Financial FAQs

The U.S. Senate has finally begun debate on financial reform, but only after eye-opening testimony at Senator Carl Levin’s Permanent Subcommittee on Investigations by Goldman Sachs’ executives, who claimed that hedging their bets on subprime mortgages was perfectly legal, while not believing that telling clients what they thought of the securities or derivatives sold to them was relevant.

Why their belief that they were innocent of any fraud? This is when economic theory gets mixed up with ideological belief systems. Economist John Kenneth Galbraith labeled it “The Economics of Innocent Fraud” in his book of that title (2004, Houghton Mifflin, Boston). “Most progenitors of innocent fraud…are not deliberately in its service. They are unaware of how their views are shaped, how they are had. No clear legal question is involved. Response comes not from violations of law but from personal and social belief. There is no serious sense of guilt; more likely, there is self-approval.”

The inherent conflict in Goldman’s case was that of the classic inside trader, who believed that free, unregulated market forces should determine investor behavior. We now know that unregulated ‘free markets’ are a vehicle for manipulation by insiders. Goldman had inside information that their buyers didn’t—i.e., that there was a great likelihood the underlying subprime mortgages might have very high default rates. And as ‘market-makers’, their function as a pure trader was to find buyers for sellers and vice versa, without evaluating the underlying worth of the assets being traded.

Of course there were other conflicts of interest. Goldman was both an unregulated securities’ trader and an investment bank regulated by the Federal Reserve, which gave them a source of very cheap funds (i.e., because tax payer guaranteed). Until the Depression era Glass-Steagall Act was repealed in 2000, commercial banks regulated by the Fed could not also be securities’ traders. The reason was that stock, bond, and derivatives’ trading was a very risky business where caveat emptor prevailed—‘buyer beware’, in other words.

This was precisely why Senate members used the Las Vegas casino analogy at the Goldman hearings. Bets were being placed on which direction the subprime market would go, without the bettors having any ‘skin’ in the game—i.e., no equity or ownership interest in the underlying securities—just like placing a horse racing bet. It was gambling, in a word, but Las Vegas gamblers knew they were gambling as Nevada’s Senator John Ensign said at the hearings, whereas Wall Street investors did not at the time.

And, more importantly, because derivatives’ trading was unregulated, no one knew how much was bet for or against subprime mortgages at the time. It was being transacted through a shadow-banking system specifically set up to escape regulation. Whereas horse race bettors know exactly what the odds are, because regulations require the odds to be publicly posted.

The result was that traders’ profited, but those pension funds and foreign banks that had no real knowledge of the risks inherent in such trades did not. That is why this ‘last bastion of free enterprise’, as some traders call it has to become more transparent. Financial markets are now as interconnected as our environment. What happens in one part of the financial environment can affect other parts not directly involved.

The environmental analogy is apt here. Financial markets have become an internationally connected financial ecosystem subject to ‘pollution’ with toxic securities, just as our environment has become polluted with toxic chemicals. The world has become ‘flat’ and interconnected, said columnist and author Thomas Friedman, precisely because information is now transmitted at light speeds in our new digital world.

The Darwinian world’s survival of the fittest analogy was true 100 years ago when Capitalism was an infant struggling to survive in a post-feudal age world where ownership was still in the hands of the few—whether monarchs or military dictators. But once the Industrial Revolution prevailed over the feudal age, laws regulating private property rights and controlling predatory behavior became necessary.

In fact, markets only function well when there is transparency. Otherwise assets become mispriced, bubbles formed, and greater losses ensue. Nobelist George Akerlof knew this best when he did ground-breaking research on how asset markets really function. He studied the Lemon used-car market, of all things, which before it became regulated meant buyers had no knowledge whether a new or used car was a lemon—had some undetectable defect, in other words. And because buyers therefore discounted the price of those unguaranteed cars, it drove sellers with vehicles of better quality out of the market.

And that is why state vehicle Lemon Laws now require some guarantee or warranty of quality for each vehicle for sale. Professor Akerlof’s seemingly innocuous research, along with that of Joseph Stiglitz and Michael Spence won them the 2001 Nobel Prize in the Economic Sciences “for their analysis of markets with asymmetric information”, and proved that insider trading will always harm markets, if not regulated.

Professor Akerlof, also the co-author with behavioral economist Robert Shiller of “Animal Spirits”, has been very vocal about the need for regulations and laws to keep up with financial innovations. One of his favorite sayings first appeared in a New York Times editorial.

