[As a courtesy to our guests, please keep comments to the book. Please take other conversations to a previous thread. – bev]
Scott Nelson, Host:
Many current books on this crash describe in detail the manufactured financial instruments that contributed to the collapse of the high-interest bond market, the real estate market, and the stock market. Eric Janszen asks us to look deeper because our situation is still dire. Worthless assets bought by the U.S. for over a trillion dollars are worth a tiny fraction of that. European states continue to throw good dollars after bad rescuing banks, but we are still on a precipice. What to do?
In The Postcatastrophe Economy, Janszen finds the sources of our difficulties over thirty years ago. He describes the troubling emergence of what some economists have called a FIRE economy in the United States, one that rewarded the Financial, Insurance, and Real Estate sectors at the expense of manufacturing and infrastructure investment. This unbalanced system grew out of the 1970s period of double-digit inflation. While high interest rates pulled capital in from around the world, they unbalanced the relationship between firms and the larger economy. Earning on high-interest loans became a kind of mania for manufacturers and retailers. GM’s profits came not from cars, but from GMAC financing for the crushing debt issued to car buyers. Only productive industries with tiny costs per unit – like software – could easily survive. The rest of our industries rusted and declined, outsourced around the world. As the FIRE industries boomed they gained complete control of the federal institutions that were supposed to regulate them, in what economists call regulatory capture. It created a third-world style system of corruption that has given us Congressional gridlock, and blocked any meaningful attempts to restructure the debt or address the fundamental problems that created toxic debt in the first place. [cont’d]
Yet Janszen is no pessimist. Even as the FIRE economy grew a continuing strain of entrepreneurial innovation has provided value for American consumers and investors. How can we protect that innovation and rescue the nation from the ashes of the FIRE economy? Janszen’s solution is to focus on the nation’s core competencies, on its entrepreneurial innovators. He suggests reorienting American investment towards Transportation, Energy Efficiency, Communication, and Infrastructure (TECI). This would not be a large-scale socialization but real investment based on public-private partnerships. The key investments should focus on sources of energy inefficiency, particularly in power distribution. Safer next-generation nuclear reactors built close to population centers, hybrid and electrical vehicles, bulbs that expel light but not heat, all built with infrastructure convertible bonds ought to be at the center of this operation. As Janszen points out, this is not a brave new world of imagination but one that harks back to the successful endings to depressions in America’s past like the Erie Canal that ended the panic of 1819 and the transcontinental railway that helped lead us out of 1857.