Brother, can you spare a paradigm?
Monday, December 29th, 2008
Aubrey Cohen’s Friday piece on the Seattle housing market got me thinking about paradigm shifts. The shift from faxes to e-mail, for example, took more than a decade. The internet has fundamentally changed business and everyday life –but slowly.
In just the last year, however, we’ve seen collapse of the stock and real estate market, decreases in home values, multiple bank failures (including Washington Mutual) and the potential bankruptcy of the big 3 American automakers.
The typical solution is to loosen rules and allow more borrowing. Credit is the fuel of innovation, driving interest rates lower, inspiring investment, job creation and expansion of the market. But easy money is what got us into this mess in the first place.
And we are in a liquidity trap. Rates can’t go any lower than zero. Despite a bail out, banks are sitting on their cash until things become more stable. Even dropping cash from a helicopter may not inspire spending.
A Keynesian-Obama-New Deal based on infrastructure upgrades might reduce unemployment, but then what? In spite of the many make-work infrastructure projects undertaken by the New Deal, there was the recession of 1938 when the projects were done. Put a shovel in my hand, but will I buy a big screen television? It wasn’t until World War II broke out that that depression ended.
The solutions (and the problems) of the past aren’t working. Since the seventies, taming inflation, not full employment, was the objective of central banks. Ironically, now we are trying to get inflation going with little luck.
Perhaps in 2009 we’ll begin to see a new paradigm, if there is one, take shape.
An economy built on single family homes filled with furniture, appliances and a car out front, all bought with credit, may disappear.
Considering all this, do we really need a rebuilt viaduct? And doesn’t this change our views about affordable home ownership? What does sustainability look like with falling demand for oil and automobiles? Can we cope with getting what we’ve asked for all these years: a less car-dependent culture living within its means in compact communities? Maybe that is the scariest thing of all.