“If you let your toddler out of her playpen, you need to watch her more carefully. This wisdom is known by every American parent but has been systematically ignored in economic deregulation…Now is the time to remember the lessons of the playpen: increased scope for action must be accompanied by increased regulatory oversight.”

JK Galbraith’s innocent fraud is the reason ideology may trump economic reality. Those AAA ratings on subprime mortgage securities were an illusion, fostered by Goldman’s traders that generated tremendous profits. There is a ‘snake oil’ element in all financial markets that free market ideologues are loath to admit. “…those employed or self-employed who tell of the future financial performance of an industry or firm, given the unpredictable but controlling influence of the larger economy, do not know and normally don’t know they do not know…Those predictions are thought to reflect economic and financial expertise. And there is no easy denial of an expert’s foresight.”

Harlan Green © 2010

Financial FAQs

". . . It is critical to understand that the recent financial crisis was not a natural disaster. It was a man-made economic assault. People did it. Extreme greed was the driving force. It will happen again unless we change the rules," stated the Chairman of the Senate Permanent Subcommittee on Investigations Carl Levin, Democrat of Michigan.

Congress and the Financial Crisis Inquiry Commission are beginning to understand the dimensions of the financial meltdown of 2008 that almost caused another Great Depression. And crimes have been committed, with only Goldman Sachs being charged with fraud to date for misrepresenting the Collateralized Debt Obligations that it sold to clients.

The just-disclosed SEC fraud case against Goldman is a perfect example of a “man-made economic assault”. On one side, Goldman marketed subprime loan-backed securities to their clients, while on the other side structuring a deal with another client—hedge fund Paulson & Co.—without revealing that Paulson was betting against it and helped to structure the deal, which is omission of at least one “material fact” and so illegal under securities’ laws.

Why the difficulty in pinning down who was responsible, is the question we asked last week. A major source of the problem is the claim the players weren’t responsible for any consequences. Even Alan Greenspan had said the Federal Reserve wasn’t able to detect asset bubbles—the major cause of most financial meltdowns—so how could anyone else detect them? And if not detectable, than how could anyone be held responsible for causing them, and the losses when they burst?

But behavioral economists such as Robert Shiller, et. al., show that the irrational exuberance that creates bubbles is detectable, and preventable with the right regulation. It is true that no one can predict the future, which is why investors have to be able to trust in the institutions that peddle financial investments before investing in them.

And that is the ‘snake oil’ component of financial markets, says 2001 Nobelist George Akerlof in a recent Cambridge University, UK conference. Much of the marketing of investments doesn’t reveal all the facts. The playing field isn’t really level, in other words, and markets are never 100 percent transparent. There are always those—either buyers or sellers—who know more about their products, and may have hidden agendas.

The rating agencies are another example. They caused much of the problem by not downgrading some of the most toxic securities, when they were paid by clients who needed the ratings—a direct conflict of interest.

India’s experience is an example of good regulations. Its Central Reserve Bank did not deregulate derivatives’ trading, and required much higher capital requirements for those who did trade in exotic instruments. Therefore no credit bubble was created, and India was not affected by the worldwide credit bust.

By now, the consequences of the financial meltdown are visible to all—the loss of 8 million plus jobs, $11 trillion in wealth, and a real estate market that will take years to recover in the U.S.. The real estate bubble is just the starkest example. As late as 2007, 2 million new homes per year were being built—much more than were needed even then, driven by easy credit and the irrational exuberance of homebuyers who thought that home prices could only go up. Today the number being constructed is little more than 600,000 units, mostly because the excess supply of the boom years hasn’t yet been sold off.

And the inventory of new homes is still above 9 months supply at current sales’ rates, when the longer term inventory backlog has averaged 6 months.

Whereas, existing home sales are doing better. What Calculated Risk calls the “distressing gap” between new and existing-home sales still exists, because of the tremendous oversupply of homes still on the market—more than 8 months supply at current sales’ rates.

In fact, bubbles can be predicted. No less than Robert Shiller in his 2000 book, “Irrational Exuberance”, predicted the implosion of the dot-com bubble. In the 2005 second edition, he also predicted the bursting of the housing bubble. And it didn’t take sophisticated math.

In the case of stocks, the price-to-earnings ratio had soared to 44 to 1, almost double the 26 to 1 ratio that existed on 1929’s Black Friday. In the case of housing, Shiller saw that housing prices had far outdistanced some fundamental indicators—rising in double digits in mid-2000 when construction costs and population growth rose less than 2 percent per year.

