Like many Americans, I do not understand economics in general, or our economy in particular. Like many Americans, I am bored stupid by the very idea of anything primarily dealing with numbers. Like some Americans, this latest giant, catastrophic meltdown made me somewhat interested in learning a bit more about the economy, so as to better understand if and how this crisis would be affecting me specifically. And (like many 20-something Americans) so as to better explain to my parents how, even though they have a lot of money and I have none, and they have a lot to say about economics and I don’t, I am still correct in my political opinions, and they are mistaken insofar as theirs differ from mine.
In pursuit of a greater understanding of economic theory and American capitalism, I have recently read two books: Naked Economics by Charles Wheelan and Spin-Free Economics by Nariman Behravesh. I thought the Wheelan was really helpful. Naked Economics is intended (as Wheelan explains in the introduction) as a clear guide for educated and well-informed people who nevertheless find economics a dull and confusing area. So, it isn’t an idiot’s guide, it doesn’t start with defining capitalism, etc. It assumes that you are not a moron or fifteen, but that you’re not entirely clear on how things work, or have forgotten the basics.
Behravesh, on the other hand, spends his introduction explaining that economics is really very simple and most economists have come to a consensus on most issues, but us poor regular folk would never know it, because those politicians with their spin and special interests, and that media with its bias, and what’s a rational citizen to do? The book is only spin-free if you are of the opinion that all liberals romanticize European-style socialism, and all conservatives think we should be paving our own roads as we drive. Whereas Wheelan spends a good bit of the book discussing the morality of markets, Behravesh begins with the assumption that the point of economics is to grow the GDP, and everything else ought to be evaluated sheerly on whether it does or does not further that unquestionably worthy goal. He does not admit of ambiguity in most heavily debated economic questions, but comes firmly down on one side, and nearly always gives a bullet-point list of the precise steps that ought to be taken to best address each social problem. Which isn’t to say that I disagreed with all (or even most) of his points, and his book is really comprehensive, and has an entire section devoted to the recent subprime crisis and resulting chaos, which was super helpful.
Between the two of these books, I gained a much clearer understanding of economic terms and concepts, and then promptly forgot all of it as soon as I returned them to the library, but whatever.
According to Wheelan, economics begins with the assumption that individuals act to maximize their own utility (unless they are depressed and self-hating), utility being anything they personally feel makes them better off. For example, I define utility as free time and vague but grand delusions, without any external expectations of follow-through. Oh, and sleep. Lots and lots of sleep. Luckily, I do not require much money to maximize my utility, which puts me at odds with 99.99% of the society I live in. I eat mostly peanut butter and still wear T-shirts I bought in seventh grade. If everyone were like me, capitalism would collapse in on itself.
The next big underlying assumption is that companies will attempt to maximize profits. Wheelan explains supply and demand, and then he defines the “superstar” phenomenon, which is that small differences in ability result in huge differences in pay, as a market becomes particularly big, so that a superstar celebrity need only be slightly better than his competition to be The Extra High Holy Chosen One. And of course, by “slightly better than,” we mean “slightly more well-connected than.”
There are various barriers to competition. For example, some things can only be gotten in certain places, some things are illegal, there are lobbyists and tariffs. Also, (and I found this particularly interesting) airlines control all the gates, so if you were to start up your own airline, your main problem would be that you couldn’t land anywhere.
Wheelan explains that the market, while amoral, is a powerful force for improving our lives. Capitalism uses prices to allocate scarce resources, as opposed to Communism, which was a first-come, first-serve kind of deal (which explains the pushy behavior of the old Polish people in the delis around here). Ultimately, things are priced according to the profit-maximizing price, which can be a difficult thing to determine; however (and I found this interesting), if we fix prices in a market system, companies will find other ways in which to compete with each other – for example, through providing better service, or offering more perks. Every market transaction makes all parties better off, and here Wheelan reiterates Nicolas Kristof’s pro-sweatshop arguments. (Incidentally, I am so glad that smart, good guys like Kristof speak out against well-intended but misguided anti-sweatshop efforts, because it gives me yet more moral support as I firmly declare, “FUCK YOU, AMERICAN APPAREL!”)
