Fareed Zakaria at PostGlobal

Fareed Zakaria

Editor of Newsweek International, columnist

PostGlobal co-moderator Fareed Zakaria is editor of Newsweek International, overseeing all Newsweek's editions abroad. He writes a regular column for Newsweek, which also appears in Newsweek International and often The Washington Post. He is a member of the roundtable of ABC News' "This Week with George Stephanapoulos" as well as an analyst for ABC News. And he is the host of a new weekly PBS show, "Foreign Exchange" which focuses on international affairs. His most recent book, "The Future of Freedom," was published in the spring of 2003 and was a New York Times bestseller and is being translated into eighteen languages. He is also the author of "From Wealth to Power: The Unusual Origins of America's World Role" (Princeton University Press), and co-editor of "The American Encounter: The United States and the Making of the Modern World" (Basic Books). Close.

Fareed Zakaria

Editor of Newsweek International, columnist

PostGlobal co-moderator Fareed Zakaria is editor of Newsweek International, overseeing all Newsweek's editions abroad. He writes a regular column for Newsweek, which also appears in Newsweek International and often The Washington Post. more »

Main Page | Fareed Zakaria Archives | PostGlobal Archives


The Crisis's Silver Lining

Amid the financial chaos and economic uncertainty that has rocked world
markets, I can see one silver lining. This crisis has forced the United
States to confront the bad habits it developed over the past few decades.
If we can kick those habits, today's pain will translate into gains in the
long run.

Since the 1980s, Americans have consumed more than they produced and have
made up the difference by borrowing. Two decades of easy money and
innovative financial products meant that virtually anyone could borrow any
amount for any purpose. Household debt ballooned from $680 billion in 1974
to $14 trillion today. The average household has 13 credit cards, and 40
percent of these carry a balance, up from 6 percent in 1970.

But the average American's behavior was virtuous compared with government
behavior. Every city, county and state has wanted to preserve its
proliferating operations yet not raise taxes. How to square this circle? By
borrowing, using ever more elaborate financial instruments.

Local pols weren't the only problem. Under Alan Greenspan, the Federal
Reserve refused to inflict pain. Russian default? Cut interest rates. The
economic slowdown after Sept. 11? Cut rates. Whatever the problem, the
solution was to keep money flowing and goose the economy.

In 1990, the national debt was $3 trillion. It is now $10.2 trillion.

If there is a lesson to be taken from this crisis, it's an old rule:
There is no free lunch. Now, debt is not a bad thing. Used responsibly, it
is at the heart of modern capitalism. But hiding mountains of debt in
complex instruments is an invitation to irresponsible behavior.

In the short term, governments must take on more debts and obligations to
resolve the crisis. But that doesn't mean we should stimulate the economy
with more tax cuts, as some economists advocate. That would only keep the
party going artificially. A far better stimulus would be to expedite major
infrastructure and energy projects, which are investments, not consumption,
and have a different effect on fiscal fortunes.

In the longer term, we have to get back to basics. Government should put
incentives in place that make saving more likely. The U.S. government
offers enormous incentives to consume (the mortgage interest tax deduction
being the best example), and it works. We have the world's biggest houses
and the most cars. If we were to tax consumption and encourage savings,
that would also work. Regulations on credit card debt should be revised to
ensure that people understand their risks.

Paul Volcker has long argued that the recent financial innovation simply
shuffled around existing resources while contributing few real benefits to
the economy. Such activity will now be reduced significantly. Boykin Curry,
a New York fund manager, points out that "30 percent of S&P 500 profits
last year were earned by financial firms, and U.S. consumers were spending
$800 billion more than they earned every year. As a result, most of our top
math PhDs were being pulled into nonproductive financial engineering
instead of biotech research and fuel technology. Capital expenditures went
into retail construction instead of critical infrastructure." The crisis
will stop the misallocation of human and financial resources and redirect
them in more productive ways. If some of the smart people on Wall Street
end up building better models of energy usage and efficiency, that would be
a net gain for the economy.

