Economics In RPGs 8: The Digital Age Ch 3

A visual example of a 24-satellite GPS constellation (the minimum needed to make the technology work) in motion with the Earth rotating. Notice how the number of satellites in view from a given point on the Earth’s surface changes with time. The point in this example is in Golden, Colorado, USA (39.7469°N 105.2108°W).
Image by Paulsava – Own work, CC BY-SA 4.0, Link
Lots still to get through, so as usual I’m going to dive right in. While I’ll try to have this make sense in a standalone mode, it would be preferable for you to have read Chapter 8.1 and last week’s Chapter 8.2 before continuing.
The Digital Age, Fourth Period 00s-2010s
Most of the decade that followed the beginning of the Millennium just seemed to coast on by without being particularly noticeable or significant. Everything seemed more personal in scope and less international and collective, or at least that is my impression in hindsight.
At the same time, I’m very well aware that this is a false impression that has been created by the epic buildup to the Sydney Olympics, which I wrote about in the previous post.
The goodwill and happy vibe that resulted from “The greatest Games of all time” endured until September 11, 2001 – exactly 22 years ago as I write this – diminishing the importance attached to all troubles and letting people just coast along.
Even the troubled election of George W. Bush (hanging Chads, etc) in late 2000 fitted this narrative, with his strong domestic agenda.
Beginning: Internet Awakening
One of the major challenges in constructing a series like this is trying to pick ‘mile markers’ for the end-points. In many respects, a strict chronology means the start of a period exactly matches the end of the previous one.
You can achieve a starker contrast by shifting those end points to a logical map rather than a strictly chronological one, and that’s something that’s been done throughout this series. But it frequently begs the question – move the dividing line forward or back?
Frequently, you need a string of different logical dates, which creates a fuzziness about the end/beginning points. So it is, this time around, but it’s worse than usual because one of the defining elements of the era is also somewhat fuzzy in its history, with no clear dividing line separating before from after.
Internet beginnings and early growth
While its roots trace back to the 1960s, it’s a certainty that the internet really began sometime in the 1990s. The starting point that I prefer the 1995 decommissioning of the NSFNet in the US, which removed the last impediment to full commercialization of the internet – an event so obscure that most readers will never have heard of it. But you might prefer the 1993 invention of the search engine with web crawler, before which all website indexes had to be manually curated.
By the end of the decade, the internet was doubling in size every year, while the number of users was increasing by 20-50% each year (Wikipedia, The Internet).
Here’s the thing with geometric expansions like this – the greater share of whatever you are measuring will always have ‘just happened’, only the precise numbers will change.
Consider the following sequence, which increases by 33% each year, starting (for convenience) with a value of 3:
2000 = 3
2001 = 4
2002 = 5.333
2003 = 7.110
2004 = 9.481
2005 = 12.641
growth, year-on-year:
2001 = 4 — 3 = 1 → 1 / 4 = +25%
2002 = 5.333 — 4 = 1.333 → 1.333 / 5.333 = +24.995%
2003 = 7.110 — 5.333 = 1.777 → 1.777 / 7.110 = +24.993%
2004 = 9.481 — 7.110 = 2.371 → 2.371 / 9.481 = +25.008%
2005 = 12.641 — 9.481 = 3.16 → 3.16 / 12.641 = +24.998%
The only reason these aren’t all +25% is because of rounding errors. So 25% of the total growth has always happened in the last 12 months, it doesn’t matter where you draw the line (those mathematically inclined will realize that this is the case with geometric expansion series, by definition).
Search Engines
But in this series, I’ve never been overly concerned with the existence of something compared to the ability to do something with it. You can create the greatest web page in the history of the world; it won’t mean a thing if no-one can find it to read it.
Early search algorithms were simple and unreliable (I can remember articles in computer magazines testing them and finding. that to be close to comprehensive, you needed to use at least two and preferably three. That led to Copernic (named for Copernicus) – a metasearch engine that aggregated dozens of search results. You can date it’s roots to 1996.
That was what eventually set Google apart – the algorithms that it used to rank results in an effort to bring the most relevant results to the top of the list. They have only gotten better at this in the years since, despite the best efforts of others to ‘game the system’.
Opinion: Google page ranking cheats
My take on such nonsense as ‘buying back-links’ and other google-ranking trickery: Yes, you might get a massive boost from trickery, but when it becomes apparent that you are gaming the system, you will be penalized – and such long-term pain is quite likely to exceed the short-term gain.
So I don’t go in for such – heck, I barely make a stab at SEO, preferring to put my efforts into better content, in the belief that it will pay off in the long run.
Or, to put it another way, you are only as good as your reputation – and that’s far more easily harmed than regenerated. The optimum approach is to avoid reputational harm as much as you possibly can, in the first place.
Web-based applications
Until potential customers can find your products, the internet is a plaything. The more effortlessly consumer and provider can find each other, the more significant the internet becomes. As someone once wrote (a deliberate rephrasing of the statement concerning the Bill Clinton presidency from 1992), “It’s all about the applications, stupid.”
And it’s the 2000s when web-based applications come into their own. Again, there were precursors, but the real development started during this decade, in two forms.
First, Cloud Computing – Amazon Web Services, in 2002, permitted developers to use Amazon’s hardware to build applications; in 2006, Google Docs was released in Beta Version. This was the ultimate in ‘smaller devices – using someone else’s hardware, so that all you needed was enough computing power to interface with that hardware.
Second, the first technologies to use the internet as a communications backbone rather than an end in itself – you had milestones in chat room development in 1971, 1973, 1980, and 1988. IRC (Internet Relay Chat) peaked in 2003, and has been declining since, overtaken by Social Media (and especially Twitter – which is now in decline itself).
Third, in the same vein, Peer-to-peer networked applications were one of the hot topics through the 2000s – most famously, because of Napster, which dates from May 1999. By popularizing the MP3 and MP4 digital file formats, modern-day streaming services are the legacy of these applications.
And, finally, E-Commerce. This started in 1994, and the first product for sale over the internet was Sting’s album Ten Summoner’s Tales.
Wine, chocolate, flowers, Pizza, and internet banking soon followed (see Wikipedia, Online Shopping). It is worth remembering that the creators of the 1995 film, The Net, had to actually explain (and demonstrate in the movie) online shopping for goods and services, in sequences that look incredibly clunky to those used to such services in the world of the 2020s. (I strongly recommend this movie for those trying to get a ‘feel’ for the state of the art around 1995-2000).
The 2000s were when online shopping hit its stride – Amazon may have started in 1994, and gone public in 1997, and started selling books and videos in 1998, but it was in the DVD era that it really exploded, largely because the products weighed less, reducing postage costs.
The 2000s were all about the Internet going from a toy with better things ‘on the near horizon’ to ubiquitously connecting everything and everyone – an astonishing rate of adoption. It took 25 years for mobile phones to achieve that level of market penetration, for example.
Mobile Telephones
That was because mobile phones got started earlier, and because the constraint was always the construction of a dedicated wireless network and other infrastructure.
While early examples were suitcases and bricks, the size problem was solved by the mid-90s.
In the year 2000, there were about 35 mobile phone subscriptions per 100 people in the developed world, and maybe 11 per 100 people in the developing world. By 2010, those numbers were 113 and 68, respectively. That was the year that numbers appeared to reach saturation in the developed world (only to start rising again in 2011-12), while the developing world would reach (by my estimates) 100 units per 100 people around 2017.
Shortly before the start of the decade, therefore, mobile phones were still expensive toys for wealthy and pretentious people – but the explosive growth in subscriptions from 1999 to 2000 signaled that for the decade to follow, that would no longer be the case.
Early adopters were mostly professionals (who could afford the devices) but by mid-decade, regular servicemen like electricians and plumbers were signing up as a business necessity.
Such rapid change means that the GM needs to “fingerprint” his representation of individual years within the period with an appropriate level of market penetration, and appropriate public attitude toward, mobile phones.
Beginning: 9/11: Shockwaves & Awe
So domesticity was the big ticket in 2000, and looked to be the focus for at least the first half of the decade.
Other people had other ideas.
