Friday, October 24, 2008

Elk Season

I will be in Oregon for the next week or so stalking the elusive Spike Elk. I will be mobile blogging here: whenever I have service enough to send pics and posts. I will be in Oregon for the election but will be out of the woods by next Sunday so I'll try to post more here after that.

Tuesday, October 21, 2008

A Note on Growth

Just an update to my previous post addressing Robert Skidelsky's article, if we had followed his beloved Keynesian economic model and experienced the stable 3.2percent growth he is so enamored with... The Dow would be in the mud 3000s today. How would your retirement account look then?

Monday, October 20, 2008

The John Kerry of the Republican Party

When the Democrats have a veto proof super majority just remember that the Republican party did this to you.

Wednesday, October 15, 2008

Dead Economics Rearing it's Ugly Head

Robert Skidelsky supposes in the Washington Post yesterday that economist John Maynard Keynes' economic theories would aptly have predicted the current financial crisis, and ostensibly prevented it. Skidelsky couldn't be more wrong nor more misguided. It's not a mystery that as a Keynes biographer Skidelsky would take this opportunity to hawk the Keynesian ideology but he does so with an obvious lack of understanding of both the effects of Keynesian economics nor the theories he claims to debunk.

He writes:

"...what is in even shorter supply than credit is an economic theory to explain why this financial tsunami occurred, and what its consequences might be. Over the past 30 years, economists have devoted their intellectual energy to proving that such disasters cannot happen. The market system accurately prices all trades at each moment in time. Greed, ignorance, euphoria, panic, herd behavior, predation, financial skulduggery and politics -- the forces that drive boom-bust cycles -- only exist off the balance sheet of their models."

The forces to which he is referring can be summed up in one phrase, the title of one of Ludwig Von Mises' seminal works Human Action, and to suggest that Keynes discovered some magical theory for predicting human action is more than misleading. Keynes as we can recall has been shown the architect and follower of a school of economics long since discredited as the type of policy that made the Great Depression last as long as it did. Keynes in fact advocated the kind of price manipulation that led us to the situation we are in today.

Skidelsky further writes:

"It held that governments should vary taxes and spending to offset any tendency for inflation to rise or productivity to fall. And for roughly 25 years -- from 1950 to 1975 -- they did. The developed world grew at an average annual rate of 3.2 percent without a business cycle, with very moderate inflation, and without the benefit of the huge rewards now deemed necessary to keep executives properly incentivized."

Bold times to reference until you considering the fact that such growth is modest at best when compared to a skyrocketing workforce and massive post war productivity. While inflation was stable during that time period it is important to understand that most of the inflation our economy was creating was exported along with the goods and services we sold to other nations whose infrastructures were recovering from the physical effects of a war we did not see on our soil.

"Plagued by inflation, governments around the world took up Friedman's monetarism, which maintained that inflation was due to governments' printing too much money. Central banks were made independent (the Fed already was) and were given the single task of keeping prices stable. Moreover, financial innovation in increasingly deregulated markets was said to make investment less and less risky"

While Friedman did advocate the policies that the FED has used to manage deflation. It's important though to understand that Friedman's monetarism was an answer to the failings of the Keynesian model, not simply an opposing viewpoint but an attempt to fix the failings within his framework. And further that it was not the absence of market manipulation simply manipulation through monetary policy and not fiscal policy. Suggesting that returning to Keynes from Friedman is like returning to the horse and buggy to improve vehicle fuel economy. Keynes didn't oppose market manipulation in fact he loved it, he simply believed in manipulation through the other end of the IS-LM framework. Keynes wanted to manipulate the market through the government's fiscal policy (government taxes and expenditures). That's an important distinction to make when you examine Congress' roll in creating lending policy and in it's encouragement and backing of Fannie May and Freddie Mac. We are in this situation in large part because of the kind of management that Keynes advocated.

"The price level is not a leading, but a lagging, indicator. Asset bubbles can coexist with a stable price level, even while the rest of the economy is starting to slide into depression."

Price is in fact a much more tuned indicator than Skidelsky suggests and while correct that it is not a leading indicator it is the first indicator in a market where it is properly allowed to do it's important job. Price, for instance would and did predict the current crises. The price of homes and mortgages took a drastic and unrealistic upturn while becoming inexplicably dissected from it's usual bedfellow; the rental price indexes. When home prices became separated drastically from rental prices it was an all too obvious indicator of things to come and free market economists have been screaming about it for years now.

He quotes Keynes
"Money, he argued, was being switched from production to speculation. The rich were getting very much richer, while the incomes of the rest were stagnating. "Profit inflation," fueled by collateralized debt, coexisted with an "income deflation.""

