Pop Philosophy

Welcome to the 21st Century

 

Decades and centuries don't tend to start on time. The 1960s arguably began in late November, 1963, on the day John F. Kennedy was shot. His assassination was the first in a series of tumultuous incidents that dominated that decade socially and politically. Similarly, the 20th Century probably started with a seemingly inconsequential event, when Henry Ford launched his Model T car in 1908 giving us both the assembly line and the automobile, and changing our world forever. 

I believe that history will record that the 21st Century actually began in the autumn of 2008. Two milestones, one economic and the other political, mark its' starting point. The first was the September Wall Street collapse, the after-effects of which we are still feeling. In the days and weeks after Lehman Brothers declared bankruptcy and the Dow Jones Industrial Average fell an almost apocalyptic 777 points, markets the world over roiled with volatility, Iceland declared bankruptcy and governments scrambled to nationalize their banks. Experts almost instantly recognized the new nature of this challenge. Harvey Pitt, a former SEC Chairman, pointed out last month that part of the problem lay in the fact that "we've got a 21st century financial services marketplace and a 19th century regulatory model." Alan Greenspan, the former Chairman of the US Federal Reserve, characterized the chaos as a "once-in-a-century credit tsunami". All this confirmed the unprecedented scale and global scope of the storm, but also served notice that we were at an economic inflection point.

The financial crisis in turn affected the direction of another key contest. Barack Obama's election on Tuesday - widely credited, in part, to his calm reaction to those events - put an exclamation point on the start of a new century. One need only look at the emotional response to his victory to see why: a new US president has never elicited more interest and engaged more people across America and around the world. On those merits alone, it would have to be considered consequential. However, the true seismic impact of Obama's selection can be felt even more in its symbolism.

In some ways, Obama represents an idealized but contemporary reflection of the country he will soon lead. The Obama brand values of youth and cosmopolitanism find their echo in the real world. Today's America is being driven by younger and more multi-cultured influences. The 'Greatest Generation' of World War II, and the Baby Boomers who followed them, had produced every president since Eisenhower. On Tuesday, that torch was passed to a leader of a new generation, but also to a large swath of the electorate - the so-called Millennials - who voted for the very first time.  Young people weren't the only segment instrumental in putting Obama in the Oval Office: his support among African-Americans and Hispanics played an enormous role as well. Both these groups will grow in influence in the decades to come. By 2050, census projections indicate that the US will no longer be a predominantly white country. Yesterday's generational and ethnic minorities will become the governing majorities of tomorrow, and Obama's election anticipates that reality before it has actually happened.

 

Barack Obama represents America not only as it wants to be, but as it will be. The same can be said about the rest of the world, however. The US might be the first majority white country to elect a member of a visible minority as its' leader, but it will surely not be the last. As a result of globalization and population shifts, politicians of mixed ethnic identities will certainly surge into power and prominence in the coming years.

Famed science fiction writer William Gibson once wrote that "the future is already here. It's just not widely distributed yet." With the advent of the first global financial crisis and the election of the first multicultural American president, I believe that we have glimpsed the future and are simply waiting for it to become more commonplace. In that sense, then, we truly have turned the page on one era and have started something new.

Centuries don't begin on a calendar so much as they turn on inflection points in history. We experienced two such events this fall, and they signaled economic and political changes that will reverberate for decades to come around the world. Welcome to the 21st Century.

Forget the Economy - the Fundamentals of our Society are not strong

The financial crisis of the past few weeks has completely changed my life. 

The clang of the 4 pm NYSE Closing Bell is now as familiar to me as the theme to Hockey Night in Canada.  I follow the (rare) ups and (sadly regular) downs of the Dow like some of my friends fret over their Fantasy football stats. I watch CNBC like I used to watch ESPN (Dylan Ratigan is the new Tony Reali, and I have a major crush on Erin 'easy on the eyes' Burnett).

That's the fun part. More ominously, these past few weeks seem to have aged me in a policy sense. At the risk of sounding like John McCain (for the record, I have already voted absentee for Obama, would like to think I'm not that old, but I am cranky), I've come to believe that our society, and not just the economy, is in crisis. As bad as the financial situation is, it appears to be the symptom of a more serious disease: a cancerous consumerism, fueled by the steroid of cheap credit, coursing through the bloodstream of contemporary North American society.

