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

Words of wisdom

Excellent insight into the housing/financial crisis, remarkably so given that is was first published in 1946, excerpted from the book "Economics in One Lesson," by Henry Hazlitt

"The Case against government-guaranteed loans and mortgages to private businesses and persons is almost as strong as, though less obvious than, the case against direct government loans and mortgages. The advocates of government-guaranteed mortgages also forget that what is being lent is ultimately real capital, which is limited in supply, and that they are helping identified (person) B at the expense of some unidentified (person) A. Government-guaranteed home mortgages, especially when a negligible down payment or no down payment whatever is required, inevitably mean more bad loans than otherwise. They force the general taxpayer to subsidize the bad risks and to defray the losses. They encourage people to "buy" houses that they cannot really afford. They tend eventually to bring about an oversupply of houses as compared with other things. They temporarily overstimulate building, raise the cost of building for everybody (including the buyers of the homes with the guaranteed mortgages), and may mislead the building industry into an eventually costly overexpansion. In brief, in the long run they do not increase overall national production but encourage malinvestment."

Every person in America should read this book, but at the very least all elected and appointed officials. I wonder if it would have made a difference in our economy over the last 50 years?

-Joe

cramer vs stewart

my comments are below the video.




for anyone who listened to cramer in the past, his candid 2006 comments should come as no surprise. the guy ran a hedge fund managing billions of dollars for institutions, pensions, and the very wealthy. he did not (and should not) serve the average investor.

stewart presents himself as a man of the people, yet it concerns me how he's directing his anger; at a television channel. a freaking television channel. perhaps more disturbing than stewarts misplaced anger is that people actually took cramer seriously. he's obviously intelligent and in the right arrangement his advice could be of value, but on his television program "Mad Money" he is an entertainer, nothing more. stewart knows as much as anyone what drives television programming; advertising. networks make money from advertisers, the more outrageous cramer acts (or anyone else for that matter), the more people who will watch. if more people watch, cnbc (or any other network) can charge more for advertising, plain and simple. there is nothing in the formula about being truthful or honest or on the side of the public; those are just fringe benefits if they happen to work out.

have we as a nation lost our ability to accept responsibility for our own destiny? i believe the american form of government crafted over 200 years ago was designed to give us just that, the opportunity to forge our own way, to work to improve our station, or not. somewhere along the journey we lost our direction, changed our course and asked a government to take care of us; an ironic twist of serve the servants. perhaps we've lost the skills necessary to navigate life without regulation and oversite, dependent on beauracracy to protect us from ourselves.

next time you hear of a financial scandle ask yourself, "how could the victims have protected themselves"? if the only answer you come up with is government regulation.....we might be too far gone.

-joe

some more video...

what's your take on john stossel's comments?

-joe

the other side of the coin...

what could be wrong with a government stimulus designed to employ people, build infrastructure, and get the economy out of a recession? well just as there are two sides to a coin, there is also a flip side to any money a government proposes to spend, that's what. clearly for those in a direct line to receive the stimulus money there's an immediate benefit. with the income they're able to make purchases and support themselves, which in turn will benefit those businesses and people they patronize. so far so good, more jobs and people consuming again, where's the trade off?
in order to understand the ill effects of government stimulation we need to recall the source of the government's ability to stimulate: taxes. taxes imposed on other citizens and businesses who's income and purchasing power are proportionally reduced. in the best of cases the net effect would be zero, what is taken from one in the form of taxes, is given to another as a "stimulus". no net increase takes place, we are simply removing it from Peter in order to pay Paul. of course we aren't in the best of cases, and 100% of the levied taxes do not pass directly to the "stimulants", rather the government itself takes a piece in order to provide for it's own expenses. real money actually leaves the economic system!
worse yet is what is presently being done: taxes are not being increased to pay for the stimulus. the money is coming from the printing press and ultimately debt issued by the government. those saddled with the burden of paying our debt will be our children and our children's, children. it's like giving money to Paul and expecting Peter's kids and grand kids to pay it back! we are making it a little easier on ourselves and sticking our posterity with the bill.
so why do it? the simple answer is it's easier to ignore the ramifications of our present actions than to suck it up and deal with the problem now. politicians aren't elected when they talk about difficult decisions, as a nation we elect legislators who promise to give us something for nothing!
like most things that sound too good to be true, the governments ability to "fix" an economic recession is dubious. even if it worked (which it doesn't) the citizenry payed the bill not the suits in washington.
i'll finish with a quote from Thomas Jefferson, "If we can prevent the government from wasting the labors of the people under the pretense of caring for them, they will be happy"


-joe

obviously you don't understand...

i found this on bencasnocha.com apparently there are others having difficulty understanding how re-inflating the credit bubble is a solution to our economic woes.

this is how Ben introduced the video to his readers:
"Congressman Peter Stark (D - California) represents all that is great about American politicians: humility, wide-ranging and mature vocabulary, and a genuine warm-heartedness towards those interested in political issues.
Take his must-watch interview with libertarian Socratic Dialogue devotee Jan Helfeld discussing the national debt. Congressman Stark, tripped up after saying that a country's wealth increases as its national debt increases, tells the interviewer to "shut up." He then tries to end the interview by telling Helfeld to "get the fuck out of here or I'll throw you out the window."