At the time, it was common for Australian TV to affiliate itself with an American network; our ‘late night” TV was their morning shows. (This continues to some extent, even now).
Since these were preceded by the graveyard shift, to which the networks relegated the shows they didn’t understand the appeal of, like Sci-Fi, it was common for gamers and the like to at least get to see the start of the shows – and make up their minds on whether or not to stay tuned based on the promised content (sometimes yes, sometimes no).
The introduction to this days’ show talked about a “terrible accident” as a 747 had struck one of the World Trade Towers. I was still getting my head around that when a second plane struck. No-one on-screen said so, but it was immediately clear that this was a terrorist attack, and the most shocking one that the world had ever seen.
I had been doing prep for one of my RPG campaigns, I forget which, but all thoughts of that vanished as I watched the events from half-a-world away. There seemed an inevitability to the third strike, as though a sword of Damocles had finally fallen. At that point, I could bear inaction no longer, and started trying to encapsulate what I was seeing and feeling in music.
That was my personal experience of 9/11. That night, the world changed. Some of the outcomes were predictable – a massive increase in security at airports, a pointed investigation into the obvious failure of intelligence and new tools and resources for the agencies, and a hot war against anyone who was deemed to have been involved. Someone had poked the bear and was about to feel the Wrath Of God.
The next few days were confused. I couldn’t understand the increasing focus on Iraq when the culprits had been traced to Afghanistan, and to locations within that country that would experience relatively few civilian casualties. Eventually, I realized that Al Quida didn’t represent enough of an outlet for the “righteous anger” of some in the US – I couldn’t blame them for that, but this made it clear to me that unless calmer heads prevailed, and quickly, there would be consequences.
Sadly, no calmer heads emerged.
Consequences
Of course, these consequences and responses were not restricted to the United States. Security at airports everywhere was immediately ramped up, for example.
Domestic issues immediately became nothing more than an arena for consequences of the international relations arena to play out. Even sacred cows like personal liberty and human rights, long held to be sacrosanct, were set aside in the resulting paranoia.
The problem with doing the previously-unthinkable is that it weakens the commitment to everything else once held inviolable. Breaking rules can be habit forming, needing only sufficient motivation or perceived benefit to doing so. This was the slippery slope upon which the US – and to a lesser extent, the rest of the world – now embarked.
I see a direct connection between these developments in response to 9/11 and events like the attempted coup of January 6, 2021, the former normalizing radicalism sufficiently to permit the latter to be contemplated.
Middle: Mega-corp Services Proliferate
But the world kept turning, and a new normal soon established itself. And that new normal was the rise of four additional Mega-corporations, to join Microsoft: Apple, Amazon, Google, and Napster.
I’ve already touched on several of these and why & how they became significant. Ultimately, these were Utility and/or Service providers who simply happened to provide a capabilities that everyone wanted. As the sole suppliers of those services to that standard, they were all-but immune to the anti-monopoly laws that had broken up large corporate entities before they got to anywhere near the size of these “new” entities.
Like most overnight successes, these weren’t – they had taken years or even decades laying groundwork for their ultimate dominance.
Nor were any of them as ubiquitous as they seemed at them time; there were alternatives to all of them, or would be before long.
Nevertheless, the second half of the decade revolves largely around those mega-corporations and the products and services they offer.
End: Personal Tech
So much so that those products and services are also central to understanding the social patterns that obtained by the end of the decade.
All of those products and services can be characterized as belonging to a singular conceptual theme: Personal, or personalized, tech. Let me demonstrate by listing some – a few obvious ones and some less obvious examples.
- iPad / Tablet: This was all about portability, about being able to take your computer, and everything it provided, anywhere you went.
- Napster / iPod: The ultimate mix-tape, fueled by the most personal of choices, the music that you listen to. Leave out any tracks you don’t like or want, and curate only your personal selection – then take it with you everywhere you want. Approve or not, there’s’ no arguing with the outcome.