And here while he isn't entirely wrong about the events that occurred it is beyond obscene to suggest that the economy of the 1920's with years of prolonged negative growth, resembles the positive growth we have seen even this year in times of turmoil. What's more is that it's clearly not the same kind of "speculation" dissected from production when our economy is booming with production in a great many sectors. While it's true that wages have stagnated recently it's not in the neighborhood of the kind of stagnation that Keynes saw and responded to.

Skidelsky is correct that the most modern economic models do not predict with great accuracy things like what we have seen this year in our economy. That is as we expect because math has a very tough time predicting the very important elements of a person's full (not just financial) self interest, nor the choices that people will make when given the opportunity. Skidelsky is wrong however to suggest that Keynesian models would have predicted this; unless taken as such a vague suggestion that in 'this kind of market instability exists'. What's more important is to note that under Keynesian market management growth, prosperity, and market innovation are greatly stifled by fiscal policy constantly, and with only the vague hope of preventing the short moments of market instability that naturally occur. Regulatory market manipulation, the likes of which Keynes advocated contributed untold force to the current economic situation in this country and only the market and it's vast ability to re-connect prices with their intended properties of communication and incentive, will restore order.

The answer is not simply a return to one form of market manipulation over another. The answer is to implement policies that allow markets to experience the natural adjustments that occur when prices are out of equilibrium with real value. The Austrian model suggests just that. In the theories of F.A. Hayek and Ludwig Von Mises we would see not only the prediction Skidelsky wishes for but also the acceptance that in the long run the market will ebb and flow, prices will inflate and deflate, naturally in order to maintain proper and efficient relationships between producers, consumers, workers, employers and investors.

The problem Mr. Skidelski isn't the wrong manipulation, it is that manipulation is wrong.

Monday, October 13, 2008

On Paul Krugman

Peter J. Boettke discusses just some of the reasons the choice of Paul Krugman for the Nobel Prize in Economics is a terrible idea.

The Worst News Yet


This bodes very poorly for the future of our society. Paul Krugman writes an Op-Ed column for the New York Times, has taught at Yale, MIT and is currently a professor at Princeton. He's also a commie.

In his recent book The Conscience of a Liberal he writes;

"My generation grew up in a nation of strong democratic values and broadly shared prosperity. But both those values and that shared prosperity have been slipping away.

"We can reverse that trend. Political and economic reform turned the oligarchic America of the Gilded Age, a place of vast inequality, bigotry, and corruption, into the imperfect but far better society of the postwar era. The challenge now is to do again what the New Deal did: to create institutions that will support and sustain a decent society."

Are you kidding me? The Nobel Prize for a man who advocates a return to the socialist economic policies that the economics world widely regards as the very thing that kept us in the Great Depression for so long? A man alive during our time, who can actually watch the failure of entitlement ideology like Social Security and still advocates a return to that kind of policy?

Paul Krugman just last night applauded the EU for massive bank nationalizations. This is stupider than when the Nobel went to Gore for learning to use Power-Point.

Tuesday, October 07, 2008

SNL is Sometimes Balanced

Of course when you watch the re-edited version on NBC's website you'll notice that certain parts including a personal interaction between a subprime lender's wife and Nance Pelosi have been edited out. NBC claims that the skit has been edited for 'legal reasons' but that doesn't stand up. It's clear the skit has been edited to lessen the implication that the Democrats in congress were personally involved with the beneficiaries of the inequitable profits in the failing mortgage market. Also removed was the title for the mortgage subprime lenders calling them "people who deserve to be shot". Which is an understandably irresponsible thing to put on tv and likely was removed to assuage the risk of litigation against NBC should subprime lenders actually be shot by disgruntled citizens.

What Do We Do Now

Alright I've railed against the bailout quite a bit and I have tried to shed a little light on how we ended up in this mess in the first place. So to recap I have presented exactly dick for useful information for the average person and for their future. Sure maybe I have had a positive impact on how you might vote against the scummy dirtbags that voted to piss away your money, but as of now I have presented next to no real advice.

So here it is.


In case I wasn't clear I'll repeat


Alright now that I know you have ignored that advice here's a little more. If you absolutely need complete liquidity in the next five years, if you will completely divest yourself of your stock portfolio due to some overwhelming liquidity need, then get out of the stock market right now. I'm not arriving at this decision by myself, in fact I may have been swayed by Jim Cramer. Cramer has to be smarting in part due to his massive public attempt to draw attention to this impending financial crisis in August of last year. It must be the hardest time to find out you were completely right.

With that said and out there, if you do not need to completely liquidate your portfolio in the next five years, DO NOT PANIC. Stay right where you are and take a very long hard look at the holdings in your portfolio. If you own stock in the specific institutions that are going bankrupt, you will likely lose money. If you have high risk venture capital in your portfolio you will probably lose money. Now is the time to pay very close attention to the stable choices in your portfolio and reinforce them. If you own stock in well established, long standing companies with substantial physical resources, stay put, do not bail on those investments. If anything pull together liquid capital and standby to move into markets where the index driven market fears have driven prices to unusual lows but where balance sheets remain intact. This can be the best opportunity for substantive growth in your investment based income you will ever see if you have the time, the patience and the fortitude to ride this out.

