Oct 312008

Having discussed the new strangeness of money as such, I will now turn the most money-dependent sector— finance. But before getting into details, let me make a point about banks and attention. Money flows in the same direction as attention does, and so, right now stars — that is, large scale attention getters — generally have high monetary incomes. But having money incomes doesn’t lower the net attention they have, because attention itself can be thought of as being “stored” in the memories of those who pay it. The more attention you pay someone the more you remember and the more likely you are to pay additional attention. And whenever you do pay attention you tend to have a certain urge to satisfy the attention-getter’s wants.

So despite their high money incomes, stars do not really require conventional banks, because their attention is stored in others’ minds, to be tapped more or less at will. The more attention you have gotten in the past, the easier it is to do this. At the same time, if you have never had attention, your money is not a very good guarantee that you will get attention when you need it. So, as attention transactions gain increasing prominence, the entire financial sector will have a less and less important real role to play. But instead of shrinking, this sector has burgeoned of late, which brings up a second mystery.

The Banking Mystery and the Suspects

In the next-to-last post, I discussed the rapid growth of productivity in typical industries that provide standardized goods and services. The financial sector, you would think, is among the most amenable to automation, since all that is involved is handling and recording the digits that represent money. And that has happened in practice:ATMs; automated credit card accounting; electronic stock exchanges and brokerage services; online banking: etc. In other words, most parts of normal financial transactions are exceedingly automated and require very little actual human attention.

However, the relative size, income, and employment of the financial sector — in this country and others — has grown and grown. Investment banks now spend an increasing portion of their efforts on trading for their own accounts. As with most hedge funds, this typically involve using sophisticated computer programs to find ways to cash in on slight fluctuations or small trends in the financial markets. Banks also package and trade in derivatives that are connected by complex algorithms to the underlying investments in such entities as standardized goods-producing companies, government bonds or real estate.

Derivatives are supposedly financial instruments intended to help minimize risk. If risk really were minimized, the possibility of gaining vast profits would presumably disappear, since profit is supposedly a reward for successful risk taking. To put it another way, if risk were so minimal, many would enter the market for the relatively small gains, which then become even smaller on average. But risk is of course not actually minimized. One reason is that the mathematics of risk minimization, like other mathematical economics, assumes that the basic conditions they describe or even just assume are somehow fixed and unchanging, or that everything had been taken into account in finite equations. Of course everything has never been taken into account; soothing generalities stop working; small risks can add up to huge ones; and risk takers, on average end up with what they came in with or less.

These risks can be taken only because the huge fund of worldwide savings that have no reasonable way of being invested in safe industrial growth  still search for growth somehow. The financial manipulations offer the appearance of such growth, even though it would certainly seem that unless they create money out of nothing, all they earn is merely taken in a game of poker in which someone else — someone with less good financial choices — actually loses.

I am agnostic about whether money is or is not in fact created, since central banks can increase the money supply through lending, and the financial houses who sometimes obtain amazing-appearing returns do so by being highly leveraged, hugely borrowing. Of course, if money can be created out of nothing, it can also disappear just as easily, and there is no reason to suspect that on net that does not happen, so as to balance everything out. (One way it disappears is when overall markets —whether of stocks or housing —  fall, certainly wiping out “paper gains.” A recent report I saw stated that two trillion dollars worth of “actual wealth” has been wiped out with declining real estate prices? Actual wealth? The houses of course are still there, for the most part, and standard economics teaches that the actual value of something is the current market value, so of course the wealth that disappeared was entirely notional, even though it was a notion central to many people’s financial planning. So much for finance, I guess.)

Of course, even if the money that is destroyed equals the money created, most players do not end up even. The banks, hedge funds, and brokerage houses probably have enriched their shareholders, and certainly their main partners and and a large subset of their employees, essentially by grabbing for themselves an ever-larger share of total incomes in each country. These unequal shares of income then head back into the global money fund, for they mostly are not used for buying things.

