Pulling back the curtain on the economy

How did the U.S. economy get into this mess? Well, I think one man is largely responsible. I call him Oz.

Nearly ten years ago the dotcom bubble occurred. This was an aberration. Large numbers of investors, many of which could be called speculators, were able to affect the economy by investing in new Internet companies. Tremendous amounts of money were poured into technology businesses. The surge drove the stock market up and employment down. Salaries soared in the technology sector. There was a shortage of talent. People who knew nothing about the Internet or software were switching careers. All was good in the land of technology.

Then reality hit and the bubble burst. New technology companies closed their doors – usually quickly. Unemployment increased. Stock markets tumbled. The bubble was so big, the U.S. and global economies felt the effects.

To make up for this financial tailspin, Oz stepped in. He stood in front of his economy machine, with its dozens and dozens of switches, buttons, and levers. He thought he knew how all those controls operated and inter-related. There he was making adjustments moving the various switches. Oz was going to fix things. Later on Oz admitted “he didn’t get it”.

That is when the damage was done. Oz lowered interest rates drastically and kept them there. He knowingly created a housing boom to curtail the dotcom fallout. This was a way to avoid the financial downturn from the technology sector. He panicked, made unnatural adjustments, and let them run their course. He had no real understanding of the side effects of his actions.

In actuality, Oz knowingly substituted a housing bubble for a technology bubble, to avoid a downturn. As the technology sector contracted, the financial sector boomed. This time the boom was fueled by Oz’s polices at the Federal Reserve. The low interest rates lured more speculators. Mortgage companies were popping up every where. They were offering loans backed by investors (speculators) – not banks. Banks, which traditionally backed loans, now offered loans backed by investment banks, who thought they could make money via new lending products based on low interest rates. Housing prices skyrocketed. With these new loans everyone one could own a home. All was well the American dream.

It turns out the cure was worse than the disease. Oz created a housing boom that was an even bigger aberration. The new financial products were unrealistic. Reality hit again. Foreclosures increased. The housing market ground to a halt. Markets plummeted. Oz brought some of the largest investment banks in the country to their knees, with several going out of business.

What was Alan Greenspan thinking? I am not sure, but I believe one conclusion can be drawn. The economy is complicated – too complicated to try to control. No one man can understand it, nor control it. To think so is foolhardy and to try makes one a fool. Here is a case where one foolish man created an economic disaster almost single handedly.