And, in a paper he presented to a Federal Reserve Board economic symposium in August 2007, Shiller warned, "The examples we have of past cycles indicate that major declines in real home prices—even 50 per cent declines in some places—are entirely possible going forward from today or from the not-too-distant future."

There were numerous others who read the signs, including Bill Gross, Managing Director of PIMCO, the world’s largest bond fund. He criticized the credit ratings of the mortgage-based Collateralized Debt Obligations (one type of insurance derivative) now facing collapse:

“AAA? You were wooed, Mr. Moody’s and Mr.Poor’s,” he said, “by the makeup, those six-inch hooker heels, and a "tramp stamp (tattoo)." Many of these good-looking girls are not high-class assets worth 100 cents on the dollar… [T]he point is that there are hundreds of billions of dollars of this toxic waste… This problem [ultimately] resides in America’s heartland, with millions and millions of overpriced homes", as quoted in Nouriel Rubini’s Global Economics blog.

Many experts predicted both the housing and derivatives collapse, in other words, which was the result of the unregulated derivatives market that operated worldwide. And because unregulated, many of the derivatives had little or no capital backup, which created a domino effect. The collapse of one, caused the collapse of others in a chain reaction.

So the main feature of regulation put forward by both House and Senate bills is greater transparency and more capital to back the transactions. In particular, derivatives, which are bets on the future value of an asset—or even ‘CDO insurance’ (which is really another derivative in this case) that guarantees the derivative, will be reported through a public clearing house just as futures are traded today. And those offering derivatives must have at least 5 percent of their own money in the transaction.

This will not eliminate the greed that is a basic ingredient of human nature, but should discourage excessive greed by making it much more expensive. Taking responsibility means being aware of the consequences to others in the larger economy, not just to oneself.

Harlan Green © 2010

Popular Economics Weekly

Retail sales soared last month and inflation was nowhere to be found, indicating that we should have at least a 3.5 percent GDP growth rate for the first quarter January to March, which follows the 5.6 percent rate in Q4 2009. Consumers are spending again, in spite of flagging confidence, proving that one can shop and feel depressed about it at the same time. But cheer up, consumers, since retail is 50 percent of all consumer consumption, spending your hard-earned savings should mean more investment, and jobs.

Overall retail sales in March jumped 1.6 percent after gaining 0.5 percent in February, and are up a huge 7 percent, year over year. The March boost topped market projections for a 1.2 percent spike. Motor vehicles provided a huge contribution, spiking 6.7 percent after dipping 1.9 percent in February. But even excluding autos, sales in March posted another healthy gain, rising 0.6 percent which came after a 1.0 percent surge in February.

Fed inflation hawks got no help in March as consumer price inflation was essentially nonexistent. Overall CPI inflation for March nudged up to 0.1 percent from no change the prior month. The rise matched the consensus forecast for a 0.1 percent increase. Core CPI inflation, however, showed no change from up 0.1 percent in March and coming in just under expectations for a 0.1 percent gain. At the headline level, food prices rose moderately while energy costs were flat. The core was held down in part by declines in apparel and recreation and flat housing costs.

Another boost to consumer confidence may come from March industrial production, which rose to 4.0 percent from 2.2 percent in February. Within manufacturing, durables output jumped a sharp 1.4 percent with all major categories advancing, most over 1 percent. Nondurables production increased 0.5 percent in March, led by a 3.0 percent jump in petroleum & coal products and by a 1.7 percent gain in rubber products. Other increases were more moderate but still widespread.

And the recovery finally is starting to take traction beyond just manufacturing. The ISM’s non-manufacturing index for March improved to 55.4—a 2.4 point jump from the prior month. The index has been in positive territory for three months in a row.

Forward momentum looks good as the new orders index spiked 7.3 points to a really hot 62.3 reading. This is the highest level for this index since a reading of 63.0 in February 2005, according to Econoday. Export orders were strong, jumping more than 10 points to 57.5.  Adding to the argument that forward momentum is strengthening, backlog orders also rose, gaining over 9 points for the month to 55.5.

The huge output increase in both the manufacturing and non-manufacturing (service) sectors has to boost employment in coming months, as we said. Even builder optimism rose, as new-home traffic has increased, according to the National Association of Home Builders, indicating that housing is not slipping back into recession although this sector is still getting support from homebuyer tax credits that are about to expire..

Housing starts in March strengthened from snow bound February-with permits pointing toward even better improvement than starts. March construction rebounded 1.6 percent after a snow storm damped 1.1 percent rise in February. The February number was revised up from an original estimate of a 5.9 percent drop. The March annualized pace of 0.626 million units rose 20.2 percent on a year-ago basis.

