Finance, goods must reconcile to restore economic partnership


Crises come and crises go, but this one seems to be in a class of its own. And now that it has arrived, it doesn’t look like it’s going away anytime soon.

The media started out by talking about the credit crunch. Now the headlines are all about the global recession. And with good reason. Economies throughout the world are suffering from the most pronounced setbacks they have seen in some time.

On the face of it, the situation does not seem to make much sense. There’s no doubt that a global credit crunch is under way, but what we need to pay more attention to is the cause: The world of finance drifted so far away from the world of goods that it acquired a life of its own.

Wall Street decoupled from Main Street. That being the case, one would’ve thought the turmoil would confine itself to the financial sector. Not so. Within days of U.S. investment bank Lehman Brothers’ liquidation, trouble was starting to brew in the real world. How can this be?

The answer is that while Wall Street may have decoupled itself from Main Street, Main Street continues to rely on Wall Street to make the money go ’round.

The slicing and dicing of loan assets and their repackaging into securities may have nothing to do with the real world, given that all the action takes place within the confines of Wall Street. But when banks start going under as a result of trouble in the market for securitized loan assets, the resulting drain on liquidity hits the real world very directly.

This is irrespective of whether companies raise capital in their own right by issuing securities or go the more traditional route of requesting loans from banks.

Either way, when financial institutions collapse or start to hoard cash in anticipation of an imminent collapse, they create a shortage in the liquidity needed to meet the funding requirements of mainstream companies and people. Just because a couple stop doing things together doesn’t mean their bills can go unpaid. The money must come from somewhere.

Moreover, purchasing power is increasingly borrowing power these days. When one thinks about it, very little actual consumption takes place without credit. Houses and cars are two big items for which people very rarely pay cash. The availability of housing and auto loans is crucial to maintaining steady growth in demand for these big-ticket items.

But if funding runs out, people can’t spend. And if people can’t spend, consumption doesn’t take place. If consumption doesn’t take place, the providers of the goods in question must cut back on production.

Thus what happens in the world of finance has a very direct bearing on the fortunes of the real world.

To that extent, the world of finance should not be allowed to detach itself totally from the world of goods. The bond of marriage is a sacred one and must be respected if the global economy is to remain a sound and healthy place. But that doesn’t mean the partners have to stick around each other all the time. They ought to be entitled to do their own thing. Each person needs his or her own space if the relationship is to remain mutually rewarding — and hence permanent.

Yet if one side of the relationship goes partying without bothering to think about the other waiting at home, trouble is sure to be in the offing. The search for a way back to married bliss is crucial.

Noriko Hama is an economist and a professor at Doshisha University Graduate School of Business.