The present economic crisis has been explained in many ways: a mortgage meltdown, a housing bubble burst, the collapse of fancy financial instruments. But all of these explanations point to a problem that plagues our economic system at its core: an economy floating free of firm connections with the real world. It’s an economy built on the abstractions of numbers on paper–“air money.” Air money is pouffy. It floats like a balloon out of reach of the ground. The only economic fix that will stick–that will make our economy sustainable–is to stop multiplying numbers on paper and tether our economy more firmly to the real world, which means, ultimately, to the natural world of rocks, trees, rivers, soil–and real air.

How do we do that? The fix will have to take place at many levels:

1. The financial system. Banks in recent decades were “engines creating money out of nothing,” says former World Bank economist Herman Daly. They extended credit, bought stocks on the margin, and dealt in derivatives–a fancy name for betting with unregulated, multiplying insurance policies. Because of the explosion of assets produced, it looked like wealth was increasing. But the wealth was only on paper.

There are two problems with the paper wealth of banks. One is that it was allowed to float far out of reach of the money banks were actually holding in reserve. A fix that Herman Daly calls for is regulating banks so that eventually they again have to hold 100% reserves. In other words, banks would have to hold enough deposits to cover all their investments. They’d have to tether their “air money” to the ground again instead of letting their paper wealth soar out of reach of their real holdings.

Another problem with the paper wealth of banks is that it accrued only in the financial sector. BusinessWeek‘s chief economist, Michael Mandel, has been showing what a farce real growth was in the decade 1997 to 2007. Almost all of the growth came from financial corporations, almost none of it from corporations outside finance. In fact, the average after-tax profits of domestic companies not in finance was lower in 2007 than it had been in 1997.

And now that we know that the financial growth was an illusion–based on air money–the problem is even more serious.

2. Ordinary households. Unfortunately, most of the rest of us were operating on air money too. I was a homeowner during part of the boom-bust decade, and the value of my home in the five years I held it increased wildly. Like most homeowners, I refinanced–and then spent my air money on other things. Now I’m a renter again, and my household again has credit card debt. We–all of us–have to stop spending more than we’re making. That’s the only way to bring our family air balloons down to the ground again.

3. Corporations. One of the ways that air money obfuscates is by concealing where it comes from and where it’s going. I’m talking now about the air money that corporations make by externalizing many real costs from their balance sheets. Financial accounting is not required to note which of the very earth resources on which we depend for life that company is in the process of using up. Absent from the balance sheet is the capital loss of forests, fisheries, minerals, rivers, wetlands, breathable air, or mountaintops–and the devastation these losses wreak on health and communities. Corporate profits are inflated–air money–because accounting doesn’t track the loss of the biosphere. What corporation could survive by ignoring its capital losses? And yet thousands do–precisely by ignoring them. A Kentucky coal mining company can look profitable because it is not required to figure in to its costs the price of a lost mountaintop and the price of the watershed destroyed by dumping that dirt into the closest river. Why not? Because no price was ever put on those invaluable resources–because we thought nature could never be depleted. We’re acting like greedy children who think their parents have all the money in the world and keep demanding more goodies, and now that resources are severely depleted, we’re beginning to realize the the riches of our Earth aren’t limitless after all.

The economic crisis we are facing at this moment provides the most exciting opportunity for change that we will ever see in our lifetimes. Now, when we can see clearly the downsides of the system we have been using, is the moment to change our habits, our accounting, and our assumptions about what the Earth can sustain. It’s time to rein in our air money balloons and get our feet firmly planted on the real ground.

Ecological economics is a branch of economics that brings the banking crisis down to Earth. Herman Daly is one of the pioneers of ecological economics, and he recently received the Person of the Year award from Adbusters magazine.

Daly says we have to revise our concept of economic growth so it no longer floats free of the real ecosphere. For a very brief intro to Daly, see this two-minute excerpt from the 2006 documentary The Planet: (video no longer available)

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