Reasons for the 2007-2009 Credit Crisis and Recession

I am certain that the roll call for one-time sterling pillars of Western Capital that have degenerated towards historical outrage and oblivion would stretch beyond infinity. All commoners may easily recite a comprehensive stream-of-consciousness list of felled power players, embattled regions, worthless investment products, and ramshackle schools of thought. I must acknowledge the fact that today's story chronicling the shocking collapse of key Western economic infrastructure would be laughable, if not degraded as the loony fiction of some mad man playwright. Of course, real life is often stranger than fiction, and the doomsday saga has shaken the world economy to its core with a gripping series of events that only the most jaded of authors could have been capable of dreaming up. Fittingly, the dramatic masks of comedy and tragedy have emerged to heckle all actors, stagehands, extras, box offices, and patrons that were to participate within this shockingly devastating account.

Reasons for the 2007 - 2009 Credit Crisis and Recession: Lights. Camera. Action.

I would argue that the seeds of destruction were sewn over the course of twenty - five years, rather than today's comical shenanigans, which are characterized by empty suits pointing fingers at the next man. Frankly, key statistics and metrics pertaining to the Western economy have been based upon illusory stage effects for the past two decades. Inevitably, the road show proceeded to cannibalize its own self and was doomed to fail.

The smiles and light-hearted laughter were to transition into maniacal disbelief, obnoxious jeers, and ultimately, writhing tears. Of course, The Game wasn't supposed to end this way at curtain call.

Legions of foreclosed homeowners, elected officials, moneymen, investment specialists, retirees, and laborers banked fortunes that were contingent upon the good times continuing to roll.

Still, the greatest economic boom of all time, which ran largely uninterrupted from 1982 - 2007, is to be juxtaposed against the most wretched commercial landscape this side of The Great Depression. Ironically, both drama masks remain propped up by the very same factors that shall always represent man's resolute strength and inevitable downfall.

The secular bull and bear markets, delineated by the 2000 barrier, have been characterized by periodic undulations of greed, fear, misplaced optimism, and complete paralysis. Our research proves that short-term moves to inject liquidity into the system and mitigate the stampede only heightened the drama and deepened the ensuing misery.

Interestingly, our conclusions shed light upon the idea that no one individual person, institution, or event is particularly at fault. The happenings surrounding today's credit bust and political fallout are best described as one long series of diverse and interconnected events. The rationale and arguments that precipitated said debacle are more so befitting of PhD theses, or even textbook authority, than of the few pages per this report.

We shall purposely communicate within broad-brush strokes to properly convey the machinations of today's rout to the standby American. Detailing the numerous intricacies of the second most devastating economic event to hit our shores falls beyond the scope of this text.

Again, the only means with which to commence a return to normalcy and reality will prove to be the ultimate and complete destruction of particular ideals. The idols must not be merely discarded; the idols must be obliterated and smashed into pieces.

I have already identified the October - November 2008 period as the crescendo and climax highlighting today's tragic account. The fear mongering and gesticulating pitting the White House, U.S. Treasury, Presidential candidates, Wall Street, and Main Street proved that the Money Machine of the past quarter - century was indeed, kaput.

To some, the smashing of the Capital Idol and prevailing free market sentiment may have been equally as jarring as Hernan Cortes riding into Tenochtitlan and destroying the spiritual monuments of the Aztecs.

Reasons for the 2007 - 2009 Credit Crisis and Recession: The Cold War as Catalyst

I must cite the collapse of the Iron Curtain as the premier catalyst undergirding today's malaise. Certainly, the Cold War is always of particular importance to every 80's baby. Again, articulating the wrinkles of U.S. - Soviet relations between World War II and the 1989 fall of the Berlin Wall into minutiae are well beyond the scope of this short play, and I am describing the happenings as catalysts, rather than the sole purveyors of the misery.

The Cold War pitted the Western Allies of Great Britain, France, and The United States versus the Soviet machine to determine the Fate of the post war world. Although these Allies combined to repel the German - Axis advance, the powers represented "Allies" in name only to comb through the WWII rubble.

In summary, the battle for control represented the clash of Free Market vs. State authority, which was to erupt in Vietnam, Latin America, and most importantly, the Eastern Bloc. The battle lines were drawn as East Berlin and East Germany sealed themselves off from the Western World behind gruesome concrete barriers and Soviet influence.

Although U.S. - Soviet tensions were highlighted by frequent overseas skirmishes, Warsaw - NATO, and espionage, the two superpowers actually checked and balanced the global equation through veiled transatlantic threats, arms-race grandstanding, and potential directives to unleash nuclear firepower of epic proportions upon the landscape.

