(This follows fast on the heels of Francis Fukuyama's similar "The
Fall of America, Inc." at http://www.newsweek.com/id/162401)
Thursday, Oct. 02, 2008
The End of Prosperity?
By Niall Ferguson
Congress's initial rejection of the Bush Administration's $700
billion bailout plan calls to mind an unhappy precedent. Back in
1930, the Senate passed the Smoot-Hawley Tariff Act, which raised
duties on some 20,000 imported goods. Historians define this as one
of the critical steps that led to the Great Depression a tipping
point when the world realized that partisan self-interest had trumped
global leadership on Capitol Hill.
It's fair to ask whether America's lawmakers could do it again. The
bursting of the debt-fueled property bubble and the crippling losses
suffered by banks, together with the political dithering of recent
days, have set in motion a chain reaction that, in the worst-case
scenario, could lead to something like a 21st century version of the
Depression even if a bailout package does eventually get approved.
The U.S. not to mention Western Europe is in the grip of a
downward spiral that financial experts call deleveraging. Having
accumulated debts beyond what's sustainable, households and financial
institutions are being forced to reduce them. The pressure to do so
results from a decline in the price of the assets they bought with
the money they borrowed. It's a vicious feedback loop. When families
and banks tip into bankruptcy, more assets get dumped on the market,
driving prices down further and necessitating more deleveraging. This
process now has so much momentum that even $700 billion in taxpayers'
money may not suffice to stop it.
full: http://www.time.com/time/business/article/0,8599,1846450,00.html
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