Gelf Magazine - Looking over the overlooked


January 19, 2009

Daniel Gross Will Burst Your Bubble

A veteran business writer speculates on the American economy.

Max Lakin

Since our glorious American empire started crumbling, the hordes of "financial experts" prognosticating the end of the Free World and clogging up the news cycle have been plentiful. They range from loud and manic (Jim Cramer) to loud and neon (Suze Orman). Mercifully, Daniel Gross has neither the crazed rantings of a street-corner preacher or the phosphorescent wardrobe of your Aunt Linda.

Photo © 2007 Alison Wachstein
"The financial sector is endlessly innovative. A new fad will pop up soon, but it won’t necessarily originate with the existing banks."

Photo © 2007 Alison Wachstein

As a senior editor at Newsweek and author of the biweekly Slate "Moneybox" column, Gross dolls out cool, even-keeled ruminations—assets that, much to our detriment, have not been embraced with the same enthusiasm of mortgage-backed securities. Gross also is the author of Pop!: Why Bubbles Are Great For The Economy, and Gelf spoke with Gross about the makings of the present fiscal calamity, why we're almost out of the woods, and why you should find yourself a good Ponzi scheme. This interview has been edited for length and clarity. You can hear Gross, along with Amit Chatwani and Katy Lederer, at Gelf's Non-Motivational Speaker Series in New York on Thursday, January 22.

Gelf Magazine: Along with the "official" declaration last month that we've been in a recession for a good year, we've read estimations of an upswing as soon as summer blockbuster season, and as late as when our grandchildren get iPhones embedded in their faces. Where do you place the light at the end of this dank hovel we've dug for ourselves?

Daniel Gross: There's one thing that's clear about the recovery: It won't start when all the economists say it will—i.e. in the second half of this year. And if it does, it'll be only because of dumb luck. I say this because professional economic forecasters never, ever call turning points in the economy. A year ago, when the economy was already in recession, they projected growth for 2008. In late 2001, when the economy was about to lurch back into gear, the forecasting groups projected negative growth for the next several quarters.
I actually think there's a case to be made that things could start to get better sooner rather than later. The reasons: regime change in Washington, and the arrival of competent people at the relevant federal agencies; an Obama effect of rising consumer confidence; actual policies that make people feel more secure (such as expanding children's health care); massive stimulus; and the nice nudge we all get from falling gas and commodity prices. So it's possible—barring further ridiculous failures in the financial system—that things stabilize and start to turn up in the second quarter of 2009.

Gelf Magazine: Speaking of Obama, you frequently mesh finance and politics in your columns. How much better off do you figure we are economically because we don't have to worry about Cindy McCain decorating the Oval Office with cacti?

Daniel Gross: Much, much better. To call the McCain financial policy crowd a clown show would be an insult to hard-working clown shows everywhere. McCain doing something rational on the economy would have required him to jettison campaign promises about taxes and spending, and to work closely with the Democratic-controlled Congress.

Gelf Magazine: What do you make of Obama's economic team so far: Larry Summers, Christina Romer, et al? What about Timothy Geithner, whom you called a "career technocrat" and who is inheriting arguably the worst job in the country since Bush's press secretaries?

Daniel Gross: The team is very impressive—they have great academic credentials, and they generally have exhibited competence in real-world situations. Of course, there were plenty of people with good credentials in the Bush economic team—a bunch of highly respected economists and former CEOs. And they screwed things up mightily. I think in the past eight years, incompetence kind of trickled down from the Oval Office into the agencies, infecting a lot of smart people. The most important member of the crack economic team is Obama himself. The economy isn't the area I think he necessarily gets instinctively, but I think he's smart enough, he's good enough, and, as the incoming junior Senator from Minnesota used to say, people like him. Geithner has a tough job. But things are so screwed up they can't get much worse. Can they?

Gelf Magazine: Don't jinx it. Still, a lot of fanfare has been made of Obama's first 100 days. What can we realistically expect within that space and how long do you figure it will take to see some tangible resurgence?

Daniel Gross: I think we can expect a fair amount. We're already going to get an expansion of children's health-care coverage. The public will realize that things Congress had to argue about endlessly in the Bush years will come easily and with little drama. I think we'll get a big stimulus package in the first 100 days, and maybe some changes in the way the foreclosure process works, and in the way the bailout funds are spent. And some extended unemployment benefits. Those are the main areas to look for. I believe, and hope, that these efforts will increase consumer confidence. But for a resurgence to take place, we need the private sector to pick up some of the slack—or, at the very least, to stop blowing up every few weeks. It's difficult right now to see what are going to be the one or two sectors that help pull us out and start creating lots of jobs.