This is in spite of flagging consumer sentiments. Consumer sentiment has fallen deeply the last two weeks in a surprise that indirectly points to trouble in the labor market, according to the University of Michigan survey. The mid-month consumer sentiment index fell to 69.5 vs. 73.6 in March. Deterioration is deepest in the leading component, expectations, which fell 5.6 points to 62.3 and a level last seen mid-year last year when payrolls were still declining severely.

We hope consumers aren’t dispirited because they are again spending what they don’t have. The evidence doesn’t show such. It may just be all the bad news still out there. The actual recession probably ended last July or August. But even the National Bureau of Economic Research that calls recessions refused to announce that fact, saying, “Although most indicators have turned up, the committee decided that the determination of the trough date on the basis of current data would be premature. Many indicators are quite preliminary at this time and will be revised in coming months.”

With even the experts uncertain about economic growth, it is no wonder consumers are still pessimistic about their future.

Harlan Green © 2010

The Mortgage Corner

First American CoreLogic just released its first monthly report on distressed sales, which are gradually improving. It also indicates that the recovery still has many bumps on the road to a sustained recovery. And Professor Robert Shiller, co-author of the S&P Case-Shiller Home Price Index, doesn’t yet see much light at the end of the tunnel.

The report indicated that distressed home sales – such as short sales and bank owned (REO) sales – accounted for 29 percent of all sales in the U.S. in January: the highest level since April 2009, reported Calculated Risk.

Professor Shiller has turned pessimistic of late, in part because real estate sales haven’t continued to improve from last fall, even though prices have stabilized. Existing-home prices hit bottom in May 2009, according to Case-Shiller’s 10-city index and have been rising since.

Shiller attributes his current doubts to what he calls “trends in news media coverage,” which help to mold conventional wisdom. The news is not good, in other words, what with the constant reports of mortgage defaults and distressed sales that have made very little of a dent in inventories.

The peak in distressed sales actually occurred in January 2009 when distressed sales accounted for 32 percent of all sales transactions. After the peak in early 2009, the distressed sale share fell to 23 percent in July, before rising again in late 2009 and continuing into 2010.

And it is the accumulation of distressed sales—whether short sales or foreclosures—that is helping existing-home sales, but decimating new-home construction and sales. There is an almost bottomless inventory of existing homes—at least 5 million loans (and so homes) have 90 day delinquent mortgages, according to Fannie Mae, that might soon come on the market as well. So it is only when the distressed share of sales shows a continuous decline will we know that real estate is on the path to recovery.

Of the 25 largest markets, California had the largest share. Riverside, CA, had the largest percentage of distressed sales in January (62 percent), followed closely by Las Vegas (59 percent) and Sacramento (58 percent) (Figure 2). The top REO (banked owned) market was Detroit where the REO share was 48 percent, followed closely by Riverside (47 percent) and Las Vegas (45 percent). San Diego’s short sale share was 19 percent in January, making it the highest ranked short sale market, followed by Sacramento (18 percent) and Oakland (16 percent).

Better news was the improvement in pending home sales, which rose in advance of the April 30 deadline for the home buyer tax credit. California recently added a $10,000 tax credit good through September to help boost first-time home sales. Indeed, there already is evidence of notable improvement in some housing markets as the National Association of Realtors, which compiles the data, reported multiple offers in some markets. The Midwest was the strongest market in February, jumping 21.8 percent, with the South, the biggest region, and the Northeast showing solid month-to-month gains, while the West declined.

Harlan Green © 2010

Popular Economics Weekly

One thing was clear from last week’s Financial Crisis Inquiry Commission hearings. Though extremely sorry, the main players—such as former Fed Chairman Alan Greenspan, as well as Robert Rubin and Charles Prince of Citibank—wouldn’t take responsibility, or return their rich payouts for helping to cause the financial market crash in 2008 that almost precipitated a second Great Depression.

Why the difficulty in pinning down who was responsible? Firstly, it hasn’t yet seemed to occur to them, or anyone, that they committed a crime. That in looking out for their short term profits, without considering the longer term consequences, what they did was indefensible. “The buck stopped there,” said one New York Times cartoon, implying some kind of group think caused the collapse and loss of more than $11 trillion in wealth, in spite of repeated warnings from underlings that much of Citibank’s mortgages were junk. “We all bear responsibility” was Rubin’s paean to the commission, as if he didn’t consider himself one of those responsible, even though he was Chairman of Citibank’s executive committee.

