Saturday, July 27, 2013

Deer in the Headlights II: A Proposal

Yesterday we saw with interest an Aaron Task/Daily Ticker interview of Meredith Whitney. Ms Whitney is a banking analyst who now manages her own advisory firm. She is a frequent contributor to business and financial news, especially after she publicly and correctly called out Citigroup in 2007 for overexposure in the sub-prime mortgage lending market.

Her most recent comments are about Detroit's bankruptcy. We like the fact that there really is a general consensus about what happened to Detroit. Both Ms Whitney and are part of that consensus. The facts are pretty straightforward and few deny them. See our most recent post Deer in the Headlights, for example – for which this is a companion piece.

We also like some of the details she noted. For example, she commented that the rich and businesses are the first to leave when an area starts having difficulties. This parallels what we pointed out in our Loyalties post and elsewhere. She also said that this left mainly the poor behind in Detroit, living in a welfare state and in conditions that are approaching third-world status.

Related to this, here is a quote from her 2013 book Fate of the States (which came out prior to the Detroit bankruptcy):
"The housing industry that drove growth in America for the past thirty years is a perfect example of the new velocity of capital. Banks and home builders do not stay the course. When home prices start dropping, they pick up stakes and search for new markets. There is no loyalty ..."
The basic premise in her book, however, is that, roughly speaking, the economies of the East Coast states and the West Coast states will be hobbled for years by poor economic policies and too many obligations. The economic hope for the U.S. is growth in the "fly-over" states in the middle of the country, from Texas to North Dakota, because of their better economic policies.

What we do not like about Ms Whitney's analysis (and many similar ones) is that it both glosses over the losers in these processes and it does not point out the obvious lesson for the future: what happened on the Coasts and to Detroit will eventually happen to the heartland unless significant changes are made. In fact she talks about boom and bust cycles as natural events, resulting in the ongoing creation of boom towns that later become ghost towns.

The idea is that big money moves into a promising area, then "strip-mines" it and the lives of its people for wealth. When prospects look better elsewhere, they leave and take their wealth with them. What is left is human detritus with little hope for the future. This process is a sort of demented ongoing rapture in which the rich are transported to heaven and the poor are left behind to deal with the apocalypse. says that this is unacceptable. It is unacceptable to build and then devastate a sequence of cities like Detroit, filling our landscape with economically burned-out places where once-wealthy workers have to live in near third-world conditions. Allowing it seems like a bland acceptance of a dystopic future in which eventually most of the nation will be impoverished. We feel certain that is not what Ms Whitney and other financial analysts desire, but perhaps their "deer in the headlights" acceptance of it indicates that they see no way out. Or perhaps, being trained to think on what is now the "wrong" side of capitalism, they do not even believe that there is a way out.

That is what is about – providing a way out. Ms Whitney still believes in having a single currency, but that will no longer do. The people of Detroit are chained to their poverty by that single currency. Like Greece they cannot earn enough of it to dig their way out of the economic hole that their leadership dumped them in.

The first step then is to define Detroit as a geographic region which will have its own markets and currency. The purpose is to get money in the hands of the people again, however valueless it might be at first in the external economy. Money is the lifeblood of the markets, and Detroit has been bled out. The economic heart of Detroit will not beat again without enough money as lifeblood, but that money cannot be in external U.S. dollars. If a bailout were possible, it would have been done already.

By using an internal currency, the people of Detroit would live in a market economy again instead of a demoralizing welfare, third-world state in the middle of the wealthy U.S. Detroit's markets might be small and protected, but their markets would encourage them to improve their lives by their own efforts to earn more. We must restore their faith in the markets to provide jobs. Therefore we must make sure that there are more jobs than there are able-bodied persons in Detroit.

Supply and demand for Detroit would at first be managed by the nation as a whole, as represented by the federal government. Naturally, not all people and businesses in Detroit need to be part of the internal markets, but many will need to be. The federal government will provide for their needs by buying for them collectively in the external markets and then selling to them individually in the internal markets. The federal government will also provide for their incomes by collectively "buying" jobs for them in the external markets and then making sure that the hiring is done in the internal Detroit markets.

This should be enough to get economically-sick Detroit back on the road to recovery. A transfusion of money within exclusive and protected markets should do. We do not believe that the full program of "mutually exclusive currencies and markets" is necessary in this case. For example, we do not think that the guarantee of basic living requirements is advisable at this point, even though it possibly could replace pensions and be a solution for pension problems in the Detroit budget.

It is expected that this program would run at a deficit for a while until the people of Detroit regain their productivity and start to build wealth. It would not be a bailout, however, and it would not be charity. Workers would get what they earn. We think that is important. Rather than handouts, it would just be a chance for the people of Detroit to enrich themselves once again by their own efforts. But our leaders will have to think of capitalism and finance in new ways. Traditional solutions based on thinking from "the wrong side of capitalism" will not do any more.

Finally, Detroit could be a proving ground for the program. A lot of experience would be gained regarding the systems and processes needed to handle exclusive currencies and internal markets. It would also be a chance to show that people are never to be treated as just detritus of the economic process. No one should be left behind just because the big economic machines have moved on.

That is the key, after all. As we said in the first Deer in the Headlights posting, one purpose of our government is to protect its people (Detroit) from being wiped out, economically or otherwise. It is a balancing act, however, because it is also important to keep competitive capitalism going. Therefore we should not ignore Detroit's problems but neither should we bail Detroit out. We need an intermediate solution that keeps the markets going and the people working. If we cannot do it with standard U.S. dollars, then we have to find another way. At, we have an alternative and we do not know anyone else who does.

The way capitalism should be.

Socialism for the socialists and capitalism for the capitalists.

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