Wheelan ends this first section with an important thought: that while it may be unfortunate that the wealthy often spend their money on worthless shit when children are starving in the world, any system that forces its citizens to spend money on important things (starving children) rather than frivolous luxuries “can only be held together by oppression.” This is quite true, and it behooves me to remember it. I am often infuriated at the way wealthy people use their money – no matter how filthy rich I got, I can’t imagine ever spending hundreds or thousands of dollars on a fucking handbag or piece of worthless jewelry, when there is so much suffering in the world (not to mention so many amazing places to travel and interesting things to do). And I know that once you start making those kind of comparisons, where do you draw the line? What luxuries can we allow ourselves, knowing that some people are poor and starving? Does that mean we can’t have anything frivolous? Everyone has to draw their line somewhere, but for me, the line is pretty firmly drawn before spending thousands of bucks on a damn bag. I don’t care who you are – that is a stupid priority, more stupid than many comparable things. If I spent lavishly on something utterly frivolous, I would be ashamed of it and try to downplay it, which is why it further totally blows my mind that wealthy people not only do spend that way, but want everyone to know it (labels), as if it gives them some sort of cred! It’s a different world for different social groups, that’s for sure.
Where was I? Oh, yes: better to tolerate greed, selfishness and waste than to live in a dictatorship. Some people (who likely have never experienced anything but total personal freedom, financial and otherwise) might disagree with this, but generally, I think we all see the logic.
Wheelan poses the question of whether it is better to have a world where everyone makes $25k, or a world in which some people are very rich, some are very poor and most make around $30k? Wheelan says clearly the latter is preferable, and while ultimately, he’s probably right, I would be interested in reading an entire book written specifically addressing that very question, because I think there is more to it than either of these books really get into. For example, neither of these books address the concept of relative poverty. Both celebrate the fact that capitalism has lifted even the poor out of desperate poverty, and made everyone much better off compared, but neither of them discuss the fact that relative poverty is what really creates hardship in people’s lives – that is, it might be more difficult to live in poverty in the Bronx than in Laos, even though the poor folk in the Bronx are much more well-off than those in Laos. I think that when you look at class divisions and income inequality in that respect, certain aspects of capitalism are not so unequivocally beneficial to everybody. For example, in the U.S. now, it’s shameful to be poor. In addition to the actual financial hardships of raising a family in poverty, you’re often assumed to be bad and unworthy people. I think that in many (not all) countries, poverty doesn’t result in such terrible social censure. People do not resist aiding you out of principle, because you ought not to be helped. You aren’t blamed for letting yourself get poor. On the other hand, an impoverished family in the Bronx (theoretically) has the chance to better their situation, whereas a family in Laos has no mobility whatsoever. Still, I need someone to explain to me why extremes of wealth and poverty are necessary for an economy to thrive, and why the dream of fabulous wealth is such an important motivating factor. Isn’t there any way to motivate a society other than the vague promise of maybe someday being far, far better off than everyone around you? Is that really such an eternal human desire? When did that start, and is it really human nature? Because personally, I don’t find it tempting.