-joe

"

home prices still too high according to...

Yale Economist Robert Schiller that's who. I was especially amused by the reminisce at the end of the video about the actions FDR took during the great depression to support agricultural prices.
-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

This pretty much says it all. Thanks to CM and BK for the heads up, sorry if it offends you.
-joe

Quote of the Year

Parables and quotes are often an effective way to make complex situations more easily understood. Take the case of the how the smart guys on Wall Street and Washington whose "risk management tools" and "economic philosophy" resulted in our current situation. Their errors can be clarified with a quote by the great boxer and intellectual Mike Tyson:

"Everyone has a plan until they get punched in the face"

-joe

Natural cycles???

Spring turns to Summer,
Summer turns to Fall,
Fall turns to Winter.
Cycles are a natural part of life, for everything there is a season. For most cycles we accept this as fact and act accordingly (think shorts in the summer, coats in winter)except when they apply to economic cycles. Since the great depression we the people have determined that natural economic cycles cannot be tolerated, that the government of our country must be charged with stopping a natural phenomenon. Actually nobody seems to mind when we are in the "economic expansion" phase, it's the downturn they want eliminated. There is of course a reason for cycles: they are essential to life. Summer is great, but if it were 85 and sunny all year long we'd all starve to death and have no water to drink. In reality the problem isn't economic, it's human nature. We like to feel good, not bad. Instead of preparing for the inevitable change in cycle, we would rather charge the government with protecting us from our own folly. (after we have profited from it of course) The boom and bust cycles are essential for capitalism to function properly. Remove the consequences of unwise behavior and humans will act foolishly. The beauty of a naturally occurring economic cycle is that the bust that follows the boom clears out the rotten behavior and makes way for the prepared (survival of the fittest at it's finest). Those that made prudent decisions will be in a position to benefit from the bust, those that were foolish will be decimated.
Human nature is an interesting thing, if you want to know why people do what they do simply look at how they are rewarded. In America we get almost unlimited tax breaks for borrowing money against our house, but we get only limited deductions for savings. It should be no wonder we have a negative savings rate as a nation! We are simply doing what the government is rewarding us to do. By taking away the cleansing effects of the economic downturn we are removing the very mechanism that protects us in the long term. Companies, people, and governments need to be accountable for their actions, meaning that bankruptcies, defaults, and foreclosures are necessary. People need to lose jobs and businesses need to close because ultimately it will prepare us for the next cycle. Think about the typical elderly person who lived through the depression, what characteristics do they embody? Are they thrifty? Do they save their money? Of course they do! They live like that because they remember how much their lives sucked when they didn't have anything so they are going to be damned sure not to let it ever happen again.
We are in the middle of our economic winter, don't let the politicians fool you into thinking they can pass laws to make it summer all the time. Cinch up your belt, learn from your mistakes, and be prepared for the next cycle.
-joe

the end of american manufacturing???

it's becoming increasingly apparent that true wealth, lasting wealth is not created through financial gimmickry but in actual productivity and production capacity. i question the relevance of our manufacturing base, we simply aren't as good at it as we once were. our once great production prowess and efficiency contributed to the allied victory in WW2, yet a mere 50 years later the very titans (Chrysler, GM, and Ford) who delivered the majority of the production are begging for a government bailout or threatening insolvency. i realize the midterm impact of failure would be painful but perhaps it is necessary. people and businesses can only be absolved of accountability for so long before they start behaving badly. consider GM, less than a decade ago they had a fleet of electric cars (the EV1) but chose instead to purchase the Hummer brand vehicles. GM CEO Rick Wagoner stated this about the EV1's cancellation "It didn’t affect profitability, but it did affect image," and that the worst decision of his tenure was "axing the EV1 electric-car program and not putting the right resources into hybrids." i wonder how GM would be fairing today if they had continued to develop the electric car platform over the last 10 years? perhaps their current troubles could have been mitigated by a ten year head start on hybrid technology? but Wagoner is probably right profitability wasn't affected...unless of course you add millions of electric cars sold placing your company in a dominant market position for the vehicle technology of the future.
the point of my example is this: we need manufacturing as a nation to have economic health, but it can't be crap. many companies compete on price or quality; apparently our major manufacturing companies do neither; they build junk at excessively high prices. damn foreigners making good stuff for cheap!
if it takes economic turmoil and the reorganization of uncompetitive companies in order fix our nations manufacturing perhaps that what needs to happen. poor choices and bad decisions should not be "bailed out." free markets require consequences to function properly, something we haven't had in our country for a while.
what do you think?
-joe