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October 10, 2008
Missing the fundamentals
For all the pain and anxiety and drama associated with the financial meltdown, the crisis is only a part of the overall picture. Overshadowed are the problems with underlying economic fundamentals. For years, people have been comparing our situation to the frog in the pot. Put a frog in a pot of boiling water and the frog will try to jump out. Put a frog in a pot of water and slowly turn up the heat, the frog will boil alive. The slow build up economic problems is like that frog sitting in that pot: the gradual increase in the heat isn’t enough to cause action.
Now, it is as if someone took a sharp pin to that slowly boiling frog. The pin will cause the frog to jump, while the slow boil will go unnoticed until it is too late. Solving the credit crisis won’t turn down heat. But we can hope that the sharp pin shocks the frog enough to cause it to jump out of the pot.
Easy credit is what kept Americans afloat for the past decade. With stagnant wages and families already relying on two incomes, the only recourse for many was borrowing. Borrow on easy terms to get that house you otherwise would not be able to afford; borrow on your house’s equity; borrow on your credit cards to do your patriotic duty, as the President stated after 9/11, to go shopping. And easy credit made up for the hemorrhaging of international accounts as money flowed out to other nations to pay for our trade deficit. (In some ways, we may have the last laugh as all that financial paper we sold them in return for goods and services may turn out to be worthless.)
Solving the financial crisis won’t solve the trade deficit, for example. I won’t go into the long litany of economic issues and problems. I will mention one: wage stagnation. Productivity gains – which have kept this economy going – used to be broadly shared. Somewhere over the past couple of decades the linkage between wages and productivity snapped. As a result, while the economy has grown, wages have not. If we are to put the country back on the right track, that needs to be fixed. Overcoming the financial crisis is the first step. But we also have to keep the frog jumping straight up and back into that pot. Otherwise the frog will be back where it was, boiling alive.
Posted by Ken Jarboe at October 10, 2008 10:24 AM
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