The Humpty Dumpty Economy

by Travis Pantin
Tue, 8 Jan 2008 at 9:35 PM

"Ooof, things have gone from bad to ugly," an economics blogger, Yves Smith, wrote on Naked Capitalism yesterday, after the stocks of the Municipal Bond Insurance Association and the American Municipal Bond Assurance Corporation tumbled on suspicion that their earnings will be lower than expected.

"It goes without saying that these developments imperil the fundraisings the insurers have been told by the ratings agencies they need to execute to fend off a downgrade. And … the implications of a ratings cut are serious, since it would lead to a wave of forced selling of certain types of insured debt," he wrote.

Mr. Smith hinted that a sovereign wealth fund could swoop in to save the day, rescuing American mortgage insurers by providing them with much-needed cash.

However, Mr. Smith wrote, if the sovereign wealth funds "were really savvy, they'd let the train wreck happen and pick among the pieces afterward."

Perhaps what Larry Kudlow, among others, has called "Goldilocks" economy -- characterized by a long period of being "just right" -- is coming to an end. The next era may be remembered as the "Humpty Dumpty" economy, after America's broken financial system and the foreign wealth funds who stopped by to pick up the pieces.

An Economic Answer to Terrorism
Two University of Chicago professors, Gary Becker and Richard Posner, wrote on their joint blog about whether economic development in poor countries can weaken support for terrorism.

Mr. Becker began the debate by focusing on rural Pakistan, where poverty is widespread and support for Al Qaeda is strong. According to the World Bank, Pakistan's real per capita income is considerably less than India's, and is less than one half of China's.

If Pakistan experienced a prolonged period of rapid growth, Mr. Becker wrote, "behavior and attitudes on many issues would change radically, regardless of the fact that it is a Muslim nation in Asia."

For example, Mr. Becker said economic development almost always leads to smaller families and less reliance on the extended family. "Families are by no means the same in different cultures, but in all poorer nations, birth rates are high, and the extended family is usually close," he wrote.

Since the family organization and structure "are the foundation of traditional societies evolved over hundreds, indeed thousands, of years," Mr. Becker said that this effect of economic development alone can drive radical social change.

He continued: "Just as economic progress greatly affects family structure and the amount of freedom available, it also sharply reduces the willingness of people to hide or otherwise protect terrorists because they have more to lose if they are caught."

However, if better economic opportunities make suicidal terrorism less appealing, how to explain that all of the September 11, 2001, suicide attackers received college educations?

According to Mr. Becker, educated terrorists with good economic opportunities are unwilling to engage in "run of the mill terrorism or ordinary suicide attacks because the cost to them would be too great. Such types can only be attracted to terrorist organizations by influential leadership roles, or by dramatic and exceptional missions, as the 9/11 terrorist mission."

On the other hand, Mr. Posner said politics, not poverty, is the driving force behind terrorism: "There is a demand for terrorism, and a supply of terrorism, and the intersection of demand and supply gives the amount of terrorism. Terrorism is a political phenomenon, and the demand is driven mainly by political grievances, real or imagined."

According to Mr. Posner, these political grievances are often related to foreign occupations, such as France in Algeria. "It is the existence of grievance that is key, and often — probably typically — the grievance is political rather than economic," he said.

If demand for terrorism is driven by political grievances, then it would make sense for terrorists to arise mainly from the intelligentsia, Mr. Posner wrote.

"Members of the intelligentsia are more likely than ordinary people to be moved by ideas, resentments, and political ambitions rather than by material concerns. They have the leisure and the education to think big thoughts, like overthrowing a government, which rarely brings material improvements," Mr. Posner said.

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