04-03-2008

THE LEAST PAINFUL COURSE FOR AMERICAN CRISIS: LET THE DOLLAR FALL

Lester C. Thurow is a professor of management and economics and dean emeritus at the MIT Sloan School of Management. Thurow's latest book is "Fortune Favors the Bold: What We Must Do to Build a New and Lasting Global Prosperity."

By Lester C. Thurow

CAMBRIDGE, MASS. -- 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 subprime mortgage and have a good job that you are not about to lose. Those are a lot of “ifs.” Let’s examine each one:

Very few Americans have to sell the home they live in right now. Those who bought a house on speculation get what they get. After all, they “speculated” and lost. Very few Americans have a subprime mortgage. Those with bad credit have bad credit. Most have a job they are not about to lose.

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 in the Great Depression affect us all.

The answer starts with the heart of the problem -- the subprime 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 subprime mortgages, there is no crisis in the financial markets.

In the future, we can regulate the markets to prevent subprime mortgages. But that is the future.

Let’s get to the real economic 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 solution. For the sake of argument, let’s say there is a lot of $20 per barrel oil in the world -- deep-sea oil, Canadian tar sands. But who would look for $20 oil if someone else (Saudi Arabia) has lots of $5 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 per barrel and that they will not lose their investments.

This is easy to do. The U.S. needs to guarantee it will buy all of its oil at $20 per barrel before buying anything from the Middle East or OPEC.

This forces the price of oil down to $20 per barrel, but it eliminates the possibility that it will ever go back to $5 per 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 America.

Suppose the dollar has to fall a lot -- let us assume 50 percent. 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 the tropics, there is the American Virgin Islands. For those who want to go to the North Pole, there is Alaska. For those who want to go skiing, there is Colorado.

If the answers are so simple, why don’t we do them? Because all of them are painful.

Write-downs for subprime mortgages cost money. $20 per barrel of oil guarantees there will be no $5 oil. A lower dollar guarantees foreign trips and foreign purchases will cost more.

We have Herbert Hoover when we need Franklin Roosevelt. Do something! Take painful actions! Gridlock is the worst of all worlds.

Luckily, we will have a new president and a new Congress come January, but January is a long time away.

Basically, we require changes in the views of President Bush. He has to propose a write-down in the subprime mortgages, he has to propose a guarantee in the price of oil, and he has to 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 since 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 deficitgets bigger and bigger. The pressure on the dollar to fall only grows.

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