The U.S. economy remains extremely dynamic. Even now, the most surprising
data continue to be how resilient the economy has been through the recent
shocks. That will not last if the panic persists, but the economy's
underlying virtues would help it recover quickly from a recession. The rise
in emerging-market economies, which have been powering global growth, will
not vanish overnight, either.

In the short run, there has been a flight to safety -- toward dollars and
Treasury bills -- but in the long run, countries are likely to seek greater
independence from an unstable superpower. The United States will have to
work to attract capital and must organize its fiscal affairs. We will have
to make strategic choices. We cannot deploy missile interceptors along
Russia's borders, draw Georgia and Ukraine into NATO, and still expect
Russian cooperation on Iran's nuclear program. We cannot denounce Chinese
and Arab investments here and the next day hope that they will keep buying
T-bills. We cannot keep preaching about democracy and capitalism with our
own house so wildly out of order. Instilling discipline will be painful for
a country used to having it all. But it will make us much stronger in the
long run.


The writer is editor of Newsweek International and co-host of PostGlobal,
an online discussion of international issues. His e-mail address is
comments@fareedzakaria.com.

Comments (30)

SuzanneVesely Author Profile Page:

“But the average American's behavior was virtuous compared with government
behavior. Every city, county and state has wanted to preserve its
proliferating operations yet not raise taxes. How to square this circle? By
borrowing, using ever more elaborate financial instruments.”

Oregon has a lottery!

What is more natural, or compatible with, or what works better with, capitalism? Taxes, or borrowing? Both are used, but borrowing (using complex financial instruments) is getting out of hand, and tax cuts need to be used cyclically—which means to not use them all the time, but sometimes, in response to certain economic conditions.

Certain types of borrowing (borrowing based on complex financial instruments is one example) are risky—mortgage-backed securities have proven this. The return (%) was known, but mortgages that go unpaid are worth very little—they result in mortgage-backed securities with 0 return.

A lot of Americans wonder—what could have been done differently to avoid this economic crisis? Change the tax policy—temporarily repeal tax cuts, starting about 3 years ago? More government intervention starting about 3 years ago when home values were inflated? Simply more government intervention? More infrastructure and energy investments starting about 3 or 4 years ago? Should lenders and credit card companies have been less generous? Were they pushing credit onto borrowers with the hopes of it being repaid, with a disregard of the borrowers’ long-term ability to repay (and their unwillingness to repay in full in the short term? Hahahahaha)? Is Wall Street to blame? The Federal Reserve?

arjay1 Author Profile Page:

Mr. Zakeria has a very accurate perception of the problem, but is there a solution? Note the following economic speculation on the Preamble to the Constitution, which all Americans are supposed to agree with if they live within its sovereignty. In order to establish the first five items for Posterity, that is, pass on a better life to the next generation, it would be necessary to remove the $237B in yearly interest (see Perotcharts.com) by slashing the budget something like the following. Please don’t engage in the pre-election blame game; it has taken nine election cycles for liberals and conservatives to lose 11 trillion dollars.

We the People of the United States, in Order to form a more perfect Union,
(1) establish Justice, ( for courts, prisons, police, etc) go from $130B to $97B
(2) insure domestic Tranquility, (physical, health infrastructure) go from $125B to $80B
(3) provide for the common defence, (DOD, Homeland Security) go from $770B to $610B
(4) promote the general Welfare, (SoSec, Medicare, retirement) go from $1.1T to $880B
(5) and secure the Blessings of Liberty to ourselves ( anti-terrorist, commerce) go from $220B to $180B ,
(6) AND our Posterity, go from $11 trillion owed to $100B owed with $7B interest.
do ordain and establish this Constitution for the United States of America.

