The economic crisis: When will it finish and how it started.

January 17, 2009

This week I went to the library of the Danish language center. I went to return some books (for learners) and had a little conversation with the librarian in Danish. Then we switched to English, as many Danes do when they see you’re struggling. Then he asked me: “So, you study economy, when do you think the crisis is going to finish?” I thought a second and said: “5 years to really recover”. He replied back: “5 years!, that’s long time, uh?!. Is that what you really think?”. I said something like. “Some say now is the lowest point of the economy. Others say in three months things will start recovering. Other 2 years and others… more. So let’s say 2014 to really see the improvement.

While I was saying it that a mix of articles at nyt, financialtimes, intereconomia, the coming of Obama, commercials or American realtors, the economic crisis/consumer confidence graph, and few other things, quickly run over my head.

I followed, “You know, the economy comes in cycles, so things will improve. When? Nobody knows. But perhaps we will not see in a very long time the kind of live many people had before”. Then I remembered the Cities of Jane Jacobs, and her worst economic dream: “Having all the main cities stagnate at the same time, and little by little all loosing their skills”.

A few months ago in the birthday party of Bram, many recent graduates (economists, mastered in businesses, etc.) and young academics were talking about the upcoming of the financial crisis, and how the cousins from Iceland just got quite screwed. Some pointed out the housing market, but I showed my skepticism towards the importance of the housing, after all if you add the price of all foreclosure and related in the US, that was only around 200 billion. Which is peanuts compared with the amounts of trillions that were being lost.

I have always been more inclined to suspect about the artificial low interest rate in the U.S., the debt, the high military expenses (the 3 are strongly connected). In the party, I even said that this could be the death of the theories of the National Innovation System, something that made all the IKE guys around quite shocked. Not that I don’t love those theories, but I doubted of the extreme relevance of the “National System” term, when the Global seemed to be the dominant. To ease the feelings and the high probabilities for me to be wrong, I said I was exaggerating.

But going back where I wanted to go, now I think that I underestimated the role of the housing. Of course this is connected with the ability of money by the artificial low interest rate. But here it came my moment of light.

I was talking with my wise grandma in Christmas. She’s 75 and she’s very intelligent, however because of the poor situation in Spain when she grew up, she did not even finish primary education. I asked her: Why do we have this crisis?. She replied without any doubt: “Because everyone wanted to get a bigger house, or a second or a third one. Have you seen how many houses they have built? And the prices kept increasing to a ridiculous level! If people would have stayed where they lived, the economy would have been ok. Look at your cousin*, she sold her old apartment, for 30 million (of pesetas) when she bought it for 12. She bought her new house for 40 and wanted to sell it for 75. Cash the money and get another house for 50. Her neighbor was lucky and sold a similar house for 75, but that was just crazy! But in the first place, why did she need a bigger house? You sleep in one room, you cook in another, you don’t need anything else! She should have stated in the first apartment and everything would have been just fine. Because they already have good salaries, and they would have been happy, now they are just worried. This is her case, because I know it, but thousands are like that.”

I replied. “Grandma, I have been thinking about it a lot, and I think you are right”.

Then I saw it was confirmed the death of the experience economy. Ok, I’m exaggerating.

* the identity of my family member has been changed.

9 Responses to “The economic crisis: When will it finish and how it started.”

  1. Jason Says:

    Good post Carlitos. It’d take multiple essays to convey my thoughts here, but I’ll just say I agree. Except with the part that you like Krugman…

  2. carlos9900 Says:

    After a long conversation I found out that Jason is becoming a pro-Krugman guy.

  3. Bram Says:

    Dear Carlos, I guess that the institutional setting of the icelandic national system failed rather then the notion of national systems has failed. But we can have a discussion on this anytime because eventhough it was my party I guess that I was not around when you made this statement ;-)

    • carlos9900 Says:

      It’s true, you were not around at that time. You were pretty popular that night, talking to guests one after another :) I’m not saying the concept of NSI has failed!! I only say that the nations and their systems are quite challenged when things like the current global economic crisis sweeps nations alike. Besides, you’re Dutch and we’re in Denmark, so the National notion fits very well for both geographical areas (small countries). But I’m from Spain (diverse big country) with roots in Latin America (huge continent); for both places, the region or city-region level, seems to me be more appropriate than the National one. I think you know that, regardless of each one origin, I’m just saying that to put an example about the fragility of working with a National level.

  4. Bram Says:

    It is the kind of people that make the country big. Not the number of inhabitants ;-). You are too stuck in numbers.

    • carlos9900 Says:

      Ok, ok, the Netherlands it’s a big country… Stuck in numbers?? This is a strong statement coming from someone who lives around statistical software… lol!

  5. Bram Says:

    Maybe the comparison with Spain and latin america is not an optimal one. Is the problem national institutions or how these national institutions are functioning? If you have large countries where regional institutions fail e.g. high degree of corruption/nepotism then you might question if regional is the way to go.

  6. carlos9900 Says:

    I think that for the majority of the Spanish speaking countries the national institutions are the problem per se. But yeah, I have to agree, that regional institutions are of course linked to the regional success. I’m not saying this because I’m in the Geography group now, I said the same in my master thesis at the Business Studies department.

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