But the shock of Bayh’s decision and its impact on the balance of power in Washington is not the important part of this story.  In fact, the news is not so great for Republicans either.  The Tea Party movement is rocking the Republican mainstream.  Candidates surfacing from this movement are taking on Republican party standard-bearers in elections all over the country.

What’s going on is not a rejection of one party in favor of another.  Rather, it’s an upswelling rejection of politics in general.  People have had their fill of politics as usual and, in growing numbers, are saying no to the status quo.  Established ways of doing things are falling out of favor.  It’s bad news for politicians, perhaps, but it’s good news for marketers.

Senator Bayh was blunt in his announcement when he said, “I love working for the people of Indiana, I love helping our citizens make the most of their lives, but I do not love Congress.”  Why?  Because the old way of doing things no longer works.  As Senator Bayh said, “For some time, I’ve had a growing conviction that Congress is not operating as it should. There is much too much partisanship and not enough progress, too much narrow ideology and not enough practical problem-solving. Even at a time of enormous national challenge, the people’s business is not getting done.”

Senator Bayh is not alone in this judgment.  It is the judgment of the American electorate, too.  An AP/GfK poll in mid-January found only 32 percent approved of the way Congress is doing its job.  An early February poll for CBS/New York Times found three-quarters disapproving of Congress, a percentage equal to the previous all-time high.  A mere 8 percent think lawmakers should receive another term; 81 percent think not.

People are fed up with business as usual and seem determined to shake up the establishment at the ballot box.  The outpouring of populist outrage uncorked by the 2008 financial crisis is now in the process of moving from last year’s town halls meetings to this year’s election booths.  People are going to send a message.  And that message is one of discontent, frustration and change.  Former governor Sarah Palin mocked President Obama at the Tea Party convention when she asked rhetorically, “How’s that whole hopey-changey thing working for ya’?”  It was a made for YouTube moment but it missed the point.  In point of fact, people remain hopeful about the future and because of that, people are determined to keep trying to change things until somebody gets it right.  In other words, that “hopey-changey thing” is the actual operative dynamic these days.

And not just in politics; in the consumer marketplace, too.  People are looking for hope and change in everything, no less in the consumer marketplace than anywhere else.  What used to motivate people, what used to inspire people, what used to capture attention and interest no longer suffices.  All of the old ambitions have been discredited by the financial crisis.  The ways in which people used to shop, spend, borrow and consume took them and the economy to the brink, so people are determined to change.

A lot of the changes people have made in their shopping and buying have been dismissed, in effect, as nothing but frugality in the face of economic calamity.  Certainly, economizing is necessary these days.  But people are doing more than embracing thrift.  They are redefining value, high and low.  They are re-evaluating what’s worth buying and, in particular, what’s worth paying a premium.  When something is worth it, people will still buy.  The problem for marketers right now is that consumers no longer think much of what they had to have before is worth having anymore.  As a result of being forced to live without, many consumers have learned that they can do without.  This is not frugality; this is a new perception of value.  This is the problem facing Congress – what used to be okay with consumers now has to go.

But this is far from bad news for marketers.  What it means is that there is more opportunity for innovation and invention than ever before.  Consumers don’t want the same old things; they’ve repudiated those.  Consumers want something fresh and new; they’re seeking things that fit their new definition of value.  In turning their back on the past, consumers are looking hopefully toward the future with a determination to change things for the better.  Optimism is the chord to strike.  Change is the path to success.

Senator Bayh’s announcement reminds us that the more the status quo clings to the way things were before, the less the status quo has to offer for the future.  People will vote and buy the same way – for something new and innovative that better fits the lessons learned from the recession and the direction in which the future needs to go.  People are fed up with the old, yet hungry for the new.  That’s what’s relevant for marketers.  Now is the time to take chances not retrench, to do something new not something less, to innovate not pull back.  For consumers, the past is no longer an acceptable guide to the future.  Extrapolation won’t point the way; only invention can take that lead.

These two questions are an odd couple.  Both presume the ascendance of new media even though no one has yet to crack the code on how to make real money from new media.  Maybe there is still a place for old media.  Maybe new media won’t be quite so dominant if they can’t find the right revenue model.

But I’ve got a solution.  In today’s smaller economy – an economic situation that will persist for some time to come – consumers want deals.  They don’t just want deals.  They still want innovative, value-added products.  But in a smaller economy, it is simply a fact that consumers have less money to spend, so even with innovation, good deals are essential.

So that’s the answer for media – be the best place for consumers to find good deals.

This seems pretty obvious, doesn’t it?  But that’s not how media properties position themselves nowadays.  To advertisers, it’s always about eyeballs (so to speak).  But what is it to consumers?  What draws consumers to one sort of medium versus another?  Different media attract audience attention by delivering something that consumers want.  Just like products, media have to deliver a benefit worth paying for (and for media, even with subscription or usage fees, the relevant currency is attention).

Traditional market structure research into habits and practices splits media benefits into categories like information, entertainment, connection, and so forth.  Different media do better or worse on each, and promote themselves to consumers in terms of one versus the other.  All of this is important, but probably not the single best opportunity for media struggling to connect with consumers (old media challenge) in a profitable way (new media challenge).

