Funny Money

The root of the financial crisis is that pinheads wearing pinstripes on Wall Street figured out how to take real assets, like houses, and make them so abstract in the form of securitized mortgages and credit default swaps, that people lost track of their actual value. We all know the value of a house. But nobody really knew  the value of a mortgage that was written by one company, bought by a second, turned into a security and broken into little bits and sold on a stock market by a third, and then bought by a hundred new companies.

Breaking the link between a real world THING OF VALUE and an abstract Wall Street asset, enabled greedy folks to pretend it was worth more than it was and use it as collateral to borrow and spend more money (30-1 leveraging helped too). That new money drove new investing, new jobs, new spending, and more wealth.

Now, the reality is bubbling back up, those houses were worth less than people thought, and the whole economy is snapping back. Think about that for a second. The world was living high on the hog for a long time based on imaginary money. But the stuff we were consuming wasn't imaginary. The IPods and sushi and nice cars were all real. We didn't imagine it, did we? No we didn't. But what it means is this:

Our "money" based economy is basically a huge imaginary construct. People thinking they have money causes other people to make new real stuff for them. The crops, and mines, and oil wells, and roads, and factories, the productivity of the labor force, haven't changed. The only thing that has changed is some numbers in the bowels of some accounting firm now show that some of the money wasn't really there. So this causes everything to come to a grinding halt.

OK, crazy idea: what if we all just agreed to keep going like nothing changed? What if we told the folks in China to just keep making stuff for us, and we'd keep sending them our stuff, and everyone keep making their stuff and sending it to everyone else, and all call it even?

Well that would be communism (or at least a centrally planned economy), and besides that it wouldn't work. But the idea of it illustrates how much of the real economy is subject to the whims of the imaginary economy. So, next time you hear some Libertarian or right wing fringe guy say that we should go back to the "gold standard", what he is saying is that we need to have the value of the money in our economy all backed by gold, or some other REAL thing of value, and not our collective imaginations.