Posts Tagged ‘Recession’

Not Getting It

Thomas Friedman has gone from being a cheerleader for globalism to a cheerleader for un-American, command-and-control industrial policy of the type enjoyed recently by China and, less successfully, the Japan, Mexico, and Brazil of yesteryear.  What he does not understand and is completely dishonest about is the widespread American rejection of the measures undertaken by Obama on the stimulus and healthcare that emulate these foreign models.  He says for example:

That is why I believe most Americans don’t want a plan for deficit reduction. The Tea Party’s vision is narrow and uninspired. Americans want a plan to make America great again, and at some level they know that such a plan will require a hybrid politics — one that blends elements of both party’s instincts. And they will follow a president — they would even pay more taxes and give up more services — if they think he really has a plan to make America great again, not just bring him victory in 2012 by 50.1 percent.

That hybrid politics will require hard choices: We need to raise gasoline and carbon taxes to discourage their use and drive the creation of a new clean energy industry, while we cut payroll and corporate taxes to encourage employment and domestic investment. We need to cut Medicare and Social Security entitlements at the same time as we make new investments in infrastructure, schools and government-financed research programs that will spawn the next Google and Intel.

There is no evidence to support this. The American conservatives and moderates that rejected Obamanomics this last election have no interest in the kind of internal nation-building he calls for.  Instead, they are aware of and have rejected the economy-destroying implications of big government.  Some, no doubt, have not thought things through and still want generous benefits.  But, nonetheless, they do not want more government, even if they want the unsustainable same amount.  And they do recognize intuitively that large deficits create problems, not least inflation, but also constraints on the government performing essential tasks like defense. Finally, most Americans know that the first Google and Intel did not require government seed capital and direction; they simply required a government that did not get in their way.

Friedman has become delusional, and he is ensconced in a bubble of fancy dinners among wealthy foreign patrons and the carefree life created by his billionaire wife’s money.

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When you look at the various policies that have contributed to America’s current crisis, it’s evident that a series of bipartisan, popular-with-elites, and thoroughly short-sighted policies have done much to bring us to where we are.   These policies are largely sacrosanct, particularly among elites, in spite of where we find ourselves as a country.  These include the following:

  • Free trade orthodoxy that eschews any “industrial policy” and has sent a great number of American jobs and much of America’s manufacturing capacity to the Third World, particularly China.
  • A related lack of criticism of our low wage, high consumption economic regime.  Americans’ wages have stagnated and credit–including housing based credit and refinance loans–did much to mask that wealth and wage decline over the last 15 years.
  • Support for multiculturalism, diversity, and mass immigration, which has left America disunited, with a lower wage and lower IQ workforce, and problems of Third World violence and terrorist acts that were formerly unknown to America.
  • A belief that home ownership is something attainable for all and that public policy should support the housing sector with various subsidies for the uncreditworthy.
  • A belief that a college degree is something attainable for all and that it should be subsidized by government grants and loans, which has left many Americans with worthless pseudo-degrees in subjects like “packaging” or “communications” along with mountains of (nondischargable) debt.
  • Indifference to unsustainable government pensions, transfer payments and welfare policies, including Medicare and Social Security, which will be insolvent in short order and will ultimately bankrupt the country.
  • Indifference to high rates of illegitimacy, which is subsidized by various government policies like Section 8 housing vouchers, food stamps, AFDC, and the like.
  • Support for global crusading, interventionism, and other activities that cost a great deal of money, employ our military in thankless and impossible ventures like Iraq and Kosovo, and that create enemies with long memories, while winning us few friends.

The thread that unites these phenomena to me is that they are all mutually enforcing, rooted in cosmopolitanism and sentimentality, and all are far from being solved.  Indeed, some of these problems are being made worse, as in the ram-through of Obamacare.  Elites have offshored jobs and imported cheap labor, which has pushed down wages and reduced productivity-per-worker, as well as the mean IQ, which in turn is masked by easy credit, worthless degrees, welfare policies, deficit spending, and denial regarding America’s various fiscal crises.  The foreign policy problem is mostly sui generis, except insofar as our elites believe so highly in themselves and consider the interests of random Third Worlders equally valuable as those of their countrymen.

In all of these areas, the elites have dissipated the country’s wealth, especially its human capital.  Whether Republican or Democrat, anyone who believes these things does not deserve to govern.

