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The Leaders Of Our Country Are Mostly Intelligent, Mostly Noble, And I Trust Them (Mostly)

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February 04, 2009 – Comments (27) | RELATED TICKERS: TR , UST , LEAD

Or: How I learned to stop worrying and love the Fed

Hey Fools - the first half of this is a defensive rant, and the second half is an "objective" educational profile.

The subject of the rant is that many people in CAPS (and elsewhere) have been doing a lot of hating with regard to our leaders/institutions during this crisis, and I see a lot of this hating as undeserved and/or uneducated.

The main thrust of my rant is this: steady, predictable inflation (say, 1% to 4% per year) is in EVERYONE'S interest, including households, government, and especially businesses. Since the Fed recognizes this, it will do everything in its power to achieve steady, predictable inflation. While people may be trying to screw you over in the market, NO ONE is trying to screw you over with hyperinflation, deflation, sustained "big" inflation, or stagflation. That is why I'm not buying gold - I'm predicting steady, predictable inflation over the long-term. It'll take a lot of sound arguments and real-world evidence to convince me otherwise - so far, I mostly just see economic conspiracy theories. Correct me if I'm wrong, but just as quickly as the government is printing money, it can take it out of circulation and destroy it, when lending and other major variables are back to normal. I'm guessing that's precisely what will happen.

While it's true that Bernanke's "helicopter printing press" and 0% interest rates would normally be extraordinarily inflationary, we're in extraordinary times - monetary policy no longer has much traction, and we're in what I view as a normal business cycle recession (that's been pumped full of steroids from bad debt and financial sector woes). With boom comes bust, and with bull comes bear. Since deflation can turn into a vicious cycle (the incentive to buy keeps decaying), we need to first worry about getting out of deflation before we worry about minimizing inflation. Obama's stimulus aims to do just that: shock the aggregate demand back into high gear with fiscal spending, which should snap us out of deflation. Unfortunately, the fiscal spending will take a while to kick in. If Princess Leia were in our mess, she might say, "Help me, fiscal policy, you're my only hope...unless interest rates can somehow go negative." (You never knew Leia was an econ geek, but she is, and it's hot.)

If (and when) inflation does hit >10% again (see 1980), I'm guessing it'll be due to extremely high oil costs, an overheating economy, or both. If this happens, I'm very sure that the Fed will have the good sense to make us swallow a big old interest-rate increase pill, straight up Volcker-style.

Contractionary monetary policy WORKED under Volcker, and it could work again. In fact, monetary policy acts much more quickly and easily than fiscal policy, and is therefore a much more desirable way to control the economy. But don't take my word for it, play this dorky but educational economic game that lets you control monetary and fiscal policy. See how easy it is to adjust the money growth up or down and either crash or boom your economy in the short term? Of course, this game is just a simplification of real life, but I hope you get the point. If not, then just take a Money and Banking class at your local higher education facility.

Last, I wanted to say that it is certainly understandable that people are angry - the $#!% is hitting the fan, and accountability and justice demand to be realized. I also understand that distrust of government, politicians, lawyers, government spending, taxes, and the boogeyman are healthy (to a degree), and about as American as apple pie (boston tea party, anyone?). However, I think it behooves us to be level-headed in our critiques and skepticism towards our leaders, especially now that the new Obama administration is underway, and is doing a lot of things right.

Also, one last rant on education, expertise, and credentials: don't knock it unless you've tried it, and know it like the back of your hand. I have a BA in economics, and have studied a decent amount with people with MAs and PhDs that really do know what they're talking about (I must say here that my time in college as Econ major and Political Science minor did color my views on our nation's political and economic institutions in a mostly positive way - go capitalism and democracy! (which are really the least bad of all the imperfect systems)). When Greg Mankiw presents an alternative view to Paul Krugman, I listen, because they both went to similar schools and talk about similar things in smart ways. When you (that is, any miscellaneous CAPS blogger) sling mud at public figures, economists, or their ideas and don't first establish some credibility or cite sources, I do not listen. Think of this as the premium that you might give to a 100.00 player vs. the natural skepticism with which you might regard a >20 player - one clearly knows what he's doing, while the other has yet to prove himself. (This is NOT to say, however, that all lowly rated players do not have good arguments or good ideas for investment.)


OK, the ranting part is over. For the second half of this post I wanted to maximize the educational content, and see if I could learn a thing or two and share with the community. So, I decided to profile our leaders, analyze who they are, what they've done, and what kind of trust I have in them. I decided to mostly focus on those that may have the biggest impact on the financial world, and/or those that have been hated-on the most. So, without further ado...


