The Long Legs of the Crash: 13 Unexpected Consequences of the Financial Crisis

Last year had more than its share of vertigo-inducing headlines: major banks suddenly disappearing, the Dow plunging day after day, and billion-dollar bailouts failing to make a dent in the worst financial crisis since the Great Depression.

Already, the Wall Street way of life seems to have gone the way of the dodo. An entire country -- are you reading this, Iceland? -- went belly up overnight. And good luck if your last job title was "mortgage-backed securities trader." But if there are some predictable economic hardships we can expect from the current crisis, there are also some trickle-down effects that aren’t so foreseeable. Here, 13 surprising consequences of the crash:

1 Your government will get smarter... In a global recession, governments around the globe will be able to recruit a better class of bureaucrats. Just a few years ago, the U.S. government had serious recruitment problems in the Foreign Service because no world-savvy 25-year-olds wanted to work for the civil service when they could make serious cash on Wall Street. In a severe downturn, however, the stability and security of a government job look far more appealing.

2 ... and more corrupt. Politicians' palms are about to get greasier. A global downturn shrinks the demand for goods and services worldwide. That means the security of a government contract will look pretty sweet to any businessperson struggling to stay afloat. A January report from Transparency International warned that corruption is bound to increase worldwide during the current crisis, as businesses prioritize survival over corporate integrity.

3 Gray skies are gonna clear up (at least a little). The central factor in projections about global warming is long-term extrapolations of current economic growth. Thing is, I doubt the Intergovernmental Panel on Climate Change expected Wall Street to tank as spectacularly as it has. The longer the global economy stays in recession, the less greenhouse gases are emitted into the atmosphere. You still might not be able to breathe easy in Beijing, but your odds just got better.

4 The Internet is about to get a lot more #@%$ing annoying. Newspapers are looking to online advertising revenue to deliver them from bankruptcy court (and eventually, total eradication). So, expect more Web advertising on your news sources -- pop-up ads, welcome screens, articles hacked into ever shorter segments to maximize clicks -- that cannot be escaped easily. Or at least not without getting extremely frustrated.

5 Glory days for evangelicals. Bad times are boon times for evangelical churches. Economist David Beckworth of Texas State University has crunched U.S. church attendance numbers and found that congregation growth at evangelical churches jumped 50 percent during each recession between 1968 and 2004.

6 Your kids will be savers. Macroeconomic realities in your childhood have a profound effect on your financial choices later in life, regardless of how much money you make, according to a study by economists Ulrike Malmendier and Stefan Nagel of the University of California, Berkeley, and Stanford University, respectively. The generation that grew up during the Great Depression, for example, was more risk-averse than its parents and its children when it came to money. Your kids, in other words, won’t be addicted to E*Trade, but you'll probably find their allowances stuffed under their mattresses.

7 Skirts will get longer. Here's a piece of Wall Street folk wisdom: There is a rough correlation between bull markets and bare knees. During boom times, skirts get shorter. In these bearish times, prepare for hemlines to head south. Somewhat in relation, we'll see something else go north: the age and weight of Playboy centerfolds. Evolutionary biology encourages people to seek "more mature" mates during times of economic insecurity, argue Terry F. Pettijohn and Brian J. Jungeberg in one of the more interesting studies published recently in the Personality and Social Psychology Bulletin. To support their claim, the researchers showed that during recessions, centerfolds get older and, well, rounder. Similar studies have confirmed an identical trend in movie comedies -- male and female leads get older during recessions.

8 Your military just got bigger. The age group that will be hit hardest by the current downturn? The world's 18- to 24-year-olds. This group just so happens to be the prime recruiting age bracket for militaries, which can generally offer a steady paycheck and decent benefits. Indeed, the U.S. Army exceeded its recruitment goals in the last three months of 2008 for the first time in 5 years. And as the war in Iraq winds down, these new soldiers' fears of being deployed in a hostile combat environment should wane. The few and the proud might grow into the many and the desperate.

