Killing it like a hooker in Hong Kong

Blame it on the river not on the bank

Every pundit has a different opinion on who is responsible for the credit crisis and the coming recession. From Kunstler who blames it on the Republicans, to Mish who includes Greenspan, to Feldstein who brings in the regulators.

I don’t think any of them deserve the blame.

My thesis is that the credit crisis and the coming recession are manifestations of a process that the entire world is responsible for. This narrative begins with the triumph of capitalism over communism in 1989, which reordered the world. As soon as capitalism became accepted as the only reasonable way of ordering the economic affairs of humanity, the warring between differing systems of capitalism began. On the one hand you have the laissez faire systems of the West and the developed countries and on the other you have the command economies of the East.

The Western system allows for individual decision making and political renewal but on the whole fails to reward long term planning by politicians. The Eastern system relies on catching up on development using methods already developed in the West while holding on fast to political power. Hence policy makers in the East are able to use their political strength to push unpopular long term goals because they have the utmost confidence in where their roadmap will lead.

The end result of the Eastern system is Japan. Once all catchup development has been done and new entrepreneurship is required, the Eastern system finds itself in crisis. Institutions which were not build to support individualistic thought find themselves struggling.

What does this have to do with the credit crisis? Well it all boils down to the savings rates of the fast growing East. With the amount of money being saved and invested in US dollar assets, there was essentially no way asset price bubbles of some sort would NOT have formed in the US. That is why the bubble moved from Internet stocks to home prices and then to all forms of debt. There is essentially no way that the Fed could have prevented this without some rather drastic measures, like for example restricting US dollar convertibility.

So when the tide of liquidity rose, there was bound to leaks, bridges swept away, land inundated, and when the levees broke, it should not have come as a surprise that a flood of biblical proportions emerged.

Blame the river, not the bank.

August 27, 2008 Posted by | Credit Crisis | , , , | Leave a comment