In recent times, though, having a national currency, at least for smaller countries, is looking more and more anachronistic. At the minimum it should be up for debate. Benn Steil, an economist at the Council on Foreign Relations, told me that when he lived in Europe in the 1990s, the old saying was that to be a country you needed an airline, a stock exchange, and a currency. By the twenty-first century, that was hardly the case: airlines had merged or gone bankrupt, stock exchanges had consolidated, and the euro had become the dominant currency of the continent. In the years ahead, more and more small countries may decide to quit their currencies and adopt that of a more powerful neighbor (the Australian dollar in parts of Oceania, for instance), band together with nearby countries to form a currency block (e.g., the East African Monetary Union), or jump aboard an international powerhouse like the U.S. dollar or the euro.

All kinds of factors could sway this decision: runaway inflation, fear of currency crises, too little infrastructure to manage the cash supply, an unexpected rash of counterfeits, hope of greater competitiveness in global trade, and the wish to put an end to potentially dangerous speculation about the currency’s worth next week or next year. Steil points to relatively strong economic growth and stability in countries like Ecuador, El Salvador, and Panama, which have all officially adopted the U.S. dollar. Even where the local currency still reigns as far as officialdom is concerned, “spontaneous dollarization” is widespread. More than half of the bank deposits in Latin America are denominated in U.S. dollars.

Steil’s thesis hinges on the fact that most monies in the world are unattractive to people who live outside the countries where those currencies circulate. Notaphilists may keep Icelandic króna in their collections, and my dad still has the Samoan, Cuban, and Egyptian banknotes I once gave him, but investors won’t hold these currencies as a store of wealth, says Steil — “something that will buy in the future what it did in the past.” The same goes for the Argentine peso, and doubly so for currencies of absolute-shambles countries. Know any friends who are denominating their kids’ college savings accounts in Somali shillings? Exactly. At the same time, while all countries conduct trade to grow their economies, smaller ones eat extra costs for perpetually converting from the local currency into something else. There’s also the fact that countries generally need U.S. dollars to repay their creditors.

Dumping the national currency would also protect people from harmful manipulation of the currency’s value by corrupt or incompetent public officials. Which begs the question: would a handful of regional currencies, or even a single global currency, help to prevent such disruptions, and by extension improve prosperity?

As for citizens in the United States and Europe, when other countries adopt the dollar or the euro, we profit from seigniorage—or the government does, anyway. By putting more money into circulation— inside or outside our borders—the Fed pockets the interest generated from this process, so it’s really no skin off our backs, provided those countries understand that the United States will never make monetary or economic policy decisions because of conditions in some other country that happens to use our currency.

This idea of pulling the plug on small-country currencies made all kinds of sense to me, right up until the insanity in Greece. Greece’s crushing debt was partly the fault of government officials who cooked the country’s books so that the nation could meet the standards of economic stability necessary to join the euro a decade ago. At the moment, the euro looks like a suit that is five sizes too small, and Steil’s Foreign Affairs piece calling for currency unions seems distinctly out of sync with the times. Maybe the króna and other tiny-country currencies have a future after all. But other leading currency experts assert that this is a short view of the euro situation, and that after this period of turmoil it’ll bounce back stronger than ever.

As Steil and his sympathizers see it, countries with their own currencies invariably walk in monetary step with their major trading partners: Mexico’s currency generally tracks to the U.S. dollar, Sweden’s krona closely follows the value of the euro, and so forth, and this is the case no matter how autonomous those countries’ central banks may think they are, and no matter how patriotic the artwork adorning their banknotes may be. As Olafur Isleifsson, a professor of business at Reykjavik University, told me: “We didn’t have monetary independence before. The central bank moves were all forced moves, like in chess. Monetary independence is a phantom.” I kept hearing this basic idea whenever I spoke with people about ending small sovereign currencies in favor of regional ones, but the debt fiascos in Europe show that this is anything but a definitive forecast of what lies ahead.

For economists, this dispute cuts to the core of the most macro question there is: what monetary system offers the best route to a more prosperous future for the most people? Starkly different answers to that question reveal how divided scholars are about what it takes to keep economies healthy, and even about the utility of sovereign currencies. As if the stability of the whole show wasn’t tenuous enough already.

Nevertheless, the fact remains that more countries, especially biggies like Turkey, want to adopt the euro. (Poland and the Czech Republic, also in line, slowed down their efforts to join in light of the debt crises, but analysts say these countries will eventually join as well.) Leaders in these countries and elsewhere are convinced that the advantages of getting hitched outweigh those of going it alone.

A third way to buttress the value of a national currency is to tether its value to that of another one that is more stable. This strategy has worked for a number of countries, and some experts argue that the availability of this tool can make the idea of regional currencies look like a moot point. Why terminate the central bank’s ability to manipulate the money supply in an emergency if you don’t actually have to? Steil says this approach is still precarious and can end up robbing people of their money: “Which would you prefer. One: I give you $100. Two: I give you a hundred pesos, with a promise to redeem them for $100 if you ask? Option two is a currency board or ‘hard peg,’ which is what Argentina did until 2002.” That was when the Argentine government reneged on its promise to redeem pesos for greenbacks. So much for your 100 bucks.