Changer of Things, Commander in Chief, Taxer of the rich, giver to the poor: Barack Obama

Preceded by much-less-competent: George "W" Bush

Why I (mostly) trust him: I'm a democrat. I feel like he's actually someone I can relate to - relatively young, academic but involved with the real world, cosmopolitan in background/belief, etc. I'm reading his Dreams From My Father, and enjoying it quite a bit. The man has a gift with words. He's also really intelligent, kind, and funny (which is a welcome change of pace):



He's also a dancer, which makes him at least 5% more trustable in my eyes:

I believe Obama is very forward-thinking, and that his time in office will still be paying dividends years later, in the form of better education/science/tech, better energy, more tolerance, and more acceptance of progressive ideas.

Things that make me go "hmm": He's proved he's smart, savvy, and diplomatic. How able is he to be a hard-ass with regards to security, if and when it becomes necessary? I'm guessing we'll see soon. Also, while I approve of his recent $500,000 income cap on bailed-out execs, it would be economically disconcerting to see this kind of thing in almost any other context. If he does somehow start to massively interfere with the private economy in ways that I view as unfavorable (which I view as unlikely), then I'll act against it.



Secretary of bailouts, stimuli, and phat $$$$: Timothy Geithner

Preceded by much-less-competent: Henry "Hank" Paulson

Why I (mostly) trust him: He grew up mostly outside of the US. Having lived a decent amount of time in other countries myself, this is big in my book - it provide invaluable perspective on the functioning of the USA (it's hard to be objective about ANY relationship when you're in the middle of it).

Also, he recently had the balls to call out China on their exchange rate manipulations, whereas Bush admin brought it up from time to time, but never had the cajones to push the issue. It now appears that Geithner and China are talking and not trade warring.

Things that make me go "hmm": Tax blundering - was it evasion, or just plain ineptitude? I'm guessing evasion, but it is good to hear that he's been forced to make things right, and has already apologized.



Interest rate d00d: Benjamin Bernanke

Preceded by much-less-competent: Alan "Maestro" Greenspan (who, to be fair, was revered until recently, and has already accepted his part in the mess)

Why I (mostly) trust him: He's smart and has studied and thought about deflation and the Great Depression for years.

Things that make me go "hmm": Lack of media savviness / leadership during this difficult time. Step up and reassure us, Ben! You're doing all that you know to be right and best for your country, so just let that come through. Long-term, I think interest rates need to be higher than they have been (just as gov't budget needs to be balanced), but in the short-term, that would spell Alstry levels of unemployment (30%+), and crazy amounts of crime. So yeah, trust your gut.

 

Head Econ Council to Obama, Possible next Interest rate d00d: Lawrence "Larry" Summers

Preceded by nebulous: Keith Hennessey

Why I (mostly) trust him: Fairly prominent conservative economist, whose hero was Milton Friedman. While I like a lot of these strains in theory, in practice I think liberals/Keynesians are closer to what's needed. While his personality and beliefs probably clash heavily with mine, I'm glad Obama has advisors from the right as well as the left.

Things that make me go "hmm": His Wikipedia article creeped me out in a variety of places, including his reliance on tax cuts, and the part where he justifies the lack women in technical fields.




SEC Chairman: Mary Schapiro

Preceded by possibly-less-competent: Christopher Cox

Why I (mostly) trust her: She's Obama's pick, and was unanimously supported by the Senate.

From the SEC website: "The SEC's foundation was laid in an era that was ripe for reform. Before the Great Crash of 1929, there was little support for federal regulation of the securities markets. This was particularly true during the post-World War I surge of securities activity. Proposals that the federal government require financial disclosure and prevent the fraudulent sale of stock were never seriously pursued.

Tempted by promises of "rags to riches" transformations and easy credit, most investors gave little thought to the systemic risk that arose from widespread abuse of margin financing and unreliable information about the securities in which they were investing. During the 1920s, approximately 20 million large and small shareholders took advantage of post-war prosperity and set out to make their fortunes in the stock market. It is estimated that of the $50 billion in new securities offered during this period, HALF
(my emphasis) became worthless." Sound familiar?

A quote from Schapiro: “Seventy-five years after this great agency was founded, the SEC must play a critical role in rebuilding investor confidence, reviving our markets, and rejuvenating our economy,” said Chairman Schapiro. “I’m honored and grateful to be entrusted with leading this agency during such an important time – when the SEC must effusively be the investor’s advocate. Working with my fellow Commissioners and the agency’s talented staff, we will be committed to reinvigorating a financial regulatory system that must protect investors and vigorously enforce the rules. We will work to deepen the SEC’s commitment to transparency, accountability, and disclosure while always keeping the needs and concerns of investors front and center.”


