December 20, 2010--Everything For Nothing

During the 1990s bubble-boom of Internet or dot-com stocks, then Federal Reserve chairman Alan Greenspan, said: "There is an ever increasing conceptualization of our Gross Domestic Product--the substitution, in effect, of ideas for physical value."

As with many things the owlish Greenspan would oracularly proclaim, this requires some translation.

He was commenting on the then almost daily floating of new IPOs to a greed-saturated public, new stock offerings that would sell for hundreds of millions of dollars when the companies offering them had never made a dime of profit. It no longer mattered, Greenspan opined, for a company to actually produce something of value or, God knows, make a profit. All that mattered in the new economy was that a company's ideas had apparent, if unverified worth.

He said pretty much the same thing more recently when the largest bubble in American economic history collapsed--the real-estate/sub-prime mortgage scam--and we know where that has brought us.

It is incredible that Greenspan, a disciple of ober-free-marketeer Ayn Rand, who literally sat at her feet in her Manhattan parlor, ever rose to such a position of power and that he was able to cling to office for 20 years though his predictions and uncontested actions brought down upon us one disaster after another. But here we are.

Last Saturday, over dinner with a bright young cousin, we talked about what Greenspan and a series of federal government enablers, Democrats as well as Republicans, have wrought.

We came to conclude that not only are we as a result faced with the most daunting crisis in a century but our culture as well as our economy may be irreparably damaged.

Everyone has been saying that we have given away that part of our economy that produces things of "physical value." Almost all of it has been outsourced to China and countries many Americans would have difficulty locating on a map. Just take a look at the labels on your clothing to get a picture of how globalized manufacturing has become.

We used to be a nation of tinkerers. People who invented things like the Model T or personal computers in their garages and from there spawned colossal industries that went on to employ millions of hard-working people. Others started small hamburger or dry goods businesses on shoestrings and from that emerged MacDonalds and Walmarts, again changing the American landscape (not always for the better) and providing additional millions of jobs for local folks.

And from many of these innovations giant service industries developed. 107 years ago the Wright brothers took the first sustained flight and not many decades later we had a global airline industry. Basic research at Bell Labs led to the invention of the transistor and wirelessness, both of which changed the world and our economy. And of course from small town and big city banks over time the financial services industry sector of our and the world's economy evolved.

Many are wondering if we have lost the innovative edge that propelled us to the forefront of the world's economies. One never knows, of course, what a young Bill Gates or Mark Zuckerberg might this very minute be concocting in her or his basement in Peoria, but there is still much to wonder about.

Including whether our investment community, our lenders, our government are set up any longer to help catalyze and then support the growth of whatever promising might be incubating. We do know that there is very little lending going on, that there are more patents being awarded to Chinese and Indian entrepreneurs than to Americans, and we know that our education system has slipped to second-world status. None of these are good signs.

What we were speaking about last Saturday was not so much these now widely agreed upon realities but rather whether we are seeing the emergence of a culture that values getting or making something from nothing. A culture spawned from Greenspan's economy based purely on ideas. Ideas of the sort that too often now seem to be more scams than the healthy growth of intellectual capital.

There were two examples that we touched on--the full emergence over the past two decades of an economy largely based on so-called "financial products" and a dinner table case study of what has happened to our once-vaunted airlines industry.

We now know that the recent economic boom was mainly the result of a real estate bubble where valuations came to be based more on a feeding frenzy of greed and fraud than any intrinsic rise in the worth of the properties themselves. And that bubble was inflated by giving "free money" to under-qualified buyers (the sub-prime borrowers) and to the banks and insurance companies that commodified and sliced and diced and sold and resold these hyper-inflated mortgages after turning them into financial products of dubious value.

In effect, the apparent growth of our economy, where it seemed that all boats were endlessly rising, was more the result of a giant Ponzi scheme than anything based on "physical value." And when there was no longer any private or government money pouring in to keep the bubble inflated there was a cataclysmic collapse because everything was based on nothing.

Innovation, American ingenuity had been transformed into scheming.

The creators of these fictive financial products were unduly rewarded, even when their scams were exposed and shown to be the cause of tens of trillions of dollars of lost value.

As I suggested to my cousin, the best-worst example of how corrupt the entire system had become were the tens of millions of dollars of "retention bonuses" that were paid to the employees of AIG's Financial Products Division. The very folks who had brought about the debacle were paid millions in spite of their disastrous performance. AIG's CEO defended these bonuses because without them, he whined, the company would lose their most valuable employees! Their best and brightest. The same people who were among those primarily responsible for the global calamity.

Shifting the subject, my cousin who had just returned from a trip to Hong Kong, was full of fresh airlines stories he was eager to share. How this once proud industry was now in the business of nickel and diming customers. From charging for checked baggage and pillows and peanuts; or how you were held up for cash if you wanted a printed ticket and how much you had to pay if your plans changed and you needed to rebook a flight.

He said that airlines' favorite employees now are not those who come up with innovative ideas for new and improved services but those who figure out how to get us to pay for things that are already a traditional part of the flying experience. Another version of squeezing something out of nothing while charging a premium for it.

I said, "I'm depressed. Let's have another glass of wine." Which we did, actually two, and as a result the conversation veered toward the weather. We wondered, would there be another cold snap next week and . . .