Credit Crash

The recent subprime mortgage meltdown (and related financial troubles) in the U.S. got me to thinking about the nature of a credit economy generally--and let there be no doubt: ours is definitely a credit-based economy. The average citizen has a negative savings rate, the Federal Govenment is hopelessly in debt, and our country as a whole has had an unfavorable balance of trade for decades now, even when the dollar is weak. In fact, the only reason we are able to afford all those imports is because the Chinese and other foreign nations have long been willing to use the profits they make off us to purchase U.S. savings bonds, giving our government more spending money on the one hand, while making the dollar artificially expensive on the other. Modern America seems positively premised on the idea of borrowing large sums of money indefinitely.

Economically speaking, credit acts on an economy the way a stimulant acts on the human body. This has been widely appreciated at least since the Federal Reserve Board was created in 1913 and given the effective power to adjust interest rates to stabilize the money supply. John Maynard Keynes in the 1930's advocated temporarily lowering interest rates (along with cutting taxes and increasing government spending) during a recession or depression in order to stimulate borrowing and, with it, consumer demand. But no one ever thought of this as a permanent, day-in-day-out growth strategy until the 1990's, when Alan Greenspan took over.

Abusing credit, the way we have been doing, is just like abusing speed. At first, it was a temporary pick-me-up meant to fend off recessions; but ultimately, it became the great cure-all, helping us to cruise along from one market bubble to the next. Now, as I watch Bernanke hurl more Fed money into the economy in a desperate attempt to create more 'liquidity', I can't help but get the feeling that our country is as hopelessly addicted to cheap money as it is to cheap oil.

And it looks like credit-addiction can be as nasty as any crystall-meth habit. Ever higher doses (that is, lower interest rates) seem to be yielding less and less of a bang. Why, a few years ago, rates actually nearly went to zero, yet median income stagnated and in some cases, actually declined. And despite today's low Fed discount rates and big-ticket Wall Street bailouts, we're nowhere even close to the end of the current recession. Isn't that what dope-fiends call 'tolerance': when ever greater amounts of a drug produces ever weaker highs?

Another, even more frightening effect of speed addiction is the manic, delusional and often violently paranoid mentality that descends on the user. So much of the needless belligerence of the past few years, like the invasion of Iraq, the hyping of the Iranian bomb and all the airport strip-searching going on now strike me ridiculous--if not alltogether dangerous in themselves. I now wonder if the fact that we as a nation have come unmoored from any sense of what a real economy is anymore--something based on production as well as consumption--has made it impossible to understand what our true national interests even are. Is the dominance of the Neo-Con ideology--both haughty and paranoid at once--somehow related to this surreal economic existence of ours?