Things that make me go "hmm": EverydayInvestor linked to this negative blog article somewhat recently. The article makes it clear that they don't think she's a good pick at all, but isn't convincing because it avoids detailing why. I'll take the investment community's word for it that the SEC could do better, but for now my eyes and ears are open.



Macroeconomic Lefty Spokesman: Paul Krugman

Preceded by: John Maynard Keynes (for interventionist economics)

Why I (mostly) trust him: His arguments for greater fiscal spending / stimulus should bump aggregate demand back up to a healthy level, and may end up snapping us out of a deflationary spiral. Extremely well-educated and a vocal opponent of the Bush administration, Krugman is unafraid to hold others accountable:


(in which Krugman dissects Paulson, his bailout, Bush, and Greenspan)

Things that make me go "hmm": Involved with Enron. He's occasionally elitist in tone / dismissive in writing, which can be off-putting. Dwot seems to think that his spending arguments will become a long-term drain on future generations. I would argue that lack of stimulus puts us in grave danger of an immediate depression, which would almost certainly and harshly impact our future generation as well. Doing nothing also puts us on path to follow the route of Japan, with deflation becoming long-term.

 

OK, kids...   since no CAPS blog is complete without a funny and off-topic youtube embed, if you've eaten the above dinner, you can now enjoy dessert:

Critical-thinking and a variety of views are always welcomed, even if directly opposing my views. Just be respectful, you jerks. :P

-BFB

27 Comments – Post Your Own

#1) On February 04, 2009 at 5:19 PM, BigFatBEAR (29.55) wrote:

PS. Give me Recs or I will find you, take your guns, and raise your capital gains tax!  >:|

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#2) On February 04, 2009 at 7:03 PM, UltraContrarian (31.30) wrote:

"[The Fed] will do everything in its power to achieve steady, predictable inflation."

A couple of problems here.  First, most people seem to agree that our measurement of inflation is pretty bad, which is bound to introduce error into the Fed's process. Second, they have micromanaged economic growth in the past, and not always kept their eyes 100% on inflation.

OMB Director Ourszag is another guy for your trust bios, he seems extremely smart and will be an important player in the longer term.

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#3) On February 04, 2009 at 7:53 PM, DemonDoug (92.48) wrote:

You are a Keynesian.  Traditional Keynesian economics failed.  Reagonomic deficit spending Keynesian economics is what got us into this mess.  You trust a whole bunch of people with a lot of black marks on their record.

I guess I would expect a Keynesian follower to trust bernanke, paulson, mary schapiro, because they are keynesians too.

Most of us here on CAPS are in the more traditional camp in that we believe the austrian/mises economic policies are far more equitable to everyone in the long term, and basically all this other stuff is keynesian nonsense claptrap, and the more they talk and try to "do something" the more we look at them cutting themslves with a sharp knife, all the while they wonder why they are bleeding and can't understand why the bleeding doesn't stop when they move the knife further, faster, and deeper into the body.

I like obama because I agree with his social policies.  Unfortunately, his economic policies are no different from that of any president since the last true conservative in office, Dwight D. Eisenhower.

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#4) On February 04, 2009 at 8:26 PM, streetflame (30.54) wrote:

DD - Would you say that a diet failed if you ate exactly what was prescribed, only twice as much?  Or did your implementation of the diet fail?

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#5) On February 04, 2009 at 8:27 PM, Lenokis (21.61) wrote:

Correct me if I'm wrong, but just as quickly as the government is printing money, it can take it out of circulation and destroy it, when lending and other major variables are back to normal. I'm guessing that's precisely what will happen.

BFB, I refer you to the following article about the possibility of large inflation coming:

http://www.silverbearcafe.com/private/01.09/biginflation.html

There is a chart of historical levels of M0, the monetary base midway through the article. The author notes:

-The Y2k scare led to the highest monetary-base growth rate ever to that point, 15.8% as the Fed prepared for an expected run on currency. Yet that is now dwarfed by the unprecedented parabolic explosion in M0 seen during late 2008's stock panic.