Steil is hardly the first person to have thought about regional currencies, or to challenge the government imperative to issue money, but he’s one of the most vocal. The concept of optimal currency areas was coined by economist Robert Mundell in the early 1960s, and since then there have been a handful of campaigns to bring the idea into practice — a few of which are slowly moving forward, in Africa and the Middle East most notably.

On the one-world money front, there are scattered dreamers out there, outfits like the Single Global Currency Association, and supporters of something called the Terra TRC (for Trade Reference Currency). In the 1940s, the legendary John Maynard Keynes conceived of a supranational currency that he called the Bancor. The idea can be likened to the constructed language of Esperanto—one common tongue for all humankind. Why not one money for one world? Supporters of Esperanto believe it could someday reduce miscommunication and, by extension, promote world peace. Backers of a single Earth currency envision a great smoothing of transactions, an end to damaging currency speculation, and less economic turmoil, which could mean greater prosperity for all.

While Esperanto struggles for credibility, some economists seriously consider how a one-world currency might happen, albeit in a highly theoretical future. One idea is for this new currency to be an expanded version of something that already exists: Special Drawing Rights. SDR is really a crossbreed of four of the world’s most significant currencies, and it’s used for particular kinds of settlements at the IMF. Perhaps the SDR is the embryo of a new global currency. Not that this would be a geopolitical walk in the park. “No global government . . . means no global central bank, which means no global currency. Full stop,” says UC Berkeley economist Barry Eichengreen. And a world government, lest we forget, is an apocalyptic prospect to a hell of a lot of people.

At the same time, however, many Americans’ image of the future incorporates this idea of a global currency—one Tolkienesque coin to rule them all. According to a Pew Research Center survey, 31 percent of Americans think an asteroid will smack into Earth by 2050, but 41 percent of them said they expect to see a shift to a global currency. We have it in our minds that dramatic change is on the horizon, even if the variable currencies and colorful cash we currently trade in and travel with seems like a permanent aspect of modern life.

From the new book “The End of Money: Counterfeiters, Preachers, Techies, Dreamers — and the Coming Cashless Society” by David Wolman. Reprinted courtesy of Da Capo Press.

In “The Accordion Family,” Katherine Newman, a sociologist and dean of the school of arts and sciences at Johns Hopkins University, looks at the dynamics of the boomerang generation – a phenomenon she has dubbed the “accordion family.” Part economic analysis, part ethnography, Newman interviews hundreds of individuals in six different countries (in southern Europe, the Nordic states, Japan and the U.S.), to better understand the international dynamics at work. The major reasons driving adult children back to the nest are economic, she finds: Globalization and the recession are making it harder for new workers to enter the labor force, and the cost of housing is climbing. But other social and psychological factors are at play too. The result is a sometimes rocky, sometimes serendipitous experience for these families as they struggle to redefine adulthood and familial roles in the face of overwhelming global economic forces.

Salon spoke with Newman over the phone about the growing difficulty for young people to find work, how new the idea of being an independent young adult really is, and the surprising emotional benefits of the accordion family.

Is this current generation a bunch of lazy loafers? Your research doesn’t seem to indicate this. 

No. They are a generation that has been caught by a series of unfortunate, overlapping trends that put them at a disadvantage for becoming independent the way their parents did. They’re entering a very unfriendly labor market that is particularly punishing to young workers. With the housing implosion in the United States, they’re still entering a housing system in which owner-occupied housing is very expensive. So, they have lower wages, if they have wages at all; they have high housing cost; and, in the advanced countries, there are ever more demanding credential races to qualify for professional employment. If they’re aspiring to be middle- or upper-middle class, the length of time it takes to pile up the education you need to qualify for the jobs to make that possible is getting longer and longer and more and more expensive. When you put all those things together, it’s not all that surprising that the accordion family has developed the way it has. It’s just a bunch of really bad circumstances that have coincided and affected this generation in ways that have not been the case before.

Money is (maybe obviously) a major reason for this trend. How so?

The recession we’re in has intensified a bunch of trends that were already gathering force, and already pushing people into accordion families. Those trends included a real downdraft in the capacity of young workers to find their way. That has really spread as downsizing has gathered force, as jobs have been outsourced. It’s become a much more competitive labor market, and an employer can be incredibly choosy. That leaves young workers at a disadvantage. And as much as they have a hard time qualifying for those jobs, the jobs themselves have increasingly become short-term, part-time or unpaid altogether. Now, to become a qualified professional, many middle-class American kids are going to have to spend many years in completely unpaid internships. So they finish college, or in the course of going to college, they spend years upon years working in jobs that used to pay money and don’t anymore because this market is so crowded. Well, if you’re going to spend years interning somewhere so that you get the kind of experience that will cause an employer to look at you seriously when there’s a paid position, how in the world are you going to manage if you have no income? You’ve got to live someplace. So, in households that can afford it, parents are making it possible for their kids to gather those credentials that will allow them someday – they hope – to launch at the level they’re expecting.

Is this phenomenon the same for lower classes or are there different reasons driving the accordion family trend in these rungs of society?

