An analysis of the economic crisis
by Gabriel Timar
Part 1: Where and when was the crisis born?
section 1 of 2
I put these questions to a few of our politicians, and instead of a proper answer, I got a lot of hot air, essentially telling me that at the next election I should support my incumbent politico.
I asked several economists and got jumbled replies. These people are experts in making simple things hard to understand and turn complex concepts into unfathomable quagmires.
The professors of economics interviewed daily on network television are not reliable either. They are not worthy of the name of professor, as the word evolved from the concept of prophet — a guy who can foretell the future. As a former professor of engineering, I can “profess” what will happen if you load a ten-ton tractor onto beam designed to carry five tons. It will break. Period. No ifs and buts about it.
Any professor of economics worth his salt should have been able to foretell the crisis. Others joining the first guy should have made enough noise about the danger to attract the attention of the politicos, the media, and the captains of industry.
Perhaps there were one or two experts delivering the warning, but the other professors drowned out their voices. It seems that the majority were worried about their research grants and thus would not have said anything to invoke the wrath of their peers.
I know how it feels, because I started talking and writing about the impending environmental catastrophe and climate change in the early 1990’s. I was told: “Shut up and don’t rock the boat.” Thus, I retired. However, this paper is not about the environment, but another problem that needs a solution.
I am just a dumb, retired engineer — and lately a novelist — who is not supposed to understand the background of the crisis. I should “shut up” like everybody else; grin, and bear it. I cannot do that because I believe I have a little bit of gray matter stuck between my ears. I want to know what has happened, where the crisis came from, where is it going, and how to climb out of the hole.
As I cannot get a straight answer from anybody, I am going to try tackling the matter of the crisis with the mindset of an engineer who tends to oversimplify problems. Let us examine the major factors causing the crisis.
The leadership factor
Allegedly, incompetent politicians and CEO’s caused the crisis. There is a measure of truth in that. In the past few decades, corporate executives rose to the top according to one of Parkinson’s innumerable laws, the one that says: No one hires a subordinate smarter than himself. This is the reason for the deteriorating quality of the leadership in politics and in the ailing sectors of the economy.
It happened like this: many years ago, an idiot had been hired somewhere in banking, government, or major industry and began the slow climb up the organization chart. The lower levels of the management pyramid began filling up with people no smarter than our idiot. The force eventually elevating these fools and incompetents to the top is Gabriel’s tsunami.
Contrary to Parkinson’s Law, some highly competent people rode Gabriel’s tsunami to the top. Ruthlessly disguising themselves as idiots, they got in and began their meteoric rise up the corporate ladder. When they got into the top job, their real personality shone through.
These guys were — and still are — looking out for number one only; and don’t care who is hurt in the process of their self-enrichment and acquisition of power. They began advocating the concept of continuous growth at any price.
Continuous growth became the prime directive in economics, but in fact it is worse than the Black Death. The CEO’s — even the dumb ones — began concentrating on the bottom line in the short term only. Whatever might happen later did not concern them, since they made more money in a year than most of us earn in a lifetime.
The politicians have at least four years to endear themselves to the electorate, but the CEO’s must charm their boards of directors and shareholders in a single year. Otherwise, they may be thrown out and, despite their golden parachute, their reputation may take a few hits.
Therefore, in order to show more profit, they managed to move the better part of the American manufacturing sector overseas. The bottom line was great for a while, but these tsunami riders did not realize that they had also shifted a significant portion of their clientele from solvent North American purchasers to ones overseas, who did not have as much money to spend.
If they had sold their wares not for American prices but for those affordable in the countries where the goods were being manufactured, the company’s bottom line would have taken a heavy beating. We are suffering the aftereffects of the shortsighted quest for immediate profit.
As if this were not enough, the insane rush to grow led to unbridled corporate acquisitions, and mammoth corporations appeared. The upper management of such ungainly organizations were tsunami riders divorced from market realities by a lack of brains or selfishness. Upper management started collecting exorbitant wages and bonuses regardless of performance.
Huge organizations have a strong resistance to change and limited flexibility to adjust to market demands. Managing a mammoth corporation is like trying to drive a sixteen-wheeler downhill on an Alpine slalom course.
