Insights · September 15th, 2008
The 500 point drop in the Dow today, 6th largest drop in stock market history, is indicative of three interrelated social-cultural-economic factors. First, in response to 9/11 various economic actors cooperated to loosen credit as a way to prop up the economy. Ironically, in retrospect this response perfectly enabled the fulfillment of the prime goal of the 9/11 attack, which was to financially destabilize the U.S. Second the mortgage problem at the root of the current Wall Street debacle is itself a continuation of a two-decade long trend in which the financial sector became not the enabler of U.S. productivity, but a primary economic activity unto itself. Rather than earning money, we have simply borrowed it, or created it from rather thin air with creative but ultimately fictitious financial instruments. Finally, the mortgage problem is also the ultimate expression of a cultural trend in which we have valued gluttony over frugality, a lesson that people apparently have to re-learn on a continual but painful basis. The primary example of the latter is the build out of far more $600,000-$800,000 houses than any objective analysis of household earning power could ever support, under standard banking practices. We fooled ourselves.
These three factors are also examples of one of the primary tools of systems-oriented futuring processes, which is to consider not just first order (or primary) consequences of things, but also their second-order consequences. Attempting to use easy credit to off-set economic problems did stimulate the economy, but had the second order consequence of eventually destabilizing things. Attempting to spread risk with creative financial instruments did spread risk, but hid true values, and spread the fallout when the risks proved too risky. Attempting to raise standards of living to heights not supported by actual income will have the eventual effect of lowering standards of living.
Ahead we will see several more major institutions wobble and likely fail or fundamentally transform into shells of their former selves, including obviously AIG and WAMU. For consumers and home buyers, the news is not good. House prices will continue to fall well into 2009 or 2010, or until values have fallen at least 20% from the 2007 highs, more in some markets. It will be several years until prices recover to earlier values. There is even reason to suspect that values will not return to earlier values for a generation, reasons having to do with further impending economic problems caused by peaking oil supplies without enough lead time for new supplies or substitutes, and by continual financial blows from climate change.
What can we do? Get smart, get frugal, start innovating again, start producing real things again. I will have more to say about that tomorrow.
Glen Hiemstra is a futurist speaker, consultant, blogger, internet TV show host and founder of Futurist.com. To arrange for a speech contact Futurist.com.