The very best way to connect is to engage consumers on something that is highly important to everyone.  Right now, that is finding good deals.  No medium owns this space.  If consumers knew that they could turn to a particular medium like TV or to Internet portals or to newspapers for the best deals, that medium would dominate the media landscape.  An old medium would quickly reestablish itself; a new medium would quickly move to a solid model of profitability.

Yet, no medium is seen to be the best place to go for what matters most to consumers struggling with a smaller economy.  This is the real failure of media.  It is the biggest opportunity, too.  [J. Walker Smith]

The question, of course, is why.  What are these companies doing that is working?  What do they know about consumers?  What can be learned from their successes about the recovery consumer value equation?

The answer is innovation.

In announcing P&G’s results, Chairman and CEO Bob McDonald scoffed at the notion that frugality has hijacked consumer aspirations.  As reported in AdAge, McDonald argued “that while consumers may remain cautious with their money, trade-down isn’t inevitable.”  Indeed, said McDonald, “I think this idea that this economy is causing everyone to trade down is a little bit overly general and too broadly applied.”

This is exactly right.  As noted before on this blog, interpreting consumer behavior as evidence of frugality commits two classic interpretive errors.  Some consumers have become frugal, and some of them will continue to be frugal for the long-term.  But that is not true of most nor is it the key dynamic shaping the future marketplace.  P&G obviously sees this, too.

What has enabled P&G’s success is not marketing to frugality but product innovations.  Again, from AdAge: “Chief Financial Officer Jon Moeller said the quarter showed some vindication for the company’s strategy of innovating both on the premium and value ends.”  Through innovation, P&G has connected with the recovery consumer mindset.

Of course, this is not to say that every CPG company has succeeded in this way.  But many have done so, and even if others have succeeded by cutting prices, this is not the only way to succeed.  If a frugal mindset was all that mattered, then only price-cutting would work; innovation would have no chance.  Innovation is working for P&G and others because the key dynamic at work in the marketplace is not frugality.

Instead, as discussed in detail in A Darwinian Gale, the lesson of the Great Recession of 2008/2009 is risk.  Risk creates uncertainty, which upends the old value equation.  In the search for new value, consumers are open to innovation, perhaps more so than ever before.

As P&G CFO Moeller notes, P&G’s innovation has been at both ends of value, high and low.  This is crucial to note.  Innovation is not inherently premium-priced.  It is a false dichotomy to pose innovation and low price as polar opposites.  They are not.  In fact, in this economy, the best innovations are those that are also low-price leaders.  P&G has pursued innovation in premium-price offerings as well as innovation in low-price offerings.

Innovation up and down the price continuum is essential in this economy.  Consumers don’t want the same old things anymore, even if they are the cheapest.  For whatever price they pay, consumers want innovation.  The recovery consumer marketplace is about a new value equation, not the cheapest value.  Innovation is always important, but it is cost-of-entry now.  [J. Walker Smith]

From total spending alone, the conclusion might be that while the spike in consumer spending associated bubble will fall back, the new trend line will still be robust.  In other words, there was a bubble in binging, so the bust, when it finally settles out, will be nothing worse than a return to normal.

This is a misreading of the bubble.

As two recent analyses have shown, the boom in consumer spending during the 1990s and 2000s was not the result of binging on consumer goods.  Instead, it was due to skyrocketing health care costs, primarily in the form of insurance premiums.

What these two economic analyses show is that spending on consumer goods has been relatively constant for decades.  Maybe such spending would have been stronger if not for rising health care costs, but the squeeze on spending created by the recession is not wringing out waste.  Rather, it is cutting into essentials.

Published online in August 2009, these two analyses dissected the components of the spending boom.  As can be seen below in a key chart from each, health care spending was the reason for the overall increase in spending. 

See this chart from a post on the News N Economics blog, August 19, 2009:

And see this chart from an article in the Left Business Observer, August 2009:

 As the Left Wing Observer noted:

“Medical spending accounted for almost a third of that rise [in consumer spending] between 1997 and 2008.  Energy accounted for another third.  Spending on goods accounted for just 3% of the rise, or 0.1 point.  In other words, the familiar story that Americans went hog wild buying all kinds of stuff is wrong.”

Not only does the spending rate need to be reassessed and refigured to account for health care spending, so does the saving rate.  The Left Wing Observer again:

“Graphed below is the personal savings rate as reported along with how it would look had the medical bite out of after-tax income remained constant at 1991’s rate over the last 18 years.  The bottom line: it would have declined much less dramatically into its 2005-6 lows, and would since have risen back to 1992 levels.”

Few analyses of consumer spending account for health care spending.  Prognostications of where consumer spending is headed as the recovery takes hold must be properly calibrated.  Three implications jump out.

First, recessionary pressures on consumer spending are more severe than total spending numbers suggest.  Spending on consumer goods was not abnormally high during the boom, thus there is little fat to cut during the bust.  The reduction in consumer spending due to the recession will precipitate some fundamental challenges for many brands.

Second, prioritization will be the driving dynamic of consumer behavior for the near future.  This is one of the five key elements of the new value equation discussed in A Darwinian Gale.  Once health care spending is factored out of total spending, it is apparent that consumers have little cushion in their finances.  Obviously, they can’t keep buying as much as before, but they won’t be able to buy a little bit of everything either.  Something has to give.  Priorities have to be set.  As discussed in detail in the Gale, this requires that a reworking of marketing objectives, a shift in research methods and a profound change in the character and scope of competition.