If we stop for a second and look beyond the finger-pointing regarding the current housing bubble | mortgage backed securities | banking | credit crisis, there's a deeper cause for concern here. While the above heavily contributed to the sad state in which the economy finds itself now, the groundwork for this debacle, I believe, was laid decades ago in the steady erosion of sound fiscal but also personal values.

The decoupling of the previously twinned notions of 'work' and 'money'

Too many people have gotten the notion that 'money' and 'work' are only remotely (and not causally) related.  Many factors contributed to this impression over the years, from technological as well as behavioral changes. 

It used to be that employers handed out or, at minimum, mailed pay checks every two weeks. Not any more: today, we receive electronic wire transfers and the money magically appears in our accounts. This simple change has blurred the bond between work and pay; rather than linking units of labor with units of currency, there now seems to be a degree of distinction between the two.

Money also comes out of a hole in the wall nowadays, but it might as well be falling from the proverbial tree; I'm speaking, of course, of the ATM. Yet it has essentially the same effect of abstracting the provenance of money, and thereby attenuating its' intrinsic value. Moreover, cash is no longer king and practically no longer current. In North America and even more so in Europe, we are methodically moving towards a cash-less society. Everything, it seems, can be paid by credit or debit cards today. I know people who don't carry cash at all now that many taxis in NYC and London take cards as well. Finally, the emergence, then expansion of e-commerce and online shopping (a vice that my girlfriend just discovered, much to my dismay) has, for its part, further removed the physicality and proportionality of spending money. Whether you're buying a book or a round trip ticket to Bali, the experience is identical and equally ethereal. Spending money is now a virtual experience, mediated by technology and frictionless transactions (more on this later). The net effect of all this is the decoupling of the previously twinned notions of work and money, but also between cash and consumption. Today, it's possible to spend money without thinking of work, and to consume without spending cash. These may seem like insignificant psychological changes, but I suspect that they've had a lasting effect on how we actually behave as economic actors.

The loss of commonsense values in the living room and the board room

The change in consumer psychology and behavior is not the only critical factor worth noting. North Americans seem also to have loss their common sense. If you'll bear with me while I perform a quick ratio analysis of key economic indicators, you'll quickly see what I mean.

In 1975, the median American annual salary was $11,800 ($39,302 in real, or today's, dollars as adjusted for inflation) while the average house price was $38,940 ($132,000 in real dollars). This meant that the income to cost ratio of home ownership was 1 | 3.3. In other words, the typical house cost the average (one-wage earning) family 3.3 times their annual salary.

Today, salaries have risen slightly to $48,201(a 23% increase from 1975), but median house prices have more than quadrupled to $275,000 in 2006 (real dollars again). The ratio is now 1 | 5.7, almost twice the size as it was only thirty years earlier. While we should factor in that today many households have two incomes to put towards buying a house (because increasingly both parents work), it's also clear that families these days need two paychecks to make these particular ends meet.

What do these statistics tell us? That in three short decades, wages grew anemically while housing prices grew astronomically. This is evidence of a bubble, certainly; however, it also points to the fact that most home buyers never looked critically at the market 'value' of their properties and questioned whether the seemingly inexorable rise in prices was sustainable. It clearly was not, as we started learning in the second half of 2006, when housing prices in the US started to taper. Many, if not most people, looked the other way because they were among those getting richer as their homes (the main asset in most households) rose in value. This may explain the behavior, but it does not excuse their collective irrational exuberance (to use Alan Greenspan's infamous phrase); this was a clear failure of common sense.

We probably don't need another example, but let's investigate one more metric anyway - namely the hotly-discussed topic of CEO compensation. How did it become acceptable to regular folks that the average chief executive was paid $10,982,000 a year in 2005, while the typical employee that year took home $41,861?

The following statistic, from an article last month in the New York Times, further crystallizes the point: "In 2007, the total compensation of chief executives in large American corporations was 275 times that of the salary of the average worker, the Economic Policy Institute, a liberal research organization, estimates. In the late 1970s, chief executive pay was 35 times that of the average American worker." 

