From the Los Angeles Times/op-ed
It's got to hurt before it gets better
There are solutions to high oil prices, the housing crisis and
outsourcing, but they require some sacrifice.
By Lester C. Thurow
April 11, 2008
THE FINANCIAL crisis in the United States is not a crisis if you do
not want to sell your home, do not have a house with a sub-prime
mortgage and have a good job that you are not about to lose.
Very few Americans have to sell their homes right now. Those who
bought a house on speculation get what they get. After all, they
"speculated" and lost. Very few Americans have a sub-prime mortgage.
Those with bad credit have bad credit. Most have a job they are not
about to lose.
So what is all the fuss about? The meltdown of the financial markets.
Shouldn't we just let the big guys lose? After all, they are big guys.
The answer is no. The credit markets, like those before the 1929 crash
and during the Depression, affect us all.
What should be done?
The answer starts with the heart of the problem: the sub-prime
mortgages. These mortgages have to be written down to less than the
current value of the house so that if the borrower walks away, he or
she has something to lose. The government (taxpayer) is going to have
to pay to write down these mortgages. This is the subsidy -- and the
only subsidy -- that should be given to the lenders.
If the borrowers don't walk away from their sub-prime mortgages, there
is no crisis in the financial markets.
In the future, we can regulate the markets to prevent sub-prime
mortgages. But that is the future. Let's get to the real crisis: the
rising cost of oil and the outsourcing of American jobs.
There is a solution to the rising cost of oil, but it is a painful
one. Let's say there is a lot of $20-a-barrel oil in the world --
deep-sea oil, Canadian tar sands. But who would look for $20-a-barrel
oil if someone else (Saudi Arabia) has lots of $5-a-barrel oil? The
answer is: no one.
Basically, American taxpayers have to guarantee potential producers
that the price in the future will not fall below $20 a barrel and that
they will not lose their investments.
This is easy to do. The U.S. needs to guarantee that it will buy all
of its oil at $20 a barrel before buying anything from OPEC. This
forces the price of oil down to $20 a barrel, but it eliminates the
possibility that it will ever go back to $5 a barrel.
Outsourcing has an equally simple solution. Let us encourage the
dollar to fall. At some value of the dollar, it will pay producers to
bring jobs back to the United States.
Suppose the dollar has to fall a lot -- let us assume 50%. Who cares?
Only those Americans who plan to take foreign trips or buy something
abroad. It costs them more. For those who want to go to the tropics,
there are the U.S. Virgin Islands. If the solutions are so simple, why
don't we do them? Because all of them are painful.
Write-downs for sub-prime mortgages cost money. Oil at $20 a barrel
guarantees there will be no $5-a-barrel oil. A lower dollar guarantees
foreign trips and purchases will cost more.
We have Herbert Hoover when we need Franklin Roosevelt. Luckily, we
will have a new president and a new Congress come January, but January
is a long time away.
Basically, we require changes from President Bush now. He needs to
propose a write-down in the sub-prime mortgages, propose a guarantee
in the price of oil and let the dollar fall. Unfortunately, the first
two are not likely. Only the third will happen with or without his
approval. As long as we have a large current account deficit, the
dollar will fall. It has to for some very simple reasons.
To get foreign currencies to pay for the deficit, we must borrow from
abroad. Eventually, foreigners get tired of lending because they will
lose money on their holdings of dollars if the dollar falls further.
At the same time, the big American guys move money into foreign
currencies to take advantage of the falling dollar. When they move
money back into dollars, they have more dollars. Essentially, they
have an infinite amount of money to move.
As they move money, the current account deficit gets bigger and
bigger, and the pressure on the dollar to fall only grows.
We need to do something! Take painful actions! Gridlock is the worst
of all worlds.
Lester C. Thurow is a professor of management and economics and dean
emeritus at the MIT Sloan School of Management. His latest book is
"Fortune Favors the Bold: What We Must Do to Build a New and Lasting
Copyright 2008 Los Angeles Times