Which, I suppose goes back to the concept of utility, and how a society defines its own utility, and this is something that I think shifts over time and is currently going through a big change in America today. How does a society define value? While it’s not a good idea to have a central political authority mandate what people ought to value, the public does have the power to shape priorities and values, and what is cool can override what is economically enriching. After everyone has sated themselves on Prada and whatever else it is rich people like, the pendulum swings back and people want green things and climbing equipment. It’s still all stuff, though – even if moral purchasing is the new chic, it’s how you express it in accessories that matters. When will wearing the same damn thing every day advertise you as a person of substance? How can companies make a profit if sharing, borrowing and reusing become the only socially acceptable ways to consume? Behravesh “. . . summarizes the three essential ingredients of successful markets: freedom, the perpetual desire for creature comforts (not just essentials), and many market participants.” See that second one? “The perpetual desire for creature comforts (not just essentials).” Capitalism assumes that everyone will have this perpetual desire, and I don’t, really. Or not enough to give up my time for them. I know most people are not like me, but what if everybody just stopped having any real desire for luxuries? What if everybody one day said, ‘Ah, I’m going to move into an efficiency (or move my family into a small house), and work just enough to pay for our beans and rice, and we’ll spend all the rest of our time rolling around in the grass and playing charades?’ I realize that probably won’t happen, but it’s amazing how much of our society relies entirely on the pushing human desire to accumulate treasure. What if possession gets too easy, and asceticism becomes the new marker of the elite?
I really think the power of public opinion is entirely overlooked in every discussion of social change. We talk about what government ought to be able to accomplish, and what it’s morally okay for it to regulate. But, you know, Sideways came out and suddenly everybody stopped drinking merlot. People’s purchasing habits can be pretty easily shaped.
Also, like most economists, Wheelan thinks every business runs better when privatized and uses the Post Office as an example of how crappy government services are. Which I just do not get at all. I think the USPS is great! It’s affordable, it’s reliable, it’s simple to use. Why the hell would you object to the postal system? Why would you want it to be privatized and have to pay for it? It works just fine! I mean, sure, the postal workers are sometimes surly and there are long lines, but man, I would so, so much rather deal with a bit of waiting and attitude than to have to pay a lot of money for something I currently get for less than $.50/letter. I don’t get why people bitch so much about the postal service, really. If it ain’t broke, don’t privatize it. Generally, I have little beef with most public services, and I wish there were more of them – especially since, in the U.S. there is always a privatized alternative if you don’t like the public one. I love the library system. I can read all the books I want for free. If you prefer to purchase all your books from Barnes & Noble, you can, but that doesn’t preclude me from obtaining reading material. I’m cool with transit, but there are cabs for those who want them. Likewise, you can send all your mail by FedEx if you want, but don’t assume everyone else feels the same. More public services, please.
Now, I am pro-capitalism, but here is the main thing I remain unconvinced about: what motivates corporations to distribute increased profits down to low-level employees? I know that, in theory, the more profit a company makes, the more it will pay its employees, and if it fails to increase their pay, some other company in the same field will, and then all the employees will go work there, so the first one will have to raise its wages. That’s the theory. But it doesn’t really ever seem to work out that way. Minimum wage has been about the same my entire life so far, no matter how the cost of living has increased. And while profits are far, far higher in some regions (NYC) than others (rural South), the wages aren’t all that different. Sure, you might make $5.15 an hour some places, and $7.20 others, and $12 an hour somewhere else, but all three of those hourly wages are impossible to live adequately on. So, if the theory behind capitalism is that everyone will flourish as society gets richer, how is it that, for example, Wal-Mart’s employees can’t really make a living on their wages? It’s not that Wal-Mart needs to increase its profits, and that one day in the future when Wal-Mart is steady on its feet, its employees will be able to make a decent living working forty-hour weeks. Companies are never going to pay their low-level employees very much, no matter how big a profit they make. And I’m not saying that cashiers and servers and hotel housekeepers should make six figures, but it seems like in a rich society, everybody who puts in a good forty-hour work week ought to make enough money to meet basic living expenses, and that’s not true for us. I think you have to have strong unions and minimum wage laws at the least, or companies will never treat their employees decently. We’ll always have wage jobs, and there will always be people who for various reasons are in them, but I don’t think that only being capable of working a crap job is a character failing, and people ought to be paid for their work. Also (and both authors seem convinced this cannot happen), it seems to me that there’s less and less need for unskilled labor, but that pool of would-be workers isn’t really decreasing. Both Wheelan and Behravesh discuss creative destruction, and the importance of skills training for workers rendered obsolete by new technologies, but stress that the proper role of government is to provide a safety net for workers rendered obsolete, rather than to inhibit creative destruction in the first place.