The Home-Run Kings

A considerable proportion of people employed as “quants,” analysts, traders, and brokers receive many times the monetary income of others with similar talents employed outside finance. They receive much of this in bonuses, supposedly connected with the profits of the firms or the departments of firms they work for. Yet, of the hundreds of billions of dollars made in the last few years by the major investment banks, even more has been lost this year alone. Nonetheless, far from being expected to pay back their past years’ oversize earnings, those still employed might even be paid similar bonuses this year. Some percentage of these bloated bonuses are however used for buying luxuries of all sorts, which does increase employment and to an extent greater than the mass-produced goods sector can do does spread wealth around a bit. (As I discussed last time, luxuries are highly attention-related.)

To some extent the financial stars seem to think of themselves in a manner analogous to sports superstars. The latter generally sign multiyear contracts with teams that offer high remuneration even if the player or team should experience a prolonged “slump.” Similarly, financial stars, good at playing a game of their own, think they deserve healthy bonuses even if they have lost fortunes instead of  gaining them.

Another way to look a the rococo rise of the financial sector and its complex and unstable “products” and its “masters of the universe” is in the same terms as that of the nobles in say the period of Louis XIV of France. He had inherited a country full of the heirs of actual fighting feudal nobles, but he confined them to Versailles and turned them into dandies who did his bidding as they vied with each other for the most luxurious and remarkable clothes and hairdos, the best coaches and castles, etc. The competition that had taken the form of fighting was now both exaggerated and highly artificial. As they strolled through Versailles and its environs , the nobles wore bejeweled and beauteous swords and daggers, and in some cases knew how to use them, but these swords were no match for the muskets, pistols, and cannons in use by that time by actual armies. We can think of the stars of the financial sector as for the most part playing comparably decorative roles, even though apparently involved in what is most central and important for the old economy, namely money.

“Safe as Houses”

I think the complicated play-acting of the financial sector was bound to lead to an eventual fiasco, many orders of magnitude larger than, say, the Long-Term Capital Management fall of 1998 or the Enron catastrophe of 2001. As the finance sector continued to grow in apparent wealth,  more and more people would have come to depend on its inherent fallacy, until some point was reached where it proved quite incapable of actual delivery. However, the fact that the actual fiasco involved ordinary people’s homes and their putative value only helped both prolong an untenable situation and led to the effects oft ultimate crash being far more far-reaching.

If someone were to tell you that some standardized kind of good — whether it be a car, a computer or a corkscrew — could never go down in price but will always grow in value, you would consider them insane. After all, ordinary industrially produced goods become ever easier to replace,  wear out, become obsolete, or just lose their panache. But for some reason when similar optimism was expressed about very nearly mass-produced homes, too many people were willing to take the pronouncement as quite sane. “Real property” requires land, and supposedly “they aren’t making land anymore.”  Unfortunately, that statement is nonsense in several ways.

In the first place — as anyone who has ever looked at open houses offered by realtors or developers should know — much more than with ordinary mass-produced goods, they aren’t selling material objects, they are selling dreams. These are dreams of refuge, privacy, independence, marital concord, healthy and happy children, visits by friends and family, comfort,  warmth, praise from one’s friends, attention from strangers, beauty, ease, neighborhood, community, good schools, convenience — along with other emotionally tinged and historically contingent prospects. Dreams are subject to change, and the reality that supposedly underlies them can easily change too. An easy commute can become congested and overlong; neighbors can turn out not be nearly as nice as the ones one left, community spirit may not exist or may not welcome one; or an area with enough water for nice lawns can be affected by permanent shortages, especially as climate changes. And the gadgets, appurtenances, style and substance of a house or condo can become obsolete, come to seem ugly, or just fall apart.

