Saturday, March 22, 2008

I am going to start blogging again because the US has become a much more fascinating place since I stopped. The democratic primaries provided a lot of entertainment, and although the outcome seems all but inevitable now, things might change. Recently, the financial crisis has brought up a large number of interesting issues, called into doubt the current capitalist system, and provided a wealth of interesting data for institutional sociologists.

A number of sociologists have argued that the battle over how to frame the great depression has shaped economic policy for most of the 20th century, and it is likely that the current problems will have a similar effect in the short term. While it might be a bit much to hope for objectivity, there is little doubt that discussions over how to interpret the actual economic crisis will actually be policy discussions framed as descriptive accounts. How we end up interpreting the financial crisis will largely determine and be determined by who wins the policy debate.

This article in the NY Times brings up the point that both homeowners and investors took on debt foolishly, but it seems as though banks are the only ones getting bailed out. The rationale the government gives is that banks can take the whole economy down with them if they become wary of lending money. In addition, the claim is inaccurate: borrowers can declare bankruptcy, and future administrations might modify bankruptcy law to reduce its burdens on the latest batch of borrowers. However, although the article is unremarkable, it is a good entry point into the less visible debate about lending practices in the U.S. It's pretty clear that debt was playing a major role in the U.S. economy, and things may be even worse in Britain. Not only will this crisis have major consequences on lending, it may also change how the economy works. And it will be interesting to see what shapes the new economy takes. My prediction: If the government regulates the lending (banking) industry heavily, this will lead these companies to shift their investing towards equities (especially foreign ones) and municipal bonds. However, the financial sector will shrink by up to 50% of its peak size, and only slightly outgrow the economy afterwards.