The Economic Collapse: A Well Predicted Surprise?

Prof.H on Fluxlife

Cheney on the Economy: "No One Ever Saw it Coming."

Cheney couldn't have been more wrong about that.

The economic collapse that began in the last quarter of 2008 was entirely predictable, and was predicted more than two decades ago.

Let's revisit those predictions, as they were made during debates over Reagan's then-proposed economic theories: "This 'Reaganomics' idea is going to create an economy built like a house of cards. Something is going to shake it and cause it to collapse and collapse big - huge. We could be facing something worse than the Great Depression. There are many things that could trigger the collapse, but if nothing else does first, a sustained period of sharply rising oil prices are sure to."

This is exactly what happened through the first half of 2008. Oil prices rose and continued to rise, the economy shook, and collapsed like a house of cards. The first card to fall hardest and fastest, the housing market, fell first because that entire market was itself a house of cards built atop the house of cards of the overall economy. Many of those cards are still drifting down from their lofty heights, and will continue to do so for some time to come.

It's not that "no one ever saw it coming." It's that Cheney and everyone that he paid attention to didn't see it coming because they didn't understand, or didn't pay attention to, the fundamentals of the economy. The fundamentals of the economy are easily obscured by esoteric theories, but those fundamentals will always come back and wreck havoc if they are forgotten.

It isn't that Reagan was so terribly wrong. Indeed, the economy does "trickle down", as his economic theories proposed. What he did get wrong was how truly like a spring-fed watershed the economy is: it doesn't trickle down from a few vast deposits of wealth, like the seas and oceans; it trickles down from the many millions of the smallest, most remote, most inaccessible consumers, like the springs high above the headwaters of the smallest streams and brooks. Those smallest streams and brooks can be likened to small family and neighborhood businesses, and onward up the scale of businesses we go as we travel further downstream, and then downriver, through the watershed that any economy is.

In short, Reagan's error was that he got it backwards.

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Steve Morozumi said...

i'm glad somebody finally said it: it's us consumers that keep the economy alive. strangle or debilitate us financially with bad policy and lack of oversight on Wall Street, and so goes the economy; down the proverbial tubes! :D-thanks again Prof H. for your post!

Lydia said...

Thanks Prof H for a really true post. I loved your description of the economy as a spring-fed watershed. Beautiful.

Pete Murphy said...

I can't seem to follow the logic of your post. Nowhere do you explain how the price of oil was sent soaring by Reaganomics, other than to say someone predicted it. And the housing bubble had nothing to do with the price of oil. The housing bubble was fueled by the government's over-reliance on the housing construction industry to prop up an economy ravaged by the effects of a sustained, huge trade deficit, an economy ever-more dependent on selling off American assets to finance that deficit. As high-quality, high-yielding assets were depleted, the government turned to subprime mortgages, sliced and diced into mortgage-backed assets and sold to unsuspecting foreign investors.

Just because someone predicted a collapse doesn't mean that they got it right.

Pete Murphy
Author, "Five Short Blasts"

SK said...

Awesome post! Very good analogy, comparing the economy to a watershed affected by even the smallest of springs! *SK*

Prof.H said...

Thank you all for your comments. I am glad that so many found it apt. The watershed analogy is as old as the Reaganomics model, and I recall many debates where Reagan's reversal of economic fundamentals were highlighted with that analogy.

Indeed, oil prices rising had been predicted to CAUSE the collapse of the Reaganomics economy more than two decades ago.

The issue of speculative market deregulation, another Reagonomics prinicple, causing that rise in oil prices was not raised in the original article. Likewise with the unregulated mortgage backed securities market aiding and abetting the fraudulently inflated pricing of real estate. (The real estate market was discussed more here back on January 7, 2009).

Each of these individuated markets were a house of cards, or better, a cottage of cards. Each such cottage of cards was built atop the house of cards that Reganomics made of the economy as a whole. Ongoing, sustained increases in oil prices were the tipping point that sent it all tumbling down.


irish on bizz said...

well its a global crisis, us economy crisis is still fighting compared our economy here in Philippines :(

constanteanu said...

what you said it's true...

calicolyst said...

I find that often, what politicians say is fluff for the public, not what they actually are thinking.

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