Archive for June, 2010
Intentions Gone Wild
June 25th, 2010 | Author: JBH
Today, the federal government finalized the finance reform bill. From all that I have spoken to that have read through it, it does little to actually correct the isses we experienced over the past 10 years. Hooray! One more large monster federal bill that has little benefit but lots of impact.
Two quotes in the attached article unnerved me. The first was from Mr. Dodd (senator of CT) where he said;
“No one will know until this is actually in place how it works.”
And the other was from Mr. Frank (representative of MA) where he is quoted;
“We’ve put in the hands of the president a very powerful set of tools for him to reassert American leadership in the world”
Why would any sane person want these quotes attributable to themselves? Let’s see, the first one says that we just made 2,000 pages of laws and have no clue what the impact will be for the one industry that touches every single citizen. Or, the 2,000 pages of laws that we all just passed are so general and vague that one can assume that they will be deployed in ways that are completely arbitrary, ways that we can never fully grasp.
The second quote jives with it perfectly. Mr. Frank essentially celebrates the fact that our representatives, those that we rely on to check and balance the president, have given enormous power to one person. And to make it all the more exhilarating, a president that has no economic background and has demonstrated a complete lack of respect for free markets. Oh joy!
And one more thing, please read towards the bottom where they mention that 18,000 auto dealers (actually, the number is closer to 16,000 after the government forced some to close down)(also, at least 20% of them are selling government made cars) are exempt from the consumer protection portion of the law. Keep in mind, the second largest expense for most citizens is an automobile with the majority of them financed.
Corrupt and stupid make for a very bad combination. Worse, when it’s mixed with power.
Tags: 
Ignoring Reality
June 24th, 2010 | Author: JBH
Every once in awhile I troll around the internet for a discussion on economics or politics. One way I do it is by having alerts set up in Twitter that highlight whenever words/phrases such as ‘Ayn Rand’ or ‘free markets’ are used. Just a few days ago, I came across one that was too ripe to pass up. Low hanging fruit. Why do I do this? I’ve come to the conclusion that I’m tired of listening to ignorance. In the past, I would walk away. Now, with the level of ignorance and group think so high, more people need to enter the discussion and elevate it. Headline discussions need to stop and emotionally driven ideas need to be challenged.
What I hope you come away with from the discussion below, is the idea that many people that have strong opinions can not back them up with facts and reason. And when tested, they walk away. So start testing, and maybe they will rise to the challenge, helping to modify your philosophy, or they’ll stop being so free with spreading their opinions as truth. Either way, you win.
But, today, the right wing makes progress almost impossible. They object not only to demand generation through “stimulus,” they also insist on taxation policies that act against demand generation and thus ensure higher deficits. For instance, the right-wing’s attempts to maintain or create new tax reductions for the rich ensure that much of any reduction in federal revenues will go toward increased savings rather than stimulative spending that generates jobs. Rather than “trickle down” from the rich, what we should be relying on is a “gush up” from the poor and middle class who tend to spend a much larger portion of any new revenue than do the rich. What we need is more people buying movie tickets, pizzas, magazines, bus tickets, etc. — not more rich folk increasing their hedge fund investments or buying real estate. The easiest way to get more jobs created is to spend more money. Even though this may temporarily increase deficits as a percentage of GNP, the long term effect will be to increase GNP and thus reduce the deficit. Trying to reduce the deficit today will do nothing other than ensure that GNP growth remains slowed. Thus, “deficit reduction” efforts will, even on their own, result in increased deficits.
Keynes explained this all long ago. We need to find a way to get more Republicans to read what he wrote.
Keynes theory works until the point that government spending crowds out true investment. That is happening now.
BW - It is useful to remember that those Republicans who today claim concern for the deficit once supported Republican President Bush who, days before 9/11, said it was “incredibly positive news” that Republican tax-cut and spend policies were wiping out the Clinton budget surplus — since a return to deficits would halt the growth of the government.