What about those job markets so overcrowded that people are willing to work for pennies? Having competed for jobs in seriously overcrowded fields at various times in my life, this problem seems more central to me than it really is, but still, even though it’s hardly crucial, it’s still important in its way. For example, there aren’t really any paid positions in a lot of the arts, so people work for free for years until they build up some demand. But the only people able to do that (especially as the artistic centers get more and more expensive to live in) are the children of the wealthy, so the arts become more and more reflective of a single, rather narrow point of view. Do we really want art to be nothing but a hobby of upper-class people who aren’t quite smart enough to go to med school? How meaningful will that be? Won’t we have lost something of value? And journalism is going the same way now. You have to be able to start out as an unpaid intern, which means you have the means to treat your work as a hobby. Is it good for all our journalists to come from the same social class? How can people who need to work find jobs if more and more people are willing and able to do the same work for free? Won’t our society have to change the way in which it assigns value to contributions? Just because something is no longer economically worthwhile doesn’t mean it’s no longer worthwhile period, and currently, we have no good way to value fields that can’t finance themselves.
Similarly, Behravesh is against rent control (and minimum wage), but, economic considerations aside, is it really desirable for, say, Manhattan to be nothing but law firms and Cosi branches? I don’t mean to romanticize squalor, but sometimes forcing some areas to stay run down and affordable is the only way to keep things interesting. It all depends on what you define as progress. This gets to what I am going to call the “Midtown Lunch” problem. Midtown Lunch is a food blog based in New York City’s midtown office district that’s mission is finding delicious, interesting and inexpensive lunches in the area where most office workers spend their day. Now, rents in the midtown district of NYC are so high that the only food establishments that can afford to do business there are big, national chains. But those chains suck. In many parts of the country, people are so surrounded by chains that they wouldn’t know what they’re missing, but NYC still has a wide variety of restaurants, delis, food stalls and lunch counters with every imaginable variety of delicious (and inexpensive) ethnic food. So people are stuck in midtown, but they are dreaming of nearby Chinatown, or the East Village, or Brooklyn where small proprietors can still afford to own restaurants. In midtown Manhattan, a flourishing economy has restricted choices and lowered the quality of (lunchtime) life for everyone involved. What’s the point of economic progress if it drives out everything you once enjoyed?
Is it possible for a large and wealthy society to become more sophisticated about long-term self-interest as opposed to immediate gratification? This question applies to environmental concerns. Having just come through a campaign year, it’s very clear that we can’t make effective social change if it requires an immediate outlay of expense and/or inconvenience, but sometimes that’s the only way to avoid a greater evil in the long run. For example, expensive preventative health care will ultimately be less expensive and more effective than treating the medical conditions that result from neglect. And it’s becoming quite clear to me that, no matter how many studies show that napping on the job increases productivity, this is not something American employers are ever gonna go for.
Wheelan points out that we need not accept whatever the market does, and “We may well collectively decide that we would like to protect a way of life, or something that is aesthetically pleasing, even if it means higher taxes, more expensive food, or less economic growth – to an economist, life is about maximizing utility, not income.” But he says that we have to acknowledge the costs of intervening with market forces and take care that those who most benefit also foot the costs, and that one group doesn’t use the political system to impose its preferences on everybody else.
In Chapter 5, Wheelan discusses the “economics of information.” He uses McDonald’s as an example of the importance of branding. People go to McDonald’s because they know exactly what they are going to get, and it is the same everywhere. For me, though, this is the reason I never visit a McDonald’s. For me, the point of eating out is to try something new and different every time, and I suppose that that’s different than most people (because the economy operates successfully on the above assumption), but still, this is not an indisputable fact of human nature. There are a lot of people like me – see Midtown Lunch, above. What if there are more and more? Will our economy change? People are preferring local businesses more and more. How will the economy work when there’s no money to be made from chain stores? Will we get to a point where locally owned coffee shops run the Starbucks out of town? And certainly, whenever people go on vacations, everybody is looking for something to bring home that can’t be purchased anywhere but where they are. This is increasingly difficult, since everything can be purchased everywhere. I sometimes wonder why people don’t see the marketing opportunity here. Why aren’t there tons of crafts and food and clothing brands in touristy areas that limit their products to that particular site and advertise the fact? “Only sold here! No mail order, no website, and we never sell to regional distributors! Available nowhere else on Earth!” Surely, everyone would buy that shit to take home to the relatives.
