An editorial in the New York Times recently expressed concern over cyber-attacks being perpetrated by Chinese hackers against United States military, business and industrial computer systems. The editorial suggested that the US and Chinese governments try to quickly come to terms with this problem, perhaps by a negotiated agreement for fighting spam and malware. Of course, the United States has been playing this game, too; we’ve heard that the Iranian nuclear program was significantly compromised by the famous Stuxnet worm, and other hacks from the USA.
Yet such things are only toys compared to the ultimate cyber-weapon. Unlike Stuxnet and other virus-type exploits, which attack specific functions, or simply delete data that can be restored, this weapon leaves its victim intact but corrupts its relationships with everything else. It finds relationships that are essentially healthy and turns them inside out, leading people — and systems — to willingly act against their best interests. It makes highly risky behavior appear perfectly safe, and masks all cautionary signals. It proliferates via willing, self-interested individual decisions. Folks, this thing is dangerous.
Who has this weapon? We do. It has already been deployed, and its deadly work is being done, right now. And we know it works — because, alas, we tried it on ourselves first. The deployment against China, though, is a new, full-strength version whose power may be very great indeed.
The ultimate cyber-weapon has many names, but it is most commonly referred to by the innocuous-sounding moniker of Neoclassical Economics.
Its mechanism is deceptively simple. When introduced into a system, it spreads the idea that the value of real estate is always going to increase. This, of course, has never happened in history, and never will — bubbles burst — so subroutines are immediately deployed to promise great, easy, risk-free rewards, thus dampening any skepticism. Once it is accepted that real estate will always rise in value, the worm begins to deploy an insidious self-reinforcing loop. Land, which both spenders and lenders expect to appreciate without cease, is used as collateral for the loans which are used to buy and develop that land. The availability of easy credit makes more buying power available with which to buy land, and land’s constantly-rising value ensures that easy credit will always be available. Since easy credit is available and land values always go up, builders build expensive, luxurious developments. There will always be demand for these buildings because there will always be easy credit based on land’s inevitable rising value.
An eye-popping 60 Minutes report shows just how deeply-in the Worm has dug in China. Lesley Stahl tours entire cities, with high-rise central business districts, sprawling suburbs, huge shopping malls, 8-lane freeways — which are, incredibly, completely empty. Nobody is living in them. It’s unlikely that anybody ever will. They have been built by speculators, with money invested by millions of newly middle class Chinese investors.
Apparently there are large numbers of people in China who have, for the first time, some extra income to invest for their futures. However, there are very few available avenues for this investment. One that has been given official approval, however, is real estate. So we find hardworking factory workers putting every spare yuan into, maybe, four or five condominiums — while living in homes that are far more modest than the ones they’re buying. They are risking everything on real estate. They are in the grip of the Worm.
In the CBS report, Lesley Stahl interviewed a prominent Chinese developer who expressed deep worry about the future. He agreed, most emphatically, that what’s happening is a bubble — a very big bubble. Asked what would happen if the bubble were to burst, he shook his head. “Maybe,” he said, “another Arab Spring.” Recently the Chinese government, in a move reminiscent of its famous “one child” policy, has passed a law allowing each family to purchase only one home. But, there appear to be fairly easy ways of circumventing that, and investment in new real estate is till robust.
Nor has the Neoclassical Worm only been unleashed on China. A rather chilling recent article in Foreign Policy tells of the rising career of “the foul-mouthed rapper who explains India’s real estate bubble — and its rape crisis.” Yo! Yo! Honey Singh’s audience is made up of “villagers” who have soaked up new money by selling their farmland to suburban developers. Flush wth bling and badass style, these young men have been visited upon India’s cities, with horrifying results. Blame the Worm.
Finally, perhaps the most pernicious effect of the Neoclassical Worm is its ability to turn public perception on its head. Pundit after pundit, from either wing, equate economic success with rising real estate prices. For instance, liberal columnist Michael Tomasky, writing this past week, on “Obama’s Economic Miracle,” enthused that “Housing investment is up, real-estate prices are rebounding everywhere, the stock market is breaking records.” Be afraid. Be very afraid.
Is the Worm unstoppable? Maybe. It infects conventional economic thinking, perhaps terminally. Yet there exists a software workaround that can — if diligently applied — fully remove the Neoclassical Worm from our system and negate its pernicious effects. I’t not completely clear, at this point, why so few people know about this — but I fear the worst.