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Does the current financial meltdown prove that our economy is based more on just smoke and mirrors and not on true productivity?


Question/Comment: Paul: Does the current financial meltdown prove that our economy is based more on just smoke and mirrors (risky investments) and not on true productivity (ie. goods and services)? And what will be necessary for our economy to truly grow so my children have a chance at a decent standard of living. Thank you

Paul Solman: Risky investments aren’t smoke and mirrors. The Ford Motor Company was once a risky investment. (Come to think of it, it is again these days.) How about eBay or Google?

I think you mean something like “pure speculation”: credit default swaps, for instance. But even these aren’t necessarily smoke or mirrors. They’re ways of transferring risk, and that can be productive. (See our Enron farmer piece)

The problem is that the financial sector of the economy seemed to become the most profitable, thus attracting the brightest college grads, the most capital. It got bigger and bigger, more and more competitive. Its ways of “transferring risk” became ever more complex and thus more difficult to understand.

But the same thing could conceivably have happened in a sector of the economy that MADE things. Suppose the same portion of the U.S .economy devoted to finance had instead invested its capital, its best and brightest minds, in Time Travel Machines — because of supposedly new discoveries in string theory or something. (Bear with me here; I’m just trying to make a point.) And then someone discovered, after gobs of jobs and zillions of dollars, that time travel isn’t actually possible. We might well have the same kind of economic crisis we’ve got now. With hunks of junk (machines) instead of junk securities.

Fancy finance may be more vulnerable to excess than mundane manufacturing (though the auto industry might suggest otherwise), but I’d focus more on the excess than the industry.

As to our children (and grandchildren), they’ll probably have somewhat more than we do. Maybe they’ll even build time machines. But even if they don’t, compared to the past, they’ll probably have a pretty good deal.

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