In poorer households, these accordion families have always been there. There’s nothing new there, because lower-income people have had to pool their incomes for generations, because to keep the household afloat you had to have everybody working and everybody contributing – and by the way, that was true for many middle-class households before the Second World War.

So this period of time which we come to see as normal – of young people leaving home; and spending time on their own before they marry; and their parents having an empty nest – that’s a phenomenon of the post-Second World War period of great affluence. It created a huge boom in wages, and burgeoning opportunities in the white-collar world. We’re not there anymore and we might not be again. We think of it as normal – and I think this is an important point – because the generations that experienced that “normal” are so huge. They dominate the social scene. They’re the baby-boom generation. That was their normal, but it wasn’t normal before them and it may not be after them.

So is this negative impression we have of boomerang children due to fickle memory?

What people think about, what they regard as normal, what they factor in as explanation for how they got where they are really differs from one country to another. In the United States, I came to find that people forget these huge investments that were made by the whole society in the form of, for example, the GI Bill, which really made a difference in the trajectory of those generations. It allowed them to become homeowners; it allowed them to get a college education – the first in their families ever to do so. They wouldn’t have been able to do either of those things if it were not for huge investments that we made, through government, in their well-being. Now, of course, this was seen as a tribute to soldiers – and it was, of course. But when you interview people [of that generation] and ask them, “How did you manage to become a homeowner?” they almost never mention the GI Bill. It’s not that they would deny it if you asked them, but if you just ask them, “Well, how did this happen?” the account is very much one of: “Well, I worked hard. I saved my money. I didn’t go out to eat. I had very modest tastes. The problem with the next generation is that they’re spending money freely and they have expectations that are too high, and they’re not as disciplined.” It’s all down to the personality of the generation rather than these huge economic structures that really do play a powerful role in determining where any individual or family ends up.

The same thing is true when you look at other countries. The Japanese, for example, tend to be very much like Americans: they think every person is the master of his own destiny. So if his destiny is not working out, then he really is to be despised. [These individuals] are the object of disdain. The Japanese tend to look at that next generation that’s living at home and say, “Well, they’re really lazy,” or, “They’ve lost their way,” or, “They don’t know how to be men like their fathers were,” and, “They’re a defective generation.” But you never hear the Spaniards say that because they have a different history and a different political culture, and they are looking for the ways in which government, or big business, or whatever, is to blame because they see themselves as recipients of those forces.

So these cultures, they subtract and they add pieces of their histories very differently, [even though] they’re all suffering from the same economic pressures.

Is there a place that you’ve studied where the self-perspective is healthier or more accurate?

When I started the project, I thought that Americans were sort of unrealistic in the way they thought about things, but when I started looking at these other countries, I decided maybe that wasn’t the case. That’s because now I can see the extremes on either side more easily. I can see how hysterical the Japanese are about [the accordion family trend]; and I can see how comfortable the Italians are with this, and how they don’t think it’s a problem.

So the United States turns out to be the moderate middle. There are some structural reasons why that is the case. We do have some housing that’s cheap – not homeownership, but we have dormitories on college campuses, we have rental housing that people can share with roommates. You’d think that that’s the way the whole world is organized, but it’s not true. In Spain, in Italy, there are no dormitories, there’s very little rental housing. In Japan there’s almost no rental housing. So, if you don’t have the money or the kind of job that you will need to have for a bank to lend you money for a mortgage, you’re not going to be able to move out because you’ve only got two options: You live at home or you buy a house.

You point out that there are very few accordion families in the Nordic countries. Why?

In Sweden, if you’re still at home after the age of 18, something is really wrong with you. I asked people in Nordic countries why they thought that in places like Portugal and Spain young people stayed with their parents for a long, long time, and I was really intrigued by their answers. Their answers had nothing to do with differences of the welfare state, at all. They said things like, “Well, we think maybe they love their children more than we do,” and, “There’s more attachment and affection in their families.” This led to one of the most surprising parts of the research project that underlies this book.

I thought the Nordic countries would look like paradise. These are the places where the problems that produce the accordion family don’t exist because the state has stepped in and cured them. I was amazed to hear the Nordic interviews talk about people being lonely, feeling separated, like maybe they didn’t love each other enough. It made me realize that the flip side of economic dependence, or need, across generations is a degree of commitment and affection and engagement that really isn’t alive in the Nordic countries in the same way. To them the emotional side is very evident and it causes them to be self-critical about whether they’ve gone too far and made it too easy for families not to care for one another across generations because the state cares for you.

Are you advocating for any social reform in the US?

Investment in higher education has always paid off for the United States as it does in the social democracies.  Increasingly success in the world economy depends upon skill, training, flexibility, and all of the attributes we refer to in using the phrase “human capital.” Sadly, the U.S has been moving away from investing state resources in higher education at precisely the time when some of our competitors are pushing hard to increase their human capital. If we do not provide access to college for worthy students whose families cannot afford to pay the high cost of higher education, we will be wasting our talent base. So yes, I do think that we should be moving in the opposite direction, as we did with one of the greatest pieces of social legislation in the country’s history: the GI Bill.