Question: Anyone for a ten percent sales tax on everything? You might get $600 bllion a year nationally which would neatly take care of 'general welfare' in a very fair form, but you are still going up against something Solomon couldn’t solve.

aguafria08082008 Author Profile Page:

Fareed Zakaria is perfectly correct mentioning consumers' living on debt excessively, but perhaps he should point out more explicitely the fact that excessive risk appetite on the part of financial institutions is another important factor that lead to the current mess. Some financial institutions literally seemed to fall in love with very risky and very opaque products with no general and transparent valuation methodology available and where they believed they would always outsmart the odds and make a profit accordingly (like, for example re-securitisations where the investor cannot have any reliable idea as to the quality of the underlying debt). I remember feeling concerned when the voices of the lobbyists intent on loosening some of the financial market regulation originating from the FDR era were heard about 10 years ago, offering no really serious and tangible argumentation and wielding phrases about globalisation and financial innovation instead, and the current development seems to have acknowledged my concerns. I believe that what has happened justifies adopting tighter regulation in the financial market aimed at keeping risks within reasonable limits, even if this were at the price of lowering the potential for huge profits.
I am a foreigner living outside the US who is interested in the issues concerning the current financial crisis. Forgive please my possible English language mistakes.

RedRat Author Profile Page:

TominOhio wrote:

The United States manufactures more now than it ever has. Manufacturing has increased almost every year (except a few dips in recessions) for the past 150 years. What has changed is the number of people employed in manufacturing. We have automated to stay competitive, and those industries that could not automate have moved to lower wage countries. But we still produce more than ever before.
---------------------
I would disagree. We are a nation of assemblers. Parts are made overseas and then imported back here to the U.S. and we merely assemble finished products. While I would like to believe that my Dell Computer was actually manufacturerd in Texas a quick perusal of its contents indicated that most of the parts were made overseas, mostly China and Taiwan. Don't be fooled by how we have legislated "manufacturing" now. My old Ford Taurus had many parts made in Canada and Mexico.

Manufacturing means taking raw material and creating value added processes that make that cheap material into something of worth. You take the iron ore and make it into engine, here in the U.S. We start making TV sets, monitors, computers from parts made here, not from parts made in China. We are NOT a manufacturing country anymore, we are a service sector economy that assembles stuff from parts made elsewhere. That is why we have a trade deficit.

Chris53 Author Profile Page:

The US has been acting like a spoiled rich kid blowing his parent's inheritance. So many people thought that they were entitled to everything without having to work for it. Hopefully things change. If not, we're on our way to second-class status in the world.

Chris
LEED AP
http://www.everblueenergy.com/

dummy4peace Author Profile Page:

High pay low skill union jobs have been sent overseas. Unfortunately, we haven't done enough on the job training for these workers so they could take higher skill jobs till it's too late.

What we must do is to revive our education if we want to stay competitive in the hi-tech world. Instead of using money for roads and bridges all over the country, we probably should send more students to learn math, science and engineering for free. But money can't buy everything. Without a sufficient math background, you can't learn advanced physics or engineering. We should raise standards in our K-12 math education. The problem we hit firsthand is this out of control math-phobia in this country. Take the calculator away. Many students can't think or feel numbers. I think we should start using the metric system soon. It makes math easier when you count with ten fingers rather than 12 or 16. Most importantly, we should hire math teachers trained in math, not education or whatever. Sadly, this all costs much less than 700 billions.

TominOhio Author Profile Page:

The United States manufactures more now than it ever has. Manufacturing has increased almost every year (except a few dips in recessions) for the past 150 years. What has changed is the number of people employed in manufacturing. We have automated to stay competitive, and those industries that could not automate have moved to lower wage countries. But we still produce more than ever before.

Don't kid yourself that manufacturing went away and might come back. Manufacturing never left. What has gone forever are high-wage, low-skill union jobs. That they were ever highly paid is an anomaly stemming from the post-WWII world economy, where the USA had nearly the only intact industrial economy (+Canada and Sweden, who have similar problems).

In the 1990s, the USA lost 10% of its manufacturing jobs. Brazil lost 20%. China lost 30%. Don't kid yourself. Manufacturing has thrived in the USA. Only the low-skill jobs are gone. They are gone everywhere, forever. The only low skill jobs today are in the service sector. Nothing a politician can do will change that.

