Commerce: “Dumb Money” goes global

BOSTON — Alan Greenspan as Mr. Magoo. Donald Trump as the yin to Robert Rubin’s yang. The economic crisis as a multi-trillion dollar crap sandwich.

The mess now sweeping the world has sparked many colorful observations. The three above can be found in the writing of Daniel Gross, who’s covering the global economic crisis for Newsweek and Slate.

Gross has just written a very readable — and highly entertaining — book called "Dumb Money: How Our Greatest Financial Minds Bankrupted the Nation." In it, he shows how cheap money evolved into a noxious culture of "Dumb Money," with plenty of blame to go around: investors, home owners, borrowers, lenders, journalists, elected officials, economists, regulators, credit rating agencies.

In other words we’re all in this together, and that includes everyone outside the U.S., too. I caught up with Gross this week:

TM: What’s the biggest takeaway from your analysis of what House minority leader John Boehner called a “crap sandwich?”

DG: It might be that ideology and belief can be very dangerous when it comes to finance. Greenspan comes in for a lot of blame in the book. He had accumulated so much moral authority from his productive years as a central banker, and had so much power that he was really able to put his deeply held ideology and faith in the free markets, in securitization, in the capacity of firms to regulate themselves, to work, with very little pushback. The media, the political system, the financial system, popular culture – we all internalized these notions. And so the financial system just ran amok.

Which other countries went farthest down this path of cheap-to-dumb money?

Among the largest developed economies, it would have to be the U.K. London embraced the new money culture as aggressively as New York did, perhaps even more so. The City became a real hotbed of hedge funds, private equity, and was a source of some of the big innovations that wound up hurting us. For a while there in 2006 and 2007, in fact, people in New York were concerned that London would overtake Manhattan as a financial capital. The U.K. had a big housing bubble, and has had spectacular bank failures (Northern Rock, Royal Bank of Scotland). The Dumb Money virus definitely crossed the Atlantic. Iceland, obviously a much smaller country, also internalized the Cheap Money/Dumb Money mentality to such a degree that its whole economy became dependent on finance and lending. And when the bubble popped, Iceland essentially went bankrupt.

How will the crisis play out in each of those places?

The U.K. has taken aggressive action by nationalizing banks. And I think that’s to the good. Moving swiftly and dealing forthrightly with the problem is the best thing a country can do. (The U.S. doesn’t get as high marks in that regard). But clearly, the economy of the U.K., and of London in particular will suffer in the short term. Iceland will be a really interesting case study in terms of how a homogeneous, cohesive society deals with systemic failure.

It what ways will the crisis affect the BRICs (Brazil, Russia, India and China)?

The banking systems of China and India and Brazil are actually in not such bad shape compared to those of the West. I’m not as worried about the financial economies of the BRIC bloc. But they’re bearing the brunt of the damage in terms of the real economy. Finance is like oil, it lubricates the engine of global trade. And these countries are really dependent on trade for growth. So we’ve seen lots of factories close in China, outsourcing firms in India finding business drying up. Russia is getting much less money for commodities like oil and nickel. Ditto for Brazil. So the export revenues each of these countries gets will decline. They’ll have to focus more on domestic demand.

U.S. companies, of course, have been furiously targeting the BRICs. How does the slowdown in the U.S. — coupled with weakness in these high-growth economies — affect the ongoing story of globalization?

To a degree, it affects it negatively. Tourism and travel is down. The volume of trade is down. There just isn’t as much stuff and people moving around the world as there was in 2007. So on the one hand, that’s bad for globalization. On the other hand, as you note, the developed economies are shrinking. And so if you’re a company that needs growth, you have to start looking to new markets. Africa’s economy is still growing. India is growing at 6 percent, and so on. So there’s a degree to which this crisis in the developed economies is going to push companies large and small to redouble their efforts to break into new markets.

How much economic, political, and business credibility has the U.S. lost as a result of this mess?

A great deal. Pretty much everything we told the world about how the system was going to work, and about the role of government, turned out to be wrong. We look like hypocrites for bailing out our financial sector while urging other countries to reduce subsidies.

Can that image be repaired?

Yes. It’ll take time. One of the ways we can repair it is by coming up with ideas – new businesses, products, services – that can be easily exported and that can help improve efficiency. We did it with the Internet in the 1990s. I think we have the opportunity to do it again with green technology, energy efficiency, and sustainability. Imagine the positive vibes that would result if American firms were able to invent and export cheap, effective water purification technology for developing markets, or hyper-efficient solar panels, or cars that run on fuel cells.

How do you assess the Obama administration’s response to the crisis so far?

B+. They’ve inherited a very difficult situation. But the slowness to fill posts as the Treasury Department – it seems like Secretary Tim Geithner is all by his lonesome – is hindering the effectiveness of the response. And we need more declarative statements, and less hedging. What are we going to do with banks? With mortgages?

How is that response being interpreted outside the U.S.? And how much does that matter?

I think on the one hand the world is in love with Obama, they love the change, and so he’s getting a large amount of slack. So you don’t see all that much criticism. Meanwhile, countries around the world are finding they have their own financial crises to cope with and learning that the answers aren’t so easy. The international reaction matters a great deal because the U.S. depends on foreign investors to buy our debt.

How screwed are we?

Compared to who? Compared to our 2006 selves, we’re pretty screwed. Our 401Ks have been cut in half, jobs are harder to find, our homes are worthless. Compared to people around the world, we’re still in pretty good shape. We still get to live in America. And our government has the capacity and ability to take swift action.

Any silver linings?

Yes. We’re rediscovering the virtue of thrift, and by that I mean not just saving money and being stingy. I mean being more intelligent about how we used limited resources. People are getting smarter about using credit, but also about energy use. Two years ago, somebody with $3,000 to spend on their house might have bought a new couch, or a giant TV. Today, they’re probably more likely to spend it on a new coat of insulation, because it’ll save them money this year, and every year going forward. And that’s good for the economy in the long term. Do we need to buy a car every three years when a good car lasts 10 years?

Daniel Gross is a senior editor and columnist at Newsweek, and at Slate. His latest book, Dumb Money: How Our Greatest Financial Minds Bankrupted the Nation has just been published as an e-book. (You can buy a digital version, for the Kindle or Sony Reader, or an audio version. Readers interested in receiving a PDF of the first chapter or learning about a paper version should send an e-mail to: dumbmoneybook@gmail.com.)

And for more GlobalPost coverage on the global economic crisis: