Economics is a sideline interest for me, but the philosophy behind economics is incredible. Thinking about it for a second, economics goes all the way down to the household level. The very roots of the word harken back to the greek concept of house hold management or code. Yet, now it spans looks at vast international systems of trade and political mechanisms spanning billions of dollars.
So, when I picked up Mark Blythe’s book Austerity: The History of a Dangerous Idea” I already had some back ground interest in the subject. It’s goal was to set out to answer those pesky questions.
The book left me with more appreciation for the complexities of modern economics and statecraft. It also left me and probably everyone including Mark frustrated with ideas that are grounded in theory and practice from eras that have little in common with our own.
First, the crash.
Leading up to 2008 we all know that there was a real estate bubble and sub prime mortgages these are commonly linked with the crash, but what motivated banks to enter into risky mortgages in the first place. Honestly, it’s like shooting your self in your foot. Seriously, why would you lend money to people who couldn’t repay it for a lower interest rate than you can get back?
Well because they could make money on the loan that had very little to do with fidelity the prospective home owners. That should have been obvious, but it really wasn’t. I didn’t see it at all, but I’m not that versed in practical economics – more in the theory behind it.
So, now Mark Blythe lays out what the banks and major corporations had done in some brilliant moves to create liquidity. They were creating lots of cash by swapping assets related to Realestate markets. Insurance and bets on housing loans and the mortgages were traded back and forth to free up cash to pay employees and bills by major corporations. To be fair, Mark thinks it was beyond fool hardy, but I think with a little regulation and self control the idea would be brilliant.
I mean if the mortgages were all legitimate this isn’t a bad idea. From what I can tell, that’s how it started, but rising demand for these “products” made banks scramble to find ways to make the assets secure while producing more and more and more. Hence the run for sub prime mortgages.
Now in the USA this was bad, but we the banks were not insanely levered – loaning money way beyond what they had. In Europe the banks were not just loaning in multiples beyond what they had in assets. They were sometimes lending many multiples of what they had. Banks in the Eurozone were actually lending more money than the GDP of the countries that they came from.
The details are in the book which I think you should get if you’re curious.
The difficulty of all of this comes in when the government steps in to bail out the banks after the failure of these risky loans. Then the governments involved get blamed for the whole problem without any consideration of where the problem began. In other words, states were blamed for runaway spending when that really wasn’t the problem leading to the crash and the runaway deficits.
Mark Blythe continued on to really grapple with the economic philosophy behind the public ideology of austerity that in theory will lead us back to a stable economy. It seems unlikely given his analysis, but it is the theory that governments are operating with right now across the globe.