carey_jim

Financial Reform: The Moment Has Passed but the Need Is Clear

Your analysis is good, in my opinion, but it's too optimistic about the ability of reason to bring clear economic solutions to the table and therefore to transform societies rationally.

You are right to say that it is external events such as economic shocks, technological inventions and wars cause social, political and economic change.

For example, many sober historians maintain that without the industrial revolution of the 19th century (the cotton gin and other farm machinery) slavery would probably still be in place in the South and without the technological innovations (refrigeration, washing machines, etc.) that occurred in the early twentieth century, women would still be homemakers spending most of their time cooking, washing dishes and clothes, cleaning floors and raising many children to work on farms.

The feudal system of Kings, Czars, Pharaohs and Shahs produced similar forms of injustice and inequality to the ones we see today, upheld by superstition, bread and circuses, indifference and religion but they lasted for thousands of years.

It was only external shocks, often produced by technological progress, that forced the social, economic and political revolutions of the past. There is no reason to think things will be different today and in the near future.

Will Regulation Hobble Capitalism?

Formal laws and regulations are simply practical ethics and without ethics, or rules of behavior that regulate all human interactions, human beings would be animals.

I love cats but I would hate to have my cat running the economy.

All criticisms of rules and the people who enforce them are similar and amount to telling the police to go to hell.

I had a friend who worked as the head of Security for Oracle and he said that it was not unusual to see Larry Ellison come to work in the morning, or whenever it pleased him, trailed by ten or more California Highway Patrol cars. He said that Ellison had instructed Security to pay the officers whatever they asked for, and to get rid of them as soon as possible. He said they always did and Ellison never mended his speeding ways.

Somehow that seemed to me to sum up government-business interactions.

On second thought, my cat might have a better solution to the regulation problem but, to paraphrase Wittgenstein, if cats could talk, human beings wouldn't be able to understand them.

There Are No Good Choices for the Fed

The American and world economy are too large and complex to understand well and to predict future direction and behavior with confidence.

First, there are many non-economic factors such as commodity wars, government interventions, social disturbances, new inventions or stagnation of inventions, epidemics, large changes in weather patterns, ecological disasters, population explosions, revolutions and simple, but unpredictable system breakdowns. That is to say, economic history is driven by "black swan" events.

Second, economics itself is not a hard science. We have to contend with Keynesianism, neo-Keynesiansim, Monetarism, Classical Economics, Institutionalism, Austrian School economics and even various strains of socialism which we Americans have all ignored, royally, so to speak. And there are many more schools which I haven't mentioned.

History is replete with successful finance ministers whose advice to the king suddenly took a turn for the worse, starting with the disasters of the physiocrats Law, Colbert and Quesnay and continuing down into our own times with our own recent finance minister Alan Randy Greenspan.

Our destinies as financial planners force us to try to make sense out of this mess but we should look to the weatherman for advice about humility: "The rain in Spain falls mainly in the plane." (I think she's got it, I think she's got it.)

Financial Reform: Keep Dreaming

What Dylan Ratigan has forgotten is that all societies, throughout human history, have been organized around powerful elites who control most of the resources.

America is not different and was, in fact, founded by landed American aristocrats whose first goal was to take power from landed, royal British aristocrats. Anyone who has even a passing acquaintance with the original Constitution and the Bill of Rights will know that the Founding Fathers (always excepting Thomas Jefferson) feared the common people and didn't want them to vote.

Even before the revolution, George Washington was the richest man in America and Thomas Jefferson owned a 1000 slaves, most of whom he never freed.

King George placed a huge ransom on the heads of Franklin, Washington, Adams, Jefferson and the other revolutionaries and if the American Revolution had failed they were all scheduled to be executed by hanging.

The major difference between the modern America lower classes and the lower classes of other times is technology.

Revolutions are, in practice, always the taking of power from one elite and transferring it to another. The members of the next elite rarely even suspect the extent of the power, privilege and wealth they are fighting for, and are convinced that they are fighting for justice. It takes about one generation for that illusion to die out, as the second generation learns to enjoy the spoils gained by the first.

Is the Recession Really Over?

Don, if you're 5 feet 1 inch tall you can't try to be an NBA basketball player unless you are also an idiot.
How is it that you have managed to ignore the fundamental rule of life which is that people should try to develop their native talents and make use of their actual, real opportunities in life while recognizing the limitations imposed by their environments and intelligence? That has nothing to do with optimism or pessimism. It isn't a coincidence, for example, that about one quarter of all doctors have fathers or mothers who are doctors.
Wake up, and for starters, take off that NBA uniform and do something that is more appropriate like using the intelligence you were born with.

