Over-leveraged

If you want to read an early forewarning about the collapse of Wall Street and the economic troubles we all now feel and see, try this by Nouriel Roubini. It is his written testimony to Congress way back in February of 2008, before the first bank implosion (Bear Stearns). It is a bit out-dated now, referring to oil in the $100s. But this guy had a good sense of what was to come before it came. Had his knowledge been a greater part of recognized knowledge, our country could have begun a process of planning for the current mess. Instead, we were behind the curve.

A hypothesis of mine is this: American leadership over the past 20+ years has not done a good job analyzing and preparing for a wide-range of possible consequences -- specifically, unintended consequences -- that would result from their actions. The government actions that define the current era -- like expanding the money supply, cutting interest rates, depreciating the dollar, deregulating markets, undermining the tenability of unions, and financing our debt by integrating our economy with China and others -- have led to incredible growth, as they were intended to do. But have these actions created a basis of growth that was sustainable? Events seem to suggest no. And instead of admitting that and preparing a Plan B for the inevitable time when plan A hit the end of its road, have we now come to a point we must adapt to a world not of our own making and not in our interests?

The question is, how prepared are we for this moment when America must 'de-leverage.' De-leveraging means, in a nutshell, returning our debt-income ratios back to sustainable levels. For the past three decades, we -- the country, families, organizations -- have steadily increased the level at which our operations are paid for with credit. For a significant part of the country, and collectively as a country, this credit is no longer there. De-leveraging means we are going to find out we are not as rich today as we thought we were yesterday. The current economic downturn is different than a normal recession in the sense that the contraction itself is not the main story. The main story is the possibility that we may be upon a structural adjustment of the economy away from credit to some other basis of growth.

In the 1970s the great sociologist Daniel Bell predicted economic growth would increasingly come from knowledge. He was right, in a sense. It takes a whole lot of knowledge to create and package debt into forms that look like wealth. But the story of our economic growth the past few decades is the debt, or credit, not the knowledge. In fact, one of the untold consequences of the Wall Street collapse is the speed at which a whole lot of financial knowledge went poof, disappearing into thin air.

But maybe Prof. Bell's vision of a country of theoretical knowledge workers spending their 9-5s hard at work creating socially useful products will still come true. Maybe that's what this 'green economy' is all about.