Despite the bitter on-site terror, Afghanistan, Vietnam, and Korea were contained, regionally specific warfare that never exploded towards Universal anarchy.

The United States of America did not destroy the Union of Soviet Socialist Republics on the battleground. Rather, Ronald Reagan and America opened up Uncle Sam's checkbook, printed money, and outspent the Eastern Bloc into oblivion. The inability of the Soviet managed economy to efficiently perform the market's job of matching supply and demand to a particular price point spelled communism's ultimate doom.

Soviet coffers ran dry throughout the 80's, as State control stifled the movement of resources and innovation, and international prices plunged for top oil exports. Energy and industry experts will agree that the oil weapon is indeed, Russia's blunt instrument of choice. In fact, historians speculate that President Reagan pressured Saudi Arabia to increase output and slash international oil prices to strike back against The Kremlin.

Logically, weak Black Gold costs landed yet another death blow to the communist bankroll, which remained heavily dependent upon foreign reserves to transact business.

Growing U.S.S.R economic and political upheaval prompted Mikhail Gorbachev to effectively shut down the Cold War and allow Eastern European satellites to dismiss Moscow authority. The brewing outrage pertaining to Iron Curtain rule spread into the Baltic States and even to Russia itself, to further spark the confusion.

Scholars must recognize Russia as the most dominant municipality of the Soviet Union, by far. In terms of stability and Nationalism, the happenings surrounding Russia's declaration of sovereignty from the U.S.S.R would be 1,000 times more jarring than the State of California seceding from the United States.

By 1991, the ironclad Union of Soviet Socialist Republics was replaced by a loosely defined Commonwealth of Independent States, managed by Boris Yeltsin as Gorbachev had been unceremoniously shown the door. The Soviet Model and former juggernaut lay in ruin - smashed into pieces from Berlin to Warsaw to Sofia to Budapest to Moscow.

Reasons for the 2007 - 2009 Credit Crisis and Recession: U.S. Emerges as Lone Super Power

Perestroika and the fall of the Berlin Wall marked America's entry into the realm of Alpha. Unquestionably, The United States of America is the world's most dominant super power and has held sole jurisdiction over the international community per the last two decades of History.

"Reaganomics" emerged as the superior catch phrase that was to articulate American dominance and the "Right" way of doing business. Pun intended.

Yes, I must argue that Democratic President Bill Clinton remained firmly entrenched amidst the right-wing school of economic thought. Besides the growth of the "Greenspan put," and Al Gore's alleged advent of the Internet, Clinton's basic playbook was little changed from that of his Republican predecessors.

This boom-time drama called for relaxed regulation, tax cuts, deficit spending, meager interest rates, and the ability to flood the marketplace with manufactured cash, above all else. Meanwhile, Eastern European laborers were also swarming the Western system to compete for work and cap labor costs. Students of basic economics will recognize the fact that labor capacity accounts for the majority of inflation.

1982 - 2007 represented the economic Nirvana per growth, productivity, stable price levels, and minimal international strife.

Indeed, the relatively minor (in terms of duration) Black Monday 1987, Mexican default, Asian financial crisis, and 1990-1991 / 2000 - 2002 recessionary shocks were greeted with ever more pronounced levels of Reagan dogma.

Apparently, the Western Machine required ever more heightened levels of stimuli to maintain growth and shirk ruin. Of course, these directives were passed down to the populace by gentlemen feeding at the trough of Reaganomics that appeared to remain in control of the situation.

The late Bill Seidman of FDIC and CNBC fame once articulated that the "U.S. economy is on dope." The West had become addicted to "cheap money," deregulation, deficit spending, consumerism, and tax cuts to generate minimal levels of "growth." Alarmingly, The United States, along with all addicts, required stronger and stronger doses of these narcotics to achieve the proper fix.

Ironically, the very same authorities that blackballed the Soviet regime per State control transformed to manage the U.S. economy to the "upside" with the illusory instruments fostered by monetary policy, rather than addressing the root of the problem.

Policy wonks degrade the term "inflation" by limiting the term towards daily expenditures such as food, energy, utilities, and luxury items. However, I must label asset values for stocks and real estate that have adjusted far beyond any semblance of economic reality as inflation that is equally as damaging.

Of course, I am far from naïve. I recognize the idea that skyrocketing housing and stock market returns are more likely to win elections and extend those cushy 4-year lawmaker "contracts," than actually corralling The Great Bubble.

Prior to the term "bailout" affixing itself deep into the Western lexicon, the "Greenspan Put" emerged as the tool of choice to flood the industrialized world with cash and rescue society from its very own self.