How do these attitudes break down between ages?

I think what we’re going to see is that something that started out looking like an [age-specific] trend is going to engulf multiple generations. These labor market rules that introduced short-term and part-time jobs have affected one generation of young people when it began, basically in the mid ’80s. But 20 years later, it’s no longer just one generation [that is affected]. And if this keeps going – which I think it probably will – ultimately this will have engulfed the whole society because all the generations that come up from behind will be affected by the same labor laws. Right now, you’ve got two generations side by side with very different economic realities and very different definitions of a normal process of maturation: you’ve got the baby-boom generation [that] was able to be independent, and then you’ve got the generation coming behind them that inherited a completely different economic world. These two groups are now grappling for what is really normal. What should we be doing? Is it my reality or your reality that ought to count? But if you fast-forward another 20 years, when virtually everyone has been affected by this trend toward short-term employment and high housing costs, it’s going to become the new normal and there won’t be a contrast, and it won’t be age-graded because it’ll be everybody.

Some of the data you’ve collected on the accordion family phenomenon shows that there are more men staying with their parents than there are women doing so. Why do you think that is?

Women seem to be streaking ahead in educational attainment and occupational prestige. That may be one of the least recognized, but most important changes of our time. As they graduate high school and enroll in college at a higher frequency than men, women at the high end of the skill spectrum are starting to outstrip men in their earnings. This may well translate into earlier independence. Of course, in the past, women left home before men because they married at younger ages. Now, however, skill differences born of educational differences may mean men are less prepared than the women their age.

A number of college grads not having a really clear, defined career path are often returning home to “figure out what to do next.” Is this a privilege of class or reflective of a deeper social or cultural value?  

Class has something to do with it, but there is something else going on. When I [used to] talk to my grandparents, they never thought that work was something that gave you meaning – it was just the way you put the roof over your head. But suddenly in the boomer generation, you have a very different way of thinking about work: It’s to be valuable, meaningful, honorable, enjoyable, a source of identity. That has now become a kind of standard for the way we think work should be. We have accepted the notion that our children ought to have jobs that are meaningful, not just a job that puts a roof over your head. It’s true that are all these powerful economic forces have set in motion the demand for the accordion family, but it isn’t all about necessity: it’s also about desire, values, what people find useful, what they’re proud of. And every one of these cultures has a different way of defining what kind of future is honorable.

How would you summarize parents’ and their adult children’s experiences living together?

There can be a lot of stress and a lot tension because the program isn’t working if the young people are not moving forward to a future [on which] everyone can agree. [There is], of course, a sacrifice of privacy. You do hear parents talk about how their golden empty nest years disappeared because the birds came back to the nest, or that they’re having to spend a lot of money that they would’ve otherwise saved for their own retirement to pay to take care of their kids for many years longer than they expected to. At the same – because nothing is ever simple – there can be a lot of joy in this.

So these parents who remember having to make sure Mary’s home at night, because it’s 12:30, are not thinking like that anymore now that Mary is 25. So they get their kids back in a different form than the way they had them when they were teenagers, and they’re introduced to the pleasure of getting to know your child again as an adult, [someone] with whom you might have a lot in common.

[Marriage has changed too.] I think we’re seeing a return, in some ways, to the way things were before the Second World War with the rising age of marriage and people staying home until they marry. The difference is they’re taking such a long time to get there – much longer than they did even before the war. In 1938 and thereabouts, you had people marrying in their mid-20s, and then it just plummeted. In the 1950s, the age of marriage in the U.S. for women was about 19 or 20. Now it’s gone way back up to 27 or 28.

What do you think future changes will look like?

I think the changes to come will have to do with what happens when this baby-boom generation is really elderly, because a lot of the resources they might have saved to care for themselves will have been spent on their children’s advanced education and on the preservation of the accordion family itself. And there are big changes that may be coming in 10 years or so, when we discover we can’t afford the nursing home solution such as it was for the earlier generation.

In his new book, “Borrow: The American Way of Debt,” Cornell professor Louis Hyman writes, in essence, a biography of American debt. He traces debt through American history: from the late 19^th century, when unpaid dues meant public ignominy, to the 1920s, when the auto industry changed the face of borrowing to the mortgage fallouts that led the Great Depression to the invention of the credit card as we now know it, all the way to the current shambles of our national economic livelihood. Along the way we meet characters like the Henry Ford, the xenophobic inventor of the Model T whose scorn for the liberal age of borrowing got the best him, and Lower East Side grocery clerk Joseph Miraglia, whose miraculous $10,000 spending spree in 1965 made history as one of America’s heftiest credit cart blunders.

Salon got a chance to speak with Hyman last week about America’s long road into debt, the problem with applying morality to economics and, of course, that scene in “Pretty Woman” where Julia Roberts goes on a shopping spree.   

Your background is in history and mathematics. How did you become interested in debt?

When I was in graduate school I was fishing around for a history topic that hadn’t been done or worked on before. This was in 2003, before financial history became fashionable again and before people knew there was going to be a crisis.

Little did you know… or maybe you did know, what would happen with the recession?