What about that idea that the amount of land is fixed and invariable, so that, with a growing world population it is in increasingly short supply, and therefore intrinsically worth more and more? It just doesn’t hold water. The value of land, quite obviously, depends on where it  is and how it is looked upon, and both those things are subject to change, down as well as up. Land that was once highly desirable can become noisome and polluted, or just out of fashion, as home designs or sub-divisions can.  And, in effect, new land can be created every time it seems desirable — say — to live closer in to other people — perhaps in high-rise buildings rather than in a suburban houses. (Some land actually is “reclaimed” — created— from bodies of water or marshland, and though ecologically that might be undesirable, it still happens.)

Clearly though, real estate and housing related securities have a certain aura of security among people who don’t stop to think “concretely” of how very abstract the notion of ever-rising home prices is and always has been. The twenty-somethings who serve as the basic laborers in the field of investment banking may have had no knowledge or experience of land bubbles, but more mature people in those businesses seem to have been equally willing to be fooled by what they should certainly have understood better.

What makes mortgages even less reliable investment was little examined: in a typical case of foreclosure,the costs and right offs apparently can amount to upwards of 30% of the face value of the mortgage. The sliced, diced packages of mortgages seemed to lower the chances of such danger, while in fact making any analysis of risks much harder. The invention of newer and newer mortgage “products” that allowed introductory teaser rates with later sharp rate increases simultaneously gave investors the feeling that they would get good returns while greatly enlarging the pool of new home buyers. This further inflated housing prices, making the investments seem even more reliable. The chances of catastrophic failure grew ever larger.

And of course, all this would not have happened had it not been that all this funny money were chasing good investment opportunities while actual industrial growth could not offer nearly enough of an outlet. At the same time, the mortgage mess, etc.,would have been much less problematic if incomes had been less unequal. In that case, there would have been less money chasing investments, but more chance for ordinary people to pay more ordinary mortgages. That, however, is just what things once were like, in the US anyway. Whether they can be like that again, I tend to to doubt.

In a subsequent post, I will add to the prognostications and solutions I offered earlier.

Oct 232008

In the previous post, I pointed out that money is of great importance  only when the world is dominated by standardized goods and services. One essential of standardization is  that goods or services of a certain type are interchangeable. This ton of wheat equals that one, this 100 watt lightbulb equals that one, this kwh of electricity equals that one, and so on. In some cases (actually even in these cases) one has to specify more to get an acceptably  equivalent product or service, sometimes much more. For instance, 50 cycle per second, 220 volt  electricity is not equivalent to the 60-cps, 110-volt kind. Still, in both these cases, only a few numbers define the electrical service, and there are still huge numbers of completely interchangeable kilowatt hours of each kind of electricity available depending on where you get service.

As the electricity example indicates, much standardization is based on the growth of science and scientific measurements. But of course such measurements extend beyond science. Consider, let us say. men’s size 16-and-1/2, 34 white no-iron Oxford cotton, button-down, long-sleeved dress shirts (this is in American measures; to find equivalent European measures, e.g., a conversion table must be used). Any large men’s store will carry such shirts, and quite often a variety of styles and brands within the category. The different styles will not generally be exactly the same fit, and the prices will not be exactly the same either, though all the shirts of one size, style and brand will be identically priced. Also,the most expensive shirt of this general description will probably be priced at no more than about five or ten times the cheapest. The more expensive ones probably carry designer labels. You pay more because this designer adds a certain “class” to the clothing — a classiness that should be reflected in how you will appear to others. Men occasionally and women quite regularly seek out designer brands of clothing of all sorts, and some of it departs quite a bit from being highly standardized. Here, a large part of the markup in price is a kind of payment to the designer as a result of the attention she or he has gotten. (Wearing such clothes, you can hope to get a little of the attention that “rubs off” as much of it heads for the designer.)

Money’s Two Components

Thus, we can think of both goods and services as having two components in their prices: the standard component — in which the designer is indistinguishable from the herd, as if the item were not specially designed at all — and the attention part.

This is in accord of course with what Kevin Kelly reminded us I had indicated earlier about the fact that if you gain attention, you will also be able to have money flow to you. As with goods, in a sense we have to conceptualize the money we keep track of as having two components, the standardized component and the attention -connected component. A certain proportion of money transactions are completely standardized: wages of industrial workers used to buy standardized goods, and the profits that go to those who own and run such businesses. Other money transactions, such as buying designer jeans or contributing to the campaign of a political star are more mixed or virtually all attention related.

How Much Money Goes With How Much Attention?

Now let’s observe a couple of peculiarities of the attention-paying component. If people pay you attention, you generally can, if you want, receive money, and generally speaking the more attention you get, the more money you can pull towards you. This is as true of Damien Hirst, the artist, as of Osama bin Laden, the terrorist, or Giorgio Armani the clothing designer. For all three, in addition to the money, there are the fans —and the enemies too. (If bin Laden had no enemies, he would have far fewer fans, and probably the same goes for Hirst, even though in his case the enemies are not out to kill. To some degree, you receive attention by standing out, which has to mean in some way opposing the norm, the standards, and thereby, you also create some enmity.) However, a key point is there so no way to assign a definite monetary value to having a certain amount of attention.

Another thing one might hope to do with attention is buy it. Advertisers try it all the time. Some educators try to bribe their students to pay attention with offers of cash. One generally tries to buy the attention of any sort of professional — doctor, lawyer, editor, psychotherapist, tutor, architect — whom  one hires. But, in all these cases, there is no necessary correlation between the amount of money one pays and the amount of attention one gets. This is also true for the services of chefs, restaurant servers, flight attendants, etc. Are they really acknowledging who you are and what you really want when you ask, or are they to a greater or lesser extent treating you as just another random customer, with perhaps the same uniform politeness and smiles they would show anyone else? That depends you: Can you win or have you won their true attention?

A Side Remark About Luxuries

A corollary to all this: Luxuries (of the kind one buys) are basically non-standard goods or  services. They generally have large components of star connections —works of art, designer clothes, restaurants with renowned chefs, and so on. Thus the money flows to stars, to a good extent, even though they may mostly recycle it. In addition, many luxuries imply that the recipient gets a great deal of personal attention, which like any attention, cannot be relied on equally by all purchasers. Still the purchase of luxury goods, because of their usually less assembly-line production do employ more people than the standardized goods and services that the average person can mostly hope for.

Back to Money and Attention

Meanwhile, advertisers pay for the size of audiences for the surrounding attention-getting material, but that by no means guarantees how many in the audience will pay the slightest attention to the ad. Still less does the money paid indicate how many in the possible audience will be moved enough by the ad to buy what is advertised. (A very attention-getting ad often draws more attention to its creator than to the product advertised. We may not know the name of this person, but we will think to ourselves “what a clever ad,” meaning “I like the mind behind this.” )

Two Conclusions to Remember

Neither through attracting nor being sold does attention go with a definite amount of money. So as attention-paying and seeking and even receiving all grow in importance   we can expect two results:

1. A larger and larger fraction of all the money in circulation will go to net attention-getters, i.e., stars;


2. This growing non-standardized relationship to money will render definite amounts of money more and more meaningless in most cases.

Money Gets Stranger

We now have a situation in which in the rough way this happens, less and less money, comparatively, goes to the invisible, non-stars —such as factory workers, who churn out the standardized goods, along with many kinds of service worker — while a relatively larger fraction flows to attention-getters, even fairly modest attention getters such as typical doctors or lawyers or yoga instructors.

Note that this is not the same as inflation, or deflation for that matter. The “money supply” may rise —possibly by orders of magnitude — while the prices of standardized goods —quickly churned out to meet whatever the level of demand — stay more or less flat. Every unit of money is of course exactly the same, and in fact quantities of money can certainly bedazzle, but all this is symptomatic of the passing of the era in which money was a bedrock part of reality. To see what is going on with it, I will next time focus on financial institutions, such as banks, where money alone is the standardized good.

Next time: banks, etc.