Third, one hopeful benefit of health care reform will be a boost to consumer spending.  This has not been discussed during the debate over health care, but reining in the costs of medical care such as insurance premiums will put more money in the hands of consumers.  They can then spend more on other things.  This could well be the kind of jumpstart needed in the consumer economy.

While the impact of health care reform on consumer spending has received no attention in the U.S. health care debate, it is not an unknown tactic for stimulating spending.  For example, one of the stated objectives of the health care reform introduced by the Chinese government early last year was freeing up consumer spending.  One of the primary reasons why Chinese consumers have historically spent so little is that individual savings have been their only means of covering health care expenses.  Last year, with the global in meltdown and Chinese exports in decline, the Chinese government stepped in to bolster its economy with a couple of aggressive fiscal stimulus programs.  Freeing up savings through government-run, publicly-funded health care was one major initiative.  As USA Today described it, “The new health care system could free the Chinese to spend more on goods instead of saving for future medical care.”

Thinking of your brand competing for share of wallet with health care spending is not a common way of doing business planning.  But as economic analyses show, this is, in fact, the competitive context for all consumer goods, the implications of which matter a lot in figuring out how to ride the recovery into renewed growth and success.

One school of thought argues that behavior speaks for itself.  What consumers have done is the best predictor of what they will do.  Attitudes often misstate actions.  In-market tests can competently craft communications campaigns without attitudinal research.  Managing purchasing behavior is the purpose of marketing, so influencing attitudes is, if anything, nothing but a means to this end, and not always the best.

By this reckoning, consumer behavior is no more complicated than it looks.  If you want to know what to make of it, just look at it.

This is the sort of logic being used by much if not most of the news media in stories being written about the future of the consumer marketplace.  What’s observed is penny-pinching, so what’s ahead must be even more frugality.

These stories are off-base, as discussed in-depth in A Darwinian Gale.  But not only are these stories wrong, they are rooted in two major marketing fallacies.

A recent story in The New York Times is a prime example of this fallacious reasoning about consumers.  An article entitled “Hard Times Have Younger Floridians Catching the Early Bird,” (the online title was “Newly Frugal Generation Revives Discount Dining”) offers this observation:

“Across Florida in fact, the early-bird special is experiencing a revival.  With that label and some newer versions, several restaurants have introduced early dining discounts since the recession started, and younger people are arriving in larger numbers at classic establishments that have been serving up free dessert for decades.”

So far, so good.  This is simply a fact.  Consumers are looking for cheaper fare.  This is what you see when you look.  This is the behavior, but what to make of it?  In the very next paragraph, The New York Times weighs in:

“Part of it is purely business – promotions work when people have less money to spend – but restaurant owners, researchers and patrons say it also reflects a changing mood.  It is a sign, they say, of shifting priorities, as Americans respond to tighter budgets with a demand for value and a willingness to alter their habits to enjoy a little fun.”

This story advances the notion that frugality has taken hold; that unless things are really cheap, consumers won’t buy.  For marketers, this would imply that if a brand tries to market anything more than saving money, it will fail to resonate with today’s aggressively frugal mindset.  The only way to attract business, in other words, is the early bird special.

The first fallacy here is interpreting what this behavior represents, implies or means to people without asking them.  Behavior speaks clearly for itself only in a marketplace that is well-understood to begin with.  When things are in transition or rapidly changing or recovering from a major shock, then the meaning or implication of behavior is not so readily apparent.

The only times we are able to easily interpret consumer behaviors is when we have no doubts about what consumers are intending to do.  But that is exactly the problem now.  Nothing is clear anymore.  The context within which behaviors used to have meaning has utterly changed.  The depth, length and impact of this recession are wholly unprecedented.  We no longer understand where consumers are coming from, so putting a spin on their behavior is little more than a shot in the dark.

In fact, there is another very different yet equally plausible interpretation of the penny-pinching or frugality being displayed by consumers.  Maybe this behavior is not a frugality-based renouncement of spending but a shift in spending away from the kind of value available in the marketplace today.  This is not frugality; this is a shift in perceptions about what’s worth paying extra.  If true, this interpretation would predict that once consumers are able to spend again, they will do so as long as they see something worth buying.  If frugality is the key dynamic, then consumers won’t spend on anything at all unless it’s really cheap.

It’s not possible to choose between these two interpretations just by looking at consumer behavior.  At this point in the recovery, one would expect to see the same behavior either way.  The only way to sort it out is through attitudinal research.

A recent McKinsey study asked consumers what they were thinking.  Consistent with other surveys and other anecdotal evidence, 18 percent of consumers in this research reported trading down to lower-priced brands during the past two years.  But is this behavior evidence of frugality?  Of the consumers who switched, 46 percent found that lower-priced brands were better than expected, and, indeed, for many, “much” better than expected.  As a result of having been forced to make do with less, 34 percent of consumers trading down to lower-priced brands said they no longer preferred higher-priced brands and another 41 percent said that even though they still preferred higher-priced brands, they were “not worth money.” 

The bottom line, says McKinsey, is that “[a]s a result, a growing number of consumers are now in play.”  This is telltale language.  If frugality were the case, consumers would not be “in play.”  Instead, they’d be lost.  The reason that consumers remain “in play” is because they are still willing to pay for high value.