That Y2k spike's aftermath is interesting too. By January 2000, the Fed knew the world wasn't going to end. Yet it took it over a year to try and take out some of that excess liquidity, and it was a feeble effort. M0 growth didn't go negative until December 2000, and this modest and brief 2-month episode was the only shrinkage seen in the monetary base since 1961. So even if the Fed tries to reverse its doubling of M0 after it stops being scared of deflation, it isn't going to happen overnight. The money supply will be much larger going forward.-

I can also appreciate academics applying what they have learned or what has worked in the past to achieve certain results in the future. The US financial system is now entering into unchartered territory with debt levels and dependence on foreign investors while unquestionably having the lowest domestic real production capacity in its history.

I refer you to this article to give you an idea of what the chinese were doing this fall as the crisis was hitting and gives an idea of their current feelings

http://online.wsj.com/article/SB123318934318826787.html

My point is that partners and systems may not be as viable or available going forward as have been in the past. As to how important this will be remains to be seen, but I see it as significant.

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#6) On February 04, 2009 at 8:58 PM, whereaminow (42.76) wrote:

BFB,

It matters little whether the leaders are Intelligent and Noble. The can not calculate and they have insourmantable incentive problems.

I'll start with the second point, since it is the easiest. For a politician, the incentive is always to action. For a politician, action means doing something regardless of the consequences. Those consequences can be dealt with by doing something else. It's easy to see that the Noblest of leaders will soon be taking action that can not be viewed as rational or ethical. Power corrupts. Absolute power corrupts absolutely. The incentive for a politician is power, not votes. Votes can easily be bought. The more power a politician can accumulate, the more votes he can buy and the more things he can tell the voters he/she accomplished. Democracy can truly be a demon in sheep's wool.

The calculation problem is more difficult to grasp. When working outside of the priced, competitive, open market in which most businesses have to operate (most businesses are small businesses trying to make it), a bureaucrat is incapable of making decisions based on pricing. Banks have this problem as well. They can't properly price risk, since theoretically for some of them, there is no risk. They have an unlimited trough of money at their disposal called the lender of last resort. Bureaucrats operate on the same principal. If a project fails or is inefficient, more money is always the solution. One can not calculate what is infinite..... the ability to economically enslave future generations with deficit financing.

You trust your leaders. I don't begrudge you that. On the other hand, I would prefer not to be led at all. Allow me the opportunity to live by your side, take no benefit from your taxes, take no benefit from your work (unless in a mutually agreed upon voluntary contract), and live freely. Do not tax me. Do not tax my children through deficit financing. Do not impose your will upon me and I won't impose on you. Respect my property and my money. And I will respect yours and your right to live by Washington's rule.

You can have leaders. I would just like to live in freedom with no leaders. Will you allow me to do that?

David in Qatar 

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#7) On February 04, 2009 at 9:13 PM, ajm101 (32.27) wrote:

I agree with everything your wrote up there.  Thanks for contributing to a diversity of opinions vs the echo chamber.

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#8) On February 04, 2009 at 9:27 PM, blake303 (29.54) wrote:

Thank you. Nice to hear a voice of reason.

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#9) On February 04, 2009 at 9:48 PM, devoish (99.07) wrote:

Allow me the opportunity to live by your side, take no benefit from your taxes, take no benefit from your work (unless in a mutually agreed upon voluntary contract), and live freely

David.

America is "a mutually agreed upon contract". I will pay the Republican bill in Iraq just as they will.

BfB, Good post. One rec for Grunk.

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#10) On February 04, 2009 at 9:51 PM, DemonDoug (92.48) wrote:

streetflame, your argument is non-sequitor, or maybe just a poor analogy.  if a diet is quadrupling your calorie intake while doing less exercise, and you expect to lose weight, you are doing what the gov't is doing.

i'd actually give a -1 rec for some of the misinformation contained in this blog and some of the comments.

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#11) On February 04, 2009 at 10:48 PM, ajm101 (32.27) wrote:

DemonDoug, I really like your contributions here, but I disagree with you that Keynsian economics won't work or has been discredited.  Further, I think your bringing Reananomics is disingenous.  Totally different economy, very different proposals from the current one.  Massive tax cuts vs infrastructure spending?  Not equal.  Especially when one produced structural deficits while the long term costs from the other is just the cost of servicing debt (and we get durable improvements out of it, too)

I thought the argument that you responded to so blithely was fairly good.  You're cherry picking one particularly bad example of twisted, barely Keynsianism policy (Reagan's trickle down) and then using it to paint with a broad brush.  It might have been more accurate to say it was like saying you're going on a diet and then eating two sticks of butter a day.   It's like looking at the 2nd Bush's administration and saying conservative philosophy is all wrong.

