship. It would make the ship more vulnerable to tipping. The economy operates in the same way and when it crashes, the wealthy at the top of the ship have the furthest to fall.

This is not the first time this has happened. In the 1920s, factories across America were booming. The trouble was that they were paying their workers as little as possible in order to maximize profits. This meant that there were not many people who could afford the array of mass-produced products that came off the assembly lines and they began piling up in warehouses. Factories began cutting back on production, meaning that workers had even less money to spend and, it spiraled into a devastating crash.

Why should there ever be a recession or depression? If our population and productivity are continually increasing, there should really never be a decrease in business activity. Recessions are caused by a lack of spending by the average person. When people are walking around with money in their pockets, there will never be a recession.

It is not so much that the average person is not earning money but that they are loaded down with so much that they have to buy to live. This can only be caused by the unfair and unequitable distribution of the nation's increasing wealth. There has been a greatly-increasing number of billionaires while so many average families are $50,000 or more in debt, not from buying luxuries but from spending on the basic necessities of life. Eventually, the entire economic structure becomes unsustainable.

The profit motive results in the short-term thinking that as long as people are making money, everything will all work out. Underlying this mortgage mess was the assumption that property values will keep on increasing forever, this caused developers to over-build, which then caused property values to plunge, according to the law of supply and demand.

Capitalism creates wealth but the whole structure is so fickle and precarious. The rating agencies such as Moodys and Standard and Poor have a great ability to influence the economy, their recently downgrades of AIG (American Insurance Group) and General Motors sent the market into a tailspin each time. Another factor that I have pointed out in another posting on this blog, "The Extreme Inefficiency Of Wealth Creation" is that only about 15% of the workers in the economy actually create any wealth when they go to work. "Wealth" is created too much by moving paper around instead of actually producing something.

One factor that we tend to gloss over if the effect that events such as this has on the entire world. America was booming in the 1920s and only a few intellectuals in the west even knew what Communism was. The Crash of 1929 changed all of that and Communism, which never should really have been a major world system, began to be seen as the way of the future. The crash devastated the economy of Germany worse than the U.S and out of the chaos arose the Nazis.

In the 1990s, America had not only a balanced budget but a surplus and managed to avoid the currency crisis that afflicted much of the rest of the world. But under this Republican administration, America is the source of the calamity that has now hit and is so in debt that if it suddenly had to repay all the money owed to Japan, China and, Britain the economy would certainly collapse. The one thing that is worse than taxing and spending is spending without taxing in order to get way into debt.

How does this system look to the world when we are trying to promote our style of democracy? It just looks like the wealthiest people create ever-more complex derivatives and other financial products to outsmart government regulators. Over-complex financial products were a factor in the 1929 crash as well.

The simplistic Republican idea of free-wheeling capitalism was what the country needed in it's early days of the frontier. People were needed to get out there and start farms, business and, industries to build the country. The book "The Wealth of Nations" by Adam Smith is the original foundation of Republican ideology, but it was written in the Eighteenth Century. Society is much more complex today and someone cannot just head out to the frontier and start over when there is an economic downturn.

But Republican ideology has not yet caught on and you may have noticed that the economic crashes of 1929, 1987 and now 2008 all came after an extended period of Republican presidential leadership. Republican capitalism today is certainly at the same point as Communism was during the 1980s. If there is one thing we should be thankful for it is that this crash happened before the election rather than after it.

The strength of the Republican Party was always in peripheral issues rather than the core issue of politics, which is economics. Republican economics was beneficial only in the early days of the country and later when the economy had gone too far leftward and there was a pressing need to cut excessive spending and curb inflation. Other than that, their economic performance is generally poor. Even on peripheral issues, they vociferously denied global warming for years and now that it is impossible to deny, they have switched to saying it will actually be a good thing for the world.

If you think this private health care system is the best, consider that America spends far more per person on health care than any other country but U.S. male life expectancy is not even in the top thirty in the world.

An unfortunate thing about politics is that campaigning in an election and running the country after being elected requires two very different sets of skills. One ideology or party may be better at gaining power than another but not as good at running the country once actually in power. Republicans have this in common with Communists, they are much better at gaining power than actually running a modern economy once in power. Republicans have a way of making people think they are not patriotic unless they are Republican, that an American is "supposed" to be a Republican, that free-wheeling capitalism is the "American way" even though no such thing is written in the constitution. The average person is the one who ultimately pays.

I am the last person who wants to stop enterprising people from making money. But when money equals power, those who have a lot of it tend to set things up to suit themselves. People making money tend to want to keep it that way and it becomes a roadblock to progress.

The roadblock to health care reform is the fact that the private insurers are making so much money. One reason that there is not enough money in the U.S. for a national health care system and other social programs that the other western countries have is that resources are in private hands. Many countries pay for most of their health care from income produced by natural resources. Private companies may manage the production of such resources but the resources themselves belong to the country.

A mixed economy can counterbalance the effects of capitalism. Many areas of the U.S. grow rich but do so only at the expense of places like Buffalo and Detroit. When many people leave a given area, the declining population that remains will have to pay higher taxes in order to support the infrastructure that was designed for a larger population and these taxes will encourage more people to leave and discourage business from moving in. Governement involvement in the economy can provide a counterbalance by investing in the many such left-behind areas.

I pointed out in my writing about a mild form of socialism for America "Power At The Center" in my book, "The Patterns Of New Ideas" that capitalism alone does a poor job of providing low-cost housing. This is because most developers would rather deal with commercial buildings or more expensive homes. Low-cost housing often has a long waiting list. People buy houses that maybe they could not afford simply because they must have a place to live. If there was abundant low-cost housing available or if the tremendous wealth produced in America was distributed more equitably, this collapse would not have happened.

It is frustrating to know what is happening but not being able to get the powers-that-be to listed, almost a year ago, I wrote in http://www.markmeekobs.blogspot.com/ that this mortgage crisis was in danger of becoming an economic collapse.