Clearly, the pay scales swung completely out of balance in those three decades. On its' own, this would be a shocking development. Taken with the inflation in house values, however, we see that people simply took leave of their senses through much of the last 30 years. On the way to CEOs getting ridiculously rich and the middle class buying their McMansions, no one stopped to think whether this era of unprecedented economic expansion was built on strong fundamentals. Sadly but perhaps not surprisingly, the bill for this spending spree came due this September with the current crisis.

The Instant Gratification Generation and the twin ills of e-commerce and easy credit

So North Americans collectively took a vacation from economic history and assumed that markets would continuously rise. This isn't the first time it's happened, nor probably will it be the last. But there's an even deeper rot in our society, one that worsened the impact of our greed and stupidity. The simple values of earning money and delaying gratification have been eroded today. The US has the lowest savings rate in the Western world. The idea of 'saving for a rainy day' is a quaint anachronism. Why save and shop tomorrow when you can borrow and buy today? We live in an economy that depends on, if not demands, a consumer culture based on spending someone else's money.

On a macro-economic level, the system requires easy credit and care-free consumerism to thrive. The entire US economy has been propped up for years by the unfailing willingness of its citizens to consume like there were no consequences. In order to facilitate this, the Fed has maintained what were, in retrospect, almost criminally low interest rates. This ensured that everyone had access to cheap credit. 

On a commercial level, technology and industry cooperated to create a near-frictionless purchasing environment. Go to a big box electronics store and you'll be bombarded with offers to buys TVs "no money down, and no interest until 2010". Back in the day when people shopped by catalog, you paid right away and received the desired good later. That script has been flipped. There are literally no road blocks, let alone speed bumps, to buying any more: merchants allow you to take home today but pay tomorrow - and when "tomorrow" is not next month but next year, it seems even more distant.

Then there is the credit card. Its' very existence makes consuming an abstract, almost effortless exercise. Buy now and get the bill 30 days later. Purchase and cost are almost completed decoupled. When you swipe your card, it doesn't even seem real - as if it's happening in a video game as opposed to real life. Reality may intrude later, when you receive your bill. But even then many people pay their bills online, so the payment process is equally mediated. You've been sucked in to the money Matrix.

Here's a thought experiment:  the next time you buy a big ticket item - say a TV or an expensive purse - imagine purchasing it instead by withdrawing the cash rather than slapping down the card. In theory - and in pure economic terms - the two acts should be indistinguishable, because money is fungible. It makes no difference to the merchant what form it comes in (pace the credit card transaction cost, of course). But it makes a HUGE difference to the consumer. Would you feel as comfortable with the purchase if you watched the clerk count out the twenties in front of you while you waited?

Ubiquitous credit has almost certainly corroded our values. But that's not the only economic evil that tempts us today. We now have to contend with the malevolent effects of e-commerce in addition to easy credit. Have you ever shopped on Amazon? The exercise of browsing and buying is so streamlined that you're almost surprised to see something turn up at your door in a few days. Don't know what to buy? Check your wish list. Not sure you'll like it? Be persuaded by the reviews. Ready to check out? Not until you've been flashed recommendations for further shopping by Amazon's supersmart algorithms. All set to push the button? That's all you have to do, with their patented one-click purchasing system.

Easy buying doesn't just exist online, though that's probably where we find the the frictionless shopping experience in its' highest art form. Brick and mortar shopping is pretty damn easy, too. Have you been to McDonalds lately? "I'll have a Number 3 combo, please." How about ordering at Applebee's, or Montana's? You don't even need to read: just point to the photo in the menu and you're all set. At Starbucks, you don't actually require cash or credit: your own coffee debit card will do.

Getting the picture? The net effect is that it has become too easy to buy. But that's the point, isn't it? Merchants and Madison Avenue have colluded, if not conspired, to make it oh-so-simple for us to spend. And therein lies a major part of the problem. Unfortunately, it's only half of it.