Oct 152008

In my previous post on the crisis, I claimed that we are suffering from too much savings and not enough consumption. The worldwide pool of money seeking growth investments is too large to be sensibly invested in any sort of production or service-providing corporation. The reason for that is that consumption is just too low, and is not likely to be able to rise to the levels needed to sustain such investment.

In other words, because it has been so wildly successful, the industrial economy — or industrial-market money system — has pretty much reached its limits. Think of an economy in this sense as the ways in which a social system or several are knitted together through the distribution or exchange of an entity — or class of entities — both scarce and desirable. In the industrial economy those entities, primarily, are standardized goods (or standardized services), along with the standardized work needed to make them — and of course, equally standardized money.

Standardization of the things exchanged is key for a money economy to survive. If goods were each unique, their prices would be all over the map, and would mean nothing. We have some idea of the worth in money of any new pickup truck relative to a quart of non-fat milk because each is standardized to a great degree. You won’t find a new pickup truck worth only $2 if that’s the price of two quarts of milk, neither will you find a standard pickup for sale for $1 million dollars, for instance. (Unique objects, such as paintings, do have prices that vary even more wildly than that. A whole economic system revolving around paintings would not have much use to make of standardized dollar bills.)

Without predominance of standardized goods in people’s work and consumption lives, money tends towards meaninglessness. Without money, no markets, such as we know them. No stock markets either. That is where we are headed, I believe.

OK, so how does success limit the future growth of the system based on standardized goods? We do know it’s successful in the following sense. Endless numbers and kinds of such goods and services are now available, and the glory of the system is that it gets more and more efficient at doing all that. In other words, productivity is growing, in fact, the increase even seem to be speeding up. As the world grows more connected, ever more efficient means spread ever faster. New management techniques, for instance, can radically reduce the need for workers and can be learned from one industry and applied to many others in only a few years. New forms of automation spread rapidly, as computer applications is one industry are adapted to others with minimal tweaking. (Likewise, it gets ever easier to move most standardized work to wherever workers are willing to work for the least pay.)

Productivity (or, more precisely, “labor productivity”) means simply how much or how many goods or services a worker can produce in a given amount of time. No reason that can’t keep growing forever. Here’s the catch, though: Why produce what cannot be consumed?

Let’s call “consumptivity” the amount of goods and services a person can consume in a given amount of time. (A few others use this word, but I define it a bit differently than some. For me, it indicates the ability to consume goods and services, regardless of whether or not one has the money to buy.) If consumptivity cannot rise forever, then rising productivity will either lead to a shortening work day, or to growing unemployment, to the point where the entire industrial economy employs hardly anyone. That would mean the whole basis of the money economy will eventually disappear, as I shall show in more detail a little further along.

That would not be relevant, of course, if consumptivity can possibly keep rising endlessly. But it can’t. In terms of attention, here is the dilemma: with more and more efficient production, standardized goods and services can be turned out with less and less attention per item. In general, however, consumption that takes less and less attention does not make sense. There may be exceptions for strange pursuits such as hotdog eating contests, where minimal attention goes to each hot dog consumed. But most of the time, a good or service is only of real value to us if we do pay some attention for some or all of the following reasons:to learn of the item in the first place; to seek it out; to obtain it; to learn how to use it; to figure out how to keep it or access it; (most importantly) to actually enjoy or use it; to maintain it; to clean up after it; to display it to others, and so on. If the attention you pay is too little, having the actual item is no better than having the cheapest possible imitation of it. Since the total attention you can pay in your life is limited, if you keep increasing consumption there will clearly come a point when you cannot sensibly consume any more. Even if you are fairly irrational in your consumption habits, you will still reach a limit.

