In November 1963 when then US President John F Kennedy was assassinated the question, “Where were you when JFK was shot?” became a part of pop culture.
At the beginning of this week with the fallout from the sub-prime-mortgage-triggered- financial crisis cresting, with the folding of investment banks Merril Lynch, Lehman Brothers and AIG’s investment arm, economic watchers are asking “Where were you when…?”
The genesis and dynamics of the current meltdown can fill several doctoral thesis, but basically it’s a test case of what, how if bad debts get out of control can collapse whole systems and even economies.
Even a person with a head for numbers would be hard pressed to put his head around the fact that the extent of Lehman Brothers owed was estimated at about $700b. If it will help at all, that is enough money to keep Uganda running for the next 80 years.
But Uganda has been here before. In the period between 1997 and 1999 several banks were so distressed the central bank had to, intervene – Nile Bank and Sembule Bank or shutdown all together in the case of Teefe, ICB, Greenland and Trust Banks.
The effect on account holders and borrowers was not unlike being passed through a wringer. But in a country where there are currently about 1.5 million account holders out of a population of 30 million, the distress to the whole economy was headline grabbing but not insurmountable in the near time. The banking industry is now at its healthiest since the 1960s.
But the current crisis in US is a different ball game altogether. In international news we are only hearing of the big Wall Street banks, investment banks that do not take deposits, but what we are not hearing about are the smaller deposit taking banks closing shop all around the US.
Also what is not getting as much play as the multi-billion dollar bailouts, is the thousands of jobs being lost across the financial industry. A friend reported that in the last week at least 50,000 jobs have been lost in the UK’s financial district.
The Marxists have found cause to dust up their resumes, the nationalization of several bastions of the free-market, evidence that capitalism has done its course and we are on the threshold of “the real” communist era.
Only time will tell.
Economic history is strewn with stories of periods of unprecedented progress followed by collapse and uncertainity.
Going by evolutionary theory, every so often the economic system stretches its limits and stability has to be restored. The toughest survive and the weakest are shed, with the end result being that the system comes out the other side stronger and more resilient.
The problem is of course that while every boom carries along more and more people in its wake the inevitable burst invariably hurts that much more people.
If it is true that every system bears the seed of its on destruction then this boom-burst cycle is at once capitalism’s strength and weakness.
Capitalism and unlike the less successful centralized economies, is based on constant but disciplined, experimentation. With the market providing the discipline. The system through the interaction of thousands or even millions of players is always experimenting, pushing for high productivity through greater efficiency. It keeps the strong and weeds out the weak, events as we have seen in the last year that have culminated in this week’s blood letting, are examples of this.
So through a start-stop-start process progress is made.
We aspire to a free market economy, but this the price we will pay for progress every so often. We can not avoid these shocks in as far as the new generation of babies can leapfrog the less efficient crawling before they learn to walk.
But the shocks can be mitigated by strong institutions relatively free of corruption that can nurture, monitor and have the will, leeway and means to intervene with boldness to cushion inevitable breakdowns.
published September 2008