Bad Economics

I’m no economist, but I play one in my mundane white-collar fantasies. My economist alter-ego is full of facts and figures, knows the names of economic principles and when they were articulated, can spout off long streams of financial vocabulary on command, and, of course, knows everything. In my dreams, I’m the Bill Gates of economics, I smite all other weaker economists and gorgeous women, suitably impressed, throw themselves at me en masse.

I read the economist. I’ve taken Economics 101 in MBA-school. I own a copy of “Economics for Dummies” (eh) and “The Origin of Wealth” (fantastic). I haven’t become so accountant-like that I can actually entertain myself with a copy of the Financial Times or Wall Street Journal, but still, I have this erudite alter-ego, let’s call him EconoBrian, who likes to pretend he understands the machinations of the world around him as seen through the best of academic filters: economics.

I am a firm believer in science, which makes sense I guess, since I work for a scientific publisher. In school, I really believed that biology and chemistry were giving me the keys to understanding (and therefore in a way, feeling in control of) all life on earth. Reading Hawking’s book made me equally confident that I could grasp, in my tiny brain, the complete structure of the universe. But it wasn’t until I started learning about economics that I truly felt that I understood what drives the world.

My B-school econ professor described economics as: “the study of how people make decisions under conditions of scarcity.” I thought that was elegant enough to commit to memory.

For me, economics explains almost everything that humans do. Sure, there are still some world events that are simply driven by irrational human emotion, but there’s always an economic reality lurking in the background that eventually comes in and asserts itself.

The topic that got me started writing on this blog again is the sorry state of the US economy. Recently, the entire system imploded under the weight of a bunch of bad debt that toppled the investment banking house of cards and is now taking down the entire country to the tune of $700 billion.

It’s a staggering number. It’s hard to really make it present and tangible. It’s so big that its mere utterance was enough to boost the stock market (until the negotiations fell apart thanks to the President’s own party not backing his plan).

I’ve read quite a bit about the bailout, its potential impact on the economy, the various schools of thought about its prudence. I’ve skipped the details of how the politicians want to modify it because honestly, it makes little difference. Just the idea of the Government committing so much treasure to solve this problem should be enough to keep anyone up at night.

From what I’ve read, the theory is pragmatic: put all the bad debt into one place, managed by a party who can afford the losses (e.g. the Government), and the financial system will get back to doing what it does, lending money to spur economic growth.

The talking head economist who gave us the best soundbite was the one who said: “You have to remember, the entire situation’s root cause is the bad mortgage debt.”

The implication here is that if we remove that from the equation, things will get back to normal. Since my 401k has lost 22% so far this year, I certainly hope that’s true. I don’t like someone else’s bad mortgage affecting my future retirement age.

But $700 billion.

What kind of a burden does that create for us?

Well, first of all, it forces us, as a nation, to go further into debt. Bush wants to raise the debt ceiling to 10 trillion. Mind boggling. I, as a citizen of the United States, will need to nearly double the amount I owe the world from $180,000 to around $300,000. The average American household income is $60,000. That’s five years worth of gross salary, just to pay of the debt we have accumulated because we spend more than we earn as a country.

It’s shameful. But no one seems to think so.

We all go about our consumerist lives, as if we can keep buying flat-screen TVs and PlayStation 3’s and iPhones on credit. I have a friend who owes thousands of dollars on credit cards, paying hundreds of dollars a month just in interest charges, and still taking vacations to foreign countries.

The $700 billion bailout scares me. It doesn’t scare me as much as the alternative (a prolonged, deep recession), and I hope it gets passed soon so that we can start on the road ahead. The lesson I hope is learned from all of this is that the financial markets need more regulation (sorry guys, but you fucked it up, and we’d have to be idiots to let you run amok again), and that the country needs to save more and spend less.