Here’s one example of that kind of irrationality: What if you accumulate items that you only know you have, never laying eyes on them, because mere legal possession affords you satisfaction just in case you would ever want them? (Remember it is consumption not investment, that we are discussing. However, it turns out something similar is true for as well.) First of all, even knowing you have something requires some attention, and there would surely be no value in accumulating more and more things without ever even knowing it. Besides that, as efficiencies of production and distribution increase, the satisfaction of actually owning something you never see is no different from knowing you could quickly obtain it should you ever want it. Further, if you buy it just to have it , sight unseen, you can’t tell the difference between actually having it and being told you do. Within the industrial system, someone would devise a way to sell purely notional products were this degree of over-consumption to become commonplace. That would employ almost no one.

Or what about simply buying goods not to keep, but to give away to others? It won’t avail. To make your gift be other than nonsensical, the recipients would obviously have to pay attention to them in order to derive any satisfaction. So, again, net consumption for everyone would still be limited.

And so on…This argument can be carried out at any length. The point is that per capita consumption cannot even approximately sensibly grow forever, and that means that the industrial economy eventually has to become less important.

Meanwhile, the pursuit of attention for its own sake is on the rise. This includes artists, writers, movie makers, bloggers, text messagers, contributors to comments on others’ blogs, music, video or photo uploaders, listserv contributors, and so on. The number of such attention-getting attempts that do not require attention payers to pay any money keeps going up. That means , in part, direct competition for the attention that people otherwise could have spent consuming goods and services that are bought. This will bring us to the consumptivity limit even faster.

All right, perhaps I have convinced you that there will be a consumptivity limit someday. But today? Surely I can’t claim that everyone has all the goods they can consume now. Most people in the world in fact don’t have the wherewithal to buy even the minimum needed for a good life. A sizable minority don’t even have enough to eat. I will discuss inequality more in the next installment, but it should be clear that one reason a lot of people have too little is that growing productivity has made many producers — such as small farmers — economically un-viable, forcing them into greater poverty. That is precisely because consumption did not increase as fast as production, on average.

At the same time though, a substantial slice of the population of the better-off countries has already reached a limit at which their consumption of standardized goods is pretty much at a standstill, or only very slowly growing, despite the fact that they are exposed to ever more advertising. And in between there a vast mass of people who could consume somewhat more were their tastes to have a chance to develop and were the institutions that would allow them to consume more in place. However, by the time their desire to consume considerably more would match the capability of institutions — such as electrification, roads, sufficient housing, etc., —productivity would have risen enough so that they and all the others would still not be consuming all that could be produced. In other words, effectively unused capacity to produce keeps rising.

To take one example, consider the incredibly widely adopted cell phone. Over the past two decades the phones have become a standard and useful possession for a huge swath of people the world over. In that time, the phones have added more and more functions, replacing a variety of other gadgets in the process. More and more purveyors have begun offering them, in endless models. But as sales of some models rise, those of others fall, in such away that it is quite clear that far more could be sold should the demand arise. But throughout most parts of the world where cell facilities (such as the needed towers) exist, virtually everyone has one already, and usually a pretty recent model. A few people have multiple cell phones, but there is little point in having as many as ten say. Capacity to produce them could easily rise if demand were to grow, and the phones will probably get much cheaper, but the no matter how cheap, the market is pretty much saturated.

Of course, these phones, especially of the “smart” variety greatly increase opportunities to seek, obtain and pay attention , attention that competes, as I described above, from other consumption. Even very poor people, in this way, become more linked to the attention economy than to the money economy. Change to the new system happens ever faster.

An Aside on Resources
As an aside, let me point out that resource limits do not prevent the rise in productivity. Every kind of material resource, including energy, can be substituted for with easier to make alternatives, once that particular resources becomes problematically scarce. Overall increases in productivity, if anything, speed the process of resource substitution.

We are left with not enough prospects for industrial growth to absorb world savings. Of course, if typical workers could be paid more, so that spending would be closer to the limits of consumptivity, the world would be in more balance longer. But for reasons I will discuss in the next installment, that state of affairs seems less and less achievable. And anyway, it would only slow the inevitable.

