I like to make things simple. And the reason I like to make things simple is not because I'm trying to dumb them down or provide a simplistic explanation of things, but ultimately when boiled down, things really are that simple. And this current financial crisis is no different.
Talk about mortgage brokers, SWAPs, bailouts all you want, what is ultimately driving this crisis is the fact that Americans are not producing enough to warrant the prices of our assets. Housing, stocks, you name it, all derive their value from the profits or income that can be produced from them. And if there is no profits or income, then there is no value in those assets.
For example, housing. Housing rose to unrealistic heights based on temporary and flighty demand as sub prime slime who could not afford those houses long term, flooded the market only to go bankrupt 3 years later. The problem is rents, the thing that ultimately gives property its value, did not go up. This is why a bubble formed and you are now experiencing dropping property prices. The markets finally realized that housing cannot "always go up" unless there is a corresponding increase in the rents, which never happened, ergo why Case Shiller is showing plummeting housing prices.
Stocks are another perfect example. The stock market, for decades, has been flooded by basically Baby Boomer and Gen X retirement money based on the principle that we should religiously and always invest in the stock market for our retirement. The problem is we are no longer investing in the stock market for the profits the firms generate, but rather because we were told by the government to use them as a retirement vehicle. Now, as corporations report horrendous corporate earnings, not to mention practically all of the financial services industry is filing for bankruptcy or a taxpayer bailout, the market is realizing that the ultimate driver of value of stocks (PROFITS) are non-existent, and ergo, why should those stocks have any value.
The problem, however, is that while the stock market and housing market are certainly very important to the economy, it does not address the overall economy. ie-the American people. How much "wealth" or "production" do we produce as an economy. And not only how much do we produce, but how much do we spend. ie- are we net producers or are we net parasites?
Take a guess which one we are.
The metric by which this is measured is the current account balance. It shows, simply, how much more or less do we produce versus consume. It basically looks at the national accounts, measures how much we made, and then how much we spent. And for the past 20 years, we have been spending more than we made.
Going from just a 0% of GDP balance in 1991, we have persistently and continually spent more than we made in this country, more recently spending 5% more each year than we made.
Now, I know that it is blasphemy to criticize or critique the Neo-American past-time of spending more than we make. That it is a crime punishable by death to suggest people be responsible and live within their means. But that still doesn't change the fact that Americans have essentially been becoming progressively "economically lazier" as time has gone on. We work less, spend more, and don't give a damn about how to pay for it, let alone ever have the intention to pay for it.
It is this that is causing asset prices all over the place to collapse. Stocks, housing, the dollar, as nobody, Americans or foreigners, are willing to invest their money in assets that are ultimately reliant upon Americans to churn profits out of them. We're too busy watching American Idol. We're too busy campaigning for Barack Obama. We're too busy majoring in sociology to hopefully become a "community organizer." None of which produce one ounce of GDP, income, or profits.
Meanwhile, I suggest you take a look and see what the Chinese, Arabs and Russians are majoring in, in college. And then take a look at their current account balances.