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Bubble of bubbles

May 31st, 2008 · No Comments

From R-G
May 31, 2008.
The bubble of all US bubbles
By Max Fraad Wolff
http://www.atimes.com/atimes/Global_Economy/JE31Dj03.html

Two great issues define this moment in America: war in Iraq and
economic turbulence dominate debates, fears and campaigns. Optimistic
pitches can be heard about the effectiveness of the “surge” in Iraq
and policy responses to subprime-driven economic pain.

Many and influential voices loudly tout economic and military success.
Public perception on both fronts lags pundit wisdom. Polling data
suggests that more and more Americans oppose staying in Iraq and
believe the US is already in recession. There is an unusual disconnect
between general opinion, policy and

reality. All we can know for sure is that either the general public or
leading voices are very, very wrong.

The “surge” in Iraq and the surge in interest rate cuts by the US
Federal Reserve are very similar. Both involve heavily spun attempts
by authorities to postpone pain and avoid responsibility for past
miscalculation. Each policy offers as a cure more of what created the
trouble in the first place. This can last a while, not forever.

Loose money and narcotic debt dreams fueled the housing crisis run-up.
Fear of loss was contained by assurances of endless credit, increasing
housing prices and omnipotent Federal Reserve management. The bottom
dropped out of these dreams in late 2006 and we began to admit the
long obvious truths in the spring of 2007. Before spring 2008 dawned,
the Federal Reserve, Treasury Department and experts were massively
intervening to slash rates, offer larger and longer loans to more
institutions and assure that the genie was already being put back into
the bottle.

A broke government was going to hand out magic checks – with borrowed
money of course – to a broke public. This entailed trying something
new. Deficit spending and expensive, impotent cash hand-outs are so
alien to business-as-usual in America. The solution to a debt-fueled
explosion was to offer more credit for less cost to a greater array of
large and largely indebted financial firms.

The folks at home, some of them anyway, would be getting US$300-$1,200
a few months after lenders and investors received several hundred
billion in new loans, lower costs and credit access. A bigger brassier
credit and assurance surge would do what past credit provision and
assurance failed to do. It has, so far. It has also left in many out
in the cold. They are poorer, angrier and worse off then they were
last year.

The troop “surge” in Iraq was much the same. In January 2007,
President George W Bush announced a troop “surge” to stem violence in
Iraq and violently falling US support for his policy there. In
response to much mayhem and death, the administration announced plans
to send more troops, extend the tours of many and increase the US
military presence in Iraq. In March 2007, eerily almost exactly a year
before the Fed economic surge, Bush and company decided to send a
further “surge” of troops into Afghanistan and Iraq.

Why? US and coalition military “progress” in both nations was
inadequate, public support was waning and more of past failed policy
was just what was needed. Like the Fed and Treasury responding to
economic crises, the Bush administration decided that more manpower
and money – more of the same – was the best redress. Faced with
falling house prices, slowing economic conditions and serious debt
problems economic officials decided on a surge in Federal Reserve
credit creation.

The similarities do not end here. Rapid shifts in press attention away
from negative stories and toward details of surge action help to
deflect attention and awareness. The surges of money and manpower
become the story. Lost in the rush of new exciting details and minor
strategy debates are the actual issues.

What caused the great housing bubble to inflate and burst? Why are our
wars in Iraq and Afghanistan so profoundly bloody and unsuccessful?
Might there be serious problems with our conduct and policy?

Nope, these questions are not even worth asking! Instead let’s
engineer perception by debating the details of surging increases in
failed policy initiatives. This is very slowly working less and less
well with the general public. Housing prices keep falling, inventories
of unsold homes keep rising and the labor market remains weak. Gas,
food and many other prices keep rising, the US dollar remains weak.
Iraq remains bloody – if less so – and our young men and women keep
being maimed and killed. The perception, particularly the perception
of those least hurt by failures and most helped by surges, improves.

More and more surge and rhetoric is required to move fewer and fewer
people’s attitudes. More spending and spinning offers less and less
return. This is how bubbles burst. More and more is required for less
and less gain. So it was with the housing bubble and the war. Recent
economic and war polling suggests that an increasing number of our
fellow citizens have declining faith in surges and growing fears of
impending realities.

Max Fraad Wolff is a doctoral candidate in economics at the University
of Massachusetts, Amherst, and editor of the website GlobalMacroScope.

(Copyright 2008 Max Fraad Wolff.)

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