Oct 092008

As I write, the stock market is flatlining, credit has seized up, no one seems to know what to do, and bad times seem in store. What caused it? Not what you think. Not, basically, greedy Wall Streeters, ordinary consumers taking on loans they could not pay off, bad accounting requirements, faulty credit ratings, failures of regulators to regulate, nor a formerly too rosy outlook from the Fed. These were all surface phenomena.

What lay beneath then? One way to put it: too high a worldwide savings rate. Consumption too low. And, partly causing both of those, the rise of the Attention Economy (as I define it,  not as it has been defined by others).

We have been told for years that the savings rates of Americans are too low, that we are over-spending on consumption, and  that there is too much reliance on credit. That’s not impossible, but worldwide, the savings rate in fact has been too high, and I suspect it may have been unrealistically high in this country as well. And certainly, to have such a high worldwide savings rate, consumption has been too low. I am embarking on several posts to explain.

Swimming in a Pool of Money

Let’s talk about “savings” first. What most Americans understand about saving today is that it it really means investing one’s money or one’s retirement account (or paying into a pension plan that will invest for one, of relying on one’s employer to do the latter) in such a way that the total nest egg will grow to a tidy sum by retirement. Not everyone is fortunate enough to have such savings, and I don’t have the figures right now, but certainly a sizable proportion of people near retirement do have substantial savings — or did.

To that domestic pool of savings must be added similar things from Europe, plus, from the “developing world,”  the so-called “recycled petrodollars” and the savings of capitalists and to some extent even workers. Also we should add in the growing pies of savings held by non-profits, such as universities and foundations.

Take one example: the country of Singapore, which has experienced a very high rate of growth has a large investment fund to spend abroad. Why? Why not invest at home, or use the extra money to buy goods and services now? First of all there is no crying need or desire for more goods and services now, and second, Singapore seeks a nest egg for its own “retirement” or to take care of its own aging population.

Saudi Arabia’s population isn’t aging, but it also parks a considerable portion of petro dollars in the accounts of small group of ultra-rich princes and commoners, and also invests money abroad for its own post-oil future. (As if.)

All these investment pools seek more or less reliable “growth stocks” to invest in. It’s too much money chasing too few stocks. Even under ideal capitalism, we can’t all be capitalists; we can’t all get even moderately rich on the basis of investments in productive industries of any kind.  (Of course, the average financial planning advisor will be happy, even now to claim the opposite. It can happen for some, or at least it could, so the FA is only necessarily misleading in the aggregate. )

The more we save, the less we consume of course. Also, the more money is distributed unequally to the few rich and the many too ill paid, the less net consumption there is . The rich have money to burn, but most of them don’t want to. They want to get still richer, and of course their extra funds are part of the same investment pool.


Meanwhile, however, firms keep improving efficiency. Labor productivity keeps going up. But overall consumption does not increase that fast. (I’ll explain what I term “consumptivity” and how it connects to attention in my next post. ) Capital productivity keeps rising too. That means that in terms of industrial-era investments, there is not enough to invest in with any realistic hope of substantial profits. And not enough industrial type jobs either.

Hence, what the NPR program “This American Life” in a special broadcast last May about the sub-prime mortgage mess calls the “Giant Pool of Money” — to wit, about 60 trillion dollars cruising the world in search of ways to become much more. That money, feeding into the collateralized debt obligations along with credit default swaps, hedge fund shares and so on, helped propel the overheated financial sector and the overheated housing market, and much else besides.

You know the rest in that regard: the silly assumption that housing prices would rise forever, the super-easy, turn a-blind-eye mortgage offerings with huge built-in rate hikes; the speculators seeing a killing buying extra homes for nearly nothing. Many Americans, some having already developed a nest egg in investments they didn’t want to touch, and others with no money to their name at all, taking on new credit based on home -price appreciation.

Many had to do this because they simply were not paid enough to support families or send kids to college. Why so little cash? One reason: no executive “worth her or his salt” wants to overpay workers or keep more on the books than necessary. That is out of fashion throughout  the profit- and non-profit sectors alike. It was partly by paying workers as little as possible that executives and investors could grow rich, after all. That led to more money in the investment pool that could find no sensible target.