Case in point: the “Detroit Big Three.” They lost competent leaders with foresight. In their obsession with growth, they produced cars not knowing if they could sell them. In the past decades, the Big Three gradually lost market share but still kept churning out the same hard-to-sell vehicles.
Now they are stuck with quite a few acres of cars and trucks. Instead of getting rid of them at fire sale prices to generate cash flow and recover a share of the market, they procrastinate and beg for bailout money.
As the CEO’s came up riding Gabriel’s tsunami, they do not understand what is going on, let alone how to solve problems. Paraphrasing a certain congressman, they cannot find certain parts of their body with both hands.
The late Henry Ford was the last of the Mohicans. While he ran his company — albeit with an iron fist — the firm could roll with the punches. Following the 1970’s oil embargo, Ford came out with a small, cheap car: the Pinto. After the oil started flowing again, the car lost its appeal to the public.
Instead of destroying the tools and the dies necessary to restart an assembly line spewing out Pintos, Ford had them stored in anticipation of the next debacle with the oil producers. If the equipment is still in storage or being used nowadays, nobody knows. Henry Ford died, and with him the last of the legendary auto executives disappeared from Detroit.
Quite a few decision-makers were cast in the mold of Paul Erdman of the 1970’s. He invented mutual funds combined with Ponzi schemes. Studying his book — allegedly written in a Swiss prison — financiers began building mortgage-based funds.
At first, these funds were secure and turned handsome profits. The wily financiers realized that they could sell such funds easily. Therefore, with the blessings of President Bush’s tsunami rider regulators, a frenzy of irresponsible lending began.
New mortgage-based funds were born daily, and many suckers — mostly investment bankers pushed to the top by Gabriel’s tsunami — snapped them up. These guys had not watched television like the average Joe — or me. Thus, they did not realize that easy money was flooding the market, and they could not imagine that the slightest jiggle in the interest rates could cause these funds to collapse and drag the market down with them.
As this happened, like a small breach in a dam, the crisis began. I firmly believe that the unprecedented spike in oil prices was the final nail in the coffin of the world economy.
The human factor
Some experts claim that the crisis started because of irresponsible borrowing by the general population. There is some truth in that too. The perverted idea You can accomplish anything you want throws a monkey wrench into the social machinery. People lose their ability to distinguish between wants and needs.
One needs shelter, food, clothing, health, and transport. All other things are wants. The vacation, the champagne dinner in a pricey restaurant, and the excessive size or quality of items beyond one’s ability to pay for them, are all wants. Wants should be tailored to the individual’s earning power.
The leaders in the advertising industry did not rise to the top aboard Gabriel’s tsunami. In the pressure cooker of the advertising business, fools cannot survive. If they were unable to come up with copy that makes the man on the street want to buy stuff, they’d be out.
On Madison Avenue, only the smart ones stay alive. Therefore, taking orders from their clients, these experts created ads to instill intense desire in people to buy now and pay later — for wants they could not afford.
As a result, the demand for credit grew. The maxing-out of credit cards became the order of the day. Can one blame Madison Avenue for the economic crisis? No, they just fulfilled their contractual responsibilities to be paid and feed their families.
The production and the predatory marketing practices of some corporations had much more to do with the crisis. They manufactured things that were not needed, sometimes harmful. But with the help of the experts of Madison Avenue, the masses wanted them, as going without the gadgets was social, financial, or moral suicide.
Because of the breakneck speed of technology development, we ended up with great (?) products. The average Joe saw what the stars had, and s/he wanted to own the same junk now. The wants increased disproportionably and since “You can accomplish anything you want”, the general population went deeper and deeper into debt.
One could buy everything on credit as long as there was a faint chance of the borrower’s eventually repaying the loan. As the interest rate was exorbitant, the finance companies prospered. They bundled the loans into funds and sold them to the tsunami riders heading the banks as well as the other financial institutions.
Even though many people could not pay back these loans, the finance companies were not worried; someone else was taking the risks. When the masses gradually began losing the ability to make monthly payments, these funds began blowing up in our face like time bombs. Something had to give, and we ended up with the crisis.
Copyright © 2009 by Gabriel Timar