The financial system is like a pipeline. It delivers money instead of oil. The big difference is that when an oil pipeline springs a leak everyone tries to get someone else to patch it. When the financial system springs a leak, they hire a bunch of Harvard Business School grads to drill more holes.
Players in the financial sector are even better than lawyers at getting a share of the pie. Lawyers find out where money is changing hands and get in between. The guys running the mutual funds and hedge funds pay each other to move imaginary money around. And the more of this heavy lifting they do, the more they pay themselves!
Improved information systems in the financial sector make it possible for investors to respond almost instantly to the tiniest bit of news. All the highly-paid lemmings can run in the same direction whenever a nickel drops. Now we have a pipeline that has panic attacks.
It is having a panic attack right now, in fact. There isnít enough Valium on Earth to calm investors down.
The financial experts have driven the biggest economic parade in history into a swampy graveyard.
They were happy to take the credit for the good times, and to take the booty. They ought to be happy to take the blame, but of course they prefer the handouts.
We know perfectly well that the late American president George Bush wonít be tried for his crimes against the economy. Our own fluttery Flaherty wonít get nailed to the wall for blowing Canadaís fiscal surplus to buy votes. No one will be digging up past presidents of GM and burning their remains for running up such monstrous unfunded pension and healthcare liabilities.
Canadians do have a right to fantasize about retribution. Our righteous wrath wonít do much to increase Canadian exports, and it wonít refill the pension plans, but it might help us feel a bit better. Just expressing our legitimate anger encourages our politicians to set higher standards for the financial industries. Showing we know what is going on may prevent our politicians and our corporate crooks from getting too far out of line next time.
The truth is that the ìfundamentalsî for the world economy - the real long-run prospects - are as sunny as they ever were. We knew that the ìplayersî in the financial industry were taking more than they deserved, but we probably hoped to get a bit of the gravy. We trusted our governments and the boards of our banks to limit the looting to a reasonable level. We forgot that their antics could derail global growth.
Governments even let the financial players get away with printing money. Money is just a store of wealth that can be traded for other good things. Canadian Tire money is real money, and so is credit-card debt. You promise to pay the credit card company in the future, and it lets you buy things now.
Lending creates new purchasing power.
Governments used to try to control the amount of purchasing power. They were always tempted to print extra money for necessities like wars, but when they did, the excess money would lose value. To avoid inflation governments had to make sure the growth of purchasing power didnít outrun the growth of stuff to buy.
Governments lost control of debt creation. Car companies promised to pay pensions and medical bills out of future earnings. Mortgage sharks let people buy homes with no money down. Banks issued credit cards to university students. They were all creating purchasing power based on fantastical future payments. And they were all taking a cut.
We got inflation ñ not in the prices of consumables, but in the prices of assets. Housing prices, stock prices and resource prices all went up.
Too bad that the new wealth was imaginary, and too bad asset prices are coming back down. And too bad people will be laid off even though not a single ship, oil well, house or factory has disappeared.
When the panic attack ends, asset prices and stock prices may not bounce back, but there is no reason for a long economic slowdown.
Dave Robinson is an economist with the Institute for Northern Ontario Research at Laurentian
University.