On Sep 16 10:15 AM DonFurio wrote:

> Wah, wah, wah. The reality is that you can still try do just about
> anything you want in this country, you may not be successfully, but
> you still can try. While it is not true 100% of t time, many people
> in good jobs in this country worked really hard to get there and
> move up. I think unfortunately what happens is that people end up
> just being jealous no matter what, i.e. it doesn't matter that you
> didn't study as hard and went to a just ok college, and just showed
> up to your job, you should be just as successful as the ones who
> worked harder than you and were more successful than you.
>
> If you really wanted to work on "Wall Street", become a doctor, a
> lawyer., etc, you could, but you probably wouldn't have the discipline
> to either put in really long hours or excel in school for twice as
> long as the average person goes to school.
>
> At the end of the day, people still need to make back some of their
> paper losses. While people like myself continued to buy throughout
> the past year, many did not, and cannot make up for their shortfall
> by saving cash alone, they pretty much need to invest. Also, the
> earnings estimates for 2009 have had to be steadily increased as
> people realized that they were unrealistically low.
>
> The recession has forced companies to really look at how they operate
> and see what structural improvements can/could be made. How come
> there aren't more articles about how the unemployment rate for college
> educated is way better than those who are not, and that when the
> economy recovers, they have a much higher chance of being hired,
> of course I’m talking about degrees with real majors, not like a
> Philosophy major.
>
> I feel like the main objective of SA these days is to try to constantly
> bash the market. The sooner you idiots realize that the long term
> trend of the market is up, maybe you will stop the whining. I’m
> ok with analyzing company/gov’t decisions and how that impacts the
> market, but it seems like it’s always the negative. If you go back
> to many of the bearish posters now, they were posting the same bearish
> stuff when the dow was at 7,000, and have called the entire rally
> a suckers rally. I also read/hear all these arguments about how
> the market is rigged and why not to invest for moral reasons. I’m
> sure some of the same people cheat on their wives, are not good parents,
> etc. I’m clearly not trying to say that everyone is like that, because
> they’re not, my point though is that if you truly are a risk averse
> person and that even paper losses make you feel uneasy, than yes,
> stay out of the market. But to invest in the market because some
> people will also make money from stock price appreciation is just
> dumb. Of course there are always risks to investing, but there is
> just about every type of investment opportunity available depending
> on your risk tolerance and what you believe will happen in real estate,
> equities, corporate bonds, munis, etc, but you either have to do
> the work yourself and take responsibility for your decision whether
> you are right or wrong, or pay for a broker and understand that he
> may end up being right or wrong, but you made the decision to agree
> to what he suggested. It’s always easier to whine and play the blame
> game, but rarely will that ever get you paid.

Obama's Financial Reform - A Distraction from the Real Issues

History demonstrates that change only comes with crisis. Most people, and all groups of people, resist change of any kind until an outside force of some kind forces it.

The financial shock of 2008 was a major cause of Obama's election and talk of meaningful change is only possible because of the financial crisis.

If the crises ends, the forces of history will kill all possibility of change, but if it intensifies then change will be forced on us just as the changes of the 1930's were.

Talk doesn't bring change, it follows along and gives us reasons.

All leaders find crowds who are moving in various directions and then place themselves in front of the crowds and claim to be their leaders. Omama looks like a leader and talks like a leader but he will only be a leader if the crowd he has placed himself in front of turns out to be riding the wave of history and not only the latest headlines.

Economics and Its Discontents

To repeat myself again, as Yogi Berra used to say over and over, all of our theories and models are approximations and guides for action, just as a map is a guide for navigating through a city and not the city itself.

Quantum mechanics, contrary to popular belief, is one of the best theories ever discovered or invented (depending on your philosophy) because it has never encountered a particle that it can't explain. Unlike economics or psychology, it only needs to describe the actions of a few very well-behaved, simple things called subatomic particles.

The rest of the world is more complicated.

Psychoanalysis, monetarism and Islam (and I chose almost at random) are among the less useful theories we have because they CLAIM to explain almost everything but, in fact, get things wrong at least half the time.

But even though a map of Paris isn't Paris it is still indispensable for navigating around the city.

We shouldn't throw economics out completely, the way we threw out the maps called psychoanalysis, behaviorism and cognitive psychology (etc.) just because they all got about fifty percent of what they were supposed to explain, wrong.

Psychiatry has rejected psychotherapy almost completely and embraced pills as the cure of every mental ill. Let's hope that the economics profession doesn't reject economics completely and replace it with the socialist pill, Government Can Solve All Of Our Problems.

We need our models and maps even though they often don't work, or sometimes only help us with small parts of the problems we are trying to solve.

The first law of finance should be: When you reach a fork in the road, take it, or at least use it to eat dinner or dig yourself out of a hole.

Look Who's Betting on Inflation

Once you invest a substantial portion of your wealth in gold, or anything else, it gets a lot harder to be objective about its prospects.

www.lewrockwell.com/no...