- Google Search: In seeking ways of making the search results more relevant to you, Google was also able to target you with advertising relevant to you – and that translates directly into increased sales for the providers of those products and services. That was the theory, and Google translated that into becoming the biggest corporation in the world. In 2010, it was worth about 400 Billion USD; at the high point in 2021, that had risen to 2,000 Billion USD, or 2 Trillion dollars. It’s value declined sharply through 2022 (down to about 1½ Trillion), but has been recovering in 2023. If the trend continues, it will fully recover in 2024.
- Amazon: This one’s a little less obvious, but a key part of the sales strategy at Amazon is to use the shopping of others to present the individual with additional products and services that are customized to their profile, or rather, to Amazon’s best guess as to your personal profile. Everything you buy on the site, everything that you put into your wishlist, anything you even look at – in theory, they all weight the selection of products to be offered, on the premise that getting you to buy anything is better (for Amazon) than you not doing so.
- GPS: The Global Positioning System became fully operational in 1993, following twenty years of development and ‘installation’ by the US Department of Defense. Initially intended to be a purely military application, civilian use was permitted by Reagan after the Korean Airlines Flight 007 disaster. Its civilian accuracy was downgraded in the early 1990s using technology intended to prevent other militaries using the system contrary to perceived US interests, which has led multiple nations toward developing their own Sat-Nav systems. This policy was discontinued by Clinton in May 2000. In 2004, linking GPS to mobile phones for civilian purposes was successfully tested; the facility for using GPS to locate survivors of a disaster having been mandated in 2002. GPS is all about taking you to where you want to go. Most early problems with Commercial Sat-Nav systems can be laid at the feet of completely artificial human traffic-control inventions like one-way streets; since these are all exceptions to the default assumption (two-way travel on a road), they all have to be manually coded within the navigational software – without slowing it down so much as to make it useless. In 2007, Toyota introduced Map On Demand, a technology for distributing updated maps automatically, and the popularity and scope of Sat-Nav systems has been increasing ever since. I even have an App that tracks the bus that I’m waiting for, continually revising its ETA at my stop.
- iPhone / Smartphone: January 9, 2007, saw Steve Jobs introduce the first generation iPhone. Although there had been mobile computing telephony devices like the Blackberry previously, the iPhone was the device that made the Smartphone popular. Rivals developed their own, and the iPhone now accounts for just 15.6% of the global market share (as of 2022) – but that is still enough for more than 2.2 billion of them to have been sold by Apple since that auspicious 2007 date. Because of their premium pricing, I’ve always regarded the iPhone as a luxury version of the smartphone. Because they can do so much more than a “standard” mobile phone, I’m inclined to treat these as a separate product category in their own right.
End: The GFC
The 2007-2008 financial crisis, known to most of the world as the GFC, marks the beginning of the end of the decade, insofar as all the other trends had made their debut and would encounter no significant development – just more of the same.
Most of us lived through it, and most of us have only a vague idea of what happened and why. Wikipedia lists three causes culminating in a “Perfect Storm”: Predatory lending targeting low-income home-buyers, excessive risk-taking by global financial institutions, and the bursting of the United States housing bubble (Wikipedia, 2007-2008 Financial Crisis) but I would add the subsequent international banking crisis, and prepend the US policy settings for affordable housing that enabled those predatory lending practices in the first place.
Affordable US Housing
The story starts here, with government policies in the US designed to promote the construction of housing that would be affordable by those on less than the median income. There is often assumed to be a greater risk to the financing of such housing purchases, which is used to justify higher interest rates – but those can elevate such housing out of reach of those intended to benefit from it.
Overcoming that problem often requires government support, and that support has taken many forms in many different countries around the world. Ultimately, most of them seem to be founded on the idea of the government sponsoring or co-owning the mortgage, effectively guaranteeing it against failure (or, at least, softening the blow). The most common alternative is some sort of home-buyer’s grant, especially those focused on first buyers, and the construction of low-cost rental accommodations.
The last were especially popular in the 60s and 70s, and contributed markedly to the deterioration of some urban centers as lack of adequate maintenance transformed them into slum tenements. Whenever demand for low-cost housing outstrips supply, the risk is that cheaply-built substandard dwellings will be erected to satisfy that demand; urban decay inevitably follows, with all the attendant social problems.