What’s changed is the value equation.  In being forced to live without, many consumers have found that they can do without.  But this does not mean a frugal focus on nothing but price.  Instead, it means a new search for value worth the money.  The challenge for marketers is to identify the new sources of value and then deliver this to consumers.  This is in contrast to frugality.  If frugality were the case, then job one for marketers would be reassuring consumers that it’s okay to spend at all.

In other words, what we make of behavior matters for the success of our brands.  Attitudes can never be reliably inferred from behaviors alone, and what consumers are thinking not what consumers are doing is what matters most for the future of this economy.

Of course, it’s not all consumers.  This is the second fallacy.  Too often we generalize a trend true of some, even most, to everybody.  We know we shouldn’t because we understand market segmentation.  But The New York Times deliberately avoids nuance because it makes for a complex storyline.  Readers want an uncomplicated takeaway, so only the rare news story discusses differences among consumers.  Instead, universalities are preferred, which often leads to over-generalization.

The fact is that many consumers will carry frugality with them into the future.  Just not all.  Similarly, many consumers want to keep spending, but have just lost any affinity for the value, high and low, that used to motivate them.  But again, not all.

The overarching shift in the marketplace is one of a new value equation, which will mean different things to different consumers – frugality to some; new premiums to others; and, yes, the same old value as always to others.

Whatever the value equation in this evolving marketplace, it cannot be imputed from behavioral data alone nor will it be the same for all.  These two fallacies are rife in news accounts, but they should not be in marketing.  Attitudinal data establish the context within which behavioral data can be interpreted.  And many varieties of attitudes will coexist at once.  Behavioral data is merely the starting point.  Attitudinal research and consumer segmentations are needed for behavioral data to make sense, especially in today’s rapidly changing marketplace.

But there came a year in my church when the women’s group decided to put up a Chrismon Tree.  It was a wonderful idea.  They put up a huge tree in the front of our church and covered it with white lights and Chrismon decorations.  These many years later, a Chrismon still goes up every year.  It has become a tradition.

Funny thing, though, about that tradition.  It was begun in 1957 at Ascension Lutheran Church in Danville, VA, which is part of the Evangelical Lutheran Church of America, just one of many branches of Lutheranism worldwide.  And in our little Episcopal church in the Piedmont area of North Carolina, we added a bit of local spice to our Chrismon Tree with some original ornaments borrowed from the Moravians in nearby Winston-Salem.  As conservative as a church as it was, it was very cutting edge in its eclectic potpourri of religious influences.  I say cutting edge, but maybe not.  After all, this is precisely what religion in America looks like – nothing with too much of anything, just something with a little bit of everything.

A survey released this past April by the Pew Forum on Religion & Public Life confirmed and further fleshed out the findings from an earlier survey completed in 2007.  America has become a nation of ‘religious drifters.’  When we grow up, we leave our childhood traditions behind and try out other traditions.  We shop around, often embracing more than one at a time or combining several into one mélange.  We believe in something spiritual, but just what it is not exactly clear, at least from the perspective of what religious belief used to mean.

As many people say they attend multiple types of religious services (35%) as say they attend only one type of religious service (37%).  Noteworthy percentages of Christians also believe in spiritual energy in trees (23%), astrology (23%), reincarnation (22%), yoga as a spiritual practice (21%) or casting curses through the ‘evil eye’ (17%).  Well, this is all well and good, but there is no traditional branch of Christianity that includes these things in its tenets or beliefs.  The Pew Forum pictures ‘religion, American-style’ this way:

Boston University religion professor Stephen Prothero offers some assurance about these findings, noting that “religious promiscuity is nothing new. Many early Christians were also practicing Jews.  And in China the “Three Teachings” of Confucianism, Taoism and Buddhism have co-existed for centuries, with many believers turning to Confucianism for etiquette, Taoism for freedom and Buddhism for enlightenment.”

What’s good about this, writes Prothero, is that it is strong evidence of the “enduring power of the ideal of religious tolerance” in America.  But what’s troubling about this, in Prothero’s view, is that “what we are really doing looks more akin to commerce than to education.  The store managers in our spiritual marketplace seem a bit too eager to sell us whatever they imagine we want.”  If it sounds like Prothero is worrying that religion has adopted a marketing model of faith, this interpretation of religion in modern America isn’t anything new.  My favorite critic on this particular topic is University of Florida English professor James Twitchell, especially his books Lead Us Into Temptation and Shopping for God.

But my takeaway from this Pew research has nothing to do with the mix of marketing and the Messiah.  It’s about the glimpse these findings offer us into the manner in which Americans organize their lifestyles these days.  It is about diverse mixtures of strange brews.  Americans live in a constant state of “becoming,” something Ann Clurman and I wrote about in Generation Ageless in our discussion of professor Bruce Charlton’s concept of “psychological neoteny.”  This term is a mouthful, but it borrows a term from biology in order to characterize the ever-evolving, ever-adapting sense of identity and self that people must have nowadays in order to succeed.  Maturity is no longer about settling in; it is about retaining the adolescent skill of trying on identities to see what works.  That’s not just religion; that’s life.

