After America

households with children was exactly the same, but the number of three-or-more-bedroom homes had doubled to 72 million. As the Baby Boomers began to retire, America had perhaps as much as a 40 percent over-supply of family-sized houses.⁹⁹ As Mr. Baker puts it, “People shouldn’t look at a home as a way to make money because it won’t.”¹⁰⁰

Oh. So what does that leave?

The “financial sector”? In the Atlantic Monthly, Simon Johnson pointed out that, from 1973 to 1985, it was responsible for about 16 percent of U.S. corporate profits. By the first decade of the twenty-first century, it was up to 41 percent.¹⁰¹ That’s higher than healthy, but the “financial sector” would never have got anywhere near that size if government didn’t annex so much of your wealth—through everything from income tax to small-business regulation—that it’s become increasingly difficult to improve your lot in life through effort—by working hard, making stuff, selling it. Instead, in order to fund a more comfortable retirement and much else, large numbers of people became “investors”—albeit not as the term was traditionally understood. Like homeowning, it was all very painless: you work for some company, and it puts some money on your behalf in some sort of account that somebody on the 12th floor pools together with all the others and gives to somebody else in New York to disperse among various parties hither and yon. You’ve no idea what you’re “investing” in, but it keeps going up, so why do you care?

That’s not like a nineteenth-century chappie saying he’s starting a rubber plantation in Malaya and, with the faster shipping routes out of Singapore, it may be worth your while owning 25 percent of it. Or a guy in 1929 barking “Buy this!” and “Sell that!” at his broker every morning. Instead, in both property prices and retirement plans, an exaggerated return on mediocre assets became accepted as a permanent feature of life.

It’s not, and it never can be. In Sebastian Faulks’ novel A Week in December, set during the great unraveling of 2008, the wife of a hedgefundy type muses:

The essential change seemed to her quite simple: bankers had detached their activities from the real world. Instead of being a “service” industry—helping companies who had a function in the life of their society—banking became a closed system.

Profit was no longer related to growth or increase, but became self-sustaining; and in this semivirtual world, the amount of money to be made by financiers also became unhitched from normal logic.

It’s one thing to have a financial sector that provides a means for wealth creators to access equity to advance economic growth. But, by the time you’re using the phrase “credit default swap” without giggling, by the time you’re trading not only in derivatives of derivatives but in derivatives of derivatives of derivatives (seriously), you’re several links unhitched from any tangible reality. Tom borrows money from Dick, who turns a nice profit by selling Dick’s debt to Harry, who covers himself against the risk of Dick’s failure to repay by insuring the debt with Nigel, who mentions it over lunch to Peregrine, who writes it up in his Moneywatch column as a sign that confidence is returning to the markets. Only when Peregrine brings it up with Ahmed, the affable imam who lives next door, does anybody rain on the parade. The Prophet Mohammed, among his many strictures, enjoins the believers to have no truck with the frenzied infidel trade in Xeroxed IOUs. Which may be why (in the financial sector’s in-house version of the demographic Islamization of Europe) the Age of Credit also saw sharia-compliant finance plant itself in the citadels of the West.

We’re in a worse state than Jonathan Swift’s banker—we cannot reliably say who has our bonds and therefore our souls. Thanks to the packaging, repackaging, subcontracting, and outsourcing of even routine mortgages, millions of home “owners” have no idea who really holds their property or the terms by which they can be expelled from it. And nor do the banks.

According to the Office of the Comptroller of the Currency, by 2010 the U.S. financial system “owned” more than 230 trillion dollars’ worth of derivatives—or about four times the entire planet’s GDP.¹⁰²

It was Polonius who advised, “Neither a borrower nor a lender be,” and America at the dawn of the Obama era was approaching that blessed state.

A man who borrows $400,000 for a house he cannot afford isn’t really a “borrower,” is he? After all, by 2008 every politician agreed that the priority was to keep people in “their” homes, and the Congressional Progressive Caucus was soon calling for a “moratorium on foreclosures,” which is a polysyllabic way of saying there’s no need to make your monthly payments.

In what sense then is such a man “borrowing”?

And the banker who loaned the 400 grand isn’t a “lender” of anything terribly real, is he? Not in an era of banking as performance art. “We refused to touch credit default swaps,” the author and investment adviser Nassim Taleb said. “It would be like buying insurance on the Titanic from someone on the Titanic.”¹⁰³ But a lot of people did just that. The Canadian commentator Jay Currie, waxing lyrical, put it this way: “If two people make a bet on the fall of a raindrop and each puts up, say, their shoes, the bet is a real bet. If they put up cash it is very close to a real bet. IOUs are not much of a bet. Someone else’s IOUs? Still less of a bet. A good deal of imaginary money is going to money heaven, which is sort of like saying that your stuffed animal is dead.”¹⁰⁴

Except that many people made real-world decisions with their dead imaginary money. You thought the house you bought for a hundred grand was now worth a quarter-mil and so you took out a home-equity loan to buy a camper or to send your kid to private school. Your stuffed animal has died, but you’ve still got a real vet’s bill to pay.

And then, just to pile on, the government steps in to replace all that dead imaginary money with real (or realish) money. Having, in effect, colluded in the destruction of meaningful risk-evaluation, Washington decided it was obliged to act—not to prevent a Thirties-style “credit crunch” but to prop up an unsustainable form of mock credit that had led to the crisis in the first place. The state’s response to the downturn was to insist that we needed to re-inflate the credit bubble. If someone punctures your balloon, you can huff and puff into it all you want, but you’re never going to get it up in the air again. The Obama administration blew a trillion dollars of “stimulus” into the punctured credit balloon, and it flew out the gaping hole in the back, dropped into the Potomac, and floated out to sea.

“Borrowing,” continues Polonius, “dulls the edge of husbandry”—and that goes double for government, whose husbandry is dulled in the best of times. The state spends too much. So the individual spends too much. The state hires too many people on whom it lavishes too many benefits. So those foolish enough to remain in the private sector have to pay for the benefits of the public sector, and fund both their basics (housing) and their baubles (plasma TVs) through debt. At the start of the Reagan administration, America was the world’s largest creditor nation and its citizens had a 10 percent savings rate.¹⁰⁵ Not today: By 2007, the average U.S. household had debts equivalent to 130 percent of income.¹⁰⁶ Keynes’ view of the economy derived from the premise that a government treasury was not a family purse, and so the state, unlike the household, could borrow to “invest.” Now, the family purse has caught up: Governments and individuals alike borrow extravagantly —and to “consume” in the most transient sense rather than invest in anything meaningful.

SLOW BOAT TO CHINA

The intellectual cover for America’s structural deformation was provided by “globalization.” Some of us have always been in favor of the “global economy.” If I want to buy a CD or a sofa, I don’t think it’s any business of the government whether it comes from Cleveland or Milan or Ougadougou.

As Adam Smith and John Stuart Mill will tell you, free trade has been indispensable to economic vitality from the Netherlands to Bengal. But you no longer hear much about “free trade.” That humdrum, prosaic supply-and- demand concept yielded to a glittering new coinage: “globalization,” less a commercial mechanism than an ideology.

But what does this mysterious metaphysical force called “globalization” actually boil down to? At the end of 2008, a few weeks after Barack Obama’s historic election, the media reported on America’s Christmas shopping spree. “Retail Sales Plummet,” read the headline in the Wall Street Journal.