No. 31, September 2010
What's so FUBAR about our
finances?
Economist
Robert E. Wright tries to makes sense of America's economic ills
Ever wonder why we allow six guys in hardhats to stand
around doing nothing while traffic snarls? Or why you can't refinance your home
mortgage because other people stopped
paying on theirs?
It's because today's economy is FUBAR, says financial expert
and economic historian Robert E. Wright, author of Fubarnomics: A Lighthearted, Serious Look at America's
Economic Ills. And if you're wondering
what FUBAR means and how it relates to our economy, read on. It's something
every American needs to realize in these turbulent financial times.
 Prometheus Books:
What does fubarnomics mean and where did it begin?
Robert Wright: FUBAR is an acronym attributed to GIs
during World War II that stands for Fouled (or some other four-letter F-word)
Up Beyond all Recognition (or Repair). I prefer recognition to repair, as I
think our problems could be fixed if we had better leadership in Washington on
both sides of the aisle. I think our nation's serious economic problems could
be ameliorated by statesmen, politicians and bureaucrats who want
to implement the best possible policies and not just win votes or score
ideological points.
PB: How
is fubarnomics currently affecting the average working American?
RW: Due to
the FUBAR condition of many important aspects of the economy, all Americans -- rich,
poor and average -- pay more for access to the built environment (homes, offices,
roads and other infrastructure), health care, higher education, mortgages, and
retirement savings than they should have to.
PB: What
major factors have brought us to this sorry economic state?
RW: The
FUBAR or hyper-dysfunctional aspects of the economy are all rooted in hybrid
failures, or market and government failures that have festered and fed upon
each other for decades.
PB: What
are some examples of government and market fubarnomics?
RW: The
Civil War, the Great Depression, and the Subprime Mortgage Fiasco are the three
most infamous cases.
Slavery
existed because of failed labor markets in the South but persisted due to a
government failure, namely allowing some people to own other people. The War
broke out because governments taxed non-slaveholders to enrich slaveholders and
because they did not implement the most-cost effective strategy of stopping
slavery, issuing bonds to finance the purchase and emancipation of enslaved
persons.
Mortgage
lending is inherently risky due to asymmetric information, the fact that one
party to a financial contract (the borrower) typically has more information
than another (the lender). For political reasons, the government tried to
encourage home ownership in indirect ways, through the mortgage interest tax
deduction, the Community Reinvestment Act (CRA), the GSEs (Fannie and Freddie),
and other indirect policies. At the same time, it enabled the rise of
incompetent credit rating agencies, so-called silent second mortgages, and
non-recourse loans. The result was both a supply of and a demand for mortgage
loans that should never have been made.
Market
failures (asset bubbles in real estate and the stock market) initiated a
recession but government failures (Hoover's reforms and most New Deal programs)
exacerbated and lengthened the Depression.
Robert E. Wright  | PB: Do
you think we're headed toward another Great Depression?
RW: No, I
fear that we are headed for a long stagnation, decades of low to zero growth.
That is problematic because it will allow China and other large emerging markets
to catch and surpass us more quickly and also because it will lead to the more
rapid demise of Social Security, Medicaid, and other government safety net
programs.
PB: What
is your advice for the "Willy Lomans" -- the everymen -- of today's mortgage crisis?
RW: Don't
kill yourself! It isn't your fault. Scientists shouldn't call humans Homosapiens, man the wise, they should call them Homoereptor, man the thief. You
were robbed by politicians and financiers. When it comes to your mortgage,
follow your own self-interest. You know what is best for you.
PB: What
are some of the biggest financial mistakes of the past five years?
RW: The
bailout and health care reform because neither tackled the hybrid failures at
the root of the problem. The bailout exacerbated moral hazard, or the belief
that Uncle Sam will aid any big financial institution that gets into trouble.
That will lead to yet more risk taking down the road. Health care reform will
not stem rising costs because it doesn't change doctors' incentives under
fee-for-service. And by forcing insurers to do things that they clearly do not
want to do (insure everyone), the reforms are sending us down a path eerily
similar to the mortgage crisis (lend to everyone).
PB: If fubarnomics continues, what is your financial forecast for people planning to
retire in 10, 20, and 50 years from now?
RW: Most
people will never be able to retire. They will work until they die like their
19th-century forebears did. If they become disabled or demented,
they will be at the mercy of family, friends, charities, and whatever crumbs
government can muster.
PB: What is the key to our
economic rebound?
RW: Our
farmers and manufacturers continue to produce more with less but we need to
jump start productivity gains in major service sectors including construction,
home finance, health care, higher education, and retirement savings. My
proposals are not panaceas but for any reform to work it has to address the
causes -- the convoluted combination of market and government failures -- at the root
of the largest and most important parts of our economy.
PB: You
offer many creative and provocative solutions to fubarnomics. Which do you
think are most adoptable and why?
RW: All my
proposals are all eminently adoptable by statesmen and all eminently rejectable
by politicians. Unfortunately, Washington and most state capitals have a
surfeit of the latter and a dearth of the former. In fact, above the municipal
level disinterested public servants are an endangered species.
That's
not to say that businesspeople have a better record. Many of my recommendations
regarding how to develop a system of "private security" would work best if put
into action by mutuals, or for-profit companies owned by their customers. Yet
for the past few decades businesspeople have been busy converting mutuals into
joint-stock (stockholder-owned) corporations and limiting the entry of new
mutuals.
PB: What's next for the state of our
wallets?
RW: If I
knew, I'd be trading, not talking to you! Seriously, it is impossible to tell
because so much depends on political decisions, which can be quirky, to say the
least.
It
would be a great help if Americans were properly educated about economic and
financial matters but the simple fact of the matter is that most are not. Books
like Fubarnomics are a start but we
really need to reform higher education to begin to get some traction. If people
can't think for themselves, they will likely fall victim to partisan rage, be
it that of the Left or the Right.
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