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Keynesian Fail

Keynesian Fail Demotivational Poster

This was our Nobel for Economics winner of 2008. More proof that our economic situation wan’t an accident, wasn’t the result of insufficient regulation, but was engineered by those very regulators.

“To fight the recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley or Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.” -Paul Krugman, 2002

(via FalkenBlog)

Booms, Busts, and Government Stimulated Demand

Those who look busy in politics enjoy short term success. After Sept. 11, the majority were thirsty for blood and supported the Patriot Act and the invasion of two foreign nations. Now they are demanding that something be done by government to fix the economy.

It could be argued that politicians talked up the economy. It isn’t so much that they talked it up or down, but that they did them backwards. If they had tightened lending during the boom, we never would have been in the position to bust. Talking up the bust and down the boom makes me wonder if they wanted us to crash in order to boost U.S. manufacturing (see my conspiracy theory post), or if it was just straight corruption at the point where regulators choose who gets the money.

Our government is comprised almost entirely of investor-class elected officials. When times are good, they want to use their power to fuel growth and for their own profits and popularity. When times are bad, they feel the ire of the populace threatening their re-election and seek someone to blame in order to appear to be cracking down on the problem. We can see an example of this in the housing market boom and subsequent crash:

  • In 1977 Jimmy Carter signed the Community Reinvestment Act, which went a long way towards giving government the right to force the banking system to lend to high risk borrowers.
  • In 1982, Congress (with a Democratic majority) passed the Alternative Mortgage Transactions Parity Act, which allowed non-federally chartered housing creditors to write adjustable-rate mortgages.
  • Bill Clinton put pressure on “Government Sponsored Entity” Fannie May to relax credit requirements in order to try to boost lending to low income buyers. HUD wanted them to keep 50% of their portfolios in loans to low income people.
  • Bill Clinton threatened to essentially audit lenders and air their dirty laundry if they didn’t comply. Here is what realtytimes was saying back in the beginning of ’03: “Government policies encouraged riskier lending. They did this ‘encouraging’ with threats to step in with GSE reform legislation in response to accounting scandals, and other such methods.” There is clear evidence of both carrots and sticks being used by the government.
  • George W. Bush continued and expanded these policies. In 2008, Government Sponsored Entities had extended over five trillion in loans, with a mere hundred million in total assets. They were able to do this via Fractional Reserve Lending, which is an outdated concept from back when banks didn’t want to have to hold on to large amounts of gold, and more recently is used as a way for central banks to regulate the money supply.
  • Investors would flee if they saw the banks making such high risk loans, so the banks started bundling risky loans and selling them at bargain prices in order to keep profits up for investors.
  • People saw great profit in real estate and started taking out as much debt as they could, figuring they could always just sell some if things got tight.
  • A hiccup in the housing prices started a cascade. Housing prices began to drop, and people started to default on homes that were no longer worth as much as the loan.
  • As the problem gained media attention, the politicians deflected the blame, blaming the banks for the government-pushed subprime loans. They assured us that they would fix the problem by regulating these wicked banks and doing away with their subprime lending.
  • The inability of people to get loans or refinance demolished the housing market, making it even harder for those in trouble to sell, even at a loss. Foreclosures cascaded further. This tanked the housing prices and caused the very foreclosures they were intended to prevent. People who would have gladly sold their homes or refinanced were foreclosed on instead. The banks were nothing but a Ponzi scheme.
  • George W. Bush realized his legacy was threatened, and that the collapse of the American banking system would be put at his feet. He abandoned any pretense of free market and crafted the largest corporate bailouts in history.

To unravel the above mess, you have to realize that government financial regulation is an illusion. It creates waste and assures that the booms and busts are larger, last longer, and affect everyone. The bottom line is that we had people borrowing fake money from the central bank, money which was backed up by the government, which is backed up by the people – people borrowed fake money from themselves to buy houses they couldn’t afford, and subsequently lost them. The free market balanced itself, via crash, despite the government meddling, but with a much greater magnitude than it would otherwise have had. Without government regulation, fractional reserve lending wouldn’t exist on a national scale, nor would subprime loans, and neither would the problem.

From the wiki: “fractional reserve banking benefits the economy by providing regulators with powerful tools for manipulating the money supply, interest rates, and government debt creation. From a Keynesian point of view this debt creation provides governments with much greater latitude to stimulate the economy through government spending.”

