The Economic Policies of Failure 21 comments
Nicholas Jones
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Dec. 8 (Bloomberg) -- President-elect Barack Obama is focusing his economic recovery strategy on making the biggest investment in the nation’s infrastructure since President Dwight D. Eisenhower created the interstate highway system a half- century ago.
Markets cheered, analysts applauded, and I...cleaned up the bits of vomit that didn't quite make it into the toilet, but this IS the "New" America...or is it?
There is plenty more of this to be expected going forward. Unless you've been sitting in your mom's basement exclusively playing World of Warcraft for the past 12 months, you saw this as an inevitability. If that's not the case for you, and you were still too incompetent to foresee this, YOU ARE THE PROBLEM.
Regardless, this is not some drastic change in U.S. policy. Liberal economics has driven this country for several decades now. As a result, it has recently climaxed into this Incredible Hulk like beast that we have all come to know.
Before we go on, I want say that I don't want this piece to be construed as a political article. I am a TRUE economic conservative in the sense that they don't exist anymore. This does not mean I associate myself with the Republican party when in fact they are just as Liberal economically as any Democrats in office. They just try to hide it.
Let's take a walk down memory lane and discuss how the Bush/Clinton Monarchy pissed off the Incredible Hulk economy.
I need to start this analysis by mentioning that we've been in a Keynesian run economy since the Great Depression. Although recent administrations have taken that to an extreme, their policies are a direct result of Keynesian theory limitations and eventual failure (refer to my three part series on Keynesian failures for more background).
The greatest limitation set in place is the inability of the economy to deflate and the necessity of liquidity to continually grow in order to prevent the house of cards from collapsing. As a result of this, we saw some dramatic changes under the Clinton administration that really started this train rolling.
You've got to give it to the man, ol' Billy Clinton was good at more than smooth talking his interns. The man and his cabinet were very innovative in taking Keynesian economics to a new extreme.
In a sense, Clinton laid the framework for this crisis. First off, Clinton and Robert Rubin rewrote the rules governing the Community Reinvestment Act. In doing so, they applied all sorts of political pressure on institutions to lend to people who weren't credit worthy. Again, this is the Liberal economic way. It's the something for nothing scam and it doesn't work.
The problem was that these potential borrowers couldn't be given your typical 30-year fixed rate mortgages. Hence the creation of the now infamous exotic mortgage instruments you hear about today.
Now we have a massive influx of mortgage debt flooded into the system. The problem is that this created an imbalance in the fractional banking hoax. Have no fear, because Clinton had another ace up his sleeve.
He simply changed leverage rules. Historically, banks were only allowed to take 18x leverage on their balance sheets. Bill replaced the 18x leverage ratio with a 40x leverage ratio. As you can see, Clinton and his cabinet are well on their way to creating a massive credit bubble.
(Note: If you are happy in your naive Obama, nobody is holier than thou views, please don't read the rest of this note. Obama has essentially reinstated the ENTIRE cabinet that served under Clinton. The only one who is missing is Madeline Albright. That's where Hillary Clinton comes in.)
So to briefly recap, Clinton pushed sub-prime lending, and changed leverage rules in order for banks to finance the growth. What I haven't mentioned that the banks also needed to get creative in order to take on this new found debt. Hence we have the creation of illiquid credit derivatives and credit default swaps.
As previously mentioned, the Clinton era took Keynesian/Liberal economics to a level not seen before. As preached by Keynesian theory, a large growth in the credit and/or monetary base will result in a period of economic expansion. That's exactly what happened, and Clinton is perceived as one of the better presidents in recent times because of it. In reality, we are sort of paying for the economic expansion under the Clinton era.
The problem with Keynesian theory is that each economic expansion results in proportional economic downturn. Considering the growth resulting from the creation of sub-prime lending, 40x leverage, and credit derivatives, the ensuing decline can be expected to be quite severe.
Bush Whacked into Depression
The Bush era is one that will be remembered for some time to come, but not for the reasons Bush would like. In his defense, for the above mentioned reasons, he never stood a chance. This is not to say the man is a completely incompetent idiot who rode daddy's coat tails into a presidency that he doesn't remotely deserve. I digress.
Let me mention one more time, AN ECONOMY BASED ON KEYNESIAN THEORY CANNOT WITHSTAND A CONTRACTION IN LIQUIDITY. Bush happened to not only inherit an economy that was preparing for contraction, he was inheriting an economy that was coming off of a Keynesian mutation unique to history.