We don't produce anything anymore: the modern economy is based exclusively on consumers spending borrowed money

I've tried to demonstrate how the demand side of our economy has lost much of the common sense that used to characterize consumers just a generation ago. But the blame doesn't all belong on that side of the ledger. The supply side of the economic system has become equally dysfunctional. Over the past two decades, the drivers of the North American economy have not been better products but increasingly bigger bubbles: first the tech and telecoms magic carpet ride in the 1990s and, more recently, the housing one that just burst last year.

Instead of leading the world in producing cars (GM was passed by Toyota this year as the globe's number one automaker, and is rumored to be perilously close to bankruptcy), the US' most recent contribution to the world economy has been the quiver of complex financial instruments that Wall Street used to create ostensibly 'risk-free' leverage. These tools - from securitized debt vehicles to credit default swaps - are so arcane that the supposedly brilliant heads of these financial services companies could not even comprehend them.

They were created by the so-called Numerati. It sounds like a term borrowed from The Da Vinci Code, but actually they are the mathematical modelers who washed over Wall Street in recent years and gave rise to this financial engineering. The resulting products were positioned to be perfectly hedged against downside risk, but no one knew for sure. The CEOs who invested billions in them were either not smart enough to realize the actual risks, or more likely making too much money to worry about it. Their greed - and stupidity - put the financial system in unnecessary peril with what amounted to completely unregulated but legalized gambling. As incredible as it now seems, banks were allowed to make and take bets that bookies in Vegas would balk at.

These so-called derivatives were not the only big wagers these institutions made, sadly. Too many banks lent money to people who had no business borrowing. The 'sub-prime mortgage' is a very anodyne way of describing the phenomenon of banks and other lending institutions (Fannie Mae, Freddie Mac) loaning money to borrowers who fall outside the normal pool because of their poor credit history or insufficient income and collateral. This can work - for a time - when house values only go up, as the banks holding the 'paper' on these homes have a lien against an asset whose worth is rising. Even if the borrower can't make the mortgage, the bank has made money, theoretically. But like any financial scheme, there are risks. The house of cards came down as soon as people started massively defaulting on their mortgage payments, forcing a record number of foreclosures and, in effect, triggering a margin call on banks that they were increasingly unable to make.

Everyone owns their share of the blame

Yes, lenders were stupid and greedy. But they are not the only ones that deserve criticism and blame. We are guilty, too. We forgot the basic principles of both home economics and macro economics - that we shouldn't spend money we don't have and that markets that go up at some point will go down. Too many people bought too much house for their budgets. In the past decade we gave rise to a new term - House Porn - and a whole new genre of TV programming - the extreme home makeover. Too many people - especially in the US - used their houses like piggy banks, tapping the rising equity in their homes to re-finance their mortgages and borrow more to spend more. Just as many institutions took on too much risk - a process called gearing, or creating financial leverage - so too did individuals. 

Yet even these two groups weren't alone in all of this - Government allowed itself to get overleveraged as well. During 8 years of supposedly fiscally conservative Republican rule, the US spent far more than it earned. As a result, from the budget surpluses of the Clinton years 2009 will see the annual budget deficit rise to a staggering $750 Billion (6% of GDP). But this merely confirms that the rot runs deep, and that the fundamental lack of common sense and values corroded every element of our society. 

So what have we learned? The current financial crisis has its' roots, I firmly believe, in a series of lapses in the moral fiber and economic judgment of individuals and institutions alike. Wall Street didn't screw Main Street, because both own their fair share of the blame. Banks were greedy and reckless in racking up astronomical profits at enormous risk, but home buyers were equally foolish in raiding their real estate equity and refinancing at every occasion. Right now we need to contain this crisis, but we can't stop there. Our society - and everyone in it - needs to make some serious course corrections. Until we realize the importance of restoring the personal and professional principles that underpin our financial system, 'fixing' the economy's fundamentals will serve no purpose.

People have to learn to save again. We can't continue to spend someone else's money. Purchase and price, and for that matter labor and money, must get reconnected in our minds if not in our monthly budgeting. Let's get back to delaying gratification, and the proposition that putting off consumption today will give me more pleasure tomorrow.

Banks need to make smarter bets. They can't continue to lend out fifty dollars for every one they have in their coffers. They've got to get back to saying 'no' again - to borrowers who don't fit the bill, to wizards who want to sell them 'risk-less' instruments, to greedy executives who get golden parachutes after  crashing their companies into the ground.

