Failure of the free market system?

I'm reading a lot about how the free markets have failed and how we need to change this or that. In order to arrive at that conclusion you'd have to be either intellectually dishonest, ignorant, or possibly both. It's convenient to blame the current economic struggle on the failure of the "free market", however the market we have is neither free nor would it be a failure for a truly free market to experience periods of economic contraction. First of all a free market implies that there is an absence of external manipulation; with Congressional bailouts and the Federal Reserve tinkering with interest rates our market is anything but free. In fact it is the very actions of Congress and the Federal Reserve that led to the economic crisis we are now suffering. Second, in a free market excesses and malinvestment are corrected through a cleansing that comes with a contraction in the economic cycle, any attempt to intervene only postpones and increases the severity of the correction. Third, it is asinine to assume a system as complex as the US economy could be manipulated without unforseen consequences which may be more detrimental than those initially feared.

It's interesting (at least to me) that our grandparents are regarded as the "Greatest Generation"; largely because of their sacrifice during WW2 as well as the subsequent prosperity our nation enjoyed following their victorious return. They also experienced first hand the calamitous consequences of the Great Depression and responsibly saved and skimped for the remainder of their lives in preparation for the next round should it ever occur. Simply put: they experienced adversity, learned from it, and as a result were better prepared than previous generations.

It's understandable to avoid adversity and protect loved ones from the same, one possible concern being that experience is an excellent educator and as a nation we have been skipping classes for two generations. It is precisely this tendency for present day Americans to avoid hardship, demand assistance, and willfully acquiesce liberty that resulted in an economy built on consumer spending and consumption rather than saving and production. Throw in a fiat currency and a government that is willing and able to pass laws to "protect" it's citizens and you have the recipe for an economic time bomb.

Perhaps it's a bit conspiratorial, but I think the chaps in Washington don't want self sufficient citizens, the kind who can't be bribed with handouts in exchange for votes; its better for them to have a bunch of ignorant simpletons who need entitlements to survive. How else would you explain an unlimited annual tax deduction on mortgage interest and an annual cap of $5000 on retirement savings?

Would you rather be and ignorant simpleton or a thinking citizen?

-Joe

so that's the problem...

While listening to a podcast some time ago I heard the following comment: "the economy is suffering from a global savings glut", what struck me as odd was the use of the terms suffering and savings in the same sentence. I can think of many things I (we) suffer from, but a savings glut is not one of them. As I began to ponder that statement a few thoughts stuck in my mind:

• America doesn't save so our suffering must be limited to the effects of other nations saving.
• if we are in fact suffering because other nations saving their money, why?
• aren't we supposed to "save for a rainy day"?

I came to the conclusion that saving is only bad if your entire economic system is based on the expansion (artificial inflation) of money and credit (which ours is), but this is only partially true as someone will eventually benefit from all the spending and end up accruing some savings. In fact this does happen and it has a name: The Cantillon effect after economist Richard Cantillon. It turns out that the people who get the newly minted money and credit first are disproportionately benefited over those at the bottom of the barrel, in other words inflation hasn't set in for the first few recipients of the money (typically the politicallly well connected), however by the time the average citizen receives the money prices have already increased and at best any raise that may come from inflation will be to break even with the already inflated costs. Either the leadership of our country has been incredibly stupid the last 80 years or it was known that through the artificial expansion of credit and money supply, an increasing number of people would become dependent on the government. As it stands right now the primary political parties have no incentive to make the necessary long term corrections, especially if the citizenry remains largely ignorant.

The time for action is at hand, being a passive citizen will no longer suffice. We need to:

1. Learn. Education leads to awareness.
2. Share. Contribute to the knowledge of others.
3. Unite. Together we can stimulate change.
4. Act. 1-3 are irrelevant unless something happens.

-Joe

the next three fifty

As I was watching the news today I saw a playback of good ol' Hammerin' Hank Paulson's press conference from earlier in the day. When he was asked about the balance of the 350 billion bailout, er rescue package and when it might be tapped he said something about ...when we get the next three-fifty...blah, blah, blah. He really said three-fifty. Not three hundred and fifty BILLION, but just three fifty. Like me saying to my buddy Joe, 'hey can I have a five spot?'. It seemed really weird to me for him to talk about it like it was just three fifty. Crazy.

I was also amazed at the remarkable stupidity of the talking heads on the PBS news (don't ask me why I was watching it). Apparently, the 'experts' think all we need to do is get 'credit flowing', and 'confidence up' and 'people buying houses' again. If credit were accessible they said, surely people would be buying cars. What the hell? Maybe people aren't buying cars cuz they woke up to the fact that they don't need them. Perhaps the car they already have is just fine. Or maybe people are lacking confidence because they don't have jobs or fear losing their jobs? Perhaps people aren't buying houses because there are too many houses already. I have no idea who these people were- one was from something called the Brookings Institute- whatever that is. Maybe they should talk to people who actually know what's going on and don't expect that some politician is going to wave a magic wand and make it all better. Like you can just create demand and wealth out of thin air. Idiots.

Whatever...

Brian

The end of the FICO score?

i'm going to make the bold assumption that a significant number of credit scores will be damaged in the coming months. like most things in life institutions are forever attempting to rationalize human nature and reduce it to a perfectly logical math equation. an algorithm can not consistently nor accurately predict irrational human behavior, especially during times of crisis (just ask the guys on wall street). i wonder if lenders will change their underwriting standards to discount the value of the FICO score? how many people with 720 credit scores are going to have their homes and SUV's repossessed? the determining factor in the repayment of a loan is not how many credit card payments a person has payed on time, but their character. character compels a person to fulfill their obligations even in difficult times. character cannot be deciphered from a credit score; the only way to determine character is through a relationship. relationships cultivate accountability between people and form the basis for a successful transaction. unfortunately a relationship can not be quantified with math.
good luck to the lenders!
-joe