That’s what we’ve been seeing on world markets since Thursday trading began in Asia; this morning it hit the US with the kind of sickening thud we remember too well from 2008. Amid the general hurricane of bad economic news a few things stand out.
- Chinese stocks fell almost 5 percent and key real estate company stocks were down by double digit percentages as fears grow that the long-delayed bursting of the China property bubble is here;
- the European bank crisis is deepening, with the IMF sticking to its guns about the massive capital losses faced by the continent’s banks and BNP Paribas apparently trolling the Middle East in search of a big capital injection
- the Federal Reserve’s new worries about the economy made a deeper impression on investors than its plans to support growth
- some US banks are starting to look shaky again.
There are many more reasons for concern. The continuing inability of Europe to cope with the euro troubles, the political impasse over economic policy in the United States, and the deer-in-the-headlights immobility of Japan do not inspire confidence. The emerging economies — China, India, Turkey and Brazil — face increased difficulties of their own and will not pull the global economy out of the dumps. That large corporations are sitting on cash hoards or buying back stock rather than making new investments is bad news; that consumers are cutting down debt and doing what they can to increase their savings is good news for the long term, but bad news now. And it seems clear that two years of frantic efforts in Washington have failed to breathe new life into the nation’s housing market.
Trying to follow the US discussion from Tel Aviv, I’m impressed (as is so often the case) with its political and insular focus. Will the worldwide economic crisis help or hurt President Obama’s chances for re-election in 2012? Which political party is gaming the crisis best, and so will gain more or at least lose less voter support in the polls?
These questions have to be asked I suppose, but given what is going on in the world right now they are trivial. It is almost as if on December 8, 1941, the press was filled with speculation about whether Franklin Roosevelt’s chances for a fourth term were helped or hurt by the attack — and whether GOP hopes to pick up more seats in the 1942 election would have to be put on hold.
The political speculation is worse than useless at this point. Global economic events are moving so rapidly that we have no way of foreseeing the economic environment for next year. It will probably not be very good, but how bad it will be and how it will look to voters cannot yet be foretold.
More to the point, we need policy discussions more than we need political ones. This is not just about how big the deficit should be; it is about whether the international financial system will survive the next six months in the form we now know it. It is about whether the foundations of the postwar order are cracking in Europe. It is about whether a global financial crash will further destabilize the Middle East and, if so, what we and the Europeans are going to do about it. It is about whether the incipient signs of a bubble burst in China signal the start of an extended economic and perhaps even political crisis there. It is about whether the American middle class is about to be knocked off its feet once again and indeed whether the middle class as we’ve known it will survive. It is about whether sovereign governments can still underwrite economic performance and financial stability in the leading economies of the world.
In all cases, I think the odds still favor outcomes well short of catastrophic and worst case scenarios — but the global economy is now in the catastrophe zone where speculation about such scenarios is no longer science fiction but becomes part of prudent planning. This, one would hope, would engage the attention of politicians more than their poll numbers, and might even overshadow such awesomely important events as Republican presidential debates months before New Hampshire goes to the polls. One would have liked to hear a little more about this from the heads of state at the typically bombastic and time wasting annual UN talkathon.
One of the reasons I launched this blog was a sense that the world is moving faster than our thought about the world. The newly fluid international landscape in places like the Middle East, the accelerating disintegration of the economic underpinnings of the blue social model, the increasing effect of technological progress on white collar as well as blue collar employment and incomes through automation and outsourcing, the collapse of public faith in establishments and elites in so much of the world: these dramatic and fundamental changes require a re-examination of some basic assumptions and the reconstruction of many of the basic institutions of both US and global society.
It appears that while investors panic quickly and head for the exits at the first sign of trouble, many politicians, journalists and social thinkers go to sleep when the fire alarms begin to ring. The success of the West in establishing a solid set of social, political and economic institutions and policies after World War Two was so durable that we came to believe that the arrangements made then would last forever, and that further change would be slow and evolutionary rather than quick and disruptive.
The success of central banks and governments at reining in inflation, easing recessions and achieving soft landings in the 1980s and 1990s further reassured us that while there were some problems and dangers here and there, our house stood on firm foundations and was structurally sound.
I still hope the old house can weather one more storm, but it is clear that we can no longer take that for granted. The ground under the foundations is washing away; the wind threatens to rip off the roof, and cracks are appearing in load bearing walls. Sooner rather than later we are going to have to redesign and rebuild.
Financial market crashes come and go; the world may spin back into recession or the economy may wobble for a bit and then stabilize. But we’ve had a glimpse into the abyss; in Europe, in Asia and in the Americas some of our most fundamental institutions and social policies are going to have to change.