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#12) On February 04, 2009 at 11:22 PM, whereaminow (42.76) wrote:

Blah Blah Blah

Republicans! Republicans! Republicans!

Blah Blah Blah

Democrats! Democrats! Democrats!

The bankers laugh and count their money.

Deviosh, That mutually agreed upon contract is called The United States Constitution. It has been violated. I don't pay taxes anymore or hold dollars. They reneged on the contract. Opposition to the first bailout was overwhelming (a bailout supported by both parties). Its passage ended my brief return to the U.S.S.A  I'll return when the absurdity ends. 

ajm101,

This one's for you.

DemonDoug,

I always smile when I read your posts.

David in Qatar

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#13) On February 05, 2009 at 12:23 AM, ajm101 (32.27) wrote:

David, I appreciate your passing along the article.  However, even though I can appreciate the ethical impulse behind this school of though, I disagree with fundamental points like

- It assumes a highly independently individual, while modern societies become extremely specialized

- It assumes rational behavior making based on perfect information

- It doesn't deal with the notion of crime, which is a rational response for an impoverished individual in that system

- It assumes there can't be pathological end states to a free market like monopolies.

There are more, but I'm tired.  I don't think that was a compelling rebuttal to Keynsian thought, but a polemic against the ethics of Keynsian policy.  Honestly, I don't even agree with the ethical points that were made, but this is a stock site.

I approach things more pragmatically that dogmatically.  Maybe you disagree w/ the very concepts of income taxes, managed inflation, or economic intervention.  However, that is where we are.  And while you are safely away in Qatar with near guaranteed prosperity out into the future from the North Field, I am in the US and can't talk about the problem in the abstract.

 

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#14) On February 05, 2009 at 4:15 AM, DaretothREdux (49.28) wrote:

BFB,

My humourous response can be found here:

http://caps.fool.com/Blogs/ViewPost.aspx?bpid=140889&t=01007820309211448063

And least I be accused of over simplifying...I will give a more detailed reponse to the problems with Keynesian Economics later...once my computer isn't being so d&mn slow!

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#15) On February 05, 2009 at 6:06 AM, kaskoosek (92.46) wrote:

You can raise interest rates only when the dollar has already been debased.

Since both the government and private sector are insolvent at the current real value of debt, there should be a singnificant amount of inflation, before we are able to raise interest rates.

 

 

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#16) On February 05, 2009 at 9:08 AM, Mary953 (66.50) wrote:

Oh Bear, I almost hate to add my poor comments after such intelligent and thought provoking comments as those above.  Still I hope you will allow me a brief indulgence.  I enjoy your posts.  Most Democrats I know rely on pure emotion to state the case for whatever they believe best.  (And I grew up in a "mixed" home of Democrat/Republican)  It is refreshing to read the sort of presentation that you give. 

Obama took office with an enraptured populace.  I wasn't among those who were expecting such great things from him, but I did expect a nice, long honeymoon period for him.  He had great political capital from his very large wins in the primary and election.  He also had a majority Congress to work with.  My first concern was with some of his appointees.  Geithner did bother me, but in honesty, his foreign policy appointees starting with Clinton as Sec of State concerned me much more.

I am upset - that is too mild but it is the general feeling - by the stimulus package that is 95% pork and 5% job creation.  I don't like the idea of government job creation, per se, but I like the idea of incurring that debt in the name of job creation without the jobs a great deal less.  Now Obama is speaking out against against the way that business is run.  I agree with his idea that what is going on is deplorable.  I am bothered that he is saying "the American people (he) will not stand for, will not allow this to continue" and then salary limits are set. 

I suppose I had hoped that this time things actually would be a bit different - but in a better way.

BFB - I always learn when I read your posts.  The "dessert" was marvelous.

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#17) On February 05, 2009 at 11:42 AM, whereaminow (42.76) wrote:

You did say mostly intelligent:

http://www.liveleak.com/e/2aa_1233697453"> name="wmode" value="transparent">http://www.liveleak.com/e/2aa_1233697453" type="application/x-shockwave-flash" wmode="transparent" width="450" height="370">

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#18) On February 05, 2009 at 11:46 AM, whereaminow (42.76) wrote:

Tricky bastard didn't embed properly. Ya know, every day, 750 million Americans fail to properly embed videos.

Let me just give you the link.

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#19) On February 05, 2009 at 12:16 PM, BigFatBEAR (29.55) wrote:

OMG so many people to respond to. Can't I post something mildly contentious without the peanut gallery jumping down my throat? :P

Alright, chronologically -

UltraContrarian - thanks for the thoughts. Yeah, the Fed isn't perfect, it's definitely made its share of blunders. I'll give Ourszag a look.

