Download 22 Nov 2008

MODERN TIMES
Art Hobson
[email protected]
NWA Times 22 November 2008
What's wrong with the planet? It's the economy, stupid.
Since everybody is suddenly talking about the economy, I'd like to contribute
my non-economists' two cents' worth.
The immediate cause of our economic crisis was the U.S. housing
market. With the benefit of hindsight we can see that the housing bubble began
many years ago. It was "speculative" because it was based not on the actual value
of homes but rather on buyers' and lenders' perceptions of the future values of
homes. As business boomed and prices rose, people bought up extra homes purely
to sell them, or homes they couldn't afford in the expectation that the value would
go up and they could cash in the equity to pay the mortgage--something for
nothing. And because people kept buying, the price continued rising. Etcetera.
This is similar to a pyramid scheme. In the simplest, unadorned,
version, Gladhand Gus sends out notices to ten friends telling them that, if they
"invest" $100 in Gus's Fund, Gus will deliver to them a certificate entitling them to
send out notices to ten of their friends inviting them to also join Gus's Fund by
sending each of Gus's ten friends $100. If Gus's 10 friends participate, he makes
$1000. If each of Gus's 10 friends is successful in enrolling 10 new members, then
each friend makes $900 net. And so forth on down the line. Everybody makes
money. Yet Gus's Fund creates nothing of value. Nothing real is bought or sold.
After a few iterations, Gus's Fund gains many thousands of members and an
irrationally exuberant investment bubble surrounds this hot new money-making
scheme. But as the pool of willing investors dries up, new investors cannot find
other new investors, and a very large number of investors at the bottom of the
pyramid are left holding the bag. In this example, the number of people who pay
$100 and receive nothing is as much as nine times larger than the number of people
who make money. The community of investors is thrown into recession, although
a few fat cats, such as Gus, get rich.
Similarly, the home investment bubble was bound to peter out as the pool of
people willing to lend or to buy at unnaturally high prices dried up. Like Gus's
Fund, the home investment bubble was based on expectations, in this case the
expectation that people would continue paying more for homes than the homes
were really worth. Like most bubbles, it was made mainly of air.
Everybody is baffled by this crisis. It's like Frankenstein's monster: We've
built a financial system that nobody understands, and it's gone out of control. We'd
better get control soon, and lop off those parts we don't understand.
One obvious lesson: Investment regulation must be tightened. There are
huge money pools out there, such as the $60 trillion (that's right, trillion)
worldwide market in something called "credit default swaps." These operate
mostly outside of government supervision, they are not understood even by most of
those who invest in them, and they played a large role in the credit crisis that the
American people are putting up at least $700 billion to try to resolve.
Ailing companies are lining up for federal handouts. At the front of the line
are the Detroit automakers. In their self-interested campaign against higher fuel
mileage standards, their dishonest propaganda against the science of global
warming, and their unrealistic devotion to powerful gas guzzlers, Detroit has
demonstrated neither good citizenship nor competent business practice. It would
be a terrible precedent to bail them out. The Big Three need to enter bankruptcy,
from which I hope they will emerge with greater respect for public service and
business reality.
Money has been too easy to come by. Americans buy far too much on
credit. Loans are made with the expectation of growth, and this expectation
becomes a self-fulfilling prophecy as money is pumped into the system. Even
though growth might be counter-productive, it continues because people expect to
make money from it. As examples, I would cite sprawling real estate
developments at the fringes of Fayetteville (although the well-designed Southpass
development should probably not be included in this category); the proliferation of
big box stores, plastic eateries, and look-alike shopping malls throughout our land;
and in fact most of what we in the United States call "growth."
The global crisis has gotten governments talking about a new economic
order. If we're to have a new order, we'd better figure out what's been wrong with
the old one, and what led to investment in sprawl, big box stores, and
McMansions, at the expense of the welfare of people and the environment.
The new economic order must respect working people, and it must respect
the environment. It must be oriented toward real things such as shelter, food,
education, and health, rather than toward money. For just one example, let's put
the auto makers to work doing something useful for a change. Let's invest in
turning them toward building a national fast train network, a network to equal the
wonderful European rail system. After December 7, 1941, these companies
quickly turned from building cars to building tanks and warplanes. They can
retool again, and for the same reason: the national interest.
The byword of the new economy, if it is to be a market economy, must be to
include workers' welfare and environmental health in the cost of doing
business. This way, the market will work for real things rather than simply for an
abstraction called "money" or another abstraction called "growth."