What went wrong with business and governmental economic systems that sustain our economy? What is behind the continuing economic recession we are mired in? The nation’s leveraged credit habits and wasteful use of resources have drifted over to our island
What went wrong with business and governmental economic systems that sustain our economy? What is behind the continuing economic recession we are mired in? The nation’s leveraged credit habits and wasteful use of resources have drifted over to our island shores.
Are we wasteful because our country has too much of a wealth of resources. Our nation’s geographic location provides bountiful clean water, fertile agricultural land, timber, plentiful commodities, coastal ports, temperate weather and peaceful neighbors.
Our previous can-do generations provided our citizens with an unparalleled infrastructure of highways, railroads, dams, canals, hydroelectric generation, parks and recreation facilities, energy and plentiful food production.
Our education system is open. We provide public education up to high school and community colleges. States subsidize universities and higher education. Loan agencies are available to fund tuition and subsistence. Grants are available from private and government institutions. In other words we have ensured a literate populace.
One observation we can agree on is that something has gone drastically wrong with our economy in the last few years.
Critics can’t seem to agree on the causes of the economic breakdowns in our systems and government oversight. They complain of over spending by local, state and federal governments. Of course they all blame unchecked welfare, illegal immigration, costly prisons, drug cartels and costly wars. So on and so on.
There may be some truth to these ills. But we’ve lived and coped with them through our history as a nation. No, let’s discuss the real culprit. Our majority are living a weird sort of utopian mindset. The newer generations are convinced of a perpetual bounty due them as a birthright, a mindset that our nation’s natural resources will support us no matter how much we waste. Further, we have become a bankrupt nation through the abuse of credit.
Start with micro-economics at the household level. Accounting is not so complicated at this basic level to sum up our assets and liabilities and the remaining balance is net worth. The small business owner does the same and prepares what accountants refer to as a balance sheet.
Measuring our income is not complicated. We can easily sum our household family income each month needed to pay expenses and hopefully invest some savings. Small business needs sales each day which are summed up on monthly income statements. Bigger businesses and governments do the same basic accounting. Add them all together and then we can look at it from a macro-level gross national product and per capita standard of living. What do we come up with? Over spending at every level. Deficits.
Not only are we overspending but to continue this utopian mindset we are borrowing like no end. Our credit card debt is mind-boggling. To pay the bills and buy more we borrow on our house equity. People buy houses that are unaffordable. Several SUVs and pickups sit in the driveway. Businesses and corporations speculate by merging, buying other companies with equity financing, highly leveraged loans and junk bonds.
History of past credit bubbles shows that when things start to go wrong in financial markets, they go terribly wrong. The day the sky starts to fall is called a “Minsky moment.” It has fallen. The Minsky model of credit cycle boom to bust talks about five stages: displacement, boom, euphoria, profit taking, and panic.
Hyman Minsky was an economist whose main contribution to economics was a model of asset bubbles driven by credit cycles. In his view, periods of economic and financial stability lead to a lowering of investors’ risk aversion and a process of leveraging. Investors start to borrow excessively and push up asset prices. The model fits the last three U.S. credit booms and asset bubbles that ended in recessions: S-and-L-based real estate boom and bust in the late 1980s; tech bubble boom and bust in late 1990s; and recent mortgage credit boom and bust cycle.
Another important aspect of the Minsky model is the loosening of credit standards among regulators and financial institutions /lenders who, during the credit boom, find ways to avoid prudent lending standards as evidenced by the recent mortgage sub-prime bust. The toxic waste aftermath of the credit abuse by our utopian mindset has led us into the near bankruptcy of the entire nation.
My conclusion is that the fallout from the damage caused by the recession will lead us back to a practice of conservatism in our daily lives, business management and political voter preference. Gov. Linda Lingle and Lt. Gov. Duke Aiona have initiated energy conservation and self-sustaining agriculture policies that will be implemented by our island populace and political leaders not by choice but by necessity.
• Ron Holte is the former chair of the Kaua‘i Republican Party.