What this means for marketers is pretty clear.  There is no such thing as “the” consumer anymore.  Consumers are always looking for and open to something new, even something paradoxical and contradictory.  This is the culture of suburbs, malls and ‘Trading Up’ that so puzzled David Brooks in his send-up of Baby Boomers, Bobos in Paradise.  It is a plasticity of self that, at its worst, is exhibited by people who, in Brooks’ words, act like “spiritual reactionaires,” longing for traditional comforts while rejecting the norms and strictures that are the underpinnings of tradition.  At its best, though, such plasticity facilitates the “potential” — again, Brooks’ words — that points toward an ever-greater future.

To boil it down, it simply means that consumers thrive by adapting not by retrenching.  They will spring forward out of this long recession when marketers offer them a new value equation that resonates more strongly with the new reality of economic risk.  American consumers don’t want to look backward.  They want to experiment.  They want to innovate.  They want to put something new together.  Consumers are not looking back.  My childhood church in North Carolina is not standing pat.  Religion in America is not being tied down by tradition.  Reconfiguration is the rule of the day.  And that’s what consumers want from marketers – a fresh configuration of value.  Just as we say in A Darwinian Gale.  [J. Walker Smith]

The Monday, September 15, bankruptcy of Lehman Brothers set off a chain of events that brought the global financial system to what then-Treasury Secretary Henry Paulson privately called at the time “the precipice.”  Only determined intervention by Paulson and Fed Chairman Ben Bernanke staved off utter collapse.  (Had they not, martial law was next.)  Out of that experience, they surfaced on Friday, September 19, with the original TARP plan.  Knowing what we know now, think back to the looks on their faces as they faced TV cameras that Friday.  As dramatic as the House vote on TARP turned out to be, for those in the know, it paled in comparison to the calamity averted two weeks before.

In September 2008, I knew very little about finance.  But after that month, I resolved to learn more because, apparently, this topic required my attention.  No one else seemed to be watching out for me.  I figured I’d better catch up quickly.  I did, and it turns out that I was amazingly ignorant about something that has affected me enormously.  I may still only know just enough to be dangerous, but dangerous is exactly how the outraged American public views itself these days.

Here’s what I’ve read over the past year in my self-education about finance.  If you are similarly motivated and looking for some holiday reading, here’s what I would recommend:

Start with the April 8, 2009 episode of the NPR show This American Life.  It’s entitled “The Giant Pool of Money,” produced by Alex Blumberg and narrated by Adam Davidson.  This provides the broad outlines of what happened, and introduces an idea that you won’t fully appreciate until much later, namely, that without the huge capital account surpluses of nations like China, the housing bubble in America would never have happened.  After all, somebody had to finance American debt, not to mention all the encouragement that was given to consumers to take on more debt.  This doesn’t excuse Americans, but it does offer some perspective on why macroeconomists are saying that unless Chinese consumers start spending more and saving less, the global economy won’t recover.  (On this subject, see the two Financial Times pieces here and here by Martin Wolf.)

 Then read the Stewart story in The New Yorker mentioned above.

With these two articles as background context, you’re now ready to take on some of the core concepts in finance, mortgage financing in particular, that you have to master if you’re really going to understand what happened and how things need to be fixed.  Read the Uber-Nerd posts at the Calculated Risk blog that were written by the late Doris Dungey, who blogged under the pseudonym Tanta.  You have to put on your thinking cap when you read these.  They are long posts and the concepts are involved.  But it’s necessary reading, and it’s interesting.

To close the circle on fundamentals, read Financial Shock by economist Mark Zandi.  But read the 2009 updated edition, not the pre-September 2008 first edition.  Each chapter of this book provides an accessible overview of a particular facet of the housing bubble.

• Federal judge and law professor Richard Posner’s 2009 book, A Failure of Capitalism, is the same sort of book as Zandi’s, although not as succinct and sharp in its explanations of finance concepts.  However, it does provide a more overarching perspective on what happened that points to a number of public policy priorities.
• Economist Robert Shiller was an early Cassandra about the housing bubble in the revised 2005 edition of his book Irrational Exuberance.  While Shiller does not dig into specific finance concepts and instruments like Zandi and Posner, he does offer a pre-crisis look at the economic measures and psychological dynamics of impending doom.

The next book to read is Past Due, the excellent 2009 book by New York Times reporter Peter Goodman.  Goodman paints a picture of the bubble as it unfolded and tipped over into a crisis.  He focuses on the bigger picture of economic events, but does so without ignoring the very human dimension of it all.  Alongside his economic narrative, he narrates the stories of the ever-changing prospects of several actual people as they ride the wave and then crash on shore, where they find themselves drowning in debt and diminishing job prospects.  Your appreciation of this book is much greater if you understand the basic finance concepts that you will have learned from your prior reading.

The next step in your self-education is to read The Myth of the Rational Market, another excellent 2009 book by Time magazine writer Justin Fox.  This is an accessible, and essential, intellectual history of the concept of the “rational market” in economics and finance since the 1930s.  This may seem like pedantry, but if you want to understand how financiers came to believe in the infallibility of the financial instruments that nearly brought down the global financial system then you must understand their intellectual underpinnings.  This book also helps you sort out the different sides in the on-going debate among economists over what this crisis means for public policy as well as for the discipline of macroeconomics itself.

