BASIC ECONOMICS

(The following are the opinions of the author, and are subject to debate.)

The economy of the United States can be considered as divided into three fundamental structures:

1. Making things, so we and others can purchase them. The value added by American workers comes back to them in the form of wages and benefits, and to the stockholders in the form of profits.

2. Doing things, providing services which make it possible for others to make and sell things. This includes tasks which may not be involved in making and selling, but are needed or desirable for quality of life. For the services, fees are charged which are used to pay wages and benefits to the service providers.

3. An overlying structure which neither makes things or provides services directly related to making things. They are the money manipulators; banks, stock brokers, mortgage bankers, insurance companies, etc. In theory they are the traffic cops of capital. Their role is to gather funds from investors,and use those funds to provide capital to the firms that make things or do things. All three structures rely on the ability of the public to buy things and services.

In the interests of lowering costs and maximizing profits the "making things" structure has shifted manufacturing operations to lower labor cost venues. The reduced product costs has not compensated for the loss of purchasing power by the displaced workers. Voila, a lower GDP!

The money managers discovered that they could get obscenely richer, quicker, by manipulating investment vehicles than in the traditional role of providing capital to the makers and doers. So we got derivatives, sub-prime mortgages, securitized mortgage loan portfolios---a poisonous porridge of investments that contained the seeds of its own destruction. Those seeds have now blossomed, with a vengeance.

Bailouts are not a solution. They will only prolong and exacerbate the destructive process. Only a return to traditional business models, properly supervised, will solve the problems. That will take a long time and cause a great deal of pain. Are we up to it as a nation?