THE US GOVERNMENT MAY HAVE MOVED decisively -- many say uncharacteristically -- over the weekend to forestall a conflagration in the global financial markets, but no one is betting that happy days are here again and it’s time for business as usual. This much we should be able to tell from the roller-coaster ride that the stock markets have gone through in the past week. Once again, the wild swings on Wall Street show us how artificial and fickle the behavior of the financial markets can be, quite distinct from that of the “real” markets, otherwise known as the economy of bricks and mortar, of food and farms, or of men and machines. And so, while the tiny minority of Filipinos who have investments in the stock markets or in the broader financial market may be justifiably jittery over the prospect of losing large bundles of money, the rest of us with shallower pockets need not worry unnecessarily, right? Let us see.
Where it came from
All financial market transactions (save perhaps for pure pyramid scams) are rooted in transactions in goods and services. Thus we can’t really say that the financial market turmoil is separate and detached from the real markets that matter directly to us. “Bursting bubbles” occur in the market when the financial transactions get way ahead of the transactions in real goods and services on which they are based. The so-called “dot.com bubble” near the turn of the millennium happened because the actual expansion potential of Internet-based businesses was way overrated by the financial investors who made a mad rush to put their money into it—until reality set in.
Similarly, the US subprime crisis happened because too much money was put in the hands of Americans who in the first place never had the inherent capability to buy the houses that they bought. Who put the money in their hands? It was people with deep pockets, most of whom did not even know they were doing so. And this was because the complex web that the modern financial system has become now makes it possible for the original irresponsible lenders to these unviable home buyers to pass on—and hide—the undue risk to others. Meanwhile, the mounting risk was never directly visible because house prices were constantly moving up—pushed up, of course, by the growing base of increasingly unviable home buyers who were being lent money by the system to do so nonetheless. Indeed, it looked like a great investment to anyone: borrow now to buy something that is rising in value.
Moral hazard
But it was in every sense a pyramid. Home buyers who came in earlier in the game were all right for as long as many others were still getting in at the base, constantly raising demand for (and therefore prices of) houses. Obviously, that could not happen indefinitely, and the market will eventually not have enough new home buyers. As in any pyramid scheme, sooner or later there will no longer be any base on which to build the pyramid, and the entire pyramid collapses.
The sad part of it all was that the financial players involved—the banks, the mortgage companies, the investment houses, and even the credit-rating agencies—must have understood this and realized that the whole situation just wasn’t sustainable. They all knew that something had to give at some point, and yet they just kept on going. Why? Because fat profits and huge salaries were being made all throughout the process, of course. That is the nature of this huge industry that thrives on “playing with” and growing other people’s money. But more than that, they also had faith that Uncle Sam would not let the industry down when the inevitable day of reckoning comes. The financial system, after all, is too vital to be allowed by the government to collapse. The White House’s most recent moves once again reinforces this faith that time and again has moved people to do irresponsible things—what economists call “moral hazard” that is so prevalent in free-market systems. The same moral hazard led to the Asian financial crisis 10 years ago, and the many other financial crises the world has seen since the Great Depression of the 1930s. And so once again, it is ultimately the common taxpayers who end up paying for the excesses of the market players.
Fearing fear itself
For the average Filipino, the question is: What can we expect, and what do we do in the face of all this? Let us examine the implications. If the banks, insurance companies and investment houses you put your money in had placed too much of it directly or indirectly in such failed investments via the toppling giants like Lehman Brothers and AIG, then they may have trouble giving you back your money, much less the yields you had expected from it. But the Bangko Sentral and the banks themselves assure us that the few hundreds of million dollars that our financial institutions had placed in such investments are too tiny relative to their total resources to leave more than just a dent, even if they were to lose it all. And with the lifeline the US government is throwing, a total loss on these failed investments is highly unlikely. So please don’t rush out and withdraw all your money, because if too many people did, then it is that panic—and not the Wall Street meltdown—that will do your bank in. At times like these, the saying “there is nothing to fear but fear itself” is quite apt. Meanwhile, we should remember that it is bricks and mortar, food and farms, and men and machines that make the economy run and create the jobs and incomes to sustain our lives. And for as long as people need to eat and be clothed, housed, and indulged beyond basic necessities, these things are not about to disappear before our eyes the way money put into subprime or other loans could.
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(Comments welcome at chabito@ateneo.edu)
