Book: Dumb Money, ch 2

Chapter 2 is The Era of Cheap Money. Daniel Gross explains that bubbles require two factors: new economic assumptions and new tools. The 2008-09 bubble was built on “new and improved” econ assumptions of cheap money but mostly on risk-manipulating innovations that made money appear even cheaper.

I agree with what I think what he’s saying: Efforts to systematically, artificially grow an economy too high, too fast are recipes for disaster. One reason I agree is that I appreciate the business model of a former employer.

McMaster-Carr is the #2 distributor of industrial supplies, behind Grainger. It meticulously managed growth to be sustainable and without risk of deteriorating its phenomenal customer service. In the mid-90s McMaster mailed its iconic catalog annually to generate sales, almost exclusively via inbound phone calls to well-paid staff whose job was to provide Nordstrom-quality service. The company knew how many inbound orders that each incremental catalog would yield and mailed to only enough new recipients that its “sales” staff and operations infrastructure could service without leading to depressed service.

Non-market-priced cheap money facilitated unprecedented and unchecked growth in home ownership, stock ownership, conspicuous consumption, overcapacity of retail stores and restaurants, exurbs, commuting times and the assumption that bad times won’t happen.

Looking forward, we need some new ideas about regulation. Even Alan Greenspan has acknowledged that he overestimated the rational, free-market theories.


NY Times: Revenue Loss Putting Cities in Fiscal Vise

“If there’s any light that comes out of this deep national recession, it’s that people have to take realistic views of things they would not otherwise consider at other times,” said NJ Governor Jon Corzine.

New Jersey is infamous for the overwhelming number of local governments and their attachment to home rule. Common sense says we have too many chiefs and high salaries running all these towns, police and fire departments and school districts. When life was much more simple in the 1700s and 1800s, such a landscape was probably ideal. These days I doubt anyone would build a new state that way — it’s inefficient and unsustainable.

“The dire fiscal prospects have sparked a renewed interest in consolidation among New Jersey’s 566 local governments. Princeton Borough and Princeton Township held a meeting last Monday to discuss for the third time the prospect of merging their local governments. Mr. Corzine, who has long said the state has too many governing bodies, welcomed talk of mergers.”

The rallying call is to lower property taxes in NJ – which has the highest average property taxes in the US – by sharing services across municipalities. What’s the best ratio of governing bodies, chiefs and bottle washers? I think a good starting place are ratios of critical municipal employees and public-safety employees per citizen.

But how do you think we should determine these ratios?