So what did Bush do? Remembering that the man is completely incapable of unique thought, he did exactly what his advisers (schooled in Keynesian theory) told him to do; throw everything, including the kitchen sink, at it.
What ensued was a dangerous cocktail of monetary and fiscal stimulus. Bush cut taxes, increased government spending, and inflated the money/credit supply. All stimuli on their own rights, but put together, creates a sort of economic crack cocaine.
Similar to the Clinton Keynesian stimulus, it worked...for a period of time. Bush and company were able to stave off economic contraction and actually produce some decent growth. But it was this sort of policy that finally pushed us past the tipping point.
(Note: Again, if you have recently signed up as a platinum member of the Barrack Obama fan club, I suggest you stop reading here. As mentioned in the Bloomberg article, Obama supports this sort of Keynesian adrenaline shot at or above a level seen in the Bush administration. All those who voted for "change" and against for more years of Bush got completely duped in the largest public puppet show ever seen.)
We all know what happened next. So what's the moral of the story? If there was one, I guess it would be that our political process is completely meaningless. It doesn't matter what party or which official is elected. Besides some of the minor details, they all follow the same economics policies. The difference between the good ones and the bad ones is simply the result of where they fall on the Keynesian cycle. Obama is no different, and if anything is a more extreme example of the same problems that got us here.
Disclosure: No positions.
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This article has 21 comments:
These dogmatic political parties and operatives will continue to act in accordance with their beliefs even if it destroys the productive base of the country. Expecting the federales to act rationally is unrealistic. The traditional wisdom is, when you find yourself in a hole, STOP DIGGING. Los federales have brought in more backhoes. They are ordering mining equipment.
The underlying assumptions of Keynsian economics no longer exist. Sustainable population with ample natural resources and a solid base of wealth and capital was then. This is now. We brought massive, bloated nstitutions into the 21st century, most of which were and are unsustainable. Like the dinosaurs their time has come and gone and they must disappear.
They became bloated on a flood of liquidity made possible by the one person who is more responsible for this mess than any other - el maestro, Alan "Bubbles" Greenspin. Our bloated financials and governments at all levels grew fat and lazy on a flood of cheap, easy endless money poured into the credit markets.
In an environment of scarce money, no lender would make liar's loans, or "invest" in bizarre derivatives. They wouldn't have to because interest rates would pay them enough to invest wisely in secure ways. The flood of liquidity changed everything. It created an illusion of wealth which was and is, in fact, nothing more than a millstone of debt.
Debt service depends on income. When earnings and income drop, debt goes bad. Both of the ruling parties and the economists that advise them believe debt levels can be managed. They are wrong. The Emperor has his new clothes on and his willy is hanging out.
Will infrastructure spending stimulate the economy ? Yes. Will it magically reconstitute the bloated economy of 2006 ? No/ No way.
To summarize one could say that contemporary elected governments transfer the wealth of the citizens to favored cartels which in turn fund the democrat and republican parties during elections by paying for media ads to the media cartel.
This appears to be the end game of the popular revolutions that started 300 to 400 years ago with the investion and distribution of the rifle. The rifle was used to end survitude. Todays mega governments and their allied privet sector cartels are set up to reserect serviture.and abject and hopeless poverty in the greatl majority ot the population governed.
This is the out come of the Keynesian design for government avtivity in the economy.
Long live Adam Smith and his Wealth of Nations.
One should rememeber that Rome rose and fell for good over a 700 year period and the year zero A. D. was the middle.
The public wins in the end because govrnments and cartels go broke.
Since 1971, the US Presidents fretted greatly about trade deficits. Bretton Woods II and the Plaza Accords and Louver Agreements were all pitched towards fixing the US trade deficit...by manipulating the value of the dollar lower than our two major trade rivals who happened to be Germany and Japan.
Don't even think about why the two nations we defeated in WWII were the two nations to run up the biggest trade surpluses with the US! HAHAHA.
To think about this is to go insane!
Anyway, after we lost the trade wars with our former enemies, we went off and went even deeper in trade debt with OPEC and Communist China!
Now, tell me if the US deserves to die a terrible death at the hands of dire trade rivals? Of course! We slit our own wrists. The G20 had a meeting in November. Guess what they decided?
To make this trade imbalance worse! And the US agreed!!! Amazing!
Arrest our leaders who agreed to this. Impeach Bush. Put anyone who allows this free trade mess to continue, put them in prison! Hire new negotiators who understand the need to balance our trade! Good grief! Time is running out!