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The economic journalist and consultant behind Shadow Stats has an absolutely off the wall interview in a mainstream business publication that begins reasonably enough, but ends sounding like a cross between Ludwig von Mises and the Road Warrior.

It’s worrisome when guys in pinstripes who went to Ivy League schools begin to make the kooks talking about the Illuminati at gun shows sound like the moderate wing of the movement.  These are very tough times for so many Americans. I hope our country somehow pulls through.  But I fear that it will get much worse before it gets better.  There is so much that is unsustainable right now; it can’t go on like this indefinitely. 

I try to count my many blessings in times like these–a job, a great family, freedom, my education, my faith–but it’s so downright depressing to see so many good, hardworking people caught up in a storm beyond their control, while the worst of the worst, the least productive and most parasitical in DC and Wall Street, are living the high life on a combination of government bailouts and central bank sponsered hustles.

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The Funniest Guy in America

I was a little bereft of blog inspiration this morning when I saw this op-ed by Treasury Secretary Tim Geithner:   “Welcome to the Recovery.”


I seriously do not think I’ve seen anyone nearly so incompetent, overpromoted, and out of touch with reality until, well, until the last time I took a serious look at Obama.  And if these two think they’ll convince millions of broke, unemployed, underemployed, “under water,” and hurting Americans that they’re in a recovery simply through words and sleight of hand, they are seriously mistaken.

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Banking by corporations and limited liability companies is not essential to free markets. Like bankruptcy, all of these arrangements involve shifting some of the harm caused by risk-takers onto those who did not take the risks. There may be good reasons to socialize (i.e,. disperse) risk. People may be improvident or need some paternalistic guidance. A certain amount of risk-taking perhaps should be subsidized, i.e., venture capital, homesteading. But there are other means to amass capital and spread risk–not least debt obligations and insurance respectively–without shielding decisionmakers from personal liability to creditors and others in the case of civil offenses and breached contracts. The possible value of tying corporate decisionmakers and stockholders to the downside of corporate risk-taking should be obvious, considering the heads-I-win-tales-you-lose mess we’ve gotten into under the influences of many factors that have spread risk: limited liability, financial engineering, leverage, and the ethos that on the downside these firms (and investors in the same) are simply too big to fail. I wrote something about this many years ago along these lines here and Hillaire Belloc, to his credit, long ago distinguished between the character of real property and the “paper wealth” with which it shares so little in common as far as social benefits goes. Conservatives who are found of free markets should be rethinking their attitudes towards banking, corporations, and the combination of loose money and weak regulation we’ve recently experienced.

An interesting symposium at the liberal-leaning American Prospect discussed the problems of risk, particularly risk with public consequences. It offered an interesting defense of the welfare state along the same lines as the bailouts; namely, that it frees people up to take certain risks. Of course, like FDIC insurance, bailouts, and bankruptcy, that’s part of the problem when it becomes too generous.

The polymath Richard Posner weighs in, concluding that sensible bank regulation failed, and combined with easy money this brought about the recent crisis:

Finally, let’s place the blame where it belongs. Not on the bankers, who are not responsible for assuring economic stability, but on the government officials who had that responsibility and failed to discharge it. They failed even to develop contingency plans to deal with what everyone knew could happen in a context of escalating housing prices (it had happened in Japan in the late 1980s and the 1990s). Lacking such plans, the government responded to the crisis with spasmodic improvisations, amplifying uncertainty and mistrust and thus retarding recovery.

And let’s not forget to apportion some of the blame to the influential economists who assured us that there could never be another depression. They argued that in the face of a recession the Federal Reserve had only to reduce interest rates and flood the banks with money and all would be well. If only.

Finally, in a tour de force, Allan Meltzer eviscerates the continuing inflationary practices of the unholy triumverate of Obama, Geithner, and Bernanke, viz.:

IN the 1970s, with inflation rising, I often described the Federal Reserve as knowing only two speeds: too fast and too slow. At the time, the Fed’s idea was to combat recession by promoting expansion, printing money and making it easier for businesses and households to borrow — and worry only later about the inflation that resulted. That strategy produced a sorry decade of slow productivity growth, rising unemployment and, yes, rising inflation. If President Obama and the Fed continue down their current path, we could see a repeat of those dreadful inflationary years.