• One really interesting book for those who, at this point, find themselves deep in the uber-nerd thicket is the 2009 book This Time is Different by economists Carmen Reinhart and Kenneth Rogoff.  This is an extended, 800-year look at financial crises around the world.  After painting the big picture, they assess the current crisis.  It turns out that in the broader sweep of history, the current crisis is run of the mill.  It followed the standard path as it was in the making, thus it was entirely predictable, and, while brutal, is well within historical norms in terms of its severity.  This is not a casual read, though.  It has lots of detailed charts and is largely an analysis of a huge database assembled by Reinhart and Rogoff.
• If you find yourself interested in this kind of detail, then you will want to catch up with the three Lionel Robbins Memorial Lectures delivered in June at the London School of Economics by Nobel Prize-winning economist Paul Krugman.  These outstanding lectures revisit themes from the 2008 edition of his classic book The Return of Depression Economics, but add to them in order to shed light on the current financial crisis.  These lectures are available in video, podcast or PDF here, here and here, respectively.
• In addition, you will be interested in the discussion about global unemployment by three University of California at Berkeley economists at an October 2009 panel sponsored by the Berkeley Center for Law, Business & the Economy in conjunction with the Institutions and Governance Program.  It is available as video.  Brad DeLong’s presentation is the most essential of the three, and it is also available as podcast or PDF.

You are now ready to make sense of all that is being said and debated about global finance and the future of the global economy.

Interesting books that follow the collapse of various financial institutions will be no longer seem steeped in unexplained arcane financial alchemy lurking in the background that defies ordinary comprehension, such as House of Cards about the collapse of Bear Stearns or A Colossal Failure of Common Sense and The Murder of Lehman Brothers about the collapse of Lehman Brothers or Too Big To Fail about the meltdown of the entire Wall Street/Washington complex of power, hubris and greed.

You will have a deeper appreciation of books that take the long view like The Lords of Finance or The Ascent of Money.  And the eerily prescient trilogy of books by Kevin Phillips published during the early 2000s warning of the inherent dangers accompanying the rise of finance will make more sense – Wealth and Democracy, American Dynasty and American Theocracy.  (Not that these were the first warnings sounded by Phillips.  He wrote of this in another well-known trilogy published during the 1990s – The Politics of Rich and Poor, Boiling Point and Arrogant Capital.)

You will be prepared to more intelligently follow the threads on economics and finance blogs.  A comprehensive listing of these blogs is available here in the form of a periodic table.  My personal favorites are Economix, Calculated Risk, Marginal Revolution, Economist’s View, The Conscience of a Liberal and Grasping Reality.

Just for fun, I also follow the videos and posts of North San Diego County realtor Jim Klinge at BubbleInfo.com.  Knowing more about the inner workings of the market, I am able to better appreciate his ground-level view of the real estate market.  He has an ironic sense of humor that keeps you honest and puts our collective foibles into perspective. 

Indeed, I try not to get too cynical about all of this, notwithstanding what I’ve learned.  To do that, I make a weekly visit to ReasonsForOptimism.com, a Web site maintained by Cooper Carry and Iconologic to remind us that no matter how bad things look on the finance front, there are lots of other things still going on in life that give us reasons for optimism.  [J. Walker Smith]

But what exactly does the hipster of the 2000s represent?  Is this scene really the cutting edge of culture?  Or is something missing, something important, that is, from a marketing standpoint?

What the Paste timeline shows are the various personas that were celebrated as the coolest of cool during that year.  Certainly, we recognize these characters.  We saw them in the media.  We saw them on the street.  We even knew them personally.  They were real, and they’re still around.  But are they the characters we need to follow in order to know what’s going to take the marketplace by storm?

No.

For one thing, this sort of timeline obscures the fact that diversity not uniformity is what characterizes life these days.  Everybody adopts his or her own personal style, but only in the context of a diversity of personal styles.  Nowadays, there are lots of ways to be hip.  So, this timeline is interesting but by no means definitive or sufficiently inclusive.  This is the broad problem with all such generalizations of today’s consumers.  There is no single style that is representative of an entire period anymore.

Which is not to say, by the way, that a single style can’t dominate.  For a period of time, a single style can enjoy crossover appeal and momentum.  Just not any of the hipsters in this timeline.  So portraying them as central characters misrepresents the minor roles they played.

Want to know who dominates right now?  Well, it’s no hipster.  It’s Susan Boyle.  Her appearance on “Britain’s Got Talent” captivated audiences on both sides of the Atlantic.  And now her U.S. and U.K. number-one-selling CD, “I Dreamed a Dream,” is the biggest debut CD/album ever for a female artist.  That’s bigger than Rihanna.  Bigger than Beyoncé.  Bigger than Mary J. Blige.  Bigger than Mariah Carey.  Bigger than Cher.  Bigger than Olivia Newton-John.  Bigger than Shania Twain.  Bigger than Trisha Yearwood.  Bigger than Diana Ross.  Bigger than Janet Jackson.  Bigger than Faith Hill.  Bigger than Patsy Cline.  Bigger than Celine Dion.  Bigger than Dolly Parton.  Bigger than Whitney Houston.  Bigger than Barbra Streisand.  Bigger than Christina Aguilera.  Bigger than Britney Spears.  Bigger than Madonna.  In its second week, it is holding its number one position.  And it’s predicted to enjoy a third week atop the charts, with a good chance of outselling Taylor Swift for the top-selling CD/album of the year.  Non-hipster Boyle.