Unfortunately, as a historian of labor and business, I noticed that a lot of working people were struggling with debt. I thought it was a good topic to get some perspective on.  As I got into the topic it was something that lent itself well to the kinds of questions I that interested me. Historians are look at how things actually are, rather than economists who are interested in how things ought to be. My work is in people’s choices, and how our choices are constrained by institutions. It lends itself to a more readable history than just a history of charts and graphs.

In the first chapter of the book you discuss how debt was extremely stigmatized in the 1920s. What was society’s moral view on borrowing then as compared to now?

People approach their checkbook not from a math point of view, but from a moral point of view. I think that’s really a key to understanding all of this. It is shocking how commonplace debt is today, but another difference between then and now is the financial infrastructure of debt. We are told that our grandparents didn’t borrow. That’s not true. People borrowed in the 19^th century, they just did it surreptitiously, illegally, or at the margins. It was always stigmatized. That stigmatization arose out of the belief that a mortgage or a debt could easily bankrupt you, or the economy would change, and you would lose everything. In the 1930s, ’40s, and ’50s the atmosphere around debt changed: New federal programs and financial institutions, from the FHA to department stores, enabled people to borrow more safely. So that fear that everything could be lost went away in the middle of the 20^th century. In the last 30 years that changed again. Those institutions born in this era of growth have persisted into our era of stagnation.

Is debt being re-stigmatized because of our most recent financial crisis?

Absolutely. In the 70s and 80s, it was like in the movie “Pretty Woman”; how glorious it was for Julia Roberts character to use a credit card. That was because most people in the ’80s didn’t have credit cards. In the ’90s, credit card use started to take on a different cast; it started to be seen as somewhat irresponsible. Mortgages maintained that shine of responsible adulthood until the financial crisis. Now people are questioning whether it’s good to go into debt for houses in a way that they certainly haven’t for 70 years.

In the book, you talk about the balloon mortgage and mortgage-backed securities, which had a big part in the economic collapse in the housing market during the Great Depression.

What’s shocking is that the balloon mortgage and the mortgage-backed security are things that we imagine were invented in the last ten years. At least I did before I started this research. But actually, they were commonplace in the 1920s. Banks would issue bonds to local investors who would use that money to lend interest-only mortgages (or balloon mortgages) to consumers. They were called balloon mortgages because they swelled up so that you’d only pay the interest for 3-5 years and at the end of the 3-5 year period you would just refinance it. The thought then was, you’d try to get the biggest house possible and make some money off of it a few years down the line. Banks had access to all this money to lend because they were selling “mortgage bonds” or “participation certificates.” But the bonds weren’t trade-able, they weren’t like mortgage backed securities are today. They couldn’t be resold. As the markets begin to go south after the crash people stopped buying the bonds, there were foreclosures, people started to withdraw their investments, and others were unable to refinance their mortgages.

And then Fannie Mae was created to help the government fund mortgage lending?

New Deal policy makers set up the FHA, the Federal Housing Administration, which created a set of guidelines to ensure that houses would maintain value over time. They set up an insurance system so that lenders would be repaid in the case of a default, to prevent foreclosures. New Deal policy makers created Fannie Mae, originally called the Federal National Mortgage Association, to buy mortgages from local banks and mortgage companies and sell them to insurance companies and other investors. This way there was no longer a need for bonds.

In the book you give some fascinating historical information on how department stores, and later discount stores, changed the way Americans shopped and changed their intuitions about credit.

What’s interesting about department stores is that they are an amalgamation of a bunch of different kinds of stores, clothing stores, appliances, etc. Credit in the department store in the early 20^th century was a service, like delivery. The store didn’t make any money on it at all. That’s the most important thing to realize; that it was not a profit setter. It was something you did because it kept your customers happy. After the war, though, department stores begin to offer what they called “permanent budget accounts.” It allowed people to pay back purchases over many months, and the store was able to charge them interest. By the late 1950s, department stores had more money invested in consumer debt than in their own inventory, so they began to raise the interest rate on credit to 18 percent. It became profitable and they could resell that debt to finance companies. The subcontracting of debt enabled a whole system in which Americans got used to buying on credit and paying interest. Once debt could be resold, discount stores like Wal-mart and Kmart could sell for lower prices and offer the same services as department stores.

You also mention in the book that banks had an essentially trial-by-error process in learning how to profit from credit cards in the ’60s and ’70s. What were some of the regulatory and infrastructural changes that put banks at the forefront of the lending industry?

It’s important to realize that banks were not driving this shift in the ’70s. Banks didn’t come into the credit card industry until 1978 with the Marquette decision, which held that you could charge customers the legal interest rate of whichever state the bank was located in. So banks in states like South Dakota, where you could charge very high interest rates, could lend to people in Nebraska or New York City. That’s when Citibank moved its operation from Long Island to South Dakota, and charged very high interest rates across the country. This shift in the regulatory environment is key as well as the rise of interest rates more generally in the economy during the inflation of the late 1970s.

Why did consumers accept these high interest rates on credit cards?

If you are paying the customary 18 percent a year, it actually isn’t that much as long as you pay off most of your debts every month. And most of the credit cards that were lent in the ’70s and ’80s were to the well-to-do, who could handle the payments.