"The most important member of the crack economic team is Obama himself."
Gelf Magazine: What about Wall Street? Has the bleeding stopped?

Daniel Gross: Wall Street? What's that? The financial-services sector has basically destroyed itself. It's not polite to say, but many of these big institutions are basically insolvent and wards of the state. The bleeding hasn't stopped. There will be plenty more. Every kind of debt is going bad—mortgages, car loans, student loans, consumer loans. That won't stop until the job market stabilizes.
We've just gone through an era of what I call "Dumb Money" (in fact, it's the title of an electronic book I've written that's coming out next month) and the after effects are likely to linger for some time.

Gelf Magazine: So is the Gordan Gecko era of excess over, or are the banks poised to come back stronger…eventually?

Daniel Gross: Lets call it the Steve Schwartzman era of excess—he's the CEO of the Blackstone Group who personified the hedge fund/private-equity mentality. Many of those excesses—the use of ridiculous amounts of cheap and easy and stupid credit to mint money—are done. The banks, especially the investment banks that behaved like hedge funds, aren't coming back anytime soon. Hedge funds have been humbled and are losing assets. The financial sector is endlessly innovative. Money still needs to be managed, even if there's less of it around. A new fad will pop up soon, but it won't necessarily originate with the existing banks.

Gelf Magazine: Speaking of popping, in your latest book, you outline why, in fact, bubbles are good for the economy. Can you provide our loyal readership with a survey of this seemingly counterintuitive logic?

Daniel Gross: The basic argument is that bubbles are how Americans create new types of commercial infrastructure, like the railroad or the internet. Unlike the European countries, we didn't rely on the government to do it. Instead, frequently with government encouragement, we whipped up frenzies surrounding a crazy new technology and all the riches it could create. People went out, raised tons of money, and built new infrastructure recklessly. Too much gets built too soon, and it generally ends in tears.
But—and here's the but—America being America, we process failure quickly. New owners step in, the infrastructure stays up, and people figure out new types of heretofore unimagined businesses that work really well on the new infrastructure. In the 1890s, a railroad boom ended badly, bankrupting many railroads. But with rail freight suddenly cheap and pervasive, businesses like mail-order retail (Sears, Montgomery Ward), tourism, and branded national processed-food products (Bud, Coke, Campbell's) made sense. With the internet, think about how web 2.0—Google, Facebook, MySpace, iTunes—were basically built on the wreckage of the dotcom revolution. So bubbles that leave behind useful commercial infrastructure wind up being useful.

Gelf Magazine: The housing bubble would be the last notable bubble of record, correct? Gelf is kind of a humanities major, so forgive us if we miss the silver lining to that one.

Daniel Gross: The bubble in housing and housing-related credit doesn't fit as neatly into this scheme because it didn't produce a new type of commercial infrastructure. Lots of housing, and the machinery for refinancing, yes—but there's not a lot there that we can build on. A few things we can keep, however: (1) the refinancing mentality. A lot of people did quite well refinancing from fixed rate to fixed rate during the boom years, and will do so again in this cycle. (2) some of the services that arose during the bubble stick around—like Zillow or Domania—that make people, in theory, smarter and more empowered consumers.

Gelf Magazine: What do you expect the next bubble to be? You've touched on the health-care industry in a recent Moneybox column.

Daniel Gross: In Pop! I mention that the next bubble, parts of which may already have popped, is alternative energy. Bubbles are as much a social and cultural phenomenon as they are financial ones. And we've seen in the past few years many of the same cultural developments and attitudes surrounding alternative energy that popped up during previous bubbles.

Gelf Magazine: Can Ponzi schemes extend into the bubble party? They seem similar in design and post-collapse decimation.

Daniel Gross: Absolutely. Ponzi schemes are part and parcel of the bubble mentality/culture. Bubbles, like Ponzi schemes, are all about irrational belief that good things will always happen to investments. So people are more likely to be coaxed into Ponzi schemes during bubbles, and Ponzi schemes are more likely to swell to epic proportions during bubbles. They both require prolonged years of massive suspension of disbelief.

Gelf Magazine: At the risk of verging into Jim Cramer hysterics, what's your indispensable advice on weathering this climate?

Daniel Gross: Find a life partner: husband, wife, domestic partner, whatever. It doubles your chances of getting benefits.

Max Lakin

Max Lakin is a writer and journalist based in New York.

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Article by Max Lakin

Max Lakin is a writer and journalist based in New York.

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