JBH - Mr. BW, I stick by my thought that you do not understand AR from your implication that Greenspan’s actions mimic her thoughts. Given that her economic ideas were drawn from Hayek who did not believe in fiat currency. Also, his writings for AR where against fiat currency, arguing that only a gold standard-type of monetary system could be used for a free society as anything other than that would lead to a corrupt political system.
Keynesian principles have been used by both Democratic and Republican governments so I’m not sure what your argument is concerning your last post. And a point of clarification is needed wrt to Clinton’s surpluses. Even during those surpluses, the national debt grew which implies that government spent more than it collected and that the surpluses were an accounting gimmick at best.Jun 22
JBH - Mr. JS, I think you have neglected the larger drivers to any outsized growth the US experienced in the 50′s. Above-trend population growth, urbanization (which increased productivity), the rebuild of Europe, and Bretton Woods are considered by economists to be the large contributors to the post-WWII economic growth.
I would argue that the major difference between today and the 50′s would be in government involvement and in the increasing number of people that spend money before they have made it (government deficit spending, those with large mortgages, municipal pensions, federal entitlement programs, etc). Government spend as a percent of GDP was in the low/mid 20%’s in the 50′s versus 35% in the 90′s and 00′s (close to 45% in 2010). Given the economic studies that show the money multiplier for private dollars to be over 1.75 and government dollars to be sub 1, the facts point to lower GDP growth. Natural laws are hard to ignore.Jun 22
As Keynes teaches us, investment is largely determined by investor’s expectations concerning future consumption. Also, expectations inevitably too-heavily weight current conditions. Thus, uncertainty concerning consumption in the current period generates uncertainty about consumption in the future and thus lower investment. The way out is to stimulate consumption in the current period which causes investors to be more confident and thus stimulates investment…Jun 22
JBH - Mr BW, I agree with your premise but find it may lack some depth. No business leader I have spoken to or myself (as a capital allocator) would look at the temporary consumption brought on by the recent “Keynesian” policies as anything other than temporary. So, most look with a suspicious eye towards the economic numbers when government has become such a large part of it. It causes investors to wait and see what actual demand is since so much of our planning process is farther out than just one business cycle.
Also, I believe you may be neglecting that revenue (i.e. consumption) is but one part of the equation. Costs need to be considered (for everyone with the possible exception of Google). And costs come in many flavors; cogs, employee costs, regulation, trade protections, taxes, and most importantly, cost of capital. In uncertain times, the cost of capital is adjusted up for the added risk of the unknown. Some economists (including my most favorite, Milton Friedman) have concluded that the depression was lengthened by the continued changing of government policies, thereby making investors sit on the sidelines until forecasting could improve and costs (including taxes) stabilized.
I do see the benefit for Keynesian actions for crisis situations, but not for general economic cycles. Government involvement in times of great distrust for our economic system makes sense to me (guarantee of money markets, purchases of short dated RMBS, stabilizing banks, etc) but the idea that government can spend money that everyone knows is temporary and borrowed to lessen the impact of a business cycle brings distrust into the market. It doesn’t reduce it.
Two questions:
1. If Keynesian policies have been used for the past 15 or so years and yet economic cycle continue and appear to have become more volatile, when should we question the underlying assumptions of Keynes?
2. Do Keynesian policies work just as well when the government has 50% debt/GDP as when it has zero?
JS - 1. Have Keynesian policies have been used for the past 15 or so years, or instead have we been spending on foreign oil, foreign wars, overbuilt housing, and mostly fixed income entitlements, at the expense of domestic infrastructure which needs to be rebuilt almost as much as Europe needed to be in the 1950s?
2. No, they are less effective in proportion to the amount of debt which needs to be serviced with interest payments.
Population growth continues. Productivity growth continues. Breton Woods is a red herring.
Which economic studies show “the money multiplier for private dollars to be over 1.75 and government dollars to be sub 1″? Such figures for government spending vary over orders of magnitude on a per-program basis, and the 1.75 figure here sounds suspiciously like the utterly discredited idea of trickle-down economics.
JBH - Mr. JS, I really do not understand what you mean by your statement “Population growth continues. Productivity growth continues. Breton Woods is a red herring.”
