The Causes of the 2008 Crisis (Pt 3) by Paul Cottrell

The United States spends multiple times more on defense and overseas operation than any other country. Even though these defense expenditures are important, and I do think well spent, it is important to remember that there are tradeoffs with such spending decisions. There are positive externalities with these defense expenditures, especially in aeronautics technologies. But these expenditures also have the negative effect of not having funds available for internal infrastructure projects and increased educational spending, albeit that the educational spending should be for the students and not for the pensions of the teachers’ unions. The main point relative to government spending is that there are finite resources and that such unwise decisions usually result in a less productive and growing economic condition. Government involvement overseas has produced a certain level of crowding out of domestic investment.

Geithner shows the main events in the financial crisis of 2008 in is book. What is import to notice is the steady decline in the S&P 500 before the Lehman crisis. This particular period before the crisis shows the financial stress building up from the BNP Paribas redemption issues to Fannie and Freddie conservatorships. Then the shock it with the fall of Lehman and the steady mean reversion from the signing of the Recovery Act. From a chaos theorist’s perspective the pre-Lehman signs in figure 29 were fractures that did not cause system failure by themselves but began to propagate to a threshold level that lead to a total system failure. It is my option that if we did not initiate quantitative easing that the recovery would have been for longer in the United States and far more painful in terms of unemployment and availability of credit. But it is not well know how developed economies will fare in a zero bound rate policy, e.g. Japan’s long standing stagnate economic situation as of this writing. When policy makers start to raise taxes to fill budgetary holes or when central banks start to raise interest rates there are strong headwinds fighting against such moves, which leads to lower economic growth. For example, Abenomics had to reverse course on tax policy because of recessionary concerns as of November 2014. Something similar might happen in Europe and the United States when central banks start to raise interest rates, forcing the policy makers to reverse course.