Secondly, no one seemed to even understand the consequences. A string of unprecedented financial innovations created institutions that “don’t take into account the kind of communities we want to build”, said economist Robert Shiller in a recent New York Times Op-ed. Yet as leaders of their respective institutions it was certainly their job to foresee any downside consequences. There were certainly precedents, such as the creation of extreme asset bubbles in Japan. In fact, the Federal Reserve had worried about Japanese-style deflation in the early 2000s, the result of Japan’s own busted real estate and stock bubbles.

On the contrary, the biggest players only saw the upside. Greenspan in fact trumpeted the advantages of exotic (and unregulated) derivatives that spread the risk more widely, that he thought lessened the dangers of default. Yet Greenspan of all people should have foreseen the crash.

I remember well that he encouraged risky mortgages by recommending adjustable rate mortgages as preferable to fixed rates because their interest rates were lower, even though he admitted at hearings he only borrowed at fixed rates! A housing bubble was most unlikely, he said, because home owners couldn’t buy and sell their homes like stocks. Their transaction costs were higher, the housing market was less liquid—and moving costs were considerable.

This was when the Fed had been holding down short-term interest rates in 2003-4 almost as low as today in a bid to fight Japanese-style deflationary fears, and boost a recovery that hadn’t yet added one net job from the end of the 2001 recession. Because inflation was so low then—below 1 percent—the cost of money was in fact less than zero, which made it advantageous to mortgage with little or no down payment.

Why could some of the “smartest guys in the room” so miscall the worst downturn since the Great Depression? Greenspan for one, a disciple of Ayn Rand, believed that free markets embodied the highest moral order (his words). What made it moral? Greenspan, as Ayn Rand, et. al., believed that free market forces were the most efficient and impartial allocator of resources. So when crises did occur, they functioned as a market clearing device, and any attempt to mitigate their effects only prolonged the adjustment to new circumstances. Such crises embodied the forces of ‘creative destruction’ and shouldn’t be tampered with, in other words.

This is why many conservative economists who decried the stimulus spending said “let the banks fail”, so that bad debt can be wiped out. Creative destruction—the replacement of failing businesses with more vibrant ones—happened in nature, so why shouldn’t it be allowed to happen in the urban jungle?

The problem was that Greenspan’s ideology was outdated, and had become group think. The invisible hand of Adam Smith was no longer sufficient to control market forces that had become complex beyond understanding. Bubbles were caused by ignorance of fundamentals, including fundamental market forces that could go easily out of control when greater risk taking was encouraged, with no limits on borrowing.

Household incomes had been steadily shrinking in real (after inflation) terms since the 1970s, except for a short while in the 1990s, so the housing bubble and easy credit encouraged many households to spend borrowed money to keep up their standard of living, a standard that was now beyond their means.

There was too much room for greed, in a word, or as Alan Greenspan once famously said,

“It is not that humans have become any greedier than in generations past. It is that the avenues to express greed had grown so enormously.”

A sustainable economic system has to take more than individual self-interest into account. It must also include the interest of future generations, which means the Captains of Industry-and government-have to be held accountable for those generations as well.

Harlan Green © 2010

Popular Economics Weekly

The March unemployment rate held at 9.7 percent, and 162,000 payroll jobs were added to payrolls. We believe this marks a turning point. Employers were hiring in all areas, including 48,000 temps hired by the Census Bureau for the 2010 population count. Even 15,000 construction jobs were added, with winter not over in many regions.

Barron’s Gene Epstein in a recent column says that manufacturing is leading the recovery at this stage, with the ISM index jumping to a “cyclical high” of 59.6 percent. Such a reading would translate to a 5.4 percent increase in Q1 GDP, after a 5.6 jump in Q4 2009. If in fact two such quarters of growth should happen (we won’t know until end of April), it will be a more robust recovery, rather than the subpar one currently forecast.

The service sector is not far behind as the ISM’s non-manufacturing index, at 55.4, shows solid month-to-month acceleration in March for the third month of growth in a row. New orders lead the report with a really hot 62.3 reading for the sharpest month-to-month acceleration in five years. Export orders are especially strong, jumping more than 10 points to 57.5, offering further evidence that demand strength out of Asia is pulling the global economy forward. Backlog orders are also rising, at 55.5 for a 9-1/2 point gain in the month.