Population growth continues, of course, but the rate changes through time. Demographics is obviously a main driver to economic cycles. Productivity has also been shown to be age dependent as well as generation dependent so, again, I have no clue what your quip is meant to mean.
As to Bretton Woods, do you not think that currency exchange rates have a material impact on relative production costs?
JBH - Keynesian policies were used in the 80′s for the Savings and Loan bailout. and then again throughout the 90′s and 00′s. From my recollection of Keynes, he made no distinction how the money was spent (dig and refill holes I believe he recommended).
Just because you, as an individual, do not agree with how the government spent the money does not entitle you to change the definition of Keynes’ theory.
JBH - But let us go back to the original reason I responded to Mr BW’s post. His statement “Greenspan and other Ayn Rand blinded ideologues are largely responsible for creating the current financial crises” needs to be refined, imo.
1. Greenspan was not following any AR or other free-market principles. He was following cronyism and Keynesian policies. (e.g. throw dollars into the market in 2001-2004 through low rates and lower capital requirements).
2. One can hardly come to the conclusion that the trend of free-markets (i.e. non-government ) principles increased at all in the last 20 plus years. With government run companies making over 50% of home loans, government sanctioned rating agencies telling people that they were AAA when some knowledgeable free market participants knew they were junk, inefficient and large companies being bailout out by government funds, subsidization of commodities leading to pricing bubbles, increasing trade restrictions, etc, it is illogical to conclude that free markets led us to where we are since we were not in a free market.
JBH - Show me how Keynesian policies have not been dominant in the last 15 years, please. As I understand Keynes, it is central government induced spending to replace private sector spend (both consumption and investment).
You do not appear to understand Friedman at all if you think we have been following his suggested path. Refer to point #2 above. Government involvement in private enterprise has been increasing (shown by % of GDP, size of public employee base as well as other facts). For you to be credible in your assertion, you need to provide facts that back it up and reason. Outright statements of opinion presented as fact do not help the discussion.
{silence}
**I have not heard any more from BW or JS after the last comment I made. When having these discussions, I find that the opposing opinion is filled with absolutes that can not be justified with the facts at hand. Reality is ignored. I would recommend all to be willing to enter into discussions with those that believe in socialistic policies and challenge them. We need to challenge each sentence they make and separate opinion versus fact, making them substantiate their opinion with logic and reason. From my limited experience doing this, it typically ends with them walking away, unable to justify their position with anything other than emotion.**
A Guest Blog Post
June 8th, 2010 | Author: JBH
I am copying below a blog post from Ron Wilson of EDN. He nails it. After you read, please click on his link to show your support for it. Nothing other than going to his site, that’s all I ask.
Blowouts, elementary school, and the future of democracy
The weekend edition of the Financial Times this week carried a story that gave me pause. It was a long piece of straight reporting, mostly from inside BP’s command center in Houston, on that company’s struggle to control the discharge from their now-infamous Macondo well. The piece is detailed, well-written, and timely, as one might expect from the Financial Times. But it made me realize just how technically vacuous has been the deluge of coverage on the Deepwater Horizon disaster, and how totally unprepared the citizenry of the USA is to deal with the questions today’s world thrusts before them.
For example, the general impression created by the US press is that BP has spent most of its time wringing its hands about the blowout, while consulting movie stars, letters from school children, and perhaps a psychic or two in the search for solutions, while occasionally taking a stab at some scheme or other. But the Times article suggests a reality more like the rescue of Apollo 13: hundreds of engineers, 160 companies including ExonMobile and Chevron, and some of the world’s leading sea-floor engineering contractors, driving themselves to exhaustion testing plans and directing a navy of remotely-operated submersibles.
In the litany of Web video, photos, and blurbs, and on the decrying of the evening news reports, this drama is simply missing. Where are the discussions of strategy, profiles of the leading engineers, descriptions of the ships and submersibles-even an accurate description of a blow-out preventer? Where a discussion of the communications network that links equipment, crews, and engineers with live video? The sad answer, I fear, is that all this is missing because the news providers either don’t understand it themselves, or because they assume their audiences wouldn’t understand it.
