Global Recession, Global Culprit

Q: What caused the massive global recession? Was it the banks, the government, big businesses or over-litigious lawyers? Was it the lack of ‘adequate’ health care and education catching up with us, or, was it George W. Bush (The Republicans!) or Nancy Pelosi (The Democrats!)?

A: None of the above, and all of the above.

Anyone claiming to have found the singular bogeyman to blame for the worldwide recession is wrong – yes, even the execs over at AIG aren’t to blame. The globalized economy that slowed down from Singapore to Saskatchewan cannot be blamed on any singular person or even group of people. If there is one thing to keep in mind when explaining the global economic mess, keep in mind that its creation was indeed global as well.
At the heart of the recession are the global trade imbalances that exist between creditor and debtor nations. Without massive trade imbalances, there would have been little reason for the rampant lending that occurred over the past ten years in every market from real estate to consumer products. Differences in the trillions between what nations purchase and sell needs to be corrected and restructured; and the loaning and lending that was done by banks worldwide to finance this discrepancy needs to be corrected as well to make sure that when markets do again stabilize, we do not continue along the same path.

Hedge Hogging
Debt is not always bad – some debt can lead to future growth that would be hard to achieve without it. And some trade imbalances are good – France surely sells more wine than electronics to Japan and vice verse. The problem comes when the imbalances are so outrageous and the debts so huge that the only way to manage them is through wizard finance. The repeal of the Glass-Steagal act in 1999, which had previously separated investment banks and regular banks for the prior 65 years, gave the green light to repackage American debt through new financial instruments. The repeal of the act allowed regular banks and investment banks to work together to repackage and sell loans and hedge funds to other investors at alarming rates, in effect, passing the buck on debt.
The fact that banks (worldwide, not just America’s) leisurely lent money and leveraged loans based on derivatives (presumed future stock market and real estate performances, amongst other derivatives) is obvious enough. Greed and incompetence surely added to the mix. The raison d’être however, lies in the global trade imbalances that caused the global financial industry in both creditor and debtor nations to hedge outrageous debts based on future market performance.
The tipping point was reached in the American housing market in August 2007 and the global stock market in September 2008 when investors and borrowers realized their loans were essentially based on thin air. There was nothing to back assets with other than more derivatives. The cycle couldn't go on any longer.

Stimulate me
As wrong as it is to blame a singular person or group, it is as erroneous to try and find a silver-bullet solution. The global trade imbalances that tipped the world economy to the point of no return had to come along at some point. The intricate global system of financing debt based on the future earnings at unhealthy volumes could not be sustained – and is thankfully at an end.
The problem, however, is that much of the financial services industry (such as AIG) have trillions of dollars wrapped up in loans that aren’t worth a dime. This in turn affects markets all over the world – and as a result stocks plunge and investment grinds to a halt. The only plausible intermediary that can help banks and other companies from insolvency is the United States Government. Therein you have your Stimulus and Troubled Asset Relief (TARP) Programs.
When financial markets do eventually stabilize and are not allowed to repeat the mistakes of the past ten years, we will begin to see the engine of the global economy come down from the lift and begin to run smoothly. The engine won’t-be running at full speed as soon as it hits the pavement – but it will eventually down the road. Global markets are about to change for the better, so long as the bank bailouts and consumer stimulus packages are executed effectively, and the economy is restructured so as to not incur another spate of imbalance and massive debt. The oil in the engine of the world economy is being changed as we speak. Creative destruction reigns on.