And speaking of tourist destinations, what’s the deal with Europe?
Both Wheelan and Behravesh point out that Europe has lower poverty rates (especially child poverty rates) and less income inequality, although much higher unemployment rate and so forth – tough to fire, tough to hire.
Wheelan: “Per capita income in the U.S. is higher than per capita income in France; the US also has far more children living in poverty.” Here’s the thing: whether you think the first is worth the second, or whether you think the second never excuses the first, depends on your personal notions of fairness and morality, and your overall ideas about the point of life on Earth. Ultimately, there can be no single economic consensus, because people aren’t really all the same. For some people, “unfair” means having to curtail your own ambitions because others can’t do as well. For others, “unfair” means taking more than your share just because you can. Really, economic theory begins with philosophy, because at the very least, we’re assuming thriving is better than suffering…but that’s an assumption. Some people believe they are obligated to renounce all worldly goods. Others think that God wants us to be good and work hard, but doesn’t require us to take responsibility for others. Some people believe their good fortune is God-given. Others believe there is no God, so we should all try to live equally here on Earth. Others believe there is no God, so we should try to enjoy ourselves as best as we can manage while we’re here and get as much as we can. For some people, capitalism is immoral. For others, capitalism is the only moral system. There may be consensus among economists as to the best way to grow an economy, but there is no consensus between people as to the best way to live and interact as a society. For Person A, extremes of wealth will never be acceptable, since the point of life is to eradicate poverty and have peace on Earth. For Person B, there’s no point to life if you can’t prove yourself by moving vertically, since God wants you to use your gifts until you are exhausted from the effort. These two people will never agree; A’s utopia destroys B’s, and vice-versa.
Behravesh is very convinced that we’ve got a better thing going on than Europe, but for me, he doesn’t really make the case. Yes, I get that for the economy, Europe is awful, and I also get that the system there is probably unsustainable. So, perhaps France will go bankrupt eventually, but in the meantime, when Behravesh asks “Is it better to be insecurely employed in the U.S. or securely unemployed in Europe?” Well . . . is that a trick question? Because I have to say, I’m thinking it’s the latter.
Everyone has different priorities. For me, posthumous fame would be worth living in squalor and disease all my life long. How do you create financial incentives for people who feel that way?
Wheelan does address these issues a bit. He points out that “while Americans are richer than most of the developed world; we also work harder, take less vacation, and retire later.” Economists admit that at a certain point time becomes more important than money and people begin to work less (‘backward-bending labor supply curve’); they just don’t know where that kicks in. For me, it was after a single year as a full-time employee, but most people seem to think they need slightly more than $25k.
As Behravesh explains, for poor countries, improvements in income and living standards bring large increases in happiness. But for rich countries, as income and living standards continue to go up, happiness doesn’t. He kind of concludes that this might not really matter, but I think it’s just that this problem is beyond the scope of economics…except that he discusses happiness as being relative to what is around you, which nicely coincides with the way people experience relative poverty and wealth. It’s not just a matter of sour grapes; rather, relative poverty is an actual measure of quality of life, and that does seem like economics to me.
