Thoughts on a Post-Ponzied America

NOTE: I first put this together on December 6, just before the Madoff scheme broke, which appears to be the largest working Ponzi scheme in history (apart from America's Social Security system, which has not quite been revealed as such). I've made a few minor edits since, but the ideas here haven't changed.

It's been more than 75 years since America had a comparable economic hangover brought on by historic levels of debt-driven finance that has turned corporate America and most of her consumers into Ponzi units, and like most problems that extend beyond our current generational memory this one won't respond well to our traditional economic thinking. The painful de-leveraging that should have started with the burst of the 2000 tech bubble was postponed by the easy-money Greenspan Era and finally forced out into the open by the collapse of toxic collateralized mortgage debt instruments that precipitated what will likely be remembered as the largest and most rapid stock market crash in history but just a prelude to the difficulties to come.

Getting through the next 10 years will put Americans in very unfamiliar territory. We are unprepared in every possible way for the end of rampant consumerism and the inevitable social upheaval to come. Even with a very pragmatic and popular Obama presidency, the anger, blame, and repercussions from the collapse will test social order in ways not seen since the 1930s. Our generations never realized that the 1929 stock market crash, ugly as it was, didn't immediately bring on the conditions we think of from the 1930s depression. In fact, it took a long time for unemployment to reach the unfathomable levels seen prior to WWII and America would not have become the Superpower it is today had FDR not deliberately pushed an unwilling and isolationist America into the war. The war effort finally set the stage for an aligned and expanding economy and it will take a similarly ambitious, uniting cause to exit the coming deflationary period.

Among the most difficult issues that will need to be addressed to exit this decade of upheaval, in no particular order:

1. Governance and structural innovation for public and private enterprise. Information Technology could enable radical transparency and broad-based participation by shareholders and customers on a scale not previously fathomable -- yet we continue to build corporations in a command-and-control style with tone-deaf directors, overpaid executives and quarterly reporting that fails to provide a timely and responsive operational governance model for public shareholders. Alternative approaches are emerging from the Internet economy but these need to become legitimized, formalized, and scaled to the needs of the 21st century enterprise.
2. The nature and structure of intellectual property and the legal and moral mechanisms that protect and enforce it. The current approaches to patent and copyright are unsustainable and breed uncertainty, open contempt, and abuses that subvert the original purposes for which they were established.
3. An end to an ineffective and counterproductive War on Drugs in much the same way the end of Prohibition in 1933 marked an end to the corruption and influence of organized crime that had become much worse during the depression. Taxation, legalization, and government regulation will destroy the cash flow to organized crime and terrorism much more effectively.
4. A push to enable community-centric health care, education, and welfare solutions that enable those who want to serve their communities to do so--instead of chasing them out. Today's overly-centralized, overly-bureaucratic and parochial systems are perhaps the most broken part of America's social framework--and the most disconnected from the middle class. This will require a frank acknowledgement of Great Society failures and a renewed and widespread determination for success at many levels and within many socio-economic subgroups, including those with conservative or religious leanings.
5. Mechanisms to cripple the effectiveness of terrorist groups that don't rely on the use military or civilian police forces - if those who would be recruited by such groups can't be enticed to join because they have a legitimate stake in their society, the war on terror will be over and the seemingly endless cycle of blowback will finally play out.

Rebuilding functioning economic order that encourages both savings and risk-taking depends on clarity emerging in these 5 areas. I'm not going to hold my breath waiting for the answers -- but I do expect that as our situation deteriorates over the next decade we will finally gather the political will to legitimately tackle these issues. The next superpowers will be made up of those nations who successfully resolve these issues as leaders--and doesn't necessarily include the US unless we step up collectively in ways not seen since the decades following WWII.