DemonDoug - thanks for the thoughts. I really feel like you need to more strongly back up your statement that "Traditional Keynesian economics failed." If this were Wikipedia, or an academic paper, you'd need at least a few footnotes on a statement this big. Since we're just blogging it up on the net, the next best thing I can ask for is some hyperlinks to prove (or at least support) your argument. 

I do appreciate you pointing out that many people on CAPS are of the Austrian/Mises camp - it's something I'm looking into. A link or two would be appreciated.

I had to laugh when I saw that you'd give this post and its comments a -1 rec. "Oh no, my blog just went from X recs to X-1!" If you feel so strongly against it, maybe that's something worth examining - I'm just presenting my point of view. If you'd like to argue against it and perhaps win me / other CAPSters over to your side of thinking (or at least open us up to it), I'd ask to to present a more gracious and intellectual critique than what you've offered so far. That's what academics who disagree with eachother do, right? They take it to the books.

Lenokis - thanks for the links. The funny thing is that I linked to the SeekingAlpha verion of your Silver Bear article (same author and content). Part of my argument above (although I didn't really state it) is that I put very little stock into what any measure of M0, M1, M2, etc. actually mean for the economy. Taken as a whole, they're a better picture, but still just a sketch. 

I agree with you that we're entering into somewhat uncharted terroritory as a country. However, I'm still betting against "big" inflation - if we do see any big inflation, it won't be sustained.

whereaminow - thanks for your thoughts and input, though I can't say I completely got your points. I did enjoy your link to mises.org, and am currently reading and digesting that.

As for "allowing" you to live completely isolated from the influence of any government ever...   um, sure? You have yourself a deal. All I ask is that you live in Qatar.  :P

ajm101 & blake303 - Thanks, glad to hear there are some other CAPS peeps who feel the same way. Strength through diversity and such. :)

ajm101 - I thought your responses to Demon and David were very respectful and articluate. I happen to agree with much of what you said, and appreciate having your contributions here.

DaretothREdux - I think I solicited your thoughts...   so I guess this is ask and you shall receive! Your post about heroin cracked me up, and made me remember how anti-debt I am, and how pro-debt all the stimulus will likely be. The thing about stimulus-related debt (as opposed to say, Iraq-related debt) is that I think it's doing close to as much good as long-term harm.

I dunno. Debt is sketchy, and it's hard to say exactly how it'll play out. Anyhow, looking forward to hearing more from you re: Keynesianism.

kaskoosek - Pardon me for sounding unaware here, but I don't really know what you're talking about. Can you either expand, send me some links, or both? I feel like you have a valid point, but can't really connect the dots.

Mary953 - Thanks for the high praises. To be honest, in my opinion my blogs are crap, but I'm glad to hear you enjoy and get something from them. Can I ask what specifically concerned you about Geithner and Clinton?

Also, if you can find some links or just expand on your thoughts, I'd like to hear more about why you think the stimulus is 95% pork and 5% job creation. 

Last, I'm glad to hear you liked dessert. My favorite part is the entire stadium briefly flapping their arms at the end - ROFL! What is that movie called again? Angels in the Outfield?

Anyway, glad to hear from you and keep rocking the CAPS - you're definitely the darling of new CAPS players!

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#20) On February 05, 2009 at 1:42 PM, BigFatBEAR (29.55) wrote:

kaskoosek

Brushing up on my macro today - it's been a few years since I was regularly reading/talking about this stuff in college.

Interest rates have a relationship with exchange rates, when the exchange rate is not pegged...   but I don't remember much beyond that. Might actually dig out the old textbook (nerd alert!) but if you have any concise links about the relationship, please share.

Thanks.

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#21) On February 05, 2009 at 5:03 PM, anchak (99.86) wrote:

Hey Neil....Sorry man ..CAPS seems to have eaten my first comment.

Nicely written post..... I dont necessariy agree with everything - but based on what's put out - the BALANCED view was needed.

 

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#22) On February 05, 2009 at 8:09 PM, kaskoosek (92.46) wrote:

BFB

When the government raises interest rates, it must pay interest payments on its debt.

The government sector and private sector are unable to do that, because they do not have the money.

The money must come either from taxes or in the case of the private sector savings and productivity. This will most likely result in a default.

Keep in mind that when inflation is a problem the government can not service the debt by printing money it does not have.

 

Therefore high inflation is enivitable, before the government can raise interst rates. 