Nowadays almost anyone can get a credit card, not just the well off. When did that change?

It happened in the early ’90s. Banks continued to get more efficient at lending and their credit models, they believed, got better and better at differentiating between a good credit risk and a bad credit risk. It also became cheaper to borrow so that during the early ’90s from 1991 to 1996, during a five year period, nearly all the expansion in credit card debt was through securitization, when banks resell debt as credit card backed securities, just the way mortgages can be sold again as securities. Because it became cheaper to lend, banks could lend to poorer and poorer people with more vulnerable employment statuses because if these people defaulted,  it wasn’t as big of a deal. Statistically, they expected default, and they just thought they could manage those defaults through clever math.

What about the mortgage market in the ’90s? In the book you talk about how an influx of securities into the mortgage market made it ridiculously easy for people to mortgage new homes. How did this lead us into a speculative bubble?

People believed that house prices would go up and that they were good investments. Friends at work, at church, at the gym were telling each other how much money they had made on their houses over the last generation. By 2005 a lot of people bought secondary houses as investments. The speculative bubble happened for many reasons. The most important reason, we think, is that most Americans weren’t making as much money. Median wages stagnated. People couldn’t borrow to invest in the stock market, but they could borrow money from a bank very easily to buy a house. People thought investing in the housing market gave them leverage to make money quickly. You see the collision of a stagnating wage market with a rising house market during a moment of low interest rates. Wages hadn’t gone up for 30 years but wealth had gone up and concentrated at the top, amongst the wealthiest. That money had to be invested somewhere and it looked like housing was a safe, easy way to invest. This money went into houses rather than into business. It went into things that produced nothing rather than things that were economically productive.

You make a really important point comparing the housing market to a Giffen good. A Giffen good is a term, in economics, that refers to something for which demand will increase as its price increases, which works against our typical understanding of the relationship between price and demand.

In economic textbooks, Giffen Goods are described as an anomaly, like a mythical beast or a unicorn that could exist intellectually but never in the real world. But it’s exactly what happened with the housing market: when the price went up, demand went up. The key is that it was not just about borrowers but about lenders. Because there was this ready supply of capital to invest and these lenders were willing to fund all of these mortgages, the housing prices went through the roof. The market wasn’t self-correcting, and there was no equilibrium until there was a crisis.

If it were left up to you, how would you change the way capital is invested in this country? What needs to change?

I think it’s important to realize that we need to use our policies for productive investments. We’ve made it too easy to invest in consumer debt. We can use the same policies to steer money into productive investments. Businesses produce value, they produce jobs, they produce growth, and in our economy, it’s very hard to do that these days. You can get venture capital for fancy high-tech companies, but you can’t get loans for mom and pop operations. I think business investment is something that’s very moderate in a lot of ways from the left and the right. From my perspective it helps us think about how we can actually intervene in the economy rather than just scold people for borrowing too much or being predatory lenders. One of the most important points of this book is to get past moral arguments. We can acknowledge the importance of culture, but I think it’s important to see ways we can actually intervene and make things better.

The origins of the term zombie bank are much more recent than the “Epic of Gilgamesh.” The expression was first used by Boston College professor Edward J. Kane in an academic paper published in 1987. it referred to the savings and loans institutions in the United States that were insolvent but allowed to stay among the living by their regula­tors turning a blind eye to their losses.The term gained prominence in the next decade when it was more widely used to denote Japanese banks, whose refusal to face their losses and clean up their balance sheets was blamed for the industrialized nation’s so-called Lost Decade. During the financial crisis in 2008, bloggers, columnists, analysts, and even politicians began using it when talking about the weakest banks in the United States and Europe.

In its simplest form, zombie bank refers to an insolvent financial institution whose equity capital has been wiped out so that the value of its obligations is greater than its assets. The level of capital is crucial for banks, more so than for non-financial companies, because in the event of bankruptcy, a bank’s assets lose value faster and to a bigger extent. Thus, when a bank’s equity declines significantly due to losses, its creditors panic and head for the door (deposits are insured in most Western economies, so depositors don’t run away as easily). Capital is the size of the buffer that protects creditors of a bank from losses.

Even though technically, wiped out capital means bankruptcy and rules in many countries require the authorities to seize a lender in such a condition and wind it down, history is full of examples when that was not done. The dead bank is, instead, kept among the living through capital infusions from the government, loans from the central bank, and what is generally referred to as regulatory forbearance — that is, giving the lender leeway on postponing the recognition of losses.The intention is that economic conditions will improve and losses will be reversed; the bank will be able to make profits over time to cover the remaining losses and return to health.

The biggest fear that politicians and regulators have when a bank nears death is the possibility of contagion — that the collapse will spook investors, depositors, and the public in general, causing a run on other banks. So the initial knee-jerk reaction by the authorities is to prevent the fall. Of course, not every failing lender is saved. Small banks around the world get taken over by authorities and wound down all the time; the FDIC in the United States has been seizing one or two every week since the crisis started.

