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A Fleeting Thought on the Crisis
Mar. 12th, 2009 12:00 pmA few months ago I heard or read someone wonder: "Where did this crisis come from? Subprime mortgages? Then why does it have to result in unemployment and such? It's the same country, the same people, the same equipment in same factories - why is everything suddenly going to hell in a handbasket?"
To begin with, it's not exactly hell (or a handbasket) - when Ronald Reagan became president in 1981, unemployment was 7.6% and rose to 9.7% by 1982 (spiking to as high as 10.8% at one point), while inflation was 13.58%. Unemployment has risen to 8.1% now and inflation hasn't been over 5% since 1982 (with the sole exception of 1990). Pretty bad, but nothing like the Great Depression. So what happened to the real economy?
Economies run on trust - trust that your customers will pay their bills, trust that the judicial system will protect your legitimate business interests, trust that your suppliers will supply, trust that your money is reasonably safe from default and inflation. On the most basic level, even in an over-the-counter transaction there is that moment between the goods being handed over and the money being handed back when the seller has to trust the buyer to actually hand it over. It is that trust that enables businessmen to enter into agreements - with customers, suppliers, and employees - that enable economic transactions to happen.
IMHO, all economic crises that are not caused by natural disasters are crises of confidence - lack of trust in any of the above. Thus, they are ultimately information crises.
To begin with, it's not exactly hell (or a handbasket) - when Ronald Reagan became president in 1981, unemployment was 7.6% and rose to 9.7% by 1982 (spiking to as high as 10.8% at one point), while inflation was 13.58%. Unemployment has risen to 8.1% now and inflation hasn't been over 5% since 1982 (with the sole exception of 1990). Pretty bad, but nothing like the Great Depression. So what happened to the real economy?
Economies run on trust - trust that your customers will pay their bills, trust that the judicial system will protect your legitimate business interests, trust that your suppliers will supply, trust that your money is reasonably safe from default and inflation. On the most basic level, even in an over-the-counter transaction there is that moment between the goods being handed over and the money being handed back when the seller has to trust the buyer to actually hand it over. It is that trust that enables businessmen to enter into agreements - with customers, suppliers, and employees - that enable economic transactions to happen.
IMHO, all economic crises that are not caused by natural disasters are crises of confidence - lack of trust in any of the above. Thus, they are ultimately information crises.