Arrrrgggh! Who Stepped on the Brakes?

The old realities had given out, and the spiral might have kept on going if all those involved had forgotten all about those old truths. Instead, rates did reset; borrowers suddenly could not pay. Foreclosures began; housing prices stopped rising and began to fall, and more foreclosures ensued. Then the entire overheated banking edifice came crashing down, to be explained more carefully in my third forthcoming installment.

Such Golden Years

As to hopes for pensions and retirement status: Republicans shed crocodile tears over the supposed “underfunding” of Social Security based on the fact that retiring baby-boomers will not leave enough younger workers in the system to pay the taxes to fund the program. Democrats defend Social Security but also believe pensions and 401k’s, etc., are good bets. Of course younger workers have to do the work that will lead these investments to be profitable. If the investments are in other countries, those countries’ finances have to stay good and accessible. More fundamentally, what retirees really will need is actual attention paid to them. No national policy on pensions can guarantee that in advance, which neither party ever thinks about. Savings and pension funds and perhaps Social Security too were if not lies based on a false notion that the system as it was could keep going on on forever.

Still to come:

2. The Limits of Consumptitivty;
3. How the Attention Economy is (Semi) Incompatible with Money;
4. One Result: Banking Has to Go Bonkers
5. Any Chance of a Soft Landing? Possible humane policies for the new era

Oct 022008

While a money-economic downturn would have happened anyway, it need not have hit with the precipitousness it did. That has to be blamed quite substantially on the combination of cupidity and stupidity of the elite bankers. Here’s why.

The sub-prime mortgage meltdown began months ago. As more foreclosures are instigated, the adjacent homes lost value, helping lead to still further foreclosures — thus lowering the value of the collateralized debt obligations that include “tranches” of these mortgages. It seems it should have been obvious to any sophisticated banker that preventing foreclosures through renegotiating terms of loans  or even a simple moratorium would have caused less damage to the banks’ portfolio. But it would seem that nothing was done. Of course, the CDO involve mortgages that have been sliced and diced, so that no one debt-holder has control over the actual mortgages or is in a clear position to hold off on any particular foreclosure. Still  a process of acting in coordination and “walking back the cat” to reassemble a say over individual mortgages should have been possible with enough computer power. So one has to conclude that the fact that it apparently was not tried indicates that the the so-called “masters of the universe” were more clueless than their vast compensation would suggest they should be. Once the sub-prime mortgages turned sour,there was still time to act, and the banks didn’t.

(If the cat trick wouldn’t have worked, or was going to be too slow, the big banks’ lobbyists could have been sent to support a government-backed foreclosure moratorium. This has still not happened. That too is immensely short-sighted.  )

One must also ponder that the Senate and House did so little to stop the meltdown. Why did they have to wait for Paulson’s bad scheme? Why couldn’t’ they have invited in experts and crafted some other plan much earlier? It is true that often only the appearance of an extreme emergency causes politicians to act. But it is  a sad commentary on the quality of political leadership in this country (and perhaps in others) that is the case.

Finally, the fact that even the bailout bill contains no moratorium on foreclosures indicates extreme and probably ideologically-based stupidity as well as lack of sympathy on the part of the political elite. Even now, ending foreclosures would help stabilize housing prices, preventing a further meltdown, as well as keeping many deserving people in their homes.

Of course the reliance by ordinary people on credit and on rapidly growing real-estate valuations over the last few years was partly caused by extreme income imbalances. These imbalances have several sources. Among them  certainly were the efforts by the wealthy to hold down others’ wages and their own taxes while simultaneously striving to  increase returns from credit cards and low-income mortgages in their own fat paychecks and bonuses. This mistake did part of the damage that is now coming back to haunt these same people, as well as the less well off. As I wrote before, having much more money than you need is pointless except to impress others.