Maybe the definition of hip is the margin not the mainstream.  If so, then hip is inherently a niche marketing opportunity.  Unfortunately, niches mean less scale and less scale means lower margins and/or higher prices, either of which means a tougher business to sustain.

Or maybe it’s just that hip is something different than we think.  Maybe hip is not the style of the outsider who breaks away from the crowd.  Maybe, instead, it’s the style of the outsider who attracts a crowd.  By this definiton, we wouldn’t include any of the hipsters on the Paste magazine timeline.  Their crowds were small.  But we would include people like James Dean, Marlon Brando, Frank Sinatra and Elvis Presley.  And Susan Boyle.

For marketers to get hepped on hip there has to be a business in it, not just a cultural statement.  Sometimes, brands get lost out on the edge where they can’t find the market in the middle.  That’s the only hipster timeline that matters.  [J. Walker Smith]

There is even a service called Bartercard - launched in Australia in 1991 during the global downturn of that era – that enables consumers to engage in bartering for all kinds of products and services, including high-end real estate.  It’s actually just a barter club, but it links people together internationally and it enables people to provide products or services without a direct trade at the time, thus building up barter credits on their card that can be used later with other Bartercard members.

The growing popularity of barter as a way of coping with the recession shows that consumers are still looking for ways to get what they want even though they have less money and less access to credit.  In other words, instead of accepting the limits of a smaller economy and settling for less, consumers are looking for ways around the limits of a smaller economy in order to continue to enjoy as much as always.  This is not a frugal mindset resigned to living with less.  This is an aspirational mindset undeterred and undaunted by the global economic downturn.  Consumers are fighting back against the recession to continue to realize their dreams and aspirations to better lifestyles.  Or to put it another way, optimism prevails.  As difficult as times are, consumers remain convinced that they can reinvent their consumption styles to satisfy their lifestyle ambitions.

In A Darwinian Gale, the changing relationship of consumers to the brands is discussed as the rise of “dis-ownership,” or the realization of brand benefits without purchasing.  Barter is chief among these forms of “dis-ownership,” but swapping, auctions, leasing and rentals, fractional ownership, sharing and “freecycling,” digitization in place of physical products, and just plain piracy are part of it, too.  More and more, this is what consumers are doing.  Mainstream marketers need to harness some of this activity on behalf of their brands and stores.

Reuters reported on Tuesday, December 1, that Somali pirates have established a stock exchange in Haradheere to raise capital to fund their piracy.  It seems to be quite an enterprise.  Financiers from near and far are investing.  Shares are traded just like on Wall Street, and 10 of the 72 so-called “maritime companies” currently listed have conducted “successful” (presumably meaning profitable) hijackings.  In other words, they’re generating returns for investors.  And growing returns, too, perhaps.  The Reuters correspondent was told by the wealthy pirate, Mohammed, showing him around that “ransoms have…increased in recent months from between $2-3 million to $4 million because of the increased number of shareholders and the risks.”

Maybe, though, the Somali stock exchange for piracy is the very thing that will put an end to Somali piracy.

Perhaps the stock exchange really represents the emergence of a piracy bubble not the legitimization of piracy.  And if Somali piracy is fueling a financial bubble, when that bubble bursts, as they all do, will it take Somali piracy down with it?

Well, the answer to that question depends upon first recognizing that Somali piracy is not lawless buccaneering.  It is a well-ordered business.

Investors can speculate in Somali piracy in-kind as well as in cash.  Contributions of weapons and supplies also earn people a share of the ransoms collected by pirates.  One woman interviewed in the Reuters report was waiting at the stock exchange to collect her share of a ransom collected from a Spanish tuna fishing vessel.  She had contributed a rocket-propelled grenade that she got in alimony from her divorce.  “I have made $75,000 in only 38 days since I joined the ‘company’,” she said.

Piracy is the business of Haradheere.  Not only does it generate profits for pirates and their backers, it pays district taxes that are used to support public infrastructure and services like hospitals and public schools.  The stock exchange is just one more way in which piracy contributes to public welfare.  Indeed, as Mohammed put it, “[W]e’ve made piracy a community activity.”  Piracy has transformed Haradheere from “a small fishing village” into “a bustling town where luxury 4×4 cars owned by the pirates and those who bankroll them create honking traffic jams along its pot-holed, dusty streets.”

This all seems a bit fantastic, I suppose, but, believe it or not, there is a business model to piracy in Somalia.  An NPR story this past April explained the basics.  It starts with an investor who might put up as much as $250,00 or so.  These could be businessmen in other countries who call their Somali relatives and offer to stake them on a piracy business.  Or it could be terrorist groups.  Or local elders.  Or some combination.  Now, with the stock exchange, money can be raised from a much wider range of people than before.  This money is used to buy speedboats, procure weapons, buy intelligence, contract a caterer and hire pirates.  Or as NPR put it, everything a cruise ship buys except entertainment.

Once a target ship is identified, the question of whether to seize it is a decision decision driven by the potential return.  Who owns the ship?  What are the owners worth?  How valuable is the cargo on board?  How large is the crew?  How good is the ship’s security?  Obviously, a little market research, AKA intelligence, comes in handy.

After taking over the ship, the haggling starts.  Both sides hire professional negotiators.  The ship’s owner’s insurance company insists on it in order to minimize its exposure.  And the pirates hire negotiators to keep the playing field level, which means people with equal experience and good English language skills.  The pirates go high; the ship’s owner goes low; and they wind up somewhere in the middle.  Payments are made in cash that is loaded into duffels packed in watertight containers that are dropped in the water near the hijacked ship.