RedRat Author Profile Page:

Part of our economic woes began in the 80s when we moved away from being a manufacturing country and became a service sector society--basically we are nation of burger flippers. Problem is that we created jobs, but these were all minimum wage jobs and eventually with rising house debt, the burger flippers couldn't afford to buy the burgers they were flipping. Guess what? The day comes when the burger joint has to close because no one can afford to buy the goods.

Another blogger here does raise an interesting point. If we are indeed not manufacturing much than of course we really do not need much investment in roads and infrastructure. Clearly, over the past 20 years this is the tact we have collectively chosen. The recent collapse of the bridge in Minneapolis certainly makes that vivid point. Since we have become only a nation of assemblers and not creators, we do need some infrastructure but not the heavy duty kind. We have let our education of future science and technology graduates go down the drain, but assemblers don't really need scientists and engineers, after all the parts are quality assured in Asia. An hey, we have consumers out there that tolerate crap because it is cheap.

cgillard Author Profile Page:

Rethinking economic theory in total might be a better idea. The death of reaganomics and the free market voodoo worship. As well as the thorough destruction of government.
With the 80's began the vulture capitalists feeding on the sound American companies with assets to spare and communities sustained by them.

So, yes the clever financial management game began aided, I believe, by the clever Wall Street experts brokering the deals and the junk bond financing and S&L defaults.

Whining constantly about taxes, government programs, intrusive environmental restrictions, workplace safety, financial and food safety regulation and welfare cadillacs glutting our nations highways, and on and on and on.

So now we can have taxes to pay for bailouts, deteriorating infrastructure, hurricane disasters festering, vast armies of injuried and traumatized veterans, and the sooner the better.

Lets invest in something of value to our national security and provide jobs. And how about all that pharma research going to research not company profits and perks, CEO gold, advertising, lawyers etc and have gov't agencies and non-profits do it to profit the people of this country for a change.

Let's take the profit motive, which we can now clearly see is morally bankrupt, out of health care, drugs, war services, international affairs and diplomacy.

Why not hurricane proof our coastal infrastructure, and blizzard proof, and fire proof our country too. Why not get more of the carcinogens out of our health care costs. Lets invest in education and jobs and community organizers to rebuild some ghettos and serve up jobs rather than prison sentences.

Why not establish international coordinated disaster response teams, supplies, etc rather than scrambling at the last minute?

Why not realize we live in an interdependent world economically and in all other ways and plan and act for some mutual benefit and understanding rather than worship this individualism that no longer has a place and is harming our world.

dummy4peace Author Profile Page:

Bridges and roads are infrastructure and important for economic developments. However, if we are not going to revive manufacturing, the use of bridges and roads won't be as productive as before. The question is, "Can we revive manufacturing in the US?" We must be selective in what we choose to manufacture in the future, because we must consider the costs of energy and environment for manufacturing. Manufacturing for alternative energy has a much needed future. This is thinking for America.

If we were to think for the world, we should stop globalization and resume local self-supporting economy in order to minimize more energy consumption in shipping intermediate and finished goods around the globe. Unfortunately, most costs of the imported goods are spent on energy and profits for few, not to improve workers' lives around the world. In fact, it takes independence away from the poor people in underdeveloped countries. Now they have to depend on big corporations for their livelihood; and corporations would close the plant faster than they started it if they find a cheaper location. Workers are left high and dry without any land to support themselves. For us, we send more garbage to our landfill than before, because cheaper goods can be easily replaced. A second stimulus check won't stimulate anything as shown by the first check. It is irresponsible to use it as bait for votes before November.

Anti-globalization is not protectionism for the US. If we are honest about globalization for personal profits, that is fine. If we claim to globalize for a better Earth, we really have to think twice.

Optimization techniques should not be applied blindly. The decision-makers on Wall Street and in D.C. must understand that qualitative data analysis is just as important as quantitative methods. The definition of the space you are to optimize is the No. 1 question you have to ask yourself. Is it just this project, your whole organization, your state, your country or our Earth that you want to optimize for minimal costs or maximal profits? The problem is that optimizers are not decision-makers and they don't understand each other. They hear only what they want to hear.

