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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."