There are two opposite approaches zombie bank managers take as they struggle to bring their institutions back to life. They’ll hoard cash, make few new risky loans, and wait for the slow profit-building to pay for the losses over time. Or they’ll take much bigger risks with the hope that they can make windfall profits to plug the holes. The first was employed by Japanese zombie banks in the 1990s and is faulted for that nation’s Lost Decade, when the economy couldn’t resume growth after the property bubble burst because the banks wouldn’t lend. The latter was the choice of action by many savings and loans zombies in the 1980s in the United States as they “gambled for resurrection,” in Kane’s words. Although some of them won their bets and survived, most saw their losses multiply, making their final resolution even costlier for the taxpayer.

The propping up of institutions that should have died is unfair to healthy competitors. In a real market economy, those companies that take the wrong risks and lose out are supposed to fail, their customers and market share shifting to the surviving firms that were more prudent. In the United States, the credit rating uplift that Citigroup and Bank of America enjoy from their implicit government support lowers their borrowing costs, giving them an unfair advantage over the thousands of small banks that need to rely on their own strength for their ratings. Community banks have to pay more to borrow, because when they mess up and fail, they get taken over and shut down. As the ECB provides short-term loans to Irish banks and other zombies in its region in place of the wholesale borrowing they no longer can access because investors aren’t willing to risk their immi­nent death, banks that fund themselves through more expensive retail deposits lose out. “The business model that was challenged most during the latest crisis, the wholesale funding model, is being rewarded when it should really be punished, curtailed,” says Antonio Guglielmi, a bank analyst at Italy’s Mediobanca. To compete with the zombies, healthy banks end up taking bigger risks too.

When the zombies offer higher rates to lure depositors, healthier competitors may have to as well so as not to lose customers, thereby hurting their profitability and future health if those rates are unsustain­able. The rescuing of failing institutions also creates or increases what’s commonly referred to as moral hazard — the propensity of managers to take risk without considering the negative consequences, since they believe the government will bail them out in case the risks blow up in their face one day. If the executives who run their firms to the ground keep their jobs and their companies are resurrected with tax­payer funds each time, then future executives will have very little incentive to worry about the risk-reward balance that is crucial to the functioning of a healthy market economy.

Letting zombies linger around also leaves the financial system vulnerable to aftershocks following a major meltdown. If the recovery takes hold with no hiccups, everything is fine, but too many times, the road isn’t so smooth. With zombies around, a second shock will drive down the confidence of investors and customers much faster and bring the financial system to the brink of collapse once again. As much as the public might hate the bankers now, the financial system plays a crucial role in the global economy, allocating capital and moving payments around. A frozen credit market, as we witnessed in 2008, can put the brakes on economic growth.

Keeping interest rates at zero in an effort to give the zombies time to heal their balance sheets has many harmful side effects for the rest of the global economy. It’s a wealth transfer from pensioners and others relying on the fixed returns of their savings to the banks’ coffers. That transfer reduces the disposable income for a section of society and thus their spending, which can become a major drag on the economy if it lasts for many years. Meanwhile, the rise in govern­ment debt is a wealth transfer from future generations, who are forced to pay for their predecessors’ mistakes. As in the case of Japan, which has kept its interest rates near zero since 1995, it can also settle in culturally, creating expectations of stable or falling prices and cause delaying of consumption or investment decisions. “Twenty years of zero percent interest rates change the psychology of consumers and savers,” says Todd Petzel, chief investment officer at New York fund management firm Offit Capital Advisors. Petzel has calculated that the wealth transfer in the United States equates to $500 billion for each year that rates stay at these levels.

Traditionally, lower interest rates are central banks’ best weapon to stimulate economic activity. The thinking is that companies will borrow and invest when rates are lower; consumers will borrow and spend. Yet when there are zombie banks in the mix, the money provided at the low interest rate doesn’t necessarily trickle down to the consumers or the small enterprises. Zombies that borrow from the central bank at zero would rather lend to borrowers who can afford to pay higher rates since the zombie needs to heal its broken balance sheet as quickly as possible through profits. Thus, the current zero percent interest-rate policy has channeled funds to emerging market economies where returns are much higher, in double digits in some countries. That has caused overheating of their economies and could cause a crash the way Japan’s zero percent policy led to the Asian crisis of 1997–1998 when the free Japanese money found its way to neighboring countries.

Few people have made the connection, but even the events in the Middle East are an indirect result of the monetary easing in the West. Not only have the U.S. and European central banks kept inter­est rates close to zero, but they’ve also pumped trillions of dollars of extra cash into the global financial system. This policy of so-called quantitative easing has led to commodity price increases, including agricultural commodities. For the impoverished majorities of Middle Eastern countries, small increases in the cost of food can be devastating and served as a catalyst in the uprisings from Egypt to Tunisia. Last time around, when food prices surged, they came down fast with the financial crisis’s onset. This time, the Western central banks are deter­mined to keep pumping money until their banks can earn their way out of death, which can keep food prices high for much longer and lead to further unrest in poor countries.

Bailing out zombie banks can even bring down countries that have been otherwise prudent. Ireland joined Greece in seeking help from the EU in 2010, not because its government spending had been pro­lific in the past two decades, but because it decided to back its banks that collapsed with the crash of a property bubble. Pumping money into its zombie banks, which have proved to be black holes, almost doubled its national debt and raised fears that it could not sustain paying such a heavy burden.

