Web Extra: Economy on FIRE and in debt
April 8, 2009 (Corey Pein - Santa Fe Record)

In this week’s article on Thornburg Mortgage, I quoted former venture capitalist and author Eric Janszen on whether the housing crash that ultimately claimed one of Santa Fe’s largest employers could’ve been predicted or not.

Our phone interview ranged too far for that article, but we thought Janszen’s thoughts on capitalism’s boom-bust cycle and the rise of what he calls the “FIRE economy”—for finance, insurance and real estate—were worth sharing at length.

Basically, he thinks the government started selling everybody out to big creditors decades ago, and the massive debt burden that resulted has paralyzed the economy.

Janszen, who lives in Boston, also has some thoughts on the federal recovery plan, with its focus on “green jobs”: “How many unemployed mortgage brokers does it take to screw in a compact fluorescent energy-saving lightbulb?” he asks.

You write the punchline.


I liked your Harper’s article on the housing bubble.

Thanks. It seems to be panning out.

That was back in early 2008, when many people hadn’t yet grasped the extent of the subprime mortgage crisis. But you went so far as to predict the next bubble—green energy.

I’m actually working on a book on that. So far it does seem likely to focus on infrastructure.

The refrain I keep hearing was that nobody saw the real estate crash coming. You say people could’ve seen it coming.

Many people did, of course. And many people who did made money on seeing it coming. It wasn’t all that hard. There were a few fantasies you had to not buy into. One is that housing prices always go up, and stock prices always go up.

If any other product was sold based on those premises, you’d think people would be somewhat skeptical. It’s pretty marvelous to convince so many people of something that can’t possibly be true.

Was the bubble contingent on people not understanding what these financial institutions were selling, with mortgage-backed securities and so forth?

They don’t even understand that they are products. They think they’re a guarantee of something—that if you put money in the stock market, you’re saving.

These are financial products. Houses are products. Mortgages are products.
And you say regulations have been written in the finance industry’s favor over the years?

Starting with Reagan, under the banner of free markets and low taxes, with the tax relief act of 1981. If you look carefully what it was was the Debtor Creation Act.

The idea was to free up money that used to go to paying taxes to finance public projects—what some economists called the fourth factor of production, the infrastructure, the highways, what all industries need to be efficient, and move people and products.

Now we spend all our money on servicing debt. That’s what we do in this country. All this nonsense about trying to cut taxes was really to make room so you could take a good chunk of cash flow out of all these corporations and [give it to banks].

Can you put today’s economic situation in a historical perspective? Is there any parallel?

More than one-quarter of all homes have negative equity in the US. That’s a bad problem. But there’s a worse problem developing.

I refer to the American housing market as “the big slum.” A slum is where the market value has fallen below the replacement value. It doesn’t make sense to fix anything. You don’t fix it, you just let it go to hell. There’s no way to get your money back.

So in a tangible sense, the country is falling apart?

Yes. I just got back from a trip to Florida. I’ve been going down there for 20 years. It’s pretty striking. In Miami, South Beach, 20-30 percent of the businesses are out of business. Hotels, restaurants are boarded up with “for lease” signs. You can basically see the area is not doing well.

What’s happened is, we had this finance-based economy that was very dependent on continuous debt creation. That’s suddenly dried up.
Have we had an economy like this in the past? Yeah, we did in the 1920s. more...

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