The Future of US Economy

A few months ago sudden cracks started appearing in the US economy hinting of an end to years of economic expansion. It only took a short while before the whole US, and subsequently the global financial systems started crumbling, sending shockwaves around the world.

The media is full of analyses and commentaries about possible reasons and for the collapse of the banking system and the economic downturn. There is not a day that goes by without debate on whether we are paying for our excesses or that we are unfortunate victims of the greed of a select few. Such debates are necessary. In fact, it’s incredible to analyze and find out why an institution like Bear Sterns went from having $18 billion on the books to a deficit of $30 billion in one week. Such a dramatic freefall warrants investigation.

What’s more interesting, however, is the simplicity of the problem. The fact that most people start pointing fingers during hard times is only normal but to get a real understanding of the events, one needs to sit back and determine the role that each and every one of us including our government has played in creating this mess. The fact is, that the heart of the capitalist society beats by spending and that every aspect of our government and our economy has been designed to encourage spending. For years all of us developed the habit of spending more than our means. Every time we desired something and could not afford it, we took on debt to pay for our consumption. The government, on the other hand, would reduce interest rates at the first sign of any distress, artificially boosting valuations for years. As such, we were able to afford to make bad financial decisions. The value of our homes would jump 20% per year, fueled by speculation and low borrowing costs. Eventually all this needed to stop and stop it did.

As Fareed Zakaria mentioned in the 10/20/2008 issue of the Newsweek magazine: “Under Alain Greenspan the Federal Reserve obstinately refused to inflict any pain. Russian default? Cut interest rates. Worried about Y2K? Cut interest rates. NASDAQ crash? Cut rates. The economy slows after 9/11? Cut rates.” The final blow to the hole system was the prolonged boost that was given to the housing market spinning the problem so far that it was almost impossible to tackle.

Like any responsible society, we now need to look at where we stand and where we want to be tomorrow. It’s not constructive anymore to find someone to blame for the problem. What’s constructive is to envision a future for us where we can live respectfully within the international community: Less arrogant and more productive. Mistakes of previous administrations have been made and the damage is already done but the US is still a large, efficient, modern, and vibrant economy. It is still the wealthiest economy in the world. As Zakaria mentioned: “It’s a different world out there. If Iraq cast a shadow on US political and military credibility, this financial crisis has eroded America’s economic and financial power. In the short run, there has been a flight to safety but in the long run, countries are likely to gain greater independence from an unstable superpower. The United States will now have to work to attract capital to its shores, and manage its fiscal house better. We will have to persuade countries to join in our foreign endeavors. We will have to make strategic choices. We cannot deploy missile interceptors along Russia’s borders, draw Georgia and Ukraine into NATO, and still expect Russian cooperation. We cannot noisily denounce Chinese and Arab foreign investments in America one day and then hope that they will keep buying $4 billion worth of T-bills another day. We cannot keep preaching to the world about democracy and capitalism while our own house is wildly out of order.”