Tuesday, November 25, 2008


The US, indeed, the world, is in economic trouble right now. The subprime mortgage bubble burst rather abruptly, and quite a few institutions were heavily invested in things that, to everyone's surprise, had no value whatsoever. Here in the states, the government is bailing out several companies, to the delight of some and annoyance of others.

Jobs would be key to resolving this problem, as additional jobs would mean additional spending and consumer confidence. Unfortunately, since the banking industry has been heavily involved in this crisis, there is a bit of a credit crunch. Everyone is too scared to lend money, which decreases the availability of both spending and jobs.

This problem may have started in the US, but it has extended to the entire world. Iceland's banks are mostly bankrupt from their involvement in the subprimes, and they've dragged the entire Icelandic government into bankruptcy with them. European banks are failing. Chinese factories are closing for justifiable fear that they will be unable to sell the goods they produce. (Justifiable because the US is their #1 customer, and the European market also buys a lot, neither can afford to buy as much anymore.)

Trying to trace the source of economics, in this case so that we can restart it, has always given me a headache. I'm frankly, in this case, reminded of Terry Pratchett's "Making Money," in which the main character reveals that the economy of ( the fictional nation in which he lives) is basically just one entire flimflam. A confidence game. Thinking about it, currency is essentially an excuse to reward people for working, so that people can have things and distribute them in a "fair" way. This drives libertarian-types absolutely bonkers, and they advocate a return to metal-backed currencies over the law-backed ones that currently exist. I don't think that would really change anything.

It's my opinion that the government's bailouts should attach to actual equity of the company, so that the executives that caused this mess will have to frantically re-earn their position by buying it back. Unfortunately, the United States has always been wary of government involvement of businesses, fearing that strong control may lead to totalitarianism. The bailouts will likely continue with no consequence to the parties responsible for the problem, which leads to "moral hazard."

"Moral Hazard" is an economist's way of saying that if a person escapes the consequences of their actions, it will inspire them to more irresponsible behavior. If you had an insurance policy that gave you a million dollars if you broke your leg, you might be less careful about keeping your leg unbroken. (Or you may even deliberately break it if you need the money. It's happened before.) Likewise, when you control the payroll, why not give yourself an unearned raise? If this leads to loss of confidence in your company, it's not your problem because you can go retire to Tahiti and your successor will just collect money to stay afloat.

Now I suppose it would be equally bad to leave corporations afraid to take any action lest it bankrupt them, but there must be some consequence to failure. Society fairs poorly when it tolerates double standards.

Also, I hear that the infrastructure could use a repair here. We should reinstate the CCC (Civilian Conservation Corp) to try and boost consumer spending and reduce unemployment.

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