Financial Melt Up

So much to say about the current financial mess, so little time.

I’ll leave investors to fend for themselves this week. I’ve given enough of that CNBC-style advice lately, contrarian though it may be. I’d rather spend these precious minutes explaining why the financial meltdown is not a bad thing for a lot of us.

In brief: there’s a real economy, and a speculative economy. While they are usually related to each other – even dependent on each other – that relationship changed over the past twenty years. Really since the Reagan era. Trickle-down or “voodoo” economics (as the the first G Bush called it) was based on the faulty notion that if we allow investment banks to extract money from the real, working economy through artificial, hidden, and untaxed interest, that wealth would eventually trickle down to the people who are creating real value for the economy through their labor.

Turns out, it didn’t work. Instead, we ended up with the largest and fastest redistribution of wealth from poor to rich in the known economic history of the planet. Worker productivity rises, investors’ incomes increase, but worker wealth decreases. The investors are (or were) shielded through successive tiers of lending and borrowing between themselves and real people or real businesses. (Business is not bad, remember. It’s a cool thing to make stuff and sell it to other people who also make stuff and sell it to others. The purpose of money is so that you don’t have to trade just for the thing the other person makes.)

There just isn’t enough economic activity left to support the rates of extraction. So the investors who borrowed on the presumption of extracting more value have been left with debts they owe. Since deregulation let banks spend 200 dollars for every dollar they actually had, these debts are very leveraged. Thus, banks are starting to fail.

The problem for us is that if the Fed doesn’t bail out banks and insurance companies, we all lose our money. But if they do bail out the banks and insurance companies, we all have to pay for it. If the Fed runs out of money to do this, they have to print more money. So the money they insure our bank accounts with ends up worth very little. That’s not good.

But the money is itself crap. It’s based on a centralized lending scheme and has no intrinsic value. The Fed no longer even releases the metric telling us how much money is out there.

All this means is that you can’t count on capitalism anymore. Your wealth is not how many paper assets you have. It’s not even how much land you have (or think you have). It’s what you can do. It’s your value to other people.

The real economy need not suffer in the downfall of the speculative economy. If anything, the real economy has been repressed by the speculative economy. Real farmers have been crushed by Big Agra, real druggists have been crushed by Wal-Mart and real transportation alternatives have been crushed by Big Oil and Big Auto.

The opportunity here, while the big boys are down, is to rebuild the genuine, local commercial infrastructure. To make shoes, clothes, food, education, healthcare and everything else we can in a bottom-up fashion. While speculators enjoy the economy of scale, we inhabit an ecology scaled to the human being that was lost in the corporatist equation.

The sooner you “drop out” of the speculative economy and its abstract concerns, the sooner you will be able to create and provide real value for the people all around you, and the better position you will be in to get what you need for yourself and your family.

This is not bad; it is good. The pain that people are about to go through now is not the product of the speculative economy’s failure, but its former and intentional unjust success.