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Above is an interesting chart. So is this one:

There clearly were many factors in the housing bubble, all of which aligned to create a perfect storm of sorts: higher levels of leverage among investment banks, a trade imbalance, reliance by institutional investors on misleading ratings by ratings agencies, inflationary monetary policy, conversion of housing assets into opaque financial instruments, reduced lending standards, the pressures of the Community Reinvestment Act, the mystique of home ownership, business models that invited fraud, and a pervasive mania of speculation. But one factor that seems increasingly undeniable is the Bush administration’s belief that Hispanics were “natural Republicans” and that the best way to get them into the fold was to give them a stake in the “ownership society” through various housing subsidies. Hispanics’ increasing numbers in the so-called “sand states” had a lot to do with the bubble’s disproportionate influence in those regions, and these subprime borrowers’ low levels of human capital and earnings eventually led to the music stopping as payments were unmade and new borrowers could not materialize to prop up the inflated housing prices. I mean, throughout the boom, no one said, “Does it make sense a sheetrocker from Chiapas making $11/hour can afford a $400K McMansion in Anaheim?”

This is what may be called an “overdetermined” event. In other words, without large levels of Hispanic immigration and Bush’s obsession with cultivating Hispanic political support, the bubble may still have happened. But it seems unlikely that it scale would have been quite so huge and the wave of defaults quite so numerous in the absence of the low-skill Hispanic immigration wave the U.S. has undergone since the 1986 amnesty. A million people per year is a lot of people. As the chart above shows, subprime lending tripled in the boom and the bulk of that expansion was increasing lending to blacks and Hispanics. Even more important, as shown in the second chart, blacks and Hispanics–according to the Boston Fed–have default rates nearly two times higher than white subprime borrowers. Of course, the media, the Democrats, and the Republicans don’t want to discuss such things; it’s not considered polite, and, thus, the greatest demographic and social change of the United States since the Civil Rights movement is thoroughly and deliberately under-analyzed and misunderstood by well-meaning (and not-so-well-meaning) political elites.

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I’ve recently become intrigued by the writings of Nicholas Taleb.  They resonate with me because his criticism of mathematical modeling of markets–i.e., the central activity of “econometrics” and the basis of so much Wall Street activity–has long been a theme of the Austrian School of Economics. The same skepticism of predictability that leads the Austrians to reject socialism also casts a shadow over so much of the noise-making activity of Wall Street. 

Stressing instead, the unpredictability of markets, the role of idiosyncratic (and changing) individual preferences, and the heroic role of the entrepreneur and experience-driven gambles about unmet demand, the Austrians have long condemned the idea that the government, central banks, or even individual investment houses could reliably predict market movements in advance. There is a huge “X Factor,” namely, human action.

Taleb stresses that our social scientific hypotheses and data sets are likely misleading.  We craft comforting narratives from past events, even though these explanations may have little predictive value and can lead to positively dangerous “false positives” going forward.  We are, in essence, stumbling around, looking for answers, with various baffles and blinders. 

Like Taleb’s insights into Black Swans, the nice thing about the Austrian School is that it does not promise utopia.  Instead, it promises the least systemic damage because an authentic free market system–particularly one divorced from central banking and fiat money–is the least systematized.  There may be longer and shorter chains of production, misallocations of capital, and supply shocks, but these problems are dispersed and rooted in the unavoidable uncertainties of market activity.  Unlike the “modern” world of central banking based on fiat currency, temporarily correct but disastrous false signals cannot arise without the harmful pressures of central banking coupled with fiat currency.  Your loss is my gain in a true free market system, and speculators tend to cancel one another out without the false signal of inflationary monetary policy.  Wealth creation might be slower than in the present world of monteary-policy-driven economic bubbles, but so too are the crashes less frequent and less severe. 

Murray Rothbard was fond of pointing to the relatively short-lived 19th Century panics in contrast to the decade-long Great Depression and the repeated multi-year-post-war recessions.

One would have thought the econometricians would have retreated after the failure of Long Term Capital Management in the late 90s, but no such luck.  They returned with the same bravado and cock-sure certainty again, enabled by the same kind of monetary policy that presumes to “create growth.”  Of course, no one can manage the economy, not least the government who, unlike private actors, is concerned equally with social goals and concentrated public choice players as it is with profits and wealth creation.

I was happy to see some criticism of the economists counseling government intervention in today’s Wall Street Journal.  Yet this criticism will likely be drowned out by calls for intervention.  So long as Wall Street’s economists embrace the wrong kind of mathematics in an attempt to predict the unpredictable–with extreme confidence, in fact, backed up by the wrong kinds of statistical reasoning–then the theoretical framework supporting central planning and government intervention will remain.

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