Some unnamed reporter lobbed a softball question to Nouriel Roubini, asking him whether the Madoff story was somehow an allegory for the entire economy. And of course Roubini said yes, explaining how the entire economy for the last decade or so was just a big Ponzi scheme built on cheap money.
You know, a lot of people thought they were making money by trading ever-inflating assets until, boom, too many redemptions came in and it turned out that our houses and mortgage-backed securities weren’t worth what they thought they were.
Paul Krugman said the same thing, using pretty much the same language. He called it our “Decade at Bernie’s”.
Lots of other folks have said the exact same thing before Roubini or Krugman. Peter Schiff had been warning about this since back in the days when Roubini still thought the trade deficit would be our undoing. Remember that? At some point we began to guage our economic process by looking at our asset values, rather than what we created. It’s not that growing asset values aren’t good. If you buy a house in a slummy area a few years before it gets gentrified, your increasing home value will reward you for having some foresight.
The problem though is that ultimately, the economic value of these assets don’t correspond into any standard of living increases — which is what a healthy economy is supposed to achieve, and so the two had to come back in line.
That being said, it’s all well and good to say that cheap money inflated a big bubble, but the more interesting question is, why did the cheap money go towards building and buying houses. Why didn’t the cheap money go to building factories, or to building up usable infrastructure.
That part isn’t Alan Greenspan’s fault. Banks are good at housing loans and securitization made that easier. We also, obviously, have a policy bias that makes manufacturing difficult — whether it’s our labour laws, environmental regulations, zoning or whatnot. Manufacturing houses one at a time with cheap (often illegal) labour is easy. Using those same factors of production to build something else isn’t easily done.
That’s what needs addressing. If we just clamp down on the asset-growing aspects of the economy, but don’t facilitate our ability to produce anything of value, our economy is guaranteed to be a total basket case for years to come.
To some extent, this is what Obama is talking about with their desire to see “green jobs” — you know, hard hats in Ohio building turbines and solar panels.
But all the people who were previously employed in the housing sector aren’t going to find jobs in this sector. Not even close. At some point, real, non-subsidized industries need to spring up that can take advantage of all this cheap, unskilled labour that previously went into homes. Otherwise, forget about it.