Well, the Great Contraction between 1929 and 1933 was the greatest deflation in our history, so are you in favor of a deflation? Let the velocity of money decline while the money supply falls and you have a huge contraction in output. This is something to be wished for?
Recessions are part of the business cycle which has an unknown or unknowable periodicity. There is contraction in output during recessions and weaker companies fail. This is a good thing.
The circuit breakers that are in place from unemployment insurance to social security prevent demand from falling off a cliff in a recession. This is a good thing. It allows breathing room for inventories to be reduced and capicity utilization to fall. Until confidence returns as marginal demand increases the economy is resting on a floor of demand created by the circuit breakers.
All economies at all periods in history have been subject to the liquidity preference whether they were aware of it or not. The Spanish economy collapsed in the 16th and 17th centuries as its money supply shot up from gold discoveries in the new world. The situation was so dire that Spain tried to invade both England and the Netherlands. The Spanish wool trade had collapsed because of domestic inflation, Spanish wool became too expensive as measured in bullion.
We are not 16th century Spain. Our money supply as measured by M2 has remained a fairly constant percentage of total output (GDP) in other words inflation is contained. Exogenous factors like commodity price hikes or speculative investing are not under the direct control of central banks. Recently the monetary base has increased largely because velocity has decreased threatening a severe contraction in output. The FED has responded reasonably to the threat of deflation. The lessons of the Great Contraction have been learned very well. And the economy is not deflating. This is a good thing.
If you are calling the circuit breakers "keynesian" then so be it. But recognize them for what they are an economic floor. They do distort the depth of the business cycle but they do not abolish it.
Liquidity is and always has been the lifeblood of economies. Our fractional reserve banking system is the most efficient means yet invented to ensure that money supply expands in tandem with output. This is not Keynesian or Moneterist it is simply observations of how economies function put into formal practice. We could go back to Herbert Hoover or even further before the Federal Reserve Act, but do we want to?
What? You mean go back to the late 19th century when our country was a vibrant, fast growing, and wealthy creditor nation?
Who would want that? I'm sure many more prefer the crumbling, debt laden, and economically floundering country we have become instead.
Nope. It turns out the problem has been a false choice between a dishonest/unstable but fast money system (FRB) and an honest/stable but slow money system (100% reserve gold standard).
There are alternative monies that are 100% honest and that will outperform FRB in all but the short run as you would expect when the honest compete against the dishonest.
The solution is two step:
1. Move from dishonest/unstable FRB to 100% reserve gold standard. This will stabilize the stock market. Now we are at honest/stable/slow.
2. Move from honest/stable/slow (100% gold standard) to 100% reserve equity backed monies (notice plural). We would then be at honest/stable/high performance. The market as a whole would only move up. The market would then be separate forever from the threat of FRB deflation.
How appropriate, it seems. We celebrate His birthday this month, though He was probably born in the Spring, which is also appropriate since He brings new life.
In the last decade the push for everyone to own their own home, the American dream, as the politicians like to call it has gone too far. As happens the pendulum always swings too far and that is what has happened with housing. The sub-prime mortgages increased the number of buyers which directly led to higher prices, more money for Wall St, and a continuation of the Republican administration trickle down economics. This might have worked for longer if not for greed and staidness by President Bush and Wall St.
Only actions as dumb as the Iraq war and the securitizing of the sub-prime mortgages could have caused the credit crunch and the economic crisis which is on track to get much, much worse.
If you don't like Keynesian economics what is the alternative? Do nothing and go to 25% unemployment rates as we had in the 1930s. Many of you may not remember the riots of the 1960s in our big cities. This can happen again if the government does not help the economy. The sit-in at the Chicago window factory was the first sign of people rebelling. Bank of America withdrew the company's credit line causing them to shut down on three days notice in violation of federal law and reasonableness. Interestingly BA took $17 billion of tax payer's money from the federal government a short time ago. Doesn't sound fair if you live on Main St.
Honesty combined with creativity. What else could it be?
"Liquidity is and always has been the lifeblood of economies. Our fractional reserve banking system is the most efficient means yet invented to ensure that money supply expands in tandem with output."
"an overinflated economy cannot tolerate a liquidity / credit reduction explains exactly where we are now"
The original article comment at top reflects the reality of our situation most accurately. Fractional reserve banking is extremely sensitive to a contraction in liquidity. There is a lot of hysteresis when liquidity growth changes direction. This isn't an "inability to deflate", but a discontinuity when it does. In the worst case, when liquidity goes negative, discontinuity is a nice word for collapse.