Finally, governments must be the grown-ups again. They need to regulate rogue financial markets and rein in profligate profiteering, excessive executive compensation and reckless risk-taking. They've got to get back to living within their means, too, and restore the principle that budget deficits are acceptable only in times of national peril.

At the risk of sounding like John McCain, the fundamentals of our society are not strong, my friends. The formula for fixing the current financial crisis may not be obvious, but curing the cancer ailing our broader community is simple: a return to common values and common sense.

The return of History

I was having lunch in a Persian restaurant in London with my Nigerian friend Obi the other day when I had an epiphany of sorts. It wasn't a realization about globalization, though by the opening line of my post it could very well have been. Rather, a lightning bolt struck when Obi described to me the qualities he looked for in potential recruits for the unusual investment firm in which he is a partner. His company is "the largest - and sometimes only - foreign portfolio investor in many of the markets of sub-Saharan Africa." Obi and his colleagues spend their time analyzing corporate, economic and political information in that area of the world, in the hopes that this will help them make money for their clients. 

I should point out at this juncture that Obi is not your normal investment analyst or fund manager. Far from being maniacally focused on making money, he is more of a Renaissance man of rare ability and kaleidoscopic interests. Obi is a medical doctor who can extemporize for hours about politics - from the sub-Saharan variety to Britain and America's arcane political systems - who discovered a zeal for corporate finance while doing an MBA at London Business School. We met there, and I've enjoyed his company tremendously - and been enlightened by his broad ranging insights - ever since. 

While he and I chatted over lunch that day, I asked him what types of people he sought out to join his firm. After all, few people had his rare combination of medical, business and geopolitical knowledge; surely, there weren't many other 'Obis' out there to snap up for the company. Given that, I expected him to say that they hired either people familiar with Africa and its' public companies to whom they could teach corporate finance skills, or clever manipulators of the Black-Scholes options pricing model (an abstruse corporate finance tool) who could be instructed in the ways of the Saharan continent. To my great surprise, Obi responded that while both financial analysis abilities and knowledge in African affairs were valued assets in a potential recruit, the most critical requirement for him was an appreciation for ... history. 

I was astounded, and it must have been apparent by my reaction since Obi went on to explain why. It all made perfect sense after he did, too. In a nutshell, the landscape of public companies in Africa today resemble, in an approximate sense, the state of corporate America at the beginning of the 20th century. The uber-corporations that stand astride the globe today began the last century as family-owned companies started in small towns (such as Sam Walton's Bentonville, Arkansas-based Wal-Mart). As they grew into the behemoths they have become, they passed through predictable - and well documented - stages of development and growth. As Obi pointed out, looking at Africa in 2007 is not unlike looking at America in 1907. Consequently, predicting the commercial 'future' in Africa - identifying the right companies and industries in which to invest - has a lot more to do with history and less to do with finance or, to a certain extent, local realities. Obi punctuated his point by adding matter-of-factly, "face it, Ion: there is very little today that is actually new." Cue the lightning bolt here ... 

Of course, he was right, and not just about history's applicability to business but to all aspects of life. Every generation tends to think - often through an intoxicating combination of naivete and self-absorption - that the challenges they face are completely unique and unparalleled. While most people concede the existence of historical antecedents, few actually accept the proposition that progress is more of a wheel than a line - that when we experience change it is more often than not as a repetition of history rather than a completely new story. 

Take globalization, for example. Authors have written reams about the impact of this 'new' phenemenon. One of my favorite authors, Thomas Friedman, wrote two excellent tomes on the subject, The Lexus and The Olive Tree and the more recent The World is Flat. Both books gained renown for performing the literary equivalent of capturing the lightning of globalization in a bottle. Friedman - and authors like him - have done much to help the lay person understand globalization, but they have also contributed to the common misperception that somehow this is a new development. Globalization - even as we know it - has been a rising tide of change at least since Jean-Baptiste Colbert, the architect of Mercantilism, imported Venetian glass and Flemish tapestries to France in the mid 17th century. Some more imaginative historians trace its' roots all the way back to the Mongol Empire and the cross-continental capital and culture flows that stemmed from the Silk Road trade. Regardless of its' actual starting point, globalization is neither new nor a particularly revolutionary phenemenon. However, the concept is often denuded from proper historical context and portrayed in the media today as both unfamiliar and unprecedented. 