Wheelan points out that our society is growing more unequal. During our biggest economic boom, the rich got richer, and the poor stood in place or got poorer. Wheelan gives four reasons for this growing income inequality gap: (1) computer nerds are raking it in; (2) skilled workers are getting more and more important, while technology is making unskilled labor less necessary; (3) international trade provides cheaper unskilled labor; and (4) unions are weaker. Economists, however, say that income inequality shouldn’t concern us because (1) it encourages people to work harder at innovating and getting advanced degrees; and (2) the gap doesn’t matter as long as everybody’s living better. But see, I don’t understand that. How does the income gap encourage people to get advanced degrees if the people suffering from it are unskilled workers? People don’t work on assembly lines because they’re just a little too lazy to finally earn that MS. And, as I said earlier, it’s my understanding that the wider the gap is, the harder it is to be poor. Wheelan does give a nod to relative wealth being “an important determinant of our utility,” but he cites envy as a cause of this. I think he is overlooking the importance of sympathy, of social acceptability versus social blame. If poverty carries less stigma, you’re more likely to get general assistance from the community, not to mention respect and the benefit of the doubt, as opposed to being considered suspect and at fault in everything. And things like childcare and car-pooling, sharing of resources – people team up when they’re weathering the same hardships, but as the gap widens, not only are you poor, but you’re a poor outcast. And is there a point where the gap becomes large enough that it inhibits economic growth? Is there a point at which income inequality stops motivating people to work harder, and the poor are simply disenfranchised to the point where they reject all political and economic institutions, property rights and rule of law? On the bright side, Behravesh says that the vast majority of families below the poverty line are there temporarily, with about 75% escaping within a year. But then, that doesn’t mean that these same families don’t cycle unpredictably in and out of poverty over the years, yeah? Later, he says ~10% of American workers are unemployed for a year or more, compared to ~45% in Europe, but there again, that doesn’t say whether or not those same people are in and out of employment.
Ultimately, however, as Wheelan (and all economists) emphasize, poverty is not inevitable, because economic development is not a zero-sum game. There doesn’t need to be an underclass. So, you know, that’s good.
Some other, random stuff these books explained:
Wheelan explains why stupid subsidies continue: because they are of primary importance to the people directly affected by them (farmers), and an insignificant amount of money to everybody else (taxpayers). Wheelan cites Gary Becker on the economics of regulation: “all else equal, small, well-organized groups are most successful in the political process . . . because the costs of whatever favors they wrangle out of the system are spread over a large, unorganized segment of the population.” Wheelan and Behravesh both stress that subsidies are ultimately bad news. We don’t need so many damn dairy farmers. Can you imagine if the government subsidized actors? Tax shelters = also bad.
Wheelan also explains why some countries have difficulty at not being broke anymore. Turns out, natural resources aren’t such a gift. And he goes on to explain the World Bank and the IMF, and why everybody hates on them, which was helpful. He discusses America’s foreign aid budget, which is “one-tenth of 1% of GDP,” which is shameful in terms of what we could manage and in comparison to what the Euros give.
Behravesh, on the other hand, thinks foreign aid is pretty much pointless. He says that the US gives largest amount of absolute aid, but in terms of its GDP, its contribution is quite small (less than .2%) compared w/ average Euro. country (about .5%) and avg. Nordic country (about 1%). BUT American NGOs give almost 5 times as much when you include cash, goods and volunteer time. I do think that many liberally-minded people unfairly overlook privately donated aid, which is especially unfortunate, because (as we’ve all seen with the Gates’ work in Africa) there’s no red tape for private dollars, and that money can go where the government can’t.
Also, Behravesh gives some good, specific reasons why aid is not that effective: (1) it’s often politically motivated (which is why we give Iraq 10 times more aid than Sudan); (2) it’s often commercially motivated (we’ll give you aid if you buy our shit); (3) countries can’t count on it, because (like all charitable giving) the love shuts off when times get tough for the donor countries; (4) corrupt governments grab it all before it gets to the people; and (5) teach a country to fish and all that. He suggests that we can better help struggling economies by lowering tariffs on agriculture and industrial products (and stopping farm subsidies here). He does say, however, that aid is helpful for health care, education, infrastructure and technology, so I guess it’s just important not to feed people.
