No one wants to utter the word "depression." But the truth of the matter is that the American economy may be entering a state of free fall. Every day brings more bad news about the sub-prime mortgage debacle, about home foreclosures, construction industry slowdowns, a credit drought for consumers and businesses, oil price shocks and the open-ended devaluation of the dollar. Where is it all leading?
Together with the debacle in Iraq and the political implosion of the Republican Party, this economic collapse could make the presidential election of 2008 a turning point in American political history. Conservatism first triumphed over New Deal liberalism thanks in part to the same deadly combination in the late 1970s: a lost war and an economic crisis. The Vietnam War plus stagflation and deindustrialization gave us Ronald Reagan. Now history is returning the favor, as the free-market conservative political order of the last generation faces a systemic crisis from which there is no easy escape.
U.S. economy: An article by Steve Fraser in the Dec. 9 Opinion section referred to a financial instrument as "security investment vehicles." The correct term is "structured investment vehicles."
Start with the confidence game being run out of Wall Street. The sub-prime mortgage crisis occupies newspaper front pages day after outrageous day. Certainly, these tales of greed and financial malfeasance are numbingly familiar. Yet precisely that sense of deja vu -- of Enron revisited, of an endless cascade of scandalous, irrational behavior affecting the central financial institutions of our world -- suggests just how dire things have become.
Once upon a time, all through the 19th century, financial panics -- often precipitating more widespread economic slumps -- were a commonly accepted, if dreaded, part of "normal" economic life. Then the crash of 1929, followed by the New Deal Keynesian regulatory state called into being to prevent its recurrence, made these cyclical extremes rare.
Beginning with the stock market crash of 1987, however (and followed by the collapse of the savings and loan industry at the end of the 1980s and the near-meltdown of Long Term Capital Management in 1998 that required an emergency, government-assisted bailout), financial panics have become ever more common again. Most notorious -- until now, that is -- were the dot-com implosion of 2000 and the Enronization that followed. Enron seems like only yesterday because, in fact, it was only yesterday, which strongly suggests that the financial sector is now out of control.
