“The economy has become a zombie economy. 20th Century business is unable to grapple with the challenges of the 21st Century. Vast swathes of the economy are paralyzed and crippled: inhabited only by zombie companies. They are the economic living dead: unable to create authentic value.”
– Umair Haque in his Harvard blog, 2010
The economist and Nobel Prize winner Friedrich Hayek warned us in 1941, after the Wall Street crisis of 1929 and the resulting Great Depression:
“The past instability of the market economy is the consequence of the exclusion of the most important regulator of the market mechanism, money, from itself being regulated by the market process.”
Hayek thought that central bankers could never have the proper information to “manage and control” the financial system. The world market, according to Hayek, was too complex for that. Again, that was in 1941!
In the classical economic theory, the market is always on the move to its equilibrium, the market balance. Billionaire George Soros introduces, in his 1987 book The Alchemy of Finance, “reflexivity.” In this theory, Soros argues that markets are, by definition, unstable due to intangible influences not calculated in the existing economic models. By this, he means national financial supervisors are missing the real picture on the playing field of subjectively-formed bank credit ratings. These ratings, and other intangibles, have a huge impact on the behavior of other players in the economy, and cause an unpredictable imbalance.
When we realize that the global stock markets between 2002 and 2008 grew from $35 trillion to $115 trillion (a growth of over 230%), but that the expansion of the real economy only was about 50%, we see some of that “imbalance.” Value creation by using money to make more money always has been a fundamental weakness of our financial systems. When politicians than mentally forget that this growth is not growth, but in fact more debt creation, the result is a financial system holding us collectively hostage.
Many commercial and governmental organizations thankfully used this instability, almost invisibly due the lack of transparency, to divert huge money streams and presented us, with joy, all kinds of superfluous products and services. And, we, as consumers, consumed all there was to be consumed!
In 1999, the US left the Glass-Steagall doctrine. The “wall” between classic savings banks (earning money on the savings of people) and commercial banks (making money with money) was torn down. It was the staircase to the financial downfall. We saw money institutions become bigger and bigger. It was no longer clear who owned the money, nor where the ownership (and thus, responsibility for the debts) fell. On top of that, the Federal Reserve Bank of the US kept the interest rate low to stimulate the economy after the Internet bubble collapsed in 2002. The mountain of cheap money was supplemented by even more money from the Far East and Europe. Simply making money by putting surplus funds into a savings account wasn’t earning enough interest. So ,in the meantime, besides the consumer, the European pension funds, local municipalities, and other semi-governmental institutions also got access to this pile of cheap money. They also started making money with money. The casino was open!
Profits were high and losing money was only a “theoretical” possibility for pessimists. The craving for more and more, stimulated by the well-known bonus systems, created all kinds of new financial products and new terminologies entering the boardrooms: derivatives, securitizations, leverages, off balance products, and collateralized debt obligations (called by insiders “Chernobyl Death Obligations“). And, if there were no buyers, they were made. People could get mortgages based on their (in many cases nonexistent) income, which they could not afford: NINJA loans – no income, no jobs, and no assets.
In his book, Liar’s Poker, former bonds salesman Michael Lewis portrays less-than-scrupulous people on Wall Street taking advantage of others’ ignorance, and thus growing extremely wealthy. The insight reveals terms such as “Big Swinging Dicks” for traders making millions, and “blowing up a customer,” or convincing a customer to purchase an investment product which ends up declining rapidly in value, so the client has to leave the marketplace.
Pine and Gilmore state strikingly in their document, Economic Sense, that:
“The growth of services in the past two decades has largely been in financial services. And this growth in financial services has largely come from artificially propping up a world of goods (beginning with automobiles and housing, and extending to mall development and other commercial ventures) with ever-more desperate attempts to devise financial instruments that more highly leveraged old wealth (in the form of protected classes of existing assets). Incessant as it had been, all this intangible activity created precious little tangible value. And so, eventually the bubble burst.”