I think Behravesh is full of crap on health care, because he seems to think it’s a good thing to discourage people from seeking care until they have a severe medical problem. He also touts the US system’s promptness and quality for “patients,” but that’s just the thing – we’re not all patients, because a lot of us don’t have health care. For example, of course Britain’s health care system is overcrowded: everyone’s actually using it. He does recommend portable health care and pension plans, however, which I do agree with. Employer-provided health care just isn’t a workable system anymore. More and more people freelance and change jobs frequently and so forth – the days are forever gone where the majority of people start working with one company and retire from it 40 years later. Technology and specialization have changed the way we work, and will continue to do so, and we need benefits that travel with the worker.
And finally, both of these guys agree on a lot of other points I already agree with (or have no opinion on), so won’t go into, like immigration is super good, China’s growth poses no (economic) threat, government should fund development and new research, and tariffs and subsidies are bad. Behravesh does a good job of explaining monetary and fiscal policy, the Great Moderation, the role of the Fed (and criticisms of it), inflation targeting, the various crises (Savings & Loan, Bank of Japan, subprime), Keynesian economics, the recent history of tax cuts (those under Rheagan and Bushes I and II, all of which Behravesh says were not helpful), and the coming debt bomb.
As to the current troubles, Behravesh drives home that fiscal stimulus when necessary must be “well-timed and temporary,” and that what you want to do is cut taxes and increase spending in a recession, and raise taxes and cut spending in boom times…but the problem is, nobody wants to raise taxes and cut spending when things are going well. Bush used the surplus to cut taxes during a boom.
Big questions I still have about the economy:
1. So, did the New Deal help, or not? There are many differing opinions on this, all quite certain of themselves, and since I wasn’t alive then, I can’t exactly see for myself. It seems important now, in discussing what sort of stimulus will help us, to settle this question, as some people believe government spending a la the New Deal is the only way to go, and others think this is no good. Wheelan does not discuss the New Deal; Behravesh says that it was not effective.
2. The debate over bank nationalization. Neither book really addresses this, although Behravesh emphasizes the importance of independent central banks (in fact, he says that this is essential to a functioning economy).
3. Fixed exchange rates. Behravesh spent a lot of time on this, but it’s all too nebulous for me to get a clear mental image. I gathered that he says fixed exchange rates are good for small and struggling economies, but a terrible idea otherwise. He also says that of (1) the stability of fixed exchange rates; (2) a globally open market; and (3) independent monetary policy, a country can get by with any two, but not all three. I guess this is the economic version of quick, cheap, healthy: pick two.
Finally, here is what Behravesh says caused the subprime crisis:
1. Interest rates everywhere were historically low.
2. Because of that, there was a worldwide housing boom.
3. Because of deregulation and innovation, many poor, less creditworthy borrowers were able to buy homes for the first time ever, which was mostly a good thing, but encouraged “highly questionable lending practices” that permitted tons of people to take on mortgages they couldn’t really afford: subprime mortgages.
4. Innovation also encouraged lots of bundling these dubious mortgages into packages of investments that were then sold globally (securitization).
5. Everybody who normally keeps an eye on all this stuff got complacent, and anyway, it was all so complex and hard to micromanage.
6. Everybody thought houses would keep going up in value. They didn’t.
7. Because these high-risk securities had spread through the financial system without anybody knowing where they were most concentrated, everybody got spooked and stopped lending, leading to a credit freeze.
To fix it, he says that we must address the financial system’s solvency, not simply address liquidity and call it a day. To address solvency, we need fiscal policy, and the government should inject capital into the banking system, but he also kind of says this had to have happened months ago. Oh, well.
(By the way, somewhere towards the middle of this post, I buried a super juicy spoiler for the final season of Lost that was personally leaked to me by J.J. Abrams himself. He said that the middle of this post is the safest possible place to bury that secret, in case he dies unexpectedly, as he is 100% certain no one will ever come across it there.)