Chagasman Author Profile Page:

Fareed fails to note that it was a Republican who started this whole mess....Ronald Raygun, the high priest of trickle down economics, who gave us the voodoo doll of tax cuts, and the Republican borrow and spend scheme.

Remember Dick Cheney's "deficits don't matter" mantra?

Fareed mentions that the deficit was 3 trillion in 1990, but he doesn't point out that the deficit was less than a trillion before Reagan took office, or that Bush, with the help of his Republican supporters in Congress, more than doubled the deficit in just 8 years.

This reader hopes that the silver lining turns out to be a wholesale rejection of Reagan economics, a permanent Republican minority, a whole series of reforms that end the corruption of our political process by money, including the idea that money is speech, and a rebuilding of this country productive capability and education system. Government is not the problem, except when the Republicans are in power. Too little government is as bad as too much government.

mike3812 Author Profile Page:

I find it interesting that Mr. Zakaria considers infra -structure spending to be investment. I am pretty sure that infra-structures like roads, bridges and building improvements are consumption spending when made by the government. All the funds are dispersed immediately in new jobs and consumption of materials. They would benefit from the consumption multiplier effect since they are immediately injected into the economy and would benefit from the marginal propensity to consume which is much higher than the marginal propensity to invest.

That is why Obama's plan to infuse the economy with these needed programs will create new jobs and do a lot more good than McCane's program of freezing government spending which will so down job creation.

lostinthemiddle Author Profile Page:

Not to dispute Mr. Zakaria's persuasive arguments above, btu I would like to suggest there is another, albeit less significant, silver lining to be found. I believe that the current credit crisis has done more to curtail identity theft issues than anything the government has tried so far.

BennyFactor Author Profile Page:

The upside of this mess is that we may be forced to invest in initiatives that pay dividends by creating jobs (Neo-NRA/WPA). Another unintended upside is that the playing field, which has never been close to level, as the economic darwinists insist, may level somewhat now that everyone is sharing some pain. It also helps Obama, if he gets elected, because there is nowhere to go but up, unless the whole deal does a 1929 nosedive, in which case he'll probably be strung up.

-Headline- Author Profile Page:

Fluff peice stating the obvious. Stick with foreign policy. You're good at that.

eirinn Author Profile Page:

Um, who says the politicians -- or the me, me generations since WWII -- will learn anything new?

The pols already know that a recession during an election year is bad (for them) and everybody will be relieved when the recession is over and they can start eyeing the Next Big Thing for quick profits, instead of looking long term and buying value.

Until someone wakes up -- and it's likely that it will be other countries in the global economy that shake us from our stupor, as well as a good portion of our prosperity -- nothing will change.

greyghost1 Author Profile Page:

Bad habits! Crimes when you or I do the same! Perpetual crime would be a better description for the current situation.

In 1978 Nebraska Gov. Jame Exon was about to appoint a Grand Island, NE banker to NE State Banking Director, Riley was his name. A Nebraska man met with then Gov. Exon & NE State Attorney General Paul Douglas & showed them proof of Riley's banking irregularities, floating million dollar notes.

Exon didn't appoint Riley to state bankoing director but Bob Kerry when elected Gov, did. Five years later Commonwealth Savings & Loan & Nebraska State Securities went under! The truth was covered up all the way to DC. Paul Douglas was later convicted, {overturned on appeal} & the crimes were allowed to continue.

There were tapes of everybody who was anybody in Nebraska politics, involving sexual abuse with kids. Those tapes were in the Omaha police dept. evidence room & seen by many people. Those tapes later disappeared.

www.nextrevolution.net

There is still one Nebraska man fighting to retrieve the money he lost in Commonwealth & State Securities. Reuben Worster lost his life's savings which was to be used to care for his handicapped son.