Of course, these tactics were necessary and proper. The Soviet model proved inferior and Western capitalism began to overrun the Earth with a renewed vigor into the 21^st Century version of Manifest Destiny.

Reasons for the 2007 - 2009 Credit Crisis and Recession: American Arrogance

The Federal Reserve moved swiftly to slash interest rates to the floor amidst the 1987 crash, Mexican default, Russian default, Asian financial crisis, tech bubble meltdown, and September 11^th.

In moderation, lower interest rates effectively flood the capital markets with investment dollars and jump start activity. In excess, ultra-low interest rates promulgate bubble mania, inflation, and bust.

First, the time value of money enhances the value of future cash flows amidst immediate periods of low interest rates. Secondly, participants balk at the prospect of buying fixed income assets, which offer relatively meager payouts, in favor of equity instruments featuring higher potential.

To state the obvious, investors will be more likely to lend money to the Federal Government and purchase Treasury bonds at 15%, than they would at 2%. U.S. Treasuries are acknowledged as "risk free" assets because of Washington's ability to tax or simply run the printing presses at full bore to create money. Yes, creating money out of thin air devalues the dollar and is also, inflationary over the long haul.

Still, nothing is guaranteed within the stock market, or any equity investment. However, competitive players will remain more likely to bet the farm as a true owner, rather than the holder of debt securities committing measly interest payments. Furthermore, institutions, municipalities, and civilians will agitate to borrow at favorable rates and invest with the intentions of earning suitable returns upon capital.

Mr. Buyer affords more house with a 5% mortgage, than he may viably secure at 10%; and the real estate sector will be swamped with marginal prospects at every interest rate cut. Theoretically, the very same proposal holds true in regards to all assets across the board. Slashing interest rates pumps dollars into the U.S. economy, which is not always a good thing. Today's events have proven that we were not all prepared to handle those dollars intelligently.

Ironically, two contrary missions define the Federal Reserve Bank. This "independent" body is required to grow the economy at full employment and manage price stability, or general inflation. We highlight the term "independent," because I would reason that The Fed is actually highly politicized.

To this day, George Herbert Walker Bush blames The Fed for losing his re-election bid. Statesmen remain notorious for pressuring the Federal Reserve branch to embrace growth over price maintenance strategy at all costs. Certainly, Joe Six Pack's perusal of the headlines and requisite White House / Congress / Fed sniping would indicate that The Fed is "independent" in name only.

Per price stability, I have already intimated that robust labor markets always promulgate inflation and price pressure. Labor will sell his service to the highest bidder amidst tight markets. The worker bee is a spendthrift with spending money burning holes in his pockets and will easily splurge upon sweeping homes, lavish vacations, and road grading automobiles.

This is the American Way.

Reasons for the 2007 - 2009 Credit Crisis and Recession: Cheap Money is a Problem

The Federal Reserve transacts monetary policy by creating (destroying) money and buying (selling) Treasury debt to push down (raise) interest rates. Again, low interest rates incite investment activity and risk taking per the time value of money, opportunity costs of limited fixed income, and the relative attractiveness of borrowing capital and leveraging money to juice returns.

The Fed has responded to every significant setback within the world economy by cutting prevailing interest rates. Recently, impressive jargon and acronyms, such as Troubled Asset Relief Programs (TARP) and Term Asset-Backed Securities Loan Facilities (TALF) have been added to the matrix to imply action. Basically, TALF and TARP are fancy words to replace the gaudy "bailout" and describe Federal purchases (loans) of the investment gaffes that fester upon the balance sheet of Bank X.

Logically, the clamoring for this security blanket transformed into surefire expectations for the imminent rescue package. Wall Street will conveniently cry Uncle at the near-term bottom and demand Government aid, yet blast the Left for refusing to "let the market work" whenever the Age is Golden.

Pundits and policy wonks continue to waste time seeking to finger one responsible agent for today's malaise. The theatre has only acted to politicize the recovery effort at the expense of perfect expediency. Insiders must recognize the Whack-a-Mole boom, bust, bubble, and consequent disaster that have telegraphed shockwaves throughout technology, stocks, real estate, financials, and commodities.

Cheap money and easy access to credit is always the common denominator.

Reasons for the 2007 - 2009 Credit Crisis and Recession, Sources:

Kofi Bofah, Ben Bernanke, Chairman of The Federal Reserve Bank, http://www.associatedcontent.com/article/1572352/ben_bernanke_chairman_of_the_federal.html?cat=3

New York Times, Credit Crisis Articles, http://topics.nytimes.com/topics/reference/timestopics/subjects/c/credit_crisis/index.html

Recession, http://recession.org/

Moody's, Economy.com, http://www.economy.com/default.asp