The true measure of strength for consumers is the wages and salaries component of personal incomes, as we said last week, which jumped 0.4 percent in the latest month after edging up 0.1 percent in December. Both personal income and the wages and salaries component are still sluggish on a year-ago basis with personal income up just 1.1 percent in January and the latter component down 1.1 percent. But real, after inflation, personal consumption expenditures have in fact been improving since January 2009

The jobs picture provides a clue to the ‘U’ shape of this recovery. In fact, we could see a return to normalcy by December 2010, versus the 47 months it took to reclaim the 5 million jobs lost in the 2001 recession.

Though it may sound repetitious, so much of what happens in 2010 will depend on the consumer. Consumer spending is warming up with chain store sales rising 4.7 percent annually, but spirits, a reflection of the jobs market, are chilled. Reuters/University of Michigan consumer sentiment index slipped back in the mid-March reading to 72.5 vs. February’s 73.6. Both current conditions and expectations are down with expectations showing particular weakness. Expectations are the leading component and are pointing to extended weakness ahead. Inflation expectations are subdued at 2.8 percent one-year out.

All of this really means that 2011 could be the year real estate, which is most dependent on a job recovery, recovers as well.  The key will be to work off the excess inventory of so-called ‘distressed’ homes—possibly 5 million, according to Fannie Mae.  But even that number of potential defaults and/or short sales could drop if as we believe hiring picks up substantially this year.

Harlan Green © 2010

Financial FAQs

Behavioral Economist Robert Shiller in a recent New York Times Op-ed said, “We need to invent financial institutions that take into account the kinds of communities we want to build. And we need to base this innovation on an approach to economics that captures the richness of human experience—and not efficient-market economics.”

Dr. Shiller is one of many economists decrying the lack of sustainable financial institutions that have led to so many recessions, including the current Great Recession—sustainable institutions that build communities rather than destroy them. Their lack has been mainly because they targeted the wrong economic goals—productivity over sustainability, or efficient markets (i.e. markets with minimal oversight) over markets that attempt to sustain longer-term economic growth.

We seem to have mastered the means of production, as economist John Maynard Keynes predicted in his 1930 treatise, “Economic Possibilities for our Grandchildren”, yet not how to put such growth on a sustainable path that benefits future generations rather than indebting them. As the originator of an economic theory that advocated government support during the Great Depression, Keynes believed that markets did not cure themselves without widespread suffering. The “animal spirits” of a populace that was discouraged by prolonged unemployment had to be boosted by governmental job creation measures in order to boost economic growth, if private sector employers weren’t hiring.

In other words, most modern economic theory has concentrated on producing the maximum amount of goods and services (hence emphasis on efficient markets), but ignoring their social welfare aspects. I.e., how sustainable is such a system that venerates individual effort (i.e., self-interest), but ignores its results? When whole communities are destroyed by a succession of bursting asset bubbles—it was first the dot-com bubble in 2000, then real estate bubble, and now the credit bubble bust that has almost destroyed our banking system—then it is time to begin looking for a more sustainable economic system that preserves assets for our grandchildren.

Economists, sociologists and psychologists in particular are beginning to look at systems that capture the “richness of human experience” advocated by Dr. Shiller. One pioneer is economist Hazel Henderson, who helped to found the Calvert family of eco-friendly mutual funds. She also created the Calvert-Henderson Quality of Life Indicators (at http://www.calvert-henderson.com) that helps to measure what makes up a better quality of life. For example, its education component highlights why U.S. elementary education has flagged—the U.S. is ninth in the list of eighth grade math and science scores, for instance—behind nos. 1 and 2 Singapore and Taiwan, and what should be done to remedy it.

The research of behavioral economists such as Dr. Shiller are also debunking the efficient markets’ economists who generally advocate privatization (and deregulation) of financial institutions in the belief that individuals are the best regulators of their own behavior. Behavioral economists find that most people either do not have the time or knowledge to make intelligent financial decisions without some regulation to govern errant behavior. Former Fed Chairman Alan Greenspan once famously said,

“It is not that humans have become any greedier than in generations past. It is that the avenues to express greed had grown so enormously.”

Though private enterprise is the foundation of capitalism, and its source of wealth, we now know it only enriches the few without adequate regulation and governmental oversight.

And so Lord Keynes concludes, “The strenuous purposeful money-makers may carry all of us along with them into the lap of economic abundance. But it will be those peoples, who can keep alive, and cultivate into a fuller perfection, the art of life itself and do not sell themselves for the means of life, who will be able to enjoy the abundance when it comes.”

Harlan Green © 2010