The man who met with Gov. Exon in 1978 & Reuben Worster were both American Veterans! One more example of why no man should fight for America! Our representatives take campaign contributions, have taken $64 million from the failed banking, insurance, & investment companies we've already bailed out in return for NO regulation which has led US to this point!

These same politicians have been all about fixing the problem while insisting there is plenty of blame to go around but we muct fix the problem first. They are in fact covering up their crimes!!!! They have all made billions of $ & will make billions more in the recovery which the American people will finance. While Americans lose their life savings, 401s & investments which are falling daily, these crook we pay to represent US are at it again.

They have done the same only worse than they did in the eighties, they've included the world in their crimes & the world is being taken along with US taxpayers, again! If we would have held them accountable in the eighties it may not be happening now. If we don't hold them accontable now, it will happen again! Along with campaign finance this is the greatest scam the world has ever seen.

ZZim Author Profile Page:

Good article Fareed.

Regarding this: "The U.S. economy remains extremely dynamic. Even now, the most surprising
data continue to be how resilient the economy has been through the recent
shocks. " In other words, the fundamentals are sound? Now where have I heard that before?

marknelso Author Profile Page:

So I guess you are saying we should not take our cues from the two Presidential candidates who refuse to admit that their pie-in-the-sky economic proposals need to change?

flyguy49kc Author Profile Page:

Fareed, PLEASE keep up the good work - HOWEVER, apparently you didn't see that Speaker Pelosi & Harry Reid are already putting together plans for another "STIMULUS" package of at least $150B. Neither appear to have gotten your message as the money for this is not going to be coming from OUR treasury - UNLESS there is another provision in Obama's financial strategy for certain "segments" to pay even higher taxes.

Hope you will write about the "Pelosi Plan"

effie1 Author Profile Page:

No Doubt about it, When Franklin Raines who ran one of the Fannies into the ground, stated to Congress that they were going to start loaning to people who were just a" notch below normal credit requirements" to get a loan we started down a slippery slope. Add in the greed on Wallstreet and we have the mess were in today! We need to hold people accountable for their actions starting with the Congress and then going after the White collar Wall Streeters!

n2avalon Author Profile Page:

Finally a breath of fresh reality.
Thank you Mr. Fareed Zakaria.
The banks, credit cards companies, and unscrupulous mortgage lenders selling free money from the wealthy trying to make more money has bit them right in their opulent life style. Too bad for them but as you well know the rich will survive just as they did after 1929 but the pain will fall on to the workers that made the wealthy rich. Regardless of where you look around the world the story is the same for the working class. The poor dopes that are taken advantage of by the wealthy thinkng that some how the rich realy care about them. Sorry!

Tychon Author Profile Page:

GLOBAL CREDO CRUNCH

Sir, since the discovery of the civilised world's largest natural gas reserves in the Netherlands, 50 years ago, we now all start to feel and even understand the consequences of toxic conduct by past leadership, aggressive and abusive industrial dominance and arrogant, lax authorities tangled with special interests linked with ubiquitous cheap-oil pressure: imploding states and exploding nations. National lawmaking gives way for international criminal constricts of unknowable scale. Deal '63, the American contract with Europe coupled oil and natural-gas prices, hence the petrodollar is still dictating European institutional behaviour. The devastating power of borderless corporate identity now took its toll described as current events that could be met with measures of the same character as if the situation came out of the blue.
But, America should be thought capable of confronting this hidden development of bad manners and faltering education dictated by a globally instated greed-machination based on energy-fundamentals. The world has seen big and bold US steps before.
This negative conduct spiral however is based on world-wide US-imposed cheap-oil principles of profit that leave no room for equality, the desired 100% tranparency, real innovation, competition, change and progress. The bedrock problem of quality, stability and sustainability has no easy quantity solution.The emerged proof and widely misinterpreted rootcause of the current chaos and crisis rests in the asymmetrics of accepted behaviour and the discrepancy between perceived and expected performance related to havily advertised state-corporate promoted achievements of growth that caused the unequal distribution of the greater good.
The questionis: why would the US people still opt out on Atlantic Unbundling of oil and gas pricing, e.i. rebalancing of the toxic petrodollar towards the already exiting diplomatic gaseuro as the only credible way out of misery?
Taking the silver lined bitter pill would save the entire world from unthinkable costs and damages to come.

