The Sun Will Rise Again on U.S. Economy
The financial firestorm that ultimately resulted in the Dow Jones' shocking 50 percent-plus point drop smoldered for months prior to the index's implosion. Rants of depression did not create panic, but selling caused market gyrations that locked in losses. Congress passed a massive rescue package, and the world's central banks cooperated. While the initial credit logjam has been somewhat freed, the relationship between government and Wall Street -- even the basic structure of the banking system -- has changed. The crisis has caused pain and fear, with job losses and much smaller nest eggs, and the costs to taxpayers will be massive, but the economy's fundamentals remain intact.
Wealth is not paper in one's pocket, or governments would print more. Money is not safe from inflation or foreign exchange turbulence, or secure even in a vault, as bank runs can happen. Rather, wealth is about structural foundations.
Our nation is blessed with resources: land, water, minerals and fossil fuels. Mines, wells and farms produce treasures that skilled hands transform. Our workforce is educated, and our universities attract the brightest. New products are ever created and re-created.
Our economic system fostered this, creating a standard of living unmatched in history and protected by our military, which has bled for freedom around the world. Our two-centuries-old system of government -- unique at inception -- balances conflict between the executive, legislative and judicial branches while also balancing the interests of government, corporations and individuals. Our capitalism is a structurally competitive (and, yes, even messy) system.
The 20th century had six major economic cycles, and more inevitably will come in the 21st century. Each cycle taught unique lessons, and we are now once again learning about the complex interactions in our system, its problems and those culpable.
In today's crisis we see greed, lax oversight, irresponsible policy and blindness, including the failure to recognize the 800-pound gorilla (the housing bubble) that contributed to this mess. Shortsighted laws fostered irresponsible loans, undermining increasingly obtuse "securities." Still, real houses are behind most of those mortgages, and the good majority of those loans are still being paid.
Another 800-pound gorilla that went unnoticed was the exploding derivatives market. The sound idea of spreading risk was undercut by systematic misunderstandings that actually ended up concentrating the risk. Five trillion dollars of newly invented credit default swaps (insurance against defaults) was mostly underwritten by one AIG department. But these excesses and the subsequent financial collapse will ultimately result in better rules for insurers, investors and speculators.
Meanwhile derivatives reached a notional value of $60 trillion and blurred the distinction between investing, gambling and insuring. While gambling's winners take from the losers (and the house -- aka, the taxpayers), investors use money to create new wealth. Capitalists take risks -- with seed capital or bonds or by becoming owners through the stock market.
The public increasingly participates in the markets both directly and through professional money managers. Even with the financial crisis, investors have been able to count on the smooth functioning of the many trading rooms, exchanges, market data feeds and news systems that link and allocate capital to drive the expansion of the companies that are traded in the markets and of our national wealth.
Our system's philosophical roots reflect ancient but unrecognized concepts. The word "credit" came from the Latin "credere," meaning "to trust" -- an idea that permeates our system. Paper money's worth reflects a belief that it can be traded for a value.
Many elephants remain, but innovation will continue. Tomorrow will be better than today. Computer processing and information storage capabilities double every 18 months. Smaller and smaller wireless devices are being distributed by the billions. Communications, medicine, energy and transportation all are being dramatically altered. And other industries are blooming, including materials, biology and nanotechnologies.
A painful, even ugly, market prioritization of funding helps select the winners in the financial markets. This brutal process now spans the globe as outsourcing shifts production to lower-cost regions and capital flows to areas of opportunity. While huge government programs remain essential, bureaucracy -- with its proliferation of stagnant rules -- rarely picks well.
There is blame aplenty for the current crisis, but there is also reason for optimism. There will be a shifting among government, corporate and private roles to address the most egregious practices, but innovation will still be rewarded. We will continue to see firms that receive investment grow and, yes, die -- all the while adding to our national wealth.
Michael J. Czuchnicki is the Managing Partner of CM Consulting Partners. His career has included roles as the head of worldwide communications at AIG and in planning trading floor systems at the American Stock Exchange. Michael Gasperi's career as a senior IT executive has included stints as the head of trading systems at the Midwest and Philadelphia Stock Exchanges. He also oversaw systems as a VP and GM with ADP.
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