The vast majority of 'analysis' about the Internet is another example of a-historical hyperbole. Don't get me wrong: I'm obviously not one of those deluded souls who believes that the Internet is a passing fad. However, I do submit that the changes wrought by the Internet are both more familiar and less fantastical than the conventional wisdom would have us believe. The Economist's recent survey on the Internet and new media (here) correctly put the Internet 'revolution' in perspective. Far from rejecting its' legitimacy as a revolutionary force, the survey made the point that we've experienced such a revolution before and that this one would follow a similar pattern. The magazine likened the Internet's arrival to the emergence of moveable type in the middle 15th century, an era where a new technology democratized knowledge (the Gutenberg Bible), "turbo-charged an information age" (The Renaissance) and set in motion forces that would reverberate centuries later (the modern ubiquity of mass media). 

What The Economist did was to root a contemporary event or phenomenon into proper historical context. In effect, it subjected the Long Tail to the Long View, and in so doing gave us a critical and much-needed perspective on the present. As both the examples of globalization and the Internet show, what society perceives - and anoints - as new and never-before-seen is often neither. What too frequently is lacking is the intellectual reflex and rigor to look at the 'new' through the prism of the 'old'. Society would benefit, it seems to me, if more futurists acted as archeologists and the past informed more of our knowledge of the present. 

Fortunately, History has been staging a bit of a comeback lately. With many of the complex conundrums that confound us today - from terrorism and the degradation of the environment to the war in Iraq - people appear to be turning to history to help make sense of it all. Little by little, historical perspectives weave their way into the public discourse on our modern maladies. Al-Qaeda is less and less seen as a terror cell that came to life on 9/11, but more properly put into context as a movement that arose from the 1980s Soviet occupation of Afghanistan and catalyzed again by the stationing of American troops in Saudi Arabia at the end of the first Gulf War. The phenomenon of global warming was catapulted into the public consciousness by Al Gore's powerful documentary An Inconvenient Truth because it demonstrated that the Earth's temperatures were rising at a rate unseen in human history. The civil unrest in Iraq was once viewed as either the death throws of a recently-toppled totalitarian regime or the desperate final match strikes of a foreign-backed insurgency seeking to enflame the country. Today, it is seen through the prism of a millenia-old schism in Islam between Sunni and Shi'a - the contemporary boiling-over of a sectarian struggle that simmered for decades under Saddam's iron rule. 

Even self-avowed anti-historians and current affairs columnists are looking to the past for answers now. The famously anti-intellectual George W. Bush was recently reading, at Henry Kissinger's suggestion, Alistair Horne's A Savage War of Peace, about France's experiences in a guerrilla war against Muslims in Algeria in the mid 1950s, to help frame his foreign policy towards Iraq. In a stark illustration of how 'hip' historical analysis has become, New York Times opinion writer Nicholas Kristof recently reached as far back as Virgil and the travails of Thucydides to offer the appropriate historical analogy to W's Iraq adventure. 

History, like the height of hem lines, comes in and out of fashion. After all, it wasn't that long ago (1989) that Francis Fukuyama famously wrote about the 'The End of History'. George Will more recently mused sardonically about the Fukuyaman viewpoint - and the atypical period of peace, progress and prosperity that spawned it - as our collective 'vacation from history.' That holiday ended abruptly, on or about September 11, 2001. Thereafter, the world faced sufficiently chilling and complex challenges that we have increasingly turned to history for context, comfort and courses of action. This is as it should be. George Santayana's famous dictum that "those who cannot remember the past are condemned to repeat it" is as true today as it was a century ago when it was written. These days, however, his aphorism could be updated to say that those who do not listen to the past are condemned to misunderstand the present. Simply put, yesterday gives us perspective on today and a chance at properly explaining tomorrow. After all, as my friend Obi put it so well, there is very little that is truly new anymore ...