Magical Thinking in Silicon Valley and on Wall Street - Gabriel Rocha #12

Since the first stock exchange was created, in the Netherlands, around the year 1600, the business cycle of the financial markets has created several widespread booms and busts, bubbles, and then the popping of such bubbles. 
            In chapter 45 of Fantasyland, Kurt Andersen brings up the discussion of how the economy in the US has been over and over again stretched every few decades, with the creation of bubbles followed by an economic crisis. He believes that the free market is to be blamed and that the 2008 meltdown was due to deregulation. He points out that Americans got used to believing that they could spend as much as they wanted and that the bill would never come, but, as it happens, the bill always comes eventually. I believe he’s right in his overall assessment of the crises he mentions in the chapter, but he doesn’t really explain what caused the problems to begin with, which leads him to conclusions that do not entirely follow his premises. 

The Federal Reserve (commonly referred to as Fed), Fannie Mae, and Freddie Mac are the primary causes of the problem. All of those “private” companies are under the government’s control in some way or another, so when Andersen says that Wall Street is fueled with magical thinking, he forgets to mention the gas station that provides the setting for this magical thinking: Washington, DC. Fannie Mae and Freddie Mac are GSEs (Government-Sponsored Enterprises), which means that they have, with the blessing of Congress, easy access to low-interest rates money to borrow from the government, besides having a duopoly in the sector they operate. The Federal Reserve is said to be a private bank that has the mission to keep inflation and unemployment low. The problem is that the president of the Fed is indicated by the president, so it would be naïve to say that the government has no say in the policies carried out by the Fed. 

The Fed prints money whenever it feels like doing so;  more than ¾ of every dollar in existence today was printed over the last two years, and all that just to pump up the markets in an attempt to prevent layoffs during and after the pandemic. The result of that is that during a period in which the economy should’ve shrunk, almost every sector of the financial market got to new all-time highs, creating a distortion that made it even harder for the economy to reflect the effects of the crash that happened in March of 2020, when the world realized that Covid was getting more serious. Reality, however, is an anchor that brings markets back down to the ground. High inflation numbers in the U.S., not seen since the 1980s) and thousands of employees of tech companies (and other sectors of the economy) have been laid off after the Fed stopped pumping money into the economy, a hangover that could not have been avoided forever. 

The big issue caused by all this money printing is inflation. Unlike we tend to think, money is subjected to economic laws such as supply and demand laws. What do I mean by that? If too much money is thrown onto the markets over a small period, but the demand for it stays the same, all the money in circulation will lose its value. How, then, the Fed injects money into the economy? Buying assets. The federal reserve buys bonds, mortgages, or any financial asset like stocks or ETFs, and that creates distortions in the prices of all assets, directly or indirectly. Take the example of the Fed buying up several millions of dollars worth of a bank’s stock, that stock’s value will go higher even though no new wealth has been created by the bank. This bank, in turn, will be able to lend more money to its clients, and these clients might decide to buy up houses. If enough people do that, the prices of houses will also go up when they wouldn’t otherwise. Now imagine every sector of the economy being affected by this money, and we have bubbles being created everywhere. Low-interest rates and inflation are the reasons why many Americans stopped saving money and began spending it, a creation of the magical periods of easy money that Andersen talks about in his book. The incentive for the regular American to put money in a savings account was diminished by the less than 1 percent a year yield, and it was replaced by the low-interest rate to take loans. This flipped mentality used to be more common in low-income and developing countries, where people tend to spend all they have and not save anything since their currencies are usually eroded by inflation. That scenario, however, has taken over the American culture over the last few decades. Big banks and the Federal government have their large share of the blame to take, but the everyday American also has to redevelop a sense of responsibility and perhaps a small amount of skepticism to distinguish what is real from what is just magical thinking. People negatively affected by the 2008 meltdown were not only those that have no idea how interest rates work, but a more than large majority of the U.S. population. People fooled into buying a house they could not afford should take their small share of the responsibility of entering into something they could not pay for and not let that happen again moving forward. 

This video below is a bit long, but it explains in an elucidative manner the other effects of inflation and their impact on society.