At this point, the pirates have to make their getaway, which might mean delaying the release of the ship and crew until the pirates are out of range of other pirates lurking nearby to rob the robbers.  Honor and thieves, you know.  Often, naval authorities are waiting, too.  Some pirates have drowned while fleeing capture after leaving a ransomed ship. 

Getaway complete, the final thing to do is to split the loot.  After bribes, expenses and payroll, investors earn anywhere from a 30% to a 100% return.  The leader of the attack gets $10,000 to $20,000.  With the average family earning a mere $500 per year, pirates are the masters of the universe in Somalia. 

This more than gangsterism.  This is a business.  Investigators have found time sheets left behind accidentally by pirates.  But it’s not just a business for the pirates; it’s approached in business terms by all involved.  Wired magazine published a piece this past July that examined the costs, benefits and probablilities for all parties involved.  Until the equations start to produce different answers, Somali piracy is likely to continue for some time to come.  Given the risks and costs, it’s just cheaper for ship owners to suffer the occasional seizure.  Insurance companies are covered by higher premiums.  And the benefits still far outweigh the costs for Somali pirates.  The economics of the business make piracy a cost that shippers can afford to bear and a reward that pirates will continue to pursue.

Some have even said that Somali piracy is the ultimate open, unregulated, free market.  There is no government to regulate it.  It flourishes only because the economics work, and only the economics dictate its form and functioning.  It has created its own market of exchange  that is self-regulating on the basis of performance and reputation.  This is not a criticism of free markets; it is simply a recognition that Somali piracy is nothing less than a capitalistic enterprise.   

Some have argued that Somali pirates, in their jobs as business people, are also national heroes protecting their coastline from developed world predation in the form of over-fishing and dumping of toxic wastes that began after Somalia collapsed into lawlessness.  As a failed state, Somalia has no national force capable of patrolling its waters to protecting its rights nor any credible authority capable of to advocate its rights in international forums.  Pirates create the threat that serves that function.

Of course, with no national government, there is also no way to eliminate piracy by force.  Pirates are coming under greater pressure from elders and religious leaders to abandon piracy, but such pressures don’t carry sufficient weight in a country where people have few alternatives for survival.  Foreign governments are unlikely to land their own forces in Somalia because once they did, they would, in effect, “own” the broader Somali problems of anarchy and poverty.  So shippers and foreign governments are just trying to contain the costs of Somali piracy.  Somali pirates understand this.  As long as the economics work, the pirates know they can stay in business.  That’s why they don’t murder hostages or hold out for stratospheric ransom payoffs or drag out negotiations to interminable lengths.

Only the economics of the enterprise can stamp out Somali piracy.  When the numbers no longer work, when the business can no longer be run profitably, Somalis will voluntarily close down piracy.  There is some hope by shippers that a containment strategy of increasingly more effective protection will raise costs to the point where investors in Somali piracy will put their money elsewhere.  Already, the ratio is three or four piracy attempts per successful ransom.  Making it incrementally harder for pirates to succeed is the best course, and it will work because military resources are put to business purposes.

It’s possible that piracy will consume itself.  It’s possible that the creation of the stock exchange for raising money to fund piracy is the very thing that will bring an end to Somali piracy.  It’s possible that Somali piracy will suffer the same fate as Dutch tulips, dot-com stocks and Inland Empire real estate.  In other words, it may be that a Somali piracy bubble is forming that will eventually take down Somali piracy when it bursts.

A stock exchange will make it possible for Somali pirates to raise more money.  Investors looking to cash in on Somali piracy will have an easier way to invest.  More money will bring more pirates into the business or, if good pirates are a scarce commodity, will drive up the value of a pirate, which either means more activity or more aggressive activity.  With more investors eager to see big double- or even triple-digit returns, Somali pirates will be under pressure to collect more ransoms or bigger ransoms, or both.  Pirate activity will grow and become more vigorous the more money there is to support it.

The stock exchange is sure to funnel in more money, and more money will underwrite more piracy.  More piracy means more activity and thus greater costs to shippers.  As the stock exchange-fueled piracy bubble grows, the costs of piracy will eventually become greater than the costs of containment, at which point shippers will abandon containment for conflict.  This is the point where the economics of the piracy business will cease working for Somali pirates and their backers.  With no government regulators to keep it in check, piracy is likely to spiral out of control to the point of self-destruction.

Note that a military response to piracy doesn’t have to wipe it out in order to wipe out piracy.  It only has to have a large enough impact to change the economics of the business.

The recent seizure of the supertanker Maran Centaurus signals a ratcheting up of piracy.  This is one of the largest ships every hijacked.  It is carrying $20 million in crude oil.  It was headed from Saudi Arabia to the U.S., with a Greek frigate in attendance.  A military presence in the Gulf of Aden is not staunching piracy.  Piracy has not slacked off since a global task force put an unprecedented naval force in those waters.  The economics remain too compelling.  But a few more hijackings like the Maran Centaurus and maybe the economics won’t look so great.

It may take time before the economics change enough to make a difference, but the more money that pours in through the piracy stock exchange, the sooner it will happen.  [J. Walker Smith]