While unregulated financial markets are a big problem, they are not the entire problem with the U.S. economy.
Or the world economy, for that matter.
The problem for the world economy is a shortage of clean energy, a crying shortage of clean energy which has been 30 years in the making. All our incentives have favored hydrocarbons, and alternatives have been given no fair chance.
Whoever finds a way to supply this demand will get very, very rich. So the whole trick of the next few years must be to re-orient our government’s financial incentives in favor of this new supply, and against older, unstable supplies.
In The Answer to All Fears I describe the economic process which must be set in motion, but below I’m going to give you the whole key to the thing.
It’s not a short-term deal.
Nothing aimed at the short-term is going to do you any good. Putting money in consumers’ hands just bids up limited energy supplies, and it’s lost in inflation. Cutting interest rates just cuts the dollar’s value and, since our energy supplies are imported, will also be lost in inflation.
We need long-term values, not short-term fixes.
Regulatory reform is a necessity, but it doesn’t have to happen in the U.S. It’s merely an opportunity. Whichever market offers a proper regulatory system, one that gives investors confidence, will soak up the world’s available capital. Even Dubai. You want the world’s financial system run out of Dubai? No? Then reform ours now.
Not that even reform will solve our current problems. Reform will give our economy, and our investors, a floor from which to build. But it won’t matter if we then proceed in the same direction we’re going now. Going back on oil after the price of oil falls is just getting back on the cocaine after going through rehab. Doesn’t matter if your new supplies are coming from Alaska or from oil sands — unless the system of energy supply changes fundamentally you’re just waiting for the next shock.
What this means is that, fundamentally, the idea of a laissez faire economy (which doesn’t really exist) has to be scrapped in favor of regulation which directs investment to long-term values, and which discourages investment in short-term values.
This is not the direction money usually wants to go in. Politics has to push it there.
So financial and economic regulation both have to follow the current recession. Making that happen is fundamentally a political choice. The current balance of opinion in the U.S., which most analysts see as temporary, must become a permanent re-alignment (or as permanent as political re-alignments get) in order to deal with our crisis.
I have suggested we think of this as a War Against Oil for just that reason. A war footing makes this priority — clean energy — permanent and pre-eminent. All other policies must follow from that central idea.
Win the War Against Oil and you secure the future. Fail to engage and you lose everything.