9 State schools will be cool. A prolonged downturn will profoundly affect institutions of higher learning. For the past decade, private schools far outpaced state schools in terms of resources and expenditures as their endowments swelled from the long financial boom. Many elite universities followed Harvard's lead and adopted need-blind admissions with generous financial-aid packages.

That's all about to change. Endowments in the United States have declined 10 to 30 percent during the past year, which will make need-blind admissions a thing of the past and financial-aid offers far less generous. The credit crunch will also make it more difficult for young people to secure reasonable student loans.

10 Boomers will refuse to leave the building. A whole tier of older employees who planned on retiring now or in a few years simply can't -- their 401(k) retirement accounts look way too scary. In 2008 alone, U.S. workers aged 55 to 64 who have had 401(k)s for at least 20 years saw their retirement balances drop an average of 20 percent. This means those who expected promotions when the boomers cleared out are going to have to stew in their own juices and gripe around the water cooler. Office politics just got a lot nastier.

11 The world is no longer flat -- and fewer people will care. Global downturns often breed protectionism and other barriers to foreigners. Cross-border tourism is likely to plummet. Study-abroad programs will also be affected -- the New York Times recently reported a dramatic decline in South Koreans studying overseas. News outlets are also likely to further scale back their foreign news bureaus to cut costs.

12 Nouriel Roubini's frequent flyer miles will go through the roof. One business will be big this year: conferences on the crisis of capitalism. The Dr. Dooms and Cassandras of the most recent bubble era -- economists such as Nouriel Roubini, Robert Shiller, Stephen Roach, and Joseph Stiglitz -- will be doling out advice and "I told you sos" in convention halls and conference rooms around the globe. Indeed, in the month of January alone, Roubini traveled to Istanbul, Dubai, Abu Dhabi, London, Riyadh, Zurich, Davos, and Moscow. The likely difference now? Seats in coach.

13 Great Depression lit will be chic. Eras like to mine the cultural tropes of analogous eras from the past. So, expect books about the Great Depression to dominate Amazon rankings. Already, Hodding Carter IV has received a big advance to write A Year of Living Within Our Means, a book about his family living strictly within its budget by using cost-cutting measures from the 1930s. And somewhere, you just know Ken Burns is making a 25-part documentary on the Tom Joads of this world.

Missing Links


The American prohibition on thinking smart in the drug war.

The Washington consensus on drugs rests on two widely shared beliefs. The first is that the war on drugs is a failure. The second is that it cannot be changed.

Americans are a can-do people. They tend to believe that if something does not work, it needs to be fixed. Unless, that is, they are talking about the war on drugs. On this politically fraught issue, Washington's elites and, indeed, the majority of the population, believe two contradictory things. First, 76 percent of Americans think the war on drugs launched in 1971 by President Richard Nixon has failed. Yet only 19 percent believe the central focus of antidrug efforts should be shifted from interdiction and incarceration to treatment and education. A full 73 percent of Americans are against legalizing any kind of drugs, and 60 percent oppose legalizing marijuana.

This "it doesn't work, but don't change it" incongruity is not just a quirk of the U.S. public. It is a manifestation of how the prohibition on drugs has led to a prohibition on rational thought. "Most of my colleagues know that the war on drugs is bankrupt," a U.S. senator told me, "but for many of us, supporting any form of decriminalization of drugs has long been politically suicidal."

As a result of this utter failure to think, the United States today is both the world's largest importer of illicit drugs and the world’s largest exporter of bad drug policy. The U.S. government expects, indeed demands, that its allies adopt its goals and methods and actively collaborate with U.S. drug-fighting agencies. This expectation is one of the few areas of rigorous continuity in U.S. foreign policy over the last three decades.