Remember if the worst fears come true, which they wont, then it doesn't matter what you do with your money. If they don't come true, which they won't, then the best thing to do is find shelter in long term stable investments, with companies that have real property. Don't invest in companies that make money by moving money, don't by shares in your bank. Soon we will see lows that we haven't seen in years and that's the right time to buy good strong companies. If you do own high risk stocks in financial institutions, take a very long hard look at them and if you need to take a loss to get out before they fall apart then do it, but by all means do not put the cash under your mattress, there are plenty of good companies with a history of weathering storms to shift into at a lower cost than you might ever see again.

As for Congress, we have a bailout allocation and while I'm going to continue to call for their resignations for this massive socialist takeover, now is the time for forward thinking. What do we do now, not last week, but this week? The FED is out of control and needs to be reigned in and while I don't trust a United States Congressman and further than I can throw him, the Congress is the only body in a position to implement some oversight into our currency policy. There's no time like the present. We must find a way to tie the FED's currency decisions to the market in order to prevent bubbles like this in the future. Next, and I am completely stealing this idea from Cramer, if we are going to spend $700b at a time buying these bad assets, then the government needs to renegotiate them one by one and find acceptable terms to keep people paying them off, and then needs to involve private businesses in buying the rebuilt mortgages for a fair price. There is room for the market to actually grow with this new process and if we let private business participate we may yet see an overall gain from it. I doubt highly the balance sheet at government program level will turn a profit here, but they may at least be able to break even while pumping positive growth into the economy. So while I oppose buying the debt in the first place, the government has the unique ability to bend the rules, adjust the value of the mortgages and resell them at real value instead of panic value. Lets all sit back and see if that's what they do. And pay attention this program will need to be revoked at some point. We pass this garbage and then forget about it, we need to keep tight watch over it. Remember the income tax was originally designed to pay back debt from the Spanish American War. I'm not sure but I think we payed that back, but the tax is still going strong.

The next step, and one that congress should take seriously in it's lame duck session in November is to restructure the lending laws to allow institutions to implement any form of lending discrimination they see fit and let the market pick which banks get the loans. Work to find a way to make sense of bundled debt and if any new regulation is required, let it be that risk assessment criteria must be included with each individual debt bundle when it is resold.

And finally we need to make damned sure that Washington feels in it's pockets the hard hitting disapproval of their constituents. If you can't vote for your sitting Congressman's opponent because his party or policy disagrees with your ideology then by all means under vote the slot. Cast a ballot and don't mark a choice in that race. If you can vote for a third party, do it. If your Congressman or Senator made the right choice in this case, call them and let them know, then vote for them in Nov. We may not shift the outcome of the election cycle drastically this year with this effort, but we can shift the debate and we can get them running scared.

And by all means...


Monday, October 06, 2008

Drowned By the Anchor

Some people have been asking me of late why it is that such a small portion of the Mortgage market falling into default can bring down the entire economy. I'm not an economics genius but I know a few and am more than willing to henpeck their ideas in order to make my analysis of the situation seem more reasonable than it might have in the first place. I don't have a PHD but I assume that the shameless rape of another person's ideas in order make to make yours seem more plausible, if only by the manipulation of context and syntax, is the highest road to intellectual development. The same is most certainly true of religious zealotry and I can't imagine that higher education and the church differ all that much in their methods.

So I will attempt to make sense of how a relatively small shift in one area of the market can inject the kind of issues we've seen this month. The answer is not drastic shifts in actual money as one might imagine being necessary. The answer is quite reasonably uncertainty. The stock market and most other forms of trade based solely on the movement of money and not real goods, is simply like most markets a place for the exchange of risk from one source to another. Risk is the central theme of it all and is the means by which fortunes are made on Wall Street. For example if I have a company and want to try and make it bigger and better I need to invest money into it, if I invest all my own money I get all the profit but also take all the risk should my endeavor fail. If I offer a percentage of the business up for sale in the form of stock (or any number of other forms) I allow the business to be propped up on another person's money, in exchange for them sharing the risk, they also share in the possible profit. The end result is a positive one for the most part as a well examined risk is one that can be worth taking for the investor and the needed capital can be the thing that makes my business successful for both me and my investors. The problem is that when external factors to that arrangement constrain one or both parties from examining the risk they are buying, then the unknown risks make investment scary and scared investors don't invest.