http://stingflation.com
Stephan Tychon, the Netherlands.
Please join debate on the Global Credo Crunch:
http://theDow.ning.com

johne37179 Author Profile Page:

It may come as a shock to many readers of the WP, but it is better to earn it before you spend it. If only congress could get that message.

cpwash Author Profile Page:

America needs to do more than go back to its financial roots. It needs to go back to all its roots. We used to manufacture what we consumed, but now we don't. We used to be able to get college loans, but now we can't. We used to be covered by health care through employers, but now 48 million can not. We used to have pensions through our companies but now we do not. We used to innovate, but now we are stuck on oil.

How? It's easy. One way to look at the problem is that risk has been shifted from 'we' to 'I'. Shift it back. Pure unbridled capitalism, as practiced by the GOP, is seen as failed a failed ideology along with communism. We are now busy socializing our banks, but don't stop there. Continue and socialize a few other things as well, including medicine and energy.

Don't be scared by socialism. We use it a lot in America already. For example vets get socialized medicine from Uncle Sam from the VA. Our fire departments used to be for profit. The trouble was, they'd pull up to a fire and start haggling over the price to put it out. Such abuses were ended when our fire services became socialized. Primary education is socialized for the most part and works quite well.

donnolo Author Profile Page:

How the Cow jumped over the moon: a fable

One day Farmer Abner took his Appaloosa to the livestock market. There he met Farmer Bill with his Belgian and Farmer Clem with his Clydesdale. "What do you reckon they're worth?" each one asked
the others. "The value of a thing is what the thing will bring," they agreed.

Abner offered his horse for sale first. The auction opened at $100, but to Abner's surprise and great joy, Bill and Clem entered into a spirited bidding competition for the Appaloosa, finally won by Bill. Abner pocketed $500, less the auctioneer's fee.

Next, Bill put his Belgian up for sale. Abner, who was now without a horse of his own, bid fiercely against Clem, but eventually quit at $500. Bill accepted the money gleefully--minus the commission, of course.

Finally, Clem's Clydesdale went on the block. This time Abner outbid Bill and took delivery of the Clydesdale for the same price as the others, $500.

The Cow-Bones index, the dosimeter of the livestock market, was at 500.

That meant that the equity value of their holdings was $500. Since they had done so well, all three went back to the market again the next day, eager to see if they could pick up some bargains or unload their new purchases at a profit. The auctioneer started the bidding at $500. Bill and Clem bid desperately against one another for Abner's Clydesdale; once again, Bill won, but this time at the mind-boggling price of $3000. Then Bill put the Appaloosa up for sale. Abner and Clem bid equally fiercely before the latter triumphed; he too had to go to $3000 to secure his victory. In order to cover the loan he took out to raise the purchase price, he decided to sell his other horse. The bidding between Abner and Bill shot up to the $3000 level before Bill dropped out, leaving the Belgian in Abner's hands. Of course, the auctioneer again deducted his fees,
but Abner, Bill, and Clem were overjoyed at their success. They were twenty times wealthier than when they started, at least on paper.

And the Cow stood at 3000.

On the third day, optimistic that the market would continue to rise, the three farmers (though they now thought of themselves as investors who farmed as a hobby) again entered the fray. The bidding was insane; pundits who followed the market had never seen anything like it. When the dust settled, Abner had repurchased the Appaloosa, Bill the Belgian, and Clem the Clydesdale--in each case for the unheard-of, astounding price of $14,000! None of them could believe his luck. Each went around saying, "It's a dream, I never believed that wealth on this scale could be mine." The auctioneer was very satisfied too.

And the Cow jumped over the moon. It ended the day at 14,000.

Moral: The Market will decide.

Epilog:

The next day the market was closed, so Abner, Bill, and Clem went back to their farms, leading their horses on halters rather than riding.
"You don't want to take chances with a 14,000-dollar investment," they said.

