The always-thought-provoking Steve Randy Waldman, inspired by that Paul McCulley piece I cited last week on “the paradox of deleveraging,” writes:
Encouraging people to go shopping in order to help the economy is not “second best” policy. It’s a desperate last resort. We’re not at a point where there’s so little economic activity that we can’t foresee future wants. We’re at a point where people are beginning to shift from investment to storage because of a well-deserved loss of confidence in the financial system. Encouraging consumption now is nihilistic. It feeds into a vibe (I feel it personally, do you?) that saving is so uncertain and money so volatile that one might as well spend, ‘cuz who knows what tomorrow might bring. The right way to sustain aggregate demand and maintain current income is to figure out what we should be investing in — not stocks, bonds, or CDOs, but factories, windmills, or schools — and then to put current resources to work. Our financial system is failing spectacularly because it erred grievously. It built homes and roads and sewers that oughtn’t have been built, it “invested” in vacations and plasma televisions, and it paid itself handsomely for doing so. That’s not a problem we can spend our way out of. To fix the financial system we have to change it, not rally to its support. We will know we’ve put things right when thrift is something we can celebrate, when we save because we are excited about what we are creating rather than frightened by what we might lose.
Agreed. I think the issue for McCulley (and for me) is that we don’t want to make that shift to thrift all at once. Although of course the danger is that this can be an excuse for never making the shift until modern financial capitalism falls apart completely and we’re all stuck foraging for grubs.
Oh, and about those sewers: I’m figuring that’s a reference to Jefferson County, Ala., which may be headed for bankruptcy thanks to massive sewer-related debts. Those sewer improvements themselves weren’t a waste–I think I wrote the very first article for The Birmingham News pointing out, in 1992 or so, that every time it rained hard (which it does a lot in Jefferson County) huge quantities of raw sewage were pouring into creeks and rivers in and around Birmingham. The problem was the fancy-pants refinancing, urged on by some naughty bankers at JP Morgan and elsewhere in 2002, that blew up on the county when credit markets began to go haywire last year.
Sewers: good. Wall Street: very, very naughty.