The collapse
Written by Jim Blue | | news@toledofreepress.comIs this any way for a superpower to end?
It happened after a draining conflict with Islamic antagonists, mounting losses in Afghanistan and an economic crisis that left the country unable to finance its mountain of debt.
Thus, a proud economic ideology that had weathered wars and depression and foreign competition was ruined.
How could it collapse this way?
We should know. It’s exactly what happened 17 years ago — to the Soviet Union.
Maybe that’s why the Wall Street crisis seems so familiar.
The U.S.S.R. was brought down by a bankrupt ideology that flouted the workings of the marketplace and imposed a dictatorship ignoring the rights of its citizens.
Will U.S. capitalism be brought down by greedy executives who ignored the realities of the market and built their fortunes on fantasy?
The fantasy was that real estate values would increase forever, and that securities based on those values could never decline.
The epiphany hit me when my wife and I were vacationing in Florida three years ago. We were walking along the beach one night when I noticed that only a few of the million-dollar condos in an oceanfront high-rise were lighted.
How could so many people afford such expensive properties and not live in them, or at least rent them to someone?
The answer, of course, was that these homes were investment properties, and the owners would spend only a few weeks each year enjoying the view. But for investments to appreciate requires that someone someday actually use them.
Eventually a million-dollar condo must be used to house someone. Otherwise, it’s just so much empty space.
My moonlight revelation turned out to be right. Starting in 2006, Florida real estate values collapsed. And the rest of the country followed suit.
The vaporous investments created by Wall Street firms were even less tangible than the Florida condos.
Their derivatives are insurance policies written to guarantee the bonds securing thousands of mortgages. When you try to create a market in securities so far removed from real things, it’s difficult to know the true value of those securities. The mortgages got shaky, and the bonds got shaky, and the insurance underwriters couldn’t cover the bet.
No one wanted to buy derivative securities anymore.
As I write this column, Congress and the White House are preparing to saddle all us taxpayers with $700 billion of those mortgage-based securities. That’s about the gross national product of Australia.
At least some people think the securities are worth $700 billion. No one knows for sure, because no real market exists.
The politicians really have no choice but to bail out the Wall Street firms. To let the whole house of cards collapse would gut the IRAs and 401(k)s of millions of voters. And if the credit system grinds to a halt, loans for cars and education and everyday business will dry up.
But the proud capitalist tradition of the United States will suffer a tremendous blow.
We will have a hard time insisting on free-trade agreements and market-based financing from the rest of the world when we don’t practice what we preach.
Even with the bailout, we can look forward to years of economic malaise.
The giant minds on Wall Street turned out to be as clueless as the apparatchiks of the former Soviet Union.
They forgot that they owed their fortunes to the success of real people owning real things. Let’s just hope they don’t bring down the whole country.
E-mail columnist Jim Blue at letters@toledofreepress.com. Blue operates a blog at www.jimblue.com.
