We need to shed this bubble mentality which creates Ponzi schemes
There are no comments for this page [ Add Comment ]Wednesday, March 5, 2008
By JAMES M. STONE, Jr.
Guest commentary
As the housing meltdown continues and the more I read and hear, the more I am convinced that "housing" is merely the tip of the iceberg or the symptom of an economy gone wrong. The real problem is the growing risk that global investors will lose confidence in an American economy wherein its major financial institutions cannot really determine their losses because of uncertainty in valuing their investments.
Economics 101: Determining value is the key purpose of free markets. Yet, apparently, new financial instruments, such as securitized debt, derivatives, hedge funds, etc. (much of which is outside of the regulatory framework), have so blurred this process that much of the transparency necessary for the free market to operate efficiently, through reasonably valued products, has been lost.
I would suggest this potential loss of confidence in our financial institutions is a far, far greater problem than the relatively small number of people who may actually become homeless as a result of foreclosures.
Even if government steps in and mandates, in various ways, that "no one will lose their home" and takes action to prevent foreclosures, the larger question remains for investors worldwide: How did this happen? Until this question is answered adequately, don't expect much additional growth.
Another interesting question is, who is this really hurting? The media have generally focused on widowed grandmothers being tossed into the street. However, Utah's Sen. Bob Bennett quoted an interesting statistic in recent Senate Banking Committee hearings. Apparently, 20 percent of the subprime failures involve people with multiple loans and/or jumbo loans over $417,000. In other words, people either purchasing relatively expensive homes for their own use or multiple homes for investment. Does the 20 percent represent people or dollars? If it represents people, then the dollar amount could be a much larger percentage of the problem. What percentage of the anticipated total dollar losses fall into this category? Are they grandmothers on Social Security or the same sort of "investors" who bought into dot-com companies that had never turned a profit, but promised riches based on stock appreciation?
With one bubble following another, the U.S. economy is beginning to resemble a giant Ponzi scheme, sustained only by the ongoing flow of devalued currency, through artificially low interest rates, in turn tenuously justified by generating overvalued national product. And, as with Ponzi schemes, it works only as long as one can find another sucker -- such as those who lost huge amounts of money by investing based on the best presentation of dot-coms to be, instead of the track records of established companies, or who purchased real estate, not for present income, but for anticipated appreciation.
This process belies "supply side economics," which assumes rational choice and raises the question of why Americans have a problem seeing taxes as a personal investment. What's better: New public infrastructure, better education, less expensive health care, a stronger national defense, a secure Social Security system, or enough worthless stock certificates and real estate titles with which to paper your walls? I do not know a faster way for the "trickle-down effect" promised by supply-side economics to work than through taxation -- and you avoid a lot of commission fees.
The major problem facing Western democratic-free enterprise nations since the end of World War II has been the rapid expansion of the global labor market -- first through the mass entry of women into the workplace and, secondly, with the end of communism.
Labor, like any other commodity, operates on supply-and-demand principles. The more there is, the less the cost. The challenge of Western economies has been to grow economies at a rate sufficient to encompass the larger labor market and avoid a general devaluation of labor to below household subsistence levels. In the early and mid-'90s, this task was further complicated by the advent of personal computing and new information technologies, which allowed more to be produced with fewer people.
I would contend that since then U.S. policy has been aimed at maintaining what is becoming largely the "American myth" of a strong economy and powerful military establishment, though economic bubbles at home and military interventions abroad. This myth is necessary to maintain our prior post-World War II status, which many believe essential to global peace and stability and, of course, is directly linked to the spread of democratic capitalism.
While I have no quarrel with these global goals, I do have two reservations. My first reservation: To what degree do we have this global responsibility? Where does one draw the line between bringing about global peace and stability through the spread of democratic and free market states and simple exploitation? Exploitation in the form of "let me show you the way, for a small fee," a fee that generally grows with leverage.
The second reservation is whether or not we are neglecting our own society in this process to the extent that we undermine it and destroy its message? We may have reached a tipping point. Unless we turn away from the bubble mentality of the past 20 or so years and begin restoring substance to both our economy and society, we will be increasingly seen as the Great Paper Tiger of the West, ultimately undermining not only our role in globalization, but the process itself.
Maybe the way out of this mess is to stop worrying so much about our individual futures and begin worrying about the future of our community.
This November, it will be your choice.
Stone is a longtime Ogden resident. He has a master's degree in foreign and defense policy from the University of Texas at Arlington.
Text 