On the way they met Farmer Zeke, who was riding a bicycle. They told him of their new wealth, understandably proud of the acumen that had earned it, and they bragged a little. "Have you ever before in your life seen a horse worth $14,000?" they asked Zeke.

"Fourteen thousand? Why, I wouldn't give you a hundred dollars for those plugs," exclaimed Zeke. "If they were good for anything at all you wouldn't be walking."

dummy4peace Author Profile Page:

Dr. Fareed Zakaria hit it right on.
Sending math or physics Ph.D.s to Wall Street is such a waste of productivity and talent. If a country depends on finance as much as 30% of all S&P profits, it will be too late when everyone realizes that there are only emperor's clothes on Wall Street. Most people on Wall Street claimed they don't know how derivatives work, although Alan Greenspan still hails its usefulness.

These Ph.D.s either have a job or no job. The money is just too good to say No to Wall Street. This is what happens when our short-sighted Congress canceled our Superconducting Super Collider in the middle of its construction.

"NPR, September 10, 2008 · For some American scientists, the official start-up of the Large Hadron Collider near Geneva, Switzerland is a bittersweet moment.

Once it becomes fully operational, this new collider will be the most powerful machine of its kind in the world. It's designed to smash protons together to reveal the basic building blocks that make up the universe.

The Superconducting Super Collider was actually under construction when Congress killed the project back in 1993, during a period of budget cutbacks." - NPR

http://www.npr.org/templates/story/story.php?storyId=94481272

Where do you expect our math or physics Ph.D.s to go after graduation? We badly need politicians, who can see beyond their next election and have some basic scientific knowledge. German Chancellor Angela Merkel is a Ph.D. in quantum chemistry. I thought we are now reminiscing the good old times in 1993 during the Clinton administration. Why didn't Bill veto it?

SDWalters Author Profile Page:

Mr. Zakaria is absolutely right that the present economic crisis provides a cautionary tale for a government that has been a profligate spender and borrower. The crisis also teaches the dangers of having had a financial community which took risks in uncharted areas and without soberly considering the depth of the downside. The current predicament, moreover, carries a lesson for individual Americans who had become addicted to consumerism and its necessary counterpart of ever-mounting, unpayable debt.

If these truths are appreciated, although history tells us that people tend to develop amnesia about such unpleasant things, then the "silver lining" of which Mr. Zakaria writes will become a reality.

What Mr. Zakaria's upbeat article glosses over, however, is the terrible price being paid for the "silver lining" by the millions of Americans who played by the rules and did not run up a personal debt and did not condone the deficit spending or lack of regulatory oversight by the Bush administration and had no idea that the nation's largest investment houses and commercial banks were speculating on highly leveraged instruments they did not even understand.

riat10708 Author Profile Page:

With a negative savings rate there will be a huge consumer squeeze that will eventually lead to a sounder financial less credit driven society.
The housing price decline is of special interest to WOMEN as last years statistics show 22% of new home buyers were unmarried women.
For an intriguing look at some of the issues facing the 100 million unmaried American population see "Single a documentary film" www.singlefilm.com

mgmmm1 Author Profile Page:

Nice article by Fareed Zakaria.
He is right. In the short term, there is pain and loss... But we have to live within our means...
All this time, when worries about the subprime mortgage fiasco were surfacing, NOBODY, but NOBODY from the government(Bush, ignorant and at the wheel-my God who we elected as President...)nor Paulson (and he was in charge at Goldman Sacks-and still had no clue!!!-doesn't that tell you all yo need to know?!!!...)took a look to see what was happening. ALL of them were acquiescing and enabling this whole fiasco and Ponzi scheme to go on and on...what a shame...

PostGlobal is an interactive conversation on global issues moderated by Newsweek International Editor Fareed Zakaria and David Ignatius of The Washington Post. It is produced jointly by Newsweek and washingtonpost.com, as is On Faith, a conversation on religion. Please send us your comments, questions and suggestions.