Unfortunately, on this count they are probably correct. An article in a local newspaper earlier in the week gloated that Oakland had become the only school district in California to require science classes below the high-school level. Kids who have no clear idea of science or the workings of the natural world at 14 are unlikely to become adults who can form a clear idea of a complex deep-water petroleum-engineering project, or for that matter of what is likely to be an equally complex problem in ecological engineering.
Therein lies a deeper issue. Our culture will continue to face complex choices that posit an obvious benefit-energy, health, employment-against a range of technical risks, and even more complex proposals to mitigate those risks. In our political system these challenging optimization problems will be set before the court of public opinion as emotionally-charged black-vs.-white choices. The ability of a woefully undereducated public to see through the oversimplifications into the richness of the problems, and at least not to obstruct the search for useful solutions, will influence the future of the republic. All we who have had the privilege of a technical education owe some thought to capping this gusher of technological ignorance that is poisoning not just our beaches or our wildlife, but the very bedrock of civil discourse upon which our system of government must rest.
Tzimtzum commented:
As an editorial in the latest issue of EE Times suggests, not only is the general public clueless in the scientific disciplines, Congress and the White House staff are also technically illiterate. Nonetheless, these pompous baffoons in D.C. still have the “audacity” (now where have I heard this word before) to ask idiotic, brainless, questions under the pretense of finding the truth. The fact is that the whole scenario becomes an exercise in self aggrandizing–”and Nero played on as Rome burned.”
Ron Wilson in his piece observes, “Americas solution to every problem is to declare war on it like somehow that is going to rally the foolish.” But this, too, is nothing new–it’s right out of the writing of William James, “The Moral Equivalent of War,” and one of the banners being held high by the Progressives now in Washington.
Has anything changed since the era of James? Hardly. Nonetheless, the current administration–just as others–will find some way to declare a struggle against something else. Currently, we have an ongoing war on poverty, fat, crime, drugs, smoking, pollution, cancer, diabetes, carbon dioxide, nuclear power, conventional power, McDonald’s Happy Meals, and of course, terrorism–and the list goes on and on.
I am not that afraid of a dumbed down public as I am of a government which attempts to manipulate the ignorant to further and to enable its own world view. Until we have elected officials who believe in following the US Consitution rather than an agenda which looks like its been penned by Geroges Sorel and Martin Heidegger, I would not expect things to improve anytime too soon.
Regulation Works?
June 4th, 2010 | Author: DTH
Congress, The White House, and The Media all seem to agree that the answer to the question, “What went wrong?” appears to be that we did not have enough regulation, that the system (whatever that is) was not protected successfully enough from the BAD ACTORS, i.e. bankers, Wall Street, borrowers, car manufacturing executives, derivative traders, hedge fund managers, insurance companies, etc. An apparent chorus of the elected and those wishing they were in power (journalists) all agree that we need more regulation of commerce to prevent another breakdown of the system (whatever that is).
Before going further, let me suggest that you can not sell securities, make loans, finance cars, offer insurance, or manage individuals’ money unless the federal government (or state in which you wish to do business) says you can, period. Anyone who does, has the federal government’s or respective state governments’ specific and acknowledged permission to do so.
I offer that one reason that the system (whatever that is) experienced a breakdown is not from too little regulation, but from the false sense of security created by too much.
I have asked myself many times, who (because the system is us) gives all of his or her net worth to some fellow with out anything more than his figurative hand-written receipt? Is it possible that investors trusted Bernie with the dough because he could claim that he was being regulated (watched) by FINRA, the Federal Government (SEC) and every state securities commissioner in the nation? I think that smart, rich people were lulled into a false sense of security knowing that someone else was looking after their best interest.
Likewise, what prospective homeowner (because the system is us) agrees to repay more money than he or she will make in a lifetime of working? Our banks and lenders are heavily regulated. If they are willing to lend (or purchase my mortgage), it must be ok. Where is the regulator when you have to show your bad credit to the system?
Perhaps the system would be more guarded and careful with its money and its credit if the system did not know deep in its hearts that the federal and state governments have everything under control and are there to keep us from harm. Does it ring true that more of the same is the solution?