On the Federal Reserve: According to the wiki,  “The Federal Reserve System is subject to the Administrative Procedure Act. It is not “owned” by anyone and is “not a private, profit-making institution”. It describes itself as “an independent entity within the government, having both public purposes and private aspects””. The Federal Reserve was created in 1913, by a Democratic Congress and approved by Woodrow Wilson. The Chairman and Vice Chairman of the Federal Reserve are both appointed by the U.S. President.

The very creation of the Federal Reserve gave regulators both the power and the inclination to lengthen booms and then plunder private sector savings (monetize) to ‘stimulate’ our way out of the ensuing and ever larger busts.

Lack of oversight? There is a difference between no oversight and bad oversight. The government controls everything from taxes, to laws, trade treaties, tariffs, lending practices. If the regulators were pushing subprimes and Fractional Reserve Lending, then how would additional regulating been helpful? The only idea I’ve heard out of Washington lately is that we should borrow money to make a product we don’t want and then go buy it. We have a sinking boat with one party wanting to bail water out of the front of the boat into the back, and the other party wanting to bail water from the back of the boat into the front. It doesn’t help to shuffle the money around if you don’t earn it in the first place.

It isn’t so much the fault of the market or government, but at the point at which the two meld, where government decisions affect the flow of large amounts of money in the private sector, corruption is inevitable. The banking sector is a tough issue. The way I see it there are three main ways we can deal with this:

  1. We can nationalize the banks. It wouldn’t be the first time. Obviously, the government has its own problems with inefficiency and corruption, and this essentially gives a competitive advantage to those banks which are subsidized by the government (as does our current meddling in which we have seen bailed out failures buy up successful competitors).
  2. We can do nothing. This is high risk in the sense that if the banks fail, the government is obligated to pay for most of what the banks lose (FDIC guarantee of 250k per account), so if they fall, we pay anyway. As for if they will fail; deflation causes defaults, which causes bank failure; inflation higher than interest rates makes the banks lose money on all of their loans. Due to fractional reserve lending, this means they will fail if the economy is at all unstable. Seeing how we just doubled our money supply last year, this is pretty much going to happen. A failure of the banking industry impacts lending, which is central to the Ponzi schemes that are most modern businesses, and to the housing market. If everyone has to buy their houses with cash, the price is either going to fall a lot farther, or they are going to be bought by China.
  3. We can do what we are doing now, which is leave them private and give them money, which they will abuse, both due to human nature and greed, and due to it being in the bank’s best interest to hold the money as long as the dollar is gaining value (which it has been until very recently), because using it causes inflation (if the dollar drops much longer, expect dramatic inflationary action by banks trying to drop dollars which are losing value). This is just meddling, and isn’t healthy for anyone.

The problem is that we are so deep in this Keynesian lunacy, that switching systems guarantees a crash. What are we to do?

I think this highlights a serious flaw in human nature. People have this unshakable feeling that there is a benevolent deity looking out for them, that everything will turn out fine in the end, and that there is a good solution to every problem, that when life gives you lemons, you get lemonade.

Sometimes every solution comes with pain and sacrifice. Sometimes the government can’t fix it, people die, wars are lost, retreat is the best you can do. Sometimes you just have to eat your damn lemons.

The longer you fight the tough decision, the worse the consequences get. We need to deal with the core issue, which is that every day we pay more regulators more money to regulate a shrinking industrial base. It’s time we let go of the micromanaging and let our good citizens keep the fruits of their labor so that they might afford to keep doing it.

Mob Mentality

â—„Daveâ–º has an excellent post up on Thoughts Aloud about thought and emotion as they relate to politics.

  • On thinkers he says, “thinkers tend to prefer to rely on their own wits, live an independent existence, take entrepreneurial risks, and accept responsibility for the consequences of their failures. They tend not to seek or rely on leaders for direction, and do not generally find causes or identity politics compelling.”
  • On feelers, “Feelers are more sociable, prefer the security of groups of simpatico friends, and readily follow the direction of group leaders. Their need to belong makes them vulnerable to groupthink, and susceptible to the notion that the group is more important than any individual.“

I’m not a big fan of this terminology, but the points are valid. I’m going to switch the terminology towards individualists and followers, since I think there are far too many groupthink intellectuals out there (socialists), and thoughtless individuals (couch potatoes).

Both of these would appear to be valid ways of going through life, but at some point the followers run into a problem of scale. The very strength in numbers that gives them power also robs them of their free choice. Once a group gets to a sufficient size, it takes on an identity of its own. It becomes simple minded and self serving, bloated and corrupt. Those followers that make up its members find themselves in the position of opposing many of the policies of the collective; but having the choice of being with it or against it, left out on their own, they continue their support.

