At its core, [this is] a crisis of the classic 'Argentinean' variety - a debt-fed party, marked by a consumer binge on imported goods, and the strutting of an ostentatious new class of super-rich, who had invented nothing and built nothing, except intricate chains of paper claims that duller people mistook for wealth.
Morris' broader thesis on American economic history provides the bookends between which he lays out his story of what led to the particular crisis of 2007/8. His thesis is this: The ruling political / economic consensus in America alternates between liberal and conservative in roughly 25-30 year cycles. The liberal, Keynesian view believes in an active role for government in the economy and in a regulatory environment that sets up the rules of the game every player needs to follow. The conservative, Chicago School / Milton Friedman view holds that a free market always finds the best answer and the role of government is to get everything out of the market's way. The long government-centric policy making of the '60s, in Morris' view, led to the 'Great Inflation' of the '70s which Paul Volcker broke with his 'forced recession'. With the election of Reagan in 1980, the Chicago School took over in Washington and what followed was 25+ years of continuous financial deregulation and 'markets know best' thinking in Washington. But, Morris goes on, both schools of thought suffer from a problem - they can't control their own excesses.
In the early days of a cycle, the new ways of thinking are like a fresh breeze that blows away the mythologies of the past. Inevitably, through a kind of Gresham's law of
incumbency, breezes become doldrums, and leaders get trapped in mythologies of their own. Liberal cycles inevitably succumb to the corruptions of power, conservative cycles to the corruptions of money.
The prosperity of the 2000's was fake, based on massive consumer borrowing on bubbly-priced assets. Now consumers are deeply in debt, and the price of the favored assets are falling, while both employment and incomes are falling along with them. Pouring out ever more dollars in the hope of recovering the zing of the old bubble days is exactly the wrong prescription, and risks making eventual outcomes far worse than they need to be.
It's time that we take the same harsh measures we have long preached to other countries. ... Consumption has to fall, by at least 4-5 percent of GDP, and the money has to be shifted to savings and investment. The hypertrophied financial sector has to shrink drastically. And we have to run down the huge overhang of dollar-based debt by producing more than we buy for the first time in a long time - in effect, by working harder and living poorer.