Correcting these problems can be difficult and expensive, and it’s easy for it to lead to gentrification, which drives out the original residents in favor of a wealthier elite – shifting the problem to somewhere else and pretending that it’s a solution rather than a temporary band-aid.
Subsidizing the construction and purchase of well-built dwellings is the alternative – but said purchase demands affordable loans. The provision of such loans either has to be direct government policy or the result of government policies that are sufficient to persuade commercial entities that there is enough profit involved to be worth the perceived risk.
In my experience, there are two types of low-income tenant / purchaser – those who, when presented with an affordable option, will move heaven and earth to meet their commitments, and those who equate the lowered price with lowered value, and who can hardly be bothered. The first group are generally as safe as houses, given a stable economic foundation; the latter are as reliable as the weather on a changeable day. Ninety percent or more will belong in the first category; but it only takes a few bad apples…. Telling one from the other is always the difficult part.
Anyway, to avoid these problems, in the 1990s, the US Department of Housing and Urban Development (HUD) initiated policies that financed property purchases through the government sponsored entities Fannie Mae and Freddie Mac. Evidence from a securities fraud investigation against six former executives of these entities suggests that in 2008, they held 13 million subsidized loans worth a total of more than 2 trillion dollars.
Several governments, both Democratic and Republican, had sought to limit the amount of government funds that were tied up in such loans by creating policies that encouraged the private sector to do more of the heavy lifting. In particular, various credit controls that were designed to prevent risky and questionable loans to low-income households that had been emplaced as a consequence of the Great Depression were successively watered down or removed entirely.
Predatory Lending
These policy changes permitted, even encouraged the pursuit of subprime lending. This is the provision of loans to those who may have difficulty keeping up the repayment schedule. They are generally characterized by higher interest rates, poor quality collateral, and less favorable terms in order to compensate for higher credit risk, as described above. Burt with perceived government backing, and terms that permit some flexibility in repayment schedules, they can be lucrative.
Some of the protections set up post-Depression included limits to how much risk any given institution could carry. This was designed to protect everyone involved – but a spot of creative accounting on the part of the banks issuing these loans and a weakening of the financial oversight regulations combined to undermine the protection.
Here’s how it worked, as I understand it: You’re a bank, you’ve issued (say) 50 million dollars worth of these loans, in the knowledge that in a stable economy, 10% of them will fail (costing 5,000,000 dollars), but 90% of them will eventually be paid off, earning maybe 20% interest along the way – so a net profit of 5,000,000 dollars.
Packing all of these into a bundle, you can sell this as an asset worth maybe 53,000,000 dollars to someone else, generating an instant 3M profit (instead of an eventual 5M profit), and wiping all those loans off your books – so you can issue another $50 million worth. Rinse and repeat.
These packages were ‘mortgage-backed securities’ and they were being tossed around the various financial institutions like confetti because they were so profitable. Each seller was advantaged by minimizing the risk of defaults and promoting the notion that these were good economic risks to take. The sellers of these ‘securities’ also made greater profits if they exaggerated the value of the properties to assume the ‘best-case’ outcomes of selling them. After all, property always increases in value in the long run, doesn’t it?
The problem is that if there is any sort of economic instability, you can quickly have 95% defaults instead of 10%, and when you repossess the properties, you’re likely to get maybe 10 cents on the dollar (or less) compared to that ‘best case’ valuation. Until the train-wreck, though, the policy appears to be working, especially if you are only looking at the headline numbers.
In the years leading up to the Wall Street Crash, subprime loans were being issued to low-income working-class people to use for speculation on the stock market, but the packages weren’t sold as ‘speculative’, they were safe as houses, and the booming stock market would ‘always’ pay more than the cost of the loan, wouldn’t it? People mortgaged their homes and personal possessions because it was easy money…. These loans amplified and expanded on what would have been a financial crisis by creating a housing crisis and property valuation crisis and banking crisis on top of the original troubles.
Guess what happened in 2007-8 when things went pear-shaped? The sub-prime loans acted as an amplifier, adding a housing crisis and property valuation crisis and banking crisis on top of the original troubles.