Individualists have been blamed for many of the problems of society, from the destruction of family values, to corporate greed, to the collapse of the economy. I would argue that we are a relatively tiny portion of society, and that we have been vilified by the collectives as a way of passing blame to those who are not organized enough to defend themselves.

  • “Family values” is just a code phrase of conformity. Having grown up in several different family units and situations, I can say with confidence that it was enlightening, and that there is no single right way to raise a family.
  • Corporate greed is a problem of the collective. We should mistrust those in power and those organizations that have grown too large. When they stop serving us, we should stop serving them.  “The difference between corporations and governments is governments have a monopoly on force. It’s a lot easier to vote with your feet or your wallet than it is to change a government with your vote.” -P.J. O’Rourke
  • The collapse of the economy can be blamed on a great many things, but to claim that the government was powerless to stop it and lacked the ability to regulate it is ludicrous. They control the tax rates, the interest rates, the laws, the tariffs, the subsidies, minimum wage, and the printing of money, and we are expected to believe that they were powerless?

At the feet of those disciples who sacrifice free thought for membership, we can clearly lay a great deal of the worlds problems, from partisanship, to war, to oppression, to censorship. These are not the tools of individuals. This is mob mentality.

Too many run the daily news through a filter of religion and partisanship before they form their opinions, and even more these days have become too lazy even to do that, instead relying on tailored media to save them the effort of forming their own opinions, and offering them false outrage on a platter. If you only listen to the news sources that match your politics because all of the others are biased against you and make you angry, then you are a part of the problem, not the solution. Form your own opinions. Emotional response has been shown to physiologically inhibit rational thought when watching politics. Don’t get angry at the other guy, seek deeper understanding and push solutions.

Jon Stewart vs Cramer

Something constructive has come of the Santelli rant after all, albeit through a rather circuitous route. The above video is the meatier portion of the whole escapade thus far. After being taunted by NBC for just being a comedian, taking things out of context, and making funny faces, Jon Stewart had Cramer on his show and conducted the interview in a more serious and constructive manner than you will see any of the so-called journalists who leveled these accusations do themselves. Cramer was friendly and apologetic, so this must have been a hard thing to do to the man, but Stewart met any evasions with career crushing force. There have been responses from most of the major media and the White House.

CNN has a poll up that asks readers whether they see this interview as being a comic diversion or serious business. Comedy is winning 52-48. This shows a fundamental lack of understanding of what went down. A bit of background for those of you not well versed in investing; a short is when a broker sells you an investment they don’t own because they think it will go down. They intend to take your money, and when the stock goes down and you wish to sell, they just give you some of your money back and pocket the rest. Kind of like a Ponzi scheme, in the sense that if the stock market booms and everyone wants their money, we see a whole new scandal. This is legal. Some of what he was admitting to doing was not. Listen carefully to the clips Stewart plays, rewind if you have to, but make sure you understand what Cramer was admitting to. He isn’t a rogue bad apple. This is business as usual and whole system is full of rot. The government is rotten, the banks are rotten, as are the analysts, the brokers, the corporations, the media, and the investors. This isn’t something we can just make more rules against. This isn’t a failure of the free market. The people who make the rules are the same people breaking them. What we need is simple transparency. Jon Stewart has given us a taste.

The Rule of Rules and the Ethical Nature of Autonomy

In this TED Talk, Barry Schwartz speaks on a society gone over the edge with rules and regulations, and the ethical nature of autonomy.

It is easy to fall into the habit of seeing the populace as a conglomerate of ignorant sheep, and there is some truth to it. As a group we consistently make poor decisions, but the group is made up of individuals. They have their failings, but most of them get up every morning and go to work. When faced with decisions in their daily lives, they tend to make good ones.  They share your outrage over the state of the system.

It isn’t until they are corralled and herded through all the little reverberating insurance policies against litigation that most of their decisions tend to be bad ones. We haven’t added rules over the years because people have become less upstanding, people have become less upstanding because society has increasingly suppressed their spirit of ingenuity and drive with rules designed to take all of the rewards in order to ensure that no risks are taken. We now reap what we have sown. Fear of innovation. Bloated government, a litigious populace, listless children, high taxes, and low-flow toilets.

Update: This unfortunate trend has only accelerated in recent years. It’s gotten to where the insurance companies have themselves become regulators, as their coverage is now mandated, but they still write most of the terms and conditions, for both doctor and patient. Doctors are now told what they will reimbursed for in a way that has reduced their doctor patient relationship to a checklist that will keep them in business. Patients are told who they can see and which treatments will be covered, all while spending more money, on average, than before the insurance.

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