One Man's View of the Financial Hurricane

Good morning, friends. As we begin the day and await the activity on Wall Street to see whether it's going to lose a 1,000 points today or go up 50 in a weak recovery, there are many of you wondering 'how did we get here? What's causing this financial meltdown?'

It's impossible to know all the factors involved. I wrote yesterday about the huge debt levels at every layer of our national life that was bound to weaken us. James Kunstler has a somewhat different take that is helpful.

It was the end of cheap oil that catalyzed the housing collapse and, by extension, the current huge financial crisis. But the run up to it was like a bounce off a high diving board into an empty pool. The bounce came around 2001 when it became apparent that the US standard-of-living could not be maintained on incomes in a post-cheap-oil economy. The trauma of 9/11 prompted a new and utterly insane consensus to form that the US standard of living could be switched over from income to massive debt. All the normal brakes against irresponsible lending and borrowing came off -- embodied in Alan Greenspan's absurd statement that it was a good time to assume an adjustable rate mortgage when interest rates were at a historic low -- meaning they could only be adjusted upwards. Why hold Greenspan responsible? Because he was at the apex of the authority vested with establishing norms, and he shoved our behavior into the realm of the recklessly abnormal, and he should have known better.
The public went along with it because "free money" and high living are fun. Their behavior was reinforced by other authorities -- for instance, President Bush, who told Americans to go shopping after the 9/11 attacks. (They went shopping with credit cards.) Things really wobbled in 2005 -- which was, coincidentally, the year of all-time world-wide peak conventional oil production -- with hurricanes Katrina and Rita ripping through the Gulf of Mexico oil rigs as a dramatic highlight. (It was also the year that The Long Emergency was published.)
Since then, the US economy and the financial part of it that became a nine hundred pound tail wagging a thirty-pound dog, has been held together with baling wire, duct tape, and band-aids. All the debt run up by all parties -- home-owners, credit-card holders, business, banks, hedge funds, government -- is not being paid back reliably, and all the leveraged arrangements that depend on it being paid back are coming apart. Thus, capital disappears. The wealth of a nation disappears. All that remains is the pretense that we are still a wealthy society.