So, this is it. The financial system has crashed. Now we're finally seeing the Republican's cherished "trickle down" theories begin to work - and with a vengeance- as the damage spreads into the real economy. The basic mechanism for this is the contraction of credit, which is cutting off funds for real economic activity. Goldman Sachs and others estimate that the financial crash has contracted lending by about $2 trillion--and our economy is $15 trillion in GDP. Banks and other institutions are simply unwilling to lend. Here's the results we know of so far:
I'm not sure if the decline in home sales beginning in 2005 reflects the fact that stagnating wages and earnings were showing up as a decline in home sales that early, or if some regulators were starting to tighten the screws that early. Also, there was Greenspan raising interest rates off the 1.0% floor he had brought them down to after the dot com bust. I'm not sure of the dates of the interest rate increases, but I think they began in 2004.
I think what it all reflects is that whenever you let the financial and monetary system leave the real economy behind by running off and doing its own thing - speculating, creating and trading "risk management", speculating some more, trading for its own accounts, arbitraging the "noise" in the markets, etc. - you end up with a financial and banking crisis. Because any and all financial instruments must, in the final analysis, be paid for from the physical production of the real economy. Think of financial instruments as claims for payment. When there is a roughly 1.5 to 1 ratio, things are relatively sane. But when you get to where we are today, where there are $60 in claims of payment to every $1 in GDP, there is bound to be a "hiccup."
