Take a look at this 12 minute video explanation of the credit crisis:
This is the work of graduate student Jonathan Jarvis and it’s a perfect example of a point that I’ve been making here for some time: increasingly the primary modality for effective communication is a visual one.
Several things leapt out at me from the presentation and, mostly, they echo things I’ve been writing about for a while. First, the entire crisis was fomented by an attitude towards risk. Risk became obscured and, consequently, there was a greater appetite for risk. Second, there are only a handful of prospective solutions to the problem.
We could subsidize housing values and, consequently, pump air back into the system. I think that’s part of the purpose of the proposal the Obama Administration announced not long ago. I think there’s as much risk of a positive feedback situation in this approach as there was during the pre-crisis days. While it may be a reasonable palliative, it’s no longterm solution.
We could introduce friction into the system in the form of new regulation. That would reduce risk but it would also reduce the potential rewards. Since it will never promote things back to the heights they achieved a few years ago, I don’t believe that will work, either.
We could get accustomed to a reduced level of economic activity, meaning that wages and prices would fall. The problem with this is that nowadays a tremendous proportion of the population is insulated from wage declines—they work for the government or in one of government’s handmaiden industries. If you keep keep all of these government workers’ wages constant or even increase them, the degree to which everybody else’s wages will need to fall increases that much more. I see this as a formula for social upheaval.
In a globalized world that has serious implications. For us a ten or twenty percent decline in wages or standards of living would be painful but tolerable. For countries that until very recently were impoverished, e.g. China, India, Mexico, it would be very serious, indeed.
Hat tip: Joe Gandelman