This has had an effect on modern-day US politics, too. Republicans were largely and broadly condemned for the GFC, because theirs had been the hands behind the ultimate deregulation, the removal of the financial guard rails. This helped get Obama elected President, and began the drift to a new political paradigm by the right-wing party – if you don’t have a policy, just an intention, you can never be blamed when something goes pear-shaped. It’s never your fault, it’s just an accident that things worked out that way. And sure, “Mexico will pay for the wall. I intend to make them.”.
My advice (for whatever it may be worth): Don’t elect a wish-list. Make people tell you exactly how they are going to achieve their promises and the things that they want to get done. And use your GMing hat to look for ways things might go pear-shaped.
It doesn’t matter what they promise if they are incompetent to implement it, or if you can’t trust them to keep their promises – at least, that’s how I see it.
The Housing Bubble
Every time property gets purchased, it gets inflated in value. There are lots of reasons for this, some good and some bad. Some increase is inevitable because of inflation, for one thing.
Mostly, it’s because there is no rigorous process for valuing a property. It’s all guesstimates and semi-educated guesswork. “Someplace down the road sold for X, but this property isn’t quite the same, so we’ll add Y and take off Z…”
As soon as a property goes up in value, so do all the properties around it, even a block or two away. And these increases can both stack and amplify each other, chains of property value inflation rippling up and down a neighborhood.
Mortgages and interest rates normally act as a brake on these price impacts, slowing the growth of housing bubbles and even occasionally letting some of the hot air out of the prices. After all, if you can’t afford a property because its price has been over-inflated, it won’t sell, and sooner or later the value will be cut back until it does sell.
Now apply the sub-prime mortgage securities situation described earlier to this valuation mechanism. Properties that shouldn’t sell get purchased (by people who shouldn’t be able to afford them). And the place across the road, and another down the street, and another around the corner. And all thee purchases are at inflated values. The result, inevitably, is a runaway housing bubble that is inevitably going to burst at some inconvenient time.
Financial Risk: Trading Sub-Prime Mortgage Securities
It gets worse. Even if the government is no longer keeping proper track of the debt levels and insecurity, you would expect the people buying these bundles of debts (and thinking they are an asset) would do some sort of due diligence to make sure that they really are worth what they are paying for them, right?
But the numbers they would get to see on which to base such an assessment are the very numbers subject to the hyper-inflating housing bundle. So it would look like you were buying property valued at maybe 80 million for your 53 million (to continue and extend the example). That’s 17 million in paper-profits right there – even if things go belly-up, you can sell that property and more than recoup your losses. You can’t lose, right?
Incestuous financing In The Banking Industry
We’re still not at the bottom. Many of the banks that were issuing these risky loans were also investing in credit default swaps and derivatives – essentially bets on the financial soundness of the loans.
A credit default swap is essentially a promise that, in return for a fee, should a particular loan go bad, another bank will cover the loss. Since the expectation was that relatively few defaults would be recorded, this was largely seen as being paid for doing nothing (by the bank offering the money) and a sure-fire insurance policy (by the bank offering the potentially shaky loan).
Derivatives are contracts that derive their value from the performance of an underlying entity. In essence, those buying the derivatives are investing their money directly in the underlying entity; if all goes well, they get an asset of greater value that they can liquidate or on-sell. It’s quite common for assets of this type to be reinvested at the end of the term – why wouldn’t you, it’s already proven able to earn you money and to be safe.
Nothing wrong with that if the underlying entity or operation is sound. Government bonds are essentially a form of Derivative. Put them into this economic climate, however, and they simply increased the stakes that everyone had invested in sub-prime mortgages.
It really was one house of cards built on another, built in turn on a third, which was itself built on an earthquake simulator.
The Enron Failure
It’s just possible that everyone involved should have had a better sense of the dangers involved after the Enron crisis in 2001, the last time deregulation and a lack of oversight combined with people who were being too clever by half.
The story of that scandal is really beyond the scope of this article (and outside the time available to finish it) so I’ll simply drop a link – Wikipedia, Enron scandal – and recommend people watch or read Enron: The Smartest Guys In The Room:
- (limited availability)
- Streamed
- Book (last resort?) including Kindle
— I will get a small commission from Amazon.