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#23) On February 06, 2009 at 12:22 AM, DaretothREdux (49.28) wrote:

First I am going to b@^&* about websense. First of all the name...instead of using "censor" which has a negative connotation (and rightly so), they use "sense" as if it makes perfect sense or it is common sense to block people at work from seeing: The News, Sports, Entertainment, Uncatergorized, Etc. The news being censored is perhaps the one that scare me the most...I am however allowed to get on investing sites (here and bloomberg are not censored).

I figured out that it was censoring youtube vids and slowly my connections down endlessly only to never load them. I have disabled the flash player addon and now everything loads faster and I will attempt to respond to Keynes.

End bit&hing.

 

Some major problems with Keynesian economics:

1. The question of full employment.

Full employment isn't necessary, in fact it can be harmful. I have even mocked the idea in my blog in the past. It's not hard to employ everyone if you send half of them to dig holes and the other half to fill in the holes.

You should already see the inherent problem. We don't really want full employment, what we really want is full production.

An example: If all steel companies are operating at maximum capacity and maximizing their profit potential, and machines are doing everything (including fixing the broken machines), then all the steelworkers are just out of luck. They need to find other careers. It's silly to continue to employ them to make steel if they are less effective/efficent than the machines.

NOTE: Eventually this may happen to all service jobs, and people will have to devote their time to research, art, science, entertainment, and jobs that advance civilization, but for now there is no lack of service jobs.

I understand the argument that we are a 70% consumer based society and by simply employing people (who will then spend their paychecks) we will grow the economy.

The problem with this argument is that you could just as easily pay people for doing nothing (or digging holes) and get the same results. Consumer spending can only grow the economy as long as SOMEONE is making stuff (creating wealth).

We, as a nation, have stopped creating wealth through goods. Some very evil (but probably well-intentioned) people thought that it would be easier to create wealth through a fractional reserve banking system and a pyramid of debt (read ponzi scheme).

It's really no different than the very first bubble ever (not created by speculation but by artificial inflation).

Long story short: the guy had control of a bank and stock in that bank, through loans and bonds he gave away money to buy bonds, took the bonds as collateral and issued more loans. Obviously the stock price soared...

This is one of the inherant problems with a fractional reserve banking system. The only way to make lots of money is to leverage (and leverage a lot), which means that if there were ever a run on the banks, they would all be insolvent.

It's no different today. All banks are insolvent. We have the FDIC backing your money for piece of mind, but if everyone went and took out all their money from the banks, then our government would have to prints Trillions of dollars to make up for the losses incured.

So? What does this have to do with Keynes?

From Chapter 24 of his master work The General Theory:

"THE outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes."

Keynes was a product of his time. Socialism and the ideas of redistrubtion of wealth were very popular, and he bought into it. I have already dealt with the fallacy of full employment, but what about the fallacy of redistribution of wealth?

Keynes ASSUMES that income inequality is a problem.  When in fact, income inequality simply reflects the fact that some people are actually millions of times as productive as others.

Example: Steve Jobs is several million times more productive than an assembly line worker. 

Keynes was a product of his time.  Liberal thought was thrusting inexorably towards the welfare state, and in order to justify redistributionism you have to villify the ultra-productive. 

People are not equal; therefore, how are we to redistribute? You don't honestly believe that giving everyone an equal share is a good idea? Most people (even the most socialistic) do not. They will tell you that they just want to level the playing field a little.

This is where whereaminow (David)'s point comes in best. How do we determine who gets what? Even if I were the smartest man to ever live, I doubt I would be able to determine the proper distribution of wealth to continue at maximum production and efficency (I would probably piss off someone who thought they deserved more and then refuse to work for less than they are worth). This is why we MUST let the market determine prices (and never the government) because no matter how benevolant or intelligent our government is (or pretends to be), they will get it wrong the majority of the time.

The government's policies would lead to willful Unemployment. This actually already happens because of the minimum wage, and now we have a maximum wage. Why should I go and help BAC get out of this mess they are in (assuming I am right for the job), if I can go somewhere else and make millions more? I'm just not that nice of a guy...I doubt many people are.

Since this post is already WAY WAY WAY too long, I will cut it short here.

I will be happy to attempt to answer any questions that have arisen if I can. 

If you are really interested in learning about the full fallacy of Keynesian Economics I have 3 (not so small books) that you can read when you get a chance. All three are free and can be found at mises.org

Dissent on Keynes

The Critics of Keynesian Economics

The Failure of the "New Economics"

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#24) On February 06, 2009 at 1:47 AM, BigFatBEAR (29.55) wrote:

kaskoosek

Thanks - this does shed another dimension into the argument, and may actually prove my entire rant worthless. I guess time will tell.