To bring this into our mortgage 'crisis' scenario think of it this way; Fannie and Freddie by urging and by regulation sent a message to the lending community that they were willing to purchase any debt no matter how high the risk, as long as that debt contained the right quantity of people fitting the right physical description. That of course being an address in the poorest, least fortunate neighborhoods. In order to make the sales of these high risk assets worth while up the food chain, they had to be bundled with large quantities of low risk loans. When bundled together and sold over and over again from one lending institution to another the street level risk gets lost in a pile of numbers that average with other numbers repeatedly. The influx of loose cash on the housing market drove prices up as one would imagine. One of the things about the housing industry is that it has historically been a safe place to invest money for moderate growth over any period of time. In this case a drastic increase in capital without a corresponding increase in wages, meant that people were buying beyond their means. Functionally what we saw was a price increase driven solely by an increase in the number of people participating in the real estate market, not by actual economic growth or prosperity. All of this predicated on 'guarantees' issued by government backed lending institutions to buy all this higher risk debt.

But we know this already because you and I have a television or a radio and haven't heard anything but this for weeks.

But it's not a huge quantity of default. Sure a ton of people have loans that will be larger than the actual value of their homes for a very long time, but most are still making payments on those loans. Why then is the disaster afoot? It's simple really, the bundling of those high risk loans with other loans throughout the market and the sale of those bundled products repeatedly throughout the market have taken away any simple method for assessing the risk in any individual package of debt. With no firm way to assess risk there's no way to set a scale for acceptable loss, there is no way to set a fair price for sale. No one knows which packages of debt have the most high risk debt and which have the least. Nobody buys uncertain risk at a reasonable price. So thousands upon thousands of good loans are on the market for way below market price and people still aren't buying. Banks who responsibly wish to protect the real assets of their depositors are hesitant to lend money to other banks on the basis of the wild level of uncertainty in their real assets.

Bluntly, you can't see from the outside of these packages if there's more anchor than boat and nobody wants to take the risk. When people aren't willing to take risks businesses stop working.

How the government thinks they have any better shot at picking out the bad risk than the financial institutions holding the packages is beyond me.

Or maybe I'm reading everything wrong.

Saturday, October 04, 2008

October Surprise?

Biden on the way out?

In private a month or so ago I predicted a scenario when things got desperate enough for the Obama campaign that Senator Biden would suddenly have a tragedy in the family that took him out of the race and the only acceptable replacement would be Hillary. At the time I made that prediction Obama's post convention numbers were nothing like they should be considering trends and historical averages. Most of that was due to the Palin addition to McCain's camp. Today it was announced that Biden would be missing some stops including a rally in Virginia due to the terminal nature of his mother-in-law's current condition. Comment pools in online news sources are starting to grow momentum for the idea that this is the time to swap VP choices. I just don't see it.

When I made that prediction the conditions were a moment of desperation, and Biden presenting a serious lag on the campaign. Right now that's not the case and while I'm sure Obama kicked himself several times for his 'safe' VP choice I seriously doubt that a 7 point lead and a strong momentum in swing states is the time to make that change. I doubt highly that Hillary would accept the offer if the campaign wasn't in a very weak position (making her look like the D's shining hero). And I doubt very highly that the chosen family emergency would be the passing of an elderly in-law.

I could be wrong and this might be the shift that takes ol' Joe out of the picture, but I just don't see it. If at the end of the month numbers for Obama have plummeted drastically then I'll return to the point but if sometime this week there's an announcement, count me in the wrong column.

As for right now I'm still busy trying to figure out who is hurt more by the passing of the wildly unpopular, pork filled, bloated embarrassment of a 'bailout' package that caused a drop, yes a DROP in the stock market. I know my Congressman and longtime family friend will get two less votes this election because of his choice to back socialism over the free market and free people.

Friday, October 03, 2008

VP Debate

I'm not going to spend a ton of time on the debate. I don't find them to be crazy interesting. They are, for the most part, barely able to make any positive progress and serve only as mine-fields for those involved. In terms of influence over poling information and trends, sure they have some. But it's hard to point to any debate moment in recent history where we actually learned something about a candidate's policy.

With that in mind I will say that Gov. Palin and Sen. Biden both conducted themselves with a relatively high level of respectability. I could spend a ton of time dealing with all the times Sen. Biden stretched the truth in his answers but the pundits will do it for me. I could also spend a ton of time talking about how badly it must have hurt him to backtrack on comments he has made about Obama and his policies, but again there are plenty of voices to do that for me.

Gov. Palin registers a clear and measurable success in this debate as she has presented herself as having all the qualifications that people accuse her of lacking and lacking all the negative qualities people accuse her of having. That said, Joe Biden has 30 years of experience promoting bad ideas in the US Senate, and tonight he eloquently and professionally expressed his next round of bad ideas. Gov. Palin has only a small legislative record to draw on and only some of those ideas are terrible. Biden draws on his extensive experience to ably control portions of the debate, and while I think on strict debate terms he might edge out a victory, I think in the fight for public opinion he remains a boring communist.