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The Great Depression (or Depressions) [Nov. 12th, 2008|10:28 pm]
The historian James Livingston has a two-part article, Their Great Depression and Ours, which argues that "The underlying cause of that economic disaster [the Great Depression] was a fundamental shift of income shares away from wages/consumption to corporate profits that produced a tidal wave of surplus capital that could not be profitably invested in goods production—and, in fact, was not invested in good production."

In other words, money went not to folks like me and thee, who would spend most of it, but to people so rich that even spending profligately on luxuries couldn't save them from the necessity of investing most of their income. But since not enough of the money was going to people who bought actual goods and services, there was nowhere real for the investment money to go. So they invested in money -- in fancy financial mechanisms that promised to suck in money through the intake hopper and blow out more, more, more money through the output hopper. Eventually the whole Rube Goldberg money factory blew up, burned down, and poisoned the real economy with its ashes.

Livingston says the same thing happened this time around, and Michael Lewis has an article, The End, which details how. Our Rube Goldberg machine turned predatory loans to people who couldn't afford them first into BBB (crap) bonds, then (via fancy footwork and the laxity of the rating agencies) turned half of the crap bonds into blue-chip AAA bonds. Some hedge fund managers bet that the bonds' backers would go belly up -- and the bonds' backers used those bets to create more bonds: "That’s when Eisman finally got it. Here he’d been making these side bets with Goldman Sachs and Deutsche Bank on the fate of the BBB tranche without fully understanding why those firms were so eager to make the bets. Now he saw. There weren’t enough Americans with shitty credit taking out loans to satisfy investors’ appetite for the end product. The firms used Eisman’s bet to synthesize more of them. Here, then, was the difference between fantasy finance and fantasy football: When a fantasy player drafts Peyton Manning, he doesn’t create a second Peyton Manning to inflate the league’s stats. But when Eisman bought a credit-default swap, he enabled Deutsche Bank to create another bond identical in every respect but one to the original. The only difference was that there was no actual homebuyer or borrower."

All three articles are long, but fascinating. The point I take away, though, is that the egregious misbehavior of the subprime mortgage market is only the proximate cause of our current economic difficulties. If we hadn't been stuffing the rich too full of money, it couldn't have happened -- and if we'd somehow prevented the subprime mess, but still allowed the "tidal wave of surplus capital", clever schemers would have built some other exploding money machine.

The shoelaces were, I mean.
On the seven-league boots.