It’s easy for politicians to make mistakes when faced with a crisis considering that decisions have to be made on the fly, with limited information at hand. Paulson and Geithner have said they had to rescue banks otherwise the world could have faced another Great Depression. Perhaps they were right initially — to prevent a total melt­down, temporary measures were needed. However, once the panic subsides, politicians need to seize the opportunity to finish off the business they couldn’t during the heat of the moment. That hasn’t been done in the three years that have elapsed since the crisis.

Gilgamesh, who was a very good king and loved by his people, made the ultimate error of rejecting goddess Ishtar’s love. The ensuing seven-year drought, which Ishtar got the father of gods to inflict through her threat of bringing back the dead, devastated Gilgamesh’s empire. Keeping zombie banks alive can wreak similar havoc on the world in the next decade. To prevent a lost decade like Japan’s in the 1990s, today’s politicians need to kill the zombies so the drought doesn’t last longer.

Excerpted with permission from the publisher, John Wiley & Sons,  from “Zombie Banks“ by Yalman Onaran.  Copyright © 2012.

The late economist Julian Simon devoted his life to challenging that notion. “Adding more people causes problems,” he acknowledged, “but people are also the means to solve these problems.”  Simon’s optimism was famously vindicated in 1990, when he won a 1980 bet with Ehrlich over commodity prices.  Ingenuity had driven down prices of the very resources Ehrlich thought would be made more scarce by population growth.

Thus, while most resources are inherently limited, Simon said, what we can do with them is unlimited.  “The main fuel to speed our progress is our stock of knowledge, and the brake is our lack of imagination,” he wrote in his 1981 book, “The Ultimate Resource II.” “The ultimate resource is people—skilled, spirited, and hopeful people who will exert their wills and imaginations for their own benefit, and inevitably they will benefit not only themselves but the rest of us as well.”

So Simon would have celebrated the arrival of our 7 billionth neighbor. More people means more minds—more innovators and entrepreneurs working to improve the human condition.  Innovation comes not just from the introduction of a technology, but novel uses of it. Thus, while we tend to focus on inventors like Steve Jobs, no less innovative—and heroic—are, say, the fishermen in Senegal who use their cell-phones to find buyers for the day’s catch before their fish spoil, something that used to seem inevitable.

This is essentially the message of Adam Smith’s “Wealth of Nations:” Profit rewards people for meeting unmet needs, thus serving the greater good. Smith’s “invisible hand” drives not only the constant improvement of computing power but the ongoing transformation of even the remotest villages.

Smith’s less appreciated insight is that “the division of labour is limited by the extent of the market.”  More people means more buyers, too. “Smith’s point, as economist Steven Horwitz explains, “was that the degree of specialization that one would see in a given market depended upon how much demand there was for the specialized product. Thus, small towns rarely have ethnic restaurants beyond the very popular Chinese and Italian, nor do they have radio stations that specialize in very narrow musical formats…. Larger, wealthier communities can support this degree of specialization because there is sufficient demand, deriving from a larger population and a larger degree of wealth being produced.”

As Horwitz concludes, “production (supply) is the source of demand.”  Cell phones are working to expand markets at the local level across Africa, boosting the supply of, and demand for a wide range of goods.  That’s also what the Internet does on a larger scale. As Harvard Law Professor Yochai Benkler puts it, “a global network of communications and exchange that allows much greater flow and conversation, so that many new connections are possible on scales never before seen.”

The “wealth” in the title of Benkler’s “The Wealth of Networks“ comes from increased cross-fertilization of minds.  Matt Ridley, the self-described “Rational Optimist,” put it best: these networks allow ideas to have “sex” with each other.

Simon’s optimism rested on his belief that “minds matter economically as much as, or more than, hands or mouths.”  He would have applauded the “network effects” generated by the Internet as an ever-expanding “market” for ideas.

But just as important is the rising creative potential of each mind through better “training”—not for the kind of “work” done by hands or simply applying “knowledge” that can be memorized, but training for creativity and ingenuity. We need training for mindcraft, argued Lew Perelman, who prophesied the rise of digital learning technologies  in 1993. Tapping the creative potential of all seven billion minds requires transforming education from an expensive, rigidly bureaucratic system that produces credentials (and enormous debt for students and governments) into a lifelong process that maximizes the creative potential of everyone.  It also requires countering the pessimism that pervades popular culture, right down to the movies and books that inspire our youth.

That culture of pessimism saps the very ambition most needed to innovate out of the very real problems the pessimists worry about. Ehrlich’s crisis-driven mentality also fosters top-down, technocratic policymaking—as if the future were an impending disaster that required emergency planning.  The optimism of Smith and Simon is pragmatic in recognizing the challenges of population growth (among other things), but also that these problems can only be solved by more and better technologies generated by more minds working in larger, better markets.  Neither minds nor markets can flourish without freedom to experiment with new ideas, technologies and business models.

That holds true for our seven billionth neighbor whether she’s  born in Senegal or Seneca, New York.