Zhang Ai Ling’s words to live by may not apply to life (at least my life), but they do fit something else

I am by nature pessimistic, rather than optimistic. That was especially true during the last few years of my life in America. Back in the United States, I was a struggling member of the academic lumpenproletariat and had little stability or certainty with respect to employment. At the same time, I was marooned in a very conservative city that doesn't have much to offer in the way cultural and intellectual stimulation.

If that wasn't enough, I had two close shaves with being shot at and killed. As a native New Yorker friend of mine quipped, I attracted bullets while living in the US (this happened in my hometown and during a brief and very unhappy stint of living in Los Angeles). One of the many nice things about being in Beijing is the absence of violent crime; I'll have more to say about that in another post.

My outlook on life has brightened considerably since moving to China and particularly since relocating to Beijing. My life here is certainly not as rich as it was back in the states with respect to material possessions. But I feel much more at home in this vibrant and cosmopolitan city, which is filled with history and culture. I can also enjoy its urban amenities at a fraction of what it would cost to live even in the Twin Cities, Portland or Seattle, much less Los Angeles or New York. But best of all, by living in China, I can see first-hand how this fascinating country and society is literally changing at the speed of light.

Although I don't make lots of money, my income, particularly relative to my expenses, is pretty good. I can live quite comfortably and still send large sums back to the US in order to build up a nest egg for a house and my retirement. And most importantly, I have lots of wonderful friends in Beijing—mainly Chinese, but some laowai as well. In my old home town, on the other hand, I always felt like an outsider, even among that city's small and hunkered down bohemian and politically progressive community.

So my life in Beijing doesn't resemble, even at a distance, a bright beautiful gown. However, you could certainly call it a somewhat worn, but still very comfortable and snugly warm cardigan sweater. And I plan on wearing that sweater for another three or four years before trading it in for life back in the states.

Speaking of life back in the states, America's current economic woes makes it look more and more likely that this decision is as much a matter of necessity as it is a matter of choice (of course, the global economic crisis is affecting China, and I'll pass on some of my first impressions about that soon). Reflecting on the current dark economic times in the US, it occurred to me that Zhang Ai Ling's “Words to Live By” are really a very good metaphor for the root cause of America's economic problems.

I'm referring, of course, to those financial “innovations” that promised to both minimize risk and deliver handsome returns to investors. In particular, all those derivatives, as well as the securitization of sub-prime home mortgages, looked like bright and beautiful gowns from a distance. But they were all along crawling with lice. Indeed, one could add that these lice were carrying a really bad contagious disease, like say, typhus, and that the little critters spread the contagion throughout the US economy.

I take a backseat to no one when it comes to loathing President Bush. I'm confident that he will be remembered as being hands-down absolutely the worst President in American history (he's certainly up against some mighty stiff competition here). However, I don't think Bush is mainly to blame for the country's economic woes. When Bush declared in late 2007 that the economy was “excellent,” he was just being his usual clueless self.

However, the majority of economists who failed to see or downplayed the housing bubble should have known better. The data clearly showed, in real time, not only that a bubble did exist, but that the longer it went on, the more painful the consequences would be once it popped (as all bubbles do). This myopia is even more baffling in the view of the fact that the dot.com bubble was hardly ancient history.

Being a pessimistic by nature, I believed from the beginning that the big run up in housing asset prices didn't bode well for the long-term health of the US economy. To be sure, this view was based mainly on my gut feeling. I know something about economics, but am certainly no expert and can't claim any special insight here.

However, some economists, people who are infinitely more clever individuals than yours truly, did see big trouble on the horizon. These folks included Dean Baker, who wrote about it in CALCULATED RISK, this year's Nobel laureate Paul Krugman, recent Nobel laureate Joseph Stiglitz, and NYU's Nouriel Roubini. As Krugman declared back in August of 2007, “Americans make a living selling each others houses, paid for with money borrowed from the Chinese. Somehow that doesn't seem like a sustainable lifestyle.”

Of course, at that time, Krugman and the others who warned about bubble trouble were derided as Cassandra-like “bubbleheads.” And one of the biggest deniers was the man with the most influence over the US economy, namely former Fed Chairman Alan Greenspan. For this reason, the maestro, or better put, maestro no more, should bear the biggest blame for the US economy’s current woes.

To start with, Greenspan's Fed facilitated the rise in housing asset prices by pumping massive liquidity into markets. At the same time, the Fed Chairman used his immense prestige to help block any effort to regulate derivatives trading, the subprime market, and the like. Indeed, Greenspan claimed only a few years ago that derivatives had made the financial system “more resilient.” And in 2007 he insisted that a “national severe price distortion [with respect to housing] seems most unlikely.”

Well, the October Case-Shiller index drop in US nationwide housing prices was the biggest on record. I'm certain that Greenspan's comment on housing prices is certain to rank right up there with General George Armstrong Custer's statement, “The US Calvary is the Indian's best friend”, in the annals of expert misinformation.

I couldn't resist putting that photo of a very befuddled looking Greenspan at the top of this blog post. The former Fed Chairman now admits that his earlier firm belief that markets could police themselves was … well … kind of wrong.

In his extremely fawning book on Greenspan, Bob Woodward called this man a “maestro.” I think it is now clear that Stephen Roach, who is the Managing Director and Chief Executive at Morgan Stanley, was more on the mark when he called Greenspan a “serial bubble blower” some years ago. And now that these bubbles have all burst, the truest verdict on the former Fed Chairman is that offered by Steve Goldstein of Market Watch: “For a man who was once remarkably hard to decipher, Alan Greenspan is now as clear as an empty Lehman Brothers office.”

As my colleague Mike Watts, who has no love whatsoever for investment bankers and financiers, told me when he read this quote (also from Krugman's blog) and saw the photo, “Now that's absolute, utter class!!”