I did find this quick wikipedia refresher on how changes in interest rate/gov't spending affect the exchange rate (and therefore imports and exports). My head hurts from trying to wrap itself around all this info, though - it's difficult enough trying to grasp all this in a normal setting, but in a crisis, the stakes in understanding are magnified.

 

DaretothREdux 

I'm afraid that my current level of tiredness won't allow me to comment as completely as I'd like, but let me first say THANK YOU for a lengthy, well-reasoned, and respectfully-toned rebuttal.

I agree with much of what you're saying. Full employment isn't necessary, and is in fact, undesirable. Unemployment of around 4%-5% (the long-term or "natural" rate of unemployment as economists say) sounds pretty damn good about now though!

Similarly, income/wealth inequality is actually desirable because it shows the degree to which a nation embraces the market (and therefore its ability to achieve what you call full production).

However...    I do disagree with your position on the productivity of CEOs. No CEO busts his ass more than any other American who puts in 70-80 hours a week. Hell, I'd wager that most CEOs don't even come close to that amount of work. Sure, they are responsible for a lot, and have probably worked very hard to get where they are....   but still. The thought of one man earning a couple thousand per hour while so many people in this country struggle to put food on the table, make rent, heat the house, etc, is just sickening.

I'd argue that many CEOs got lucky - born into the right family, lucky enough to go to a good school, make connections, etc.

In fact, I'd even say that you somewhat contradict yourself. Bear with me... "The problem with this argument is that you could just as easily pay people for doing nothing (or digging holes) and get the same results. Consumer spending can only grow the economy as long as SOMEONE is making stuff (creating wealth)."  ...Isn't Steve Jobs just digging holes (holding tech media press conferences) while the Ipod assembly workers in Taiwan (or wherever) the real ones creating wealth?

As an liberal (read: egalitarian) economist, I understand the importance of the market. But I also believe the world would be a better, healthier place if CEOs took a pay cut and shared some more of the profits with those who work so hard to make others filthy rich. A voluntary (instead of government mandated) fifty cent pay raise for all low-income earners, given at the expense of CEOs, would do wonders for the economy right now.

I'll cut it short as well, because sleep is rearing its ugly head.

But I will start diving into mises.org resources, and learning from it whatever I can.

Good points, good debate, good night!

-BFB

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#25) On February 06, 2009 at 3:54 AM, DaretothREdux (49.28) wrote:

BigFatBEAR,

I await a more in depth response with bear-baited breath! But I will address one concern you raised:

It's not that Steve Jobs works harder or longer than the average asembly line worker, it's the quality of his work that matters. Steve Jobs is the innovator and creator of ideas. The other people (assembly line workers included) are more than welcome to attempt to come up with their own innovations, and start their own company, but as long as they simply assemble Ipods or whatever they are not worth as much as Steve. Do I think that he could pay those workers more and take a little less for himself (sure I do) but would I mandate that or insist that the government do it. Hell no. Of course, if you look at Henry Ford and how much he paid his workers (much higher than the national average), then Steve might decide that it's better for his company if he takes a little less and gives back a little more, but Steve has to do this on his own (or Labor Unions force him to do it) because the government would determine the wrongs prices and simply hurt Steve's business, which is inevitably bad for Steve and the workers.

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#26) On February 06, 2009 at 3:08 PM, OtherOracleOfOMA (67.51) wrote:

Very good. I agree (mostly) ;)

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#27) On February 12, 2009 at 2:03 AM, goldminingXpert (29.76) wrote:

Finally got around to catching up on the blogs--I've had a busy week.

Anyway, largely agree with you. A couple of minor quibbles-- I would be more negative on Geithner, Bernanke, and Krugman than you were. Krugman in particular has a very irritating tone in his writing (though maybe it just offends me) but I find his stuff grating to read.

I also disagree with the we risk being like Japan if we do nothing; Japan passed a (if you scale it to the size of our GDP) $6 trillion dollar stimulus plan that added up to a whole lot of nothing. Doing nothing would (hopefully) end things faster as it would clear out the dead institutions (like a forest fire) and allow rebirth rather than perpetuating failure. Dwot's comments about the debt are also correct--we really can't afford this bailout: http://media.www.collegian.com/media/storage/paper864/news/2009/02/10/Opinion/Stimulus.Would.Only.Prolong.Problem-3621079.shtml

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