A second, and more damaging, effect comes from the U.S. emphasis on curtailing the supply abroad rather than lowering the demand at home. The consequence: a transfer of power from governments to criminals in a growing number of countries. In many places, narcotraffickers are the major source of jobs, economic opportunity, and money for elections.

The global economic crisis will only intensify these trends as battered economies shrink and illicit trade becomes the only way for millions of people to make a living. Mexico's attorney general reckons that U.S. consumers buy $10 billion worth of drugs from his country's cartels each year, a business that propelled Joaquín "El Chapo" Guzmán Loera, the leader of the Sinaloa cartel, to Forbes magazine's latest list of the world's billionaires. According to the U.S. Department of Defense, all that money allows the two main cartels to train, equip, and pay for a highly motivated army of 100,000 that almost equals Mexico's armed forces in size and often outguns them. And this ascendancy of the drug cartels is a global problem. The opium trade is equal to 30 percent of Afghanistan's legal economy, and from Burma to Bolivia, Moldova to Guinea-Bissau, drug kingpins have become influential economic and political actors.

Fortunately, there are some signs that the blind support for prohibition is beginning to wane among key Washington elites. One surprising new convert? The Pentagon. Senior U.S. military officers know both that the war on drugs is bankrupt and that it is undermining their ability to succeed in other important missions, such as winning the war in Afghanistan. When Gen. James L. Jones, a former Marine Corps commandant and supreme allied commander in Europe, was asked last November why the United States was losing in Afghanistan, he answered: "The top of my list is the drugs and narcotics, which are, without question, the economic engine that fuels the resurgent Taliban, and the crime and corruption in the country.... We couldn't even talk about that in 2006 when I was there. That was not a topic that anybody wanted to talk about, including the U.S." Jones is now U.S. President Barack Obama's national security advisor.

But such views have set off fierce clashes between military commanders newly focused on creating peaceful economic opportunities for Afghan families and the U.S. drug warriors set on eradicating Afghanistan's major cash crop at any cost. What's more, inertia alone almost guarantees strong support for drug eradication from the massive bureaucracy that lives off the tens of billions of taxpayer dollars that have funded the war on drugs for decades. The opinions of these drug warriors are immune to data: After decades of eradication efforts around the world, neither the acreage of land used to grow drugs nor the tonnage produced has shrunk.

But prohibition at any cost is becoming increasingly hard to defend. As the drug-fueled escalation of violence in Mexico spills across the border into the United States, the American public's willingness to ignore or tolerate policies that don't work is bound to decline. And the consequences of failure are already on mounting display: According to the U.S. National Drug Intelligence Center, Mexican drug cartels have established operations in 195 American cities. It is much harder to ignore the collateral damage of the war on drugs when it happens in your neighborhood.

That is the case in many other countries where the nefarious side effects of U.S. drug policies have long been felt. Three of Latin America's most respected former presidents, Brazil's Fernando Henrique Cardoso, Colombia's César Gaviria, and Mexico's Ernesto Zedillo, recently chaired a commission that came out in favor of drastic changes in the war on drugs -- including decriminalization of marijuana for personal use. The commission, on which I sat, spent more than a year reviewing the best available evidence from experts in public health, medicine, law enforcement, the military, and the economics of drug trafficking. One of the commission's main conclusions is that governments urgently need options beyond eradication, interdiction, criminalization, and incarceration to limit the social consequences of drugs. But though smart thinkers increasingly propose confronting the drug curse as a public health crisis -- more options are in the commission's report at www.drugsanddemocracy.org -- real alternatives have found no space in a policy debate stalemated between absolute prohibition and wholesale legalization.

The addiction to a failed policy has long been fueled by the self-interest of a relatively small prohibitionist community -- and enabled by the distraction of the American public. But as the costs of the drug war spread from remote countries and U.S. inner cities to the rest of society, spending more to cure and prevent than to eradicate and incarcerate will become a much more obvious idea. Smarter thinking on drugs? That should be the real no-brainer.