Lehman Brothers Collapse
Far from reading any tea-leaves, or listening to any cautionary tales, the financial services sector seemed to have drunk the cool-aid. Lehman Brothers were the font-line example, but it could have been any of several institutions – they all borrowed money from other institutions to fund more sub-prime mortgages.
It was like a pyramid scheme in which each one was reinvesting their proceeds in the pyramid when they all should have known better.
Lehman brothers were so exposed that a 3-4% decline in the value of their assets would entirely eliminate the assets that underwrote their entire operation.
During the boom, this insane level of risk earned them and their stockholders monstrous profits, for obvious reasons, but once you start down that path, you are committed; any reduction in the practices that got you into that position completely decimate public confidence in your operation.
There were attempts to rescue them, of course. In August 2007, they bit the bullet and closed their subprime lending division, BNC Mortgage, eliminated 1200 staff positions in 23 locations, took a $25 million after tax charge, and wrote off a $27-million loss in Goodwill.
Unlike others, they didn’t repackage their subprime loans and on-sell them; they wanted the whole profit, and just because they were no longer issuing them doesn’t mean that they had eliminated any of the sub-prime loans that they had already issued – and that was what ultimately was their undoing.
They were simply lent too much money to survive when the bottom fell out of the overinflated housing market. Instead, the rot spread as a multitude of lenders had to write off the loans to Lehman Brothers, carrying them perilously close to the edge of their own financial cliffs.
Government Bailouts
The bankruptcy [of Lehman Bros] triggered a 4.5% one-day drop in the Dow Jones Industrial Average, then the largest decline since the attacks of September 11, 2001.
It signaled a limit to the government’s ability to manage the crisis and prompted a general financial panic. Money market mutual funds, a key source of credit, saw mass withdrawal demands to avoid losses, and the inter-bank lending market tightened, threatening [other] banks with imminent failure.
The government and the Federal Reserve system responded with several emergency measures to contain the panic.
— Wikipedia, Bankruptcy of Lehman Brothers
There was a real risk of the entire financial system collapsing, so deep ran the rot
After the onset of the crisis, governments deployed massive bail-outs of financial institutions and other palliative monetary and fiscal policies to prevent a collapse of the global financial system.
In the US., the October 3, $800 billion Emergency Economic Stabilization Act of 2008 failed to slow the economic free-fall.
— Wikipedia, 2007-2008 Financial Crisis
International Scope
One question not answered so far in this summary of events is why the GFC was so global in scope. Everything so far points to a US Domestic Crisis; however serious, the rest of the world should have been insulated from it, or so the casual reader might think.
There are two problems with this perspective. The first is that it completely ignores how interconnected the finances and economies of countries are in the modern world; and the US is still the focal point of the global economy.
(China could have claimed the crown in more recent years, but didn’t want the responsibility and international scrutiny that goes along with it, and definitely didn’t want the increased transparency that would have been required. So they managed their economy to keep it just a little smaller than that of the US).
The other critical factor is that banks the world over like to invest in profitable enterprises, and like to loan money to people with the apparent ability to pay it back. Combining the two left them hip-deep in the septic tank of the American problems – they simply didn’t know it until the balloon went up.
On top of all that, there’s an additional consequence of the size of the US economy – it results from a lot of people all over the world doing business with the US. People like me, for example. That makes me, and people like me, elements of both the US and my local economy – if financial trouble in the US means that buying products costs me more, that means I have less money to spend locally. There’s an inherent spread of such economic woes beyond the shores of the United States.
Credit where it’s due
When Obama won the Presidential Elections of 2008, Bush went out of his way to ease the transition to the new Administration, inviting the President-elect and members of his team to important summits and meetings such as the G-20.
Bush allegedly told Obama that the GFC was going to be his to manage, and rather than derail attempts to resolve the crisis with an abrupt shift of policies on Inauguration Day, the two worked together crafting and implementing government responses. Much as President Obama gets credit for resolving the crisis, the outgoing President Bush deserves at least some of that credit.
