What Went Wrong?
A financial 9/11 happened. The unthinkable happened. The unpredicted happened. Banks stopped lending money. The bottom fell. This is about the fourth time it has happened. Something like this seems to happen every 70 years. So it's a cycle. After each such crisis, there is major renewal and resurgence, and things are better than ever before.
What Really Went Wrong?
China lent big money to an American president to wage a war it should never have waged. It was a big time deficit war. There was flush cash in the American banking system. Elites in the not America countries seem to think money is safer on Wall Street. What did they know? Instead of investing locally they stash it away in the safe havens of Wall Street. But taking in money is only a small part of what banks do. They also have to lend money. That is how they make money. So they came up with really complex financial instruments: mortgage backed securities. So more mortgages means more such securities, more fees, more commissions. Suddenly there was this market for securities. People who could not afford homes were sold homes, because if more homes got sold, there would be more mortgage backed securities. House prices went artificially up. So the mortgage backed securities at those high prices became toxic once the prices on those houses went down. Obviously you can't just revise the prices to get them in tune with the new market reality. Demand and supply went out the window a long time ago. And because every banker and their cousin were doing this mortgage backed securities thing, when the crisis hit, people simply froze. What are you saying, that my assets are not worth what it says on paper? No way.
Japan had its own real estate bubble and a lost decade. This quarter the Japanese economy shrunk at an annual rate of 12%. That is huge.
Money And Basic Demand And Supply
Money is a resource. And it has to go where the need is the greatest, where the return will be the greatest. That would be the market way. Obviously creating a real estate bubble is not the best use of that resource.
For a long time I have felt weird about people's outsize confidence in real estate as a safe and sound investment item. The physicality of a piece of real estate really gets them. If nothing else, you got the land, you got the house. That seems to be the thinking. But what if the market price on your house went down by half, and you are still paying mortgage at the original price? Then where is the safety?
Big Demand In The Global South
Roads, bridges and broadband are needed everywhere. The returns on such investments are routinely high. You do BOOT, Build, Own, Operate, Transfer.
Inventing New Jobs And New Industries
That is where Japan comes in. You end up with all this flush cash, but if you as a society are not invested in the jobs, companies and industries of tomorrow, you are not growing. But you still end up with all that flush cash. So what happens? A housing bubble happens.
Transparency, Accountability
Those will go a long way.
A New World Order
That is sorely needed. Global rules of finance have to be set that are fair globally. They are democratic, they are transparent, they are inclusive of all countries.
We have to set up a regime such that private capital flows to the areas of greatest need and greatest return. Microfinance is really good business. If it gives a 10% return, that is to compete with a S & P 500 indexed fund. And it does. Actually better. So the market has to obey, and microfinance has to grow like crazy.
Investments in human capital in this day and age are way better than pouring money to create a housing bubble.
Flush cash asks for a much sounder global financial order.
Startup companies should be leading the green tech, infotech, basic infrastructure, and lifelong education themes, and globally so.
Monopoly?
If a few big banks can hold a national, a global economy hostage, were those banks too big in the first place? I think so.
What will the next generation of banks look like? If there can be tech startups, why not startup banks?
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