Thursday, September 6, 2007

Real Economy versus Banking Sector

On any day, you can find contradictory predictions for the U.S. economy as the subprime debacle expands. Yesterday, the Fed seemed to be saying,"Don't panic. The difficulty is limited to housing." Today, Federal Reserve Governor Randall Kroszner remarked that "Turmoil stemming from subprime mortgage delinquencies could dampen demand for homes and ultimately slow U.S. economic growth."(source)

Now here's the best part from the Reuters article:
"Kroszner, cautioning that his remarks were intended to be a survey of academic research rather than a commentary on the current financial situation, said crises in the banking sector can lead to disruptions in the real economy."

The banking sector versus the real economy? I suppose the real economy is where human beings do things like live and eat and work. You don't actually need currency to do those things. You could barter, raise your own food and use passive solar power. That would obviate the need for a banking sector. The fact is we have developed to a point where most aspects of what we do are financialized.

If you thought your house was primarily the place you live, you were wrong. When you "bought" your house (if you have a mortgage), the transaction created a debt instrument, which was turned into an investment vehicle, which became someone else's gamble. You happen to live there, but it was never merely your home. It was a poker chip among millions of tiny little poker chips on an earth-sized virtual game table.

No matter how much money central banks give troubled lenders, real people are in real pain in the real economy. The real economy is where human beings are hungry and homeless and sick. It is where people feel ashamed at being laid off or falling behind on the bills. It is where parents feel devastated at not being able to buy kids a new outfit for the first day of school. And they may even blame themselves for not earning enough at a poverty-wage-paying, real-economy job.

Will the subprime crisis reach beyond the housing sector? It already has. GM is cutting back fourth quarter production 10 percent in anticipation of lower demand. (source)

And ponder this, the financial sector is a huge part of the much vaunted "knowledge economy." Any room for fairness or compassion as we move forward?