Techfun

Robert Heinlien signing autographs (1976)

TANSTAAFL is an acronym for the adage “There Ain’t No Such Thing As A Free Lunch” originating in the 1940s and later popularized by science fiction writer Robert A. Heinlein in his 1966 novel The Moon Is a Harsh Mistress,  which discusses the problems caused by not considering the eventual outcome of an unbalanced economy. This phrase and book are popular with libertarians and is often seen in economics textbooks.

The ideas behind those discussed in The Moon is a Harsh Mistress are further explored in many of Robert Heinlien’s other books.  In one of my favorites, he explores the problems inherent in finding a use for all the money that can be generated in a capitalistic “boom” cycle without creating inflation or overproduction.

His solution involved the creation of seemingly insanely expensive practical and theoretical research problem.   This allowed the money to be put to good use immediately while at the same time guaranteeing future scientific advancement by allowing scientists to research matters that do not necessarily seem likely to generate a profit.

In today’s column, Eugene Robinson explains how we could have all benefited from Heinlien’s advice when the housing sector went insane.

Eugene Robinson – Bernie Madoff’s Lesson About a Free Lunch – washingtonpost.com

… But not all of Madoff’s investors could have been in the dark. Some must have realized how unlikely it was that he had found some sort of magical strategy or technique that would always make money, no matter what the financial markets were doing. Some investors, I would wager, must have calculated that they could get in, get their return and get out before the whole thing fell apart.

Which makes me wonder how many of us had our eyes open when housing prices were soaring in Ponzi-like leaps — by 10 percent or more a year, in some parts of the country — while middle-class incomes were largely stagnant. How many of us stopped to ask just who was supposed to be able to pay $1 million for a standard suburban split-level, even if it had an upgraded kitchen with a Sub-Zero fridge?

The whole subprime mortgage industry was based on the idea that housing prices would always rise. Given that assumption, it was perfectly rational for first-time homebuyers to sign up for adjustable-rate mortgages that they couldn’t really afford. From the moment they signed the loan papers, they would be building equity — through appreciation — that soon would make it easy, and lucrative, to refinance or sell.

In other words: Get in, get their return and get out before the whole thing fell apart.

I’m not saying that average Americans were as culpable as Wall Street in creating this financial and economic crisis; our sins were venial, whereas theirs were mortal. Madoff’s alleged fraud was at least straightforward. Much worse was the creation of exotic “derivative” investment products — whose true value turned out to be impossible to ascertain — that were bought and sold with enormous leverage. As long as real estate values kept rising, it didn’t matter what these chimerical investments were worth. What mattered to Wall Street was the ability to collect enormous fees from real people, in real dollars, for trading unicorns and dragons. ..