MODERN TIMES
Art Hobson
ahobson@uark.edu
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."