Cause and Effect
By Ian Munroe • Aug 3rd, 2009So it was a willingness to take risks on the one hand, and a failure of regulation on the other?
Yes - people were taking too many risks and regulators hadn’t kept up with the changing financial system, so we had a financial system that was largely without any form of support. There were no airbags on it, you might say.
We’ve witnessed some astonishing financial losses. In everyday terms, where did the money go?
Mostly, the money was never there. People had large sums in their accounts, but it was a mirage. It was only there until someone tried to spend it, and then it was no longer there. But on top of that, there is a lot of real destruction going on.
The world economy is probably now operating 4 or 5 percent below its capacity, which means we’re losing several trillion dollars each year of output that we could have produced but haven’t. That’s a real impoverishment of the world. If it goes on for any length of time it will end up eliminating a substantial fraction of the world’s wealth.
Have we seen the bottom yet, or do we have further to fall?
We certainly still have further to fall. Everybody talks about green shoots, favorable signs. But the only thing we have is some evidence that the pace of the decline is slowing, that things are getting worse more slowly. When we actually reach the point where things level off, nobody knows.