Plenty Of Blame
There’s also plenty of blame to be apportioned. The Republicans may have pulled the final trigger, but the banking and finance sectors had been hard at work in the Clinton administration, persuading those with the authority that they could be trusted, and the whole country would benefit, from the ongoing easing of restrictions.
I vaguely remember it being suggested in one documentary or another that the erosion of protections began with Truman. I’m not sure I entirely believe it, but Kennedy, LBJ, Nixon, or Ford? Could easily have been any of them if it wasn’t Truman.
Greed doesn’t like to be regulated.
Surviving The Storm: An Australian Perspective
Unlike most of the world, Australia did not experience a recession as a consequence of the GFC.
This was a consequence of generous stimulus payments designed to boost the economy, paid to the lowest income earners, including pensioners and the unemployed. Because they have so little, the theory went, they would pump virtually all of it directly into the economy.
The government pumped 11.8 Billion Australian dollars into the economy. They say the proof of the pudding is in the eating – it worked. It was neither too little nor too much (though pundits suggested both at the time); while there was a minor recession in the non-mining sector, overall, the economy grew at 0.4% in the fourth quarter of 2011 and 1.3% in the first quarter of 2012. (Wikipedia, Economy Of Australia – Global Financial Crisis).
The upshot: I think that I can offer a more Olympian perspective on the entire GFC, simply because I don’t have any vested interest axe to grind.
The Rise Of Obama
On November 10, Obama traveled to the White House and met with President Bush to discuss transition issues while First Lady Laura Bush took his wife Michelle on a tour of the mansion.
NBC News reported that Obama advanced his economic agenda with Bush, asking him to attempt to pass a stimulus package in a lame duck session of Congress before the inauguration.
He also urged Bush to accelerate the disbursement of $25 billion in funds to bail out the automobile industry and expressed concern about additional Americans losing their homes as mortgage rates increase again.
— Wikipedia, Presidential Transition of Barack Obama
In February, mere weeks after the inauguration, the Democrats put forward the American Recovery and Reinvestment Act of 2009 in response to the ongoing crisis, which
included a substantial payroll tax credit, saw economic indicators reverse and stabilize less than a month after its February 17 enactment.
— Wikipedia, 2007-2008 Financial Crisis
It’s highly doubtful if the new President would have been able to have all his ducks in a row this quickly if not for the assistance and cooperation of the outgoing President.
I should point out that, in part, President Bush’s treatment of Obama was a response to the events of 9/11; Bush had learned the hard way that these things can come out of nowhere at any time, and he wanted the country to be as ready to respond to an emergency on the evening of Inauguration Day as he could make it.
The economic relief was unfortunately temporary, as secondary effects sparked a recession – now known to Americans as the “Great Recession”.
In 2010, the Dodd–Frank Wall Street Reform and Consumer Protection Act was enacted in the US as a response to the crisis to “promote the financial stability of the United States”. The Basel III capital and liquidity standards were also adopted by countries around the world.
— Same Source
With these measures, the economy finally turned the corner.
I still have one, maybe two, chapters left to go in this penultimate part of the series. But I think that next week I’ll take a break from it to present something a little different.
- Economics In RPGs 1: The Early Medieval
- Economics In RPGs 2: The Later Medieval
- Economics In RPGs 3: Pre-Industrial Eras
- Economics In RPGs 4: The Age Of Steam
- Economics In RPGs 5a: Electric Age Ch. 1
- Economics In RPGs 5b: Electric Age Ch. 2
- Economics In RPGs 6a: Pre-Digital Tech Age Ch 1
- Economics In RPGs 6b: Pre-Digital Tech Age Ch 2
- Economics In RPGs 6c: Pre-Digital Tech Age Ch 3
- Economics In RPGs 7: Economic Realities
- Economics In RPGs 8: The Digital Age Ch 1
- Economics In RPGs 8: The Digital Age Ch 2
- Economics In RPGs 8: The Digital Age Ch 3
- Economics In RPGs 8: The Digital Age Ch 4
- Economics In RPGs 8: The Digital Age Ch 5
- Economics In RPGs 9: In-Game Economics
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