Fractional reserve banking is a way to keep the money supply expanding on auto-pilot while economic output is growing. It's crude and besides the reserve rate, is subject to other variables like velocity. When the economy is slowing, it breaks down in terms of efficiency. When liquidity is contracting, it's an economic trap. So it only works in one direction.
I've always thought economic cycles have more to do with elections than politics. When the economic cycle is in phase with the election cycle, the incumbents win.
Tiny,
I apologize to you. I can be an idiot. But you are in noble company; i reported Smarty by accident too.
Tim, you understand the problem well. There is a solution though.
The solution is APPRECIATING monies with a 100% reserve requirement.
that many thought crooked but swell.
It turns out they were wrong
and for the price of a song
the moonbat the secret did tell.
On Dec 11 03:07 PM Smarty_Pants wrote:
> "We could go back to Herbert Hoover or even further before the Federal
> Reserve Act, but do we want to?" - Steven H.
>
> What? You mean go back to the late 19th century when our country
> was a vibrant, fast growing, and wealthy creditor nation?
>
> Who would want that? I'm sure many more prefer the crumbling, debt
> laden, and economically floundering country we have become instead.
>
Yes we could go back to a time when banks were free to issue their own currency and when bank runs were ruinous to many communities new and old.
Even though we are a net debtor nation our debt is issued in US Dollars and we are solvent and extremely wealthy. The federal government has the power to tax so that keeps our debt highly rated. It makes sense to trade even when we might be at a disadvantage because to produce what we import could cost us more. This frees up investment to higher value activities.
The 19th century also saw the rise of gold and silver discoveries that wreaked havoc on the economy. Remember that everytime and everywhere inflation is a monetary phenomenon.
As far as the demographic differences between the 19th century and today I'll leave that to the reader as an exercise.
On Dec 11 03:16 PM moonbat1775 wrote:
> "We could go back to Herbert Hoover or even further before the Federal
> Reserve Act, but do we want to?" - Steven H.
>
> Nope. It turns out the problem has been a false choice between a
> dishonest/unstable but fast money system (FRB) and an honest/stable
> but slow money system (100% reserve gold standard).
This is a false dichotomy. Mediums of exchange whether they be gold or fiat currencies are only valuable for what they can be exchanged. Golds value fluctuates through time and is not stable. Simply fixing the unit of exchange to such a standard will prevent central bank flexibility.
> There are alternative monies that are 100% honest and that will outperform
> FRB in all but the short run as you would expect when the honest
> compete against the dishonest.
> The solution is two step:
> 1. Move from dishonest/unstable FRB to 100% reserve gold standard.
> This will stabilize the stock market. Now we are at honest/stable/slow.
>
> 2. Move from honest/stable/slow (100% gold standard) to 100% reserve
> equity backed monies (notice plural). We would then be at honest/stable/high
> performance. The market as a whole would only move up. The market
> would then be separate forever from the threat of FRB deflation.
This is just silly. If a country adopts a gold standard and If demand for gold increases thereby increasing its price then the only solution is a deflation in price of all goods and services to keep gold's price from rising. Gold is not mystical or even practical as a medium of exchange or peg of value, it is an industrial metal subject to the same forces of supply and demand as any other commodity.
This will happen whatever you say. It has the inevitability of an idea whose time has come. Enjoy the show.
Instead we have a central bank which has issued excess currency orders of magnitude over what smaller banks did in the late 19th century and as a result has brought the economy of the entire world to the brink of ruin over the massive debt based deleveraging (the current global equivalent to a bank run).
If you go back and look you will see that smaller independent banks on the gold standard prior to the FED almost always had at least 50% reserves or more (implying they issued less than double the banknotes for the specie they held). Compare that to today's banks that routinely issue 9x their reserves in loans. Which do you think would prove "more ruinous" to their community upon default? (rhetorical question - it's the 9x leveraged banks of today)
Given the choice I'd opt for smaller independent banks and the comparitively small circle of ruin they entailed than one central bank which has essentially ruined the entire country at once with a monetary policy which is essentially a "double or nothing" bet with each iteration growing geometrically.
At least with the "old" system you could trade your banknote for gold coin and put it in the cookie jar if you didn't trust banks. Today the only thing you can trade your Federal Reserve Note for is ... another Federal Reserve Note.
How reassuring.