What is he talking about?
First, Barack Obama explained a model of the 2008 financial crisis in terms of a floor he was mopping. A late-night comedy program even helped Americans understand the concept with a video clip of the president mopping a floor. Now Obama insists that the same financial crisis is like a car stuck in a ditch, a model he explained as recently as this afternoon.
Americans lacking the same vision as Obama, who spent his first year focused on mopping the economy with legislation to reform health insurance while nearly 10% of the workforce in the United States remained in unemployed misery, might find MIT economist Charles Kindleberger’s model of a financial crisis – in terms of a displacement, speculation, financial distress, and crisis that ends in panic and a possible crash – makes more common sense to explain the economic problems of 2008.
- Displacement. This is an event that changes a society’s outlook, such as the beginning or ending of a war. Many displacements have occurred seven to ten years before the onset of respective financial crises, as with the crises of 1720, 1772, 1825, 1873, and 1929. The 2008 financial crisis followed this same pattern seven years after the terrorist attacks of 2001 changed the global outlook.
- Speculation (credit expansion). The Federal Reserve lowered interest rates to stimulate aggregate demand in the wake of the terrorist attacks. Investors responded by speculating in real estate investments assisted by the credit expansion.
- Financial distress. The stock market was representative of the real estate investment peak when it reached an all-time record high on October 9, 2007.
- Crisis. The 2008 financial crisis was primarily due to investors panicking to sell real estate investments leveraged by debt from the credit expansion.
Anybody who can help explain why either model of the 2008 financial crisis given by Obama – in terms of mopping a floor or a car in a ditch – makes more sense than Professor Kindleberger’s model in terms of displacement, speculation, distress, and crisis is kindly requested to comment in the below space provided.
Thank you for your consideration and guidance.
Barack Obama, “Remarks by the President at DNC Fundraiser,” The White House, http://www.whitehouse.gov/the-press-office/remarks-president-dnc-fundraiser-hammerstein-ballroom-102009.
Barack Obama, “Remarks by the President at a DNC Finance Event in Atlanta, Georgia,” The White House, http://www.whitehouse.gov/the-press-office/remarks-president-a-dnc-finance-event-atlanta-georgia.
Charles P. Kindleberger, Manias, Panics, and Crashes: A History of Financial Crises, Revised Edition (New York: Basic Books, 1989).