Populist Politics Shouldn't Be Driving Financial Reform

You said, "the only period of truly protectionist economic policy was in the 30's, and look what happened then."

You need to do some homework. In 1930, foreign trade represented only about 5% of the American GDP and that small amount was reduced by about 50% by Smoot Hawley and other trade agreements. Most economists agree that this had little effect on the Great Depression.

Before that, America had protectionist policies from the time of the American Revolution. (The Revolution was fought, in part, for the right of Americans to erect such trade barriers to protect "infant industries.") Alexander Hamilton explicitly rejected the ideas of Adam Smith which he called radical, and embraced the older, more respected mercantilist theories instead (including tariffs.) Mercantilism remained dominant in America until World War I.

Japan and Korea did the same after World War II.

There are many articles about this on the Internet. Here is a short one: www.state.gov/r/pa/ho/...

If you don't know much about economic and general history, a profound grasp of economic/financial theory is not of much use, (which is part of what I was trying to say in my first post.)


On Sep 11 01:44 PM Daniel Harrison wrote:

> The only way that America can continue growing at the kind of break-neck
> pace it has done in the past century is by getting claws so tightly
> into ultra-fast growing markets that it benefits from them. In fact,
> America has always done this (and done very well out of it): the
> only period of truly protectionist economic policy was in the 30's,
> and look what happened then.

Populist Politics Shouldn't Be Driving Financial Reform

Economics is not a hard science. It has always been a mixture of politics, theology, psychology and sociology, and lately, mathematics, not to mention history.

It is a dangerous illusion (theology) to believe that the economy is a vast machine whose workings can, more or less, be described mathematically and agreed upon the way engineers agree upon the construction of a bridge, for example, and it is even more dangerous to believe that it will always function smoothly if the invisible hand is is "left alone" to work its magic.

The Soviet Union came to grief under this illusion when the only people who allowed themselves to see and proclaim to others that the emperor (the Soviet "economic system" wore no clothes, were called dangerous dissidents and all-too-often shipped off to Siberia for their efforts.

The economy has political (justice) religious/theological (homo economicus) psychological (advertising) and sociological (crowd behavior and mass conformity) aspects as well as what we normally think of as economic aspects.

What you call a "natural market crash" is no more (or less) natural than a revolution or war. It didn't crash the way a bridge crashes and it wasn't fixed or "pulled back from the brink" the way engineers shore up an overflowing river or rebuild a fallen bridge. It was fixed with all the usual political, theological and psychological tools used by governments in the past.

Of course, economics is, in fact, just as important as the other disciplines, which has been forgotten by cynical politicians who think everything can be manipulated with hype, slogans and other forms of advertising and exhortation (theology, politics, psychology, etc.) while only pretending to follow economic principles.

By flouting basic laws of economics, they are probably setting themselves (and us) up for an economic "surprise" which those of us who study economics and history should not be surprised at when it arrives.

Misunderstanding Inflation: There's No Free Lunch

Monetary inflation has a political/psychological component as well.

When Germany experienced hyperinflation after World War I, until 1923, it was the result of a decision by the German people to flout the absurd reparations payment requirements imposed by the victorious powers and to print as much money as necessary to pay the impossible amounts demanded.

An excellent article on Wikipedia sums up the causes of severe (hyper) inflation as: en.wikipedia.org/wiki/...

1. The general population prefers to keep its wealth in non-monetary assets or in a relatively stable foreign currency. Amounts of local currency held are immediately invested to maintain purchasing power.

2. The general population regards monetary amounts not in terms of the local currency but in terms of a relatively stable foreign currency. Prices may be quoted in that foreign currency.

3. Sales and purchases on credit take place at prices that compensate for the expected loss of purchasing power during the credit period, even if the period is short.

4. Interest rates, wages and prices are linked to a price index and the cumulative inflation rate over three years approaches, or exceeds, 100%.

These conditions are usually produced by external shocks such as wars and revolutions or severe economic instability as the article points out. But they pose little danger to wealthy individuals who simply convert their wealth into tangible assets and foreign currencies.

In fact, hyperinflation provides another opportunity for the few who are relatively nimble and intelligent to make money by exploiting the fears and ignorance of the many.

China's Credit Bubble and the Balance of Trade

Sometimes I sound like a nihilist, even to myself, but I can't help repeating that predicting even the near term future is a bear, if you'll pardon the image.

All we have to do is list a few years and a few countries, Japan 1989, Russia 1987, The United States 2008 and China ??, to get the idea.

I was sitting in my backyard with a family of politically minded Germans, in 1986, telling them that I thought the Berlin Wall was about to come down and they all laughed at me and said it would not come down in our lifetimes. The conversation changed to another subject, abruptly, but the Berlin Wall fell around their ears within a few months of their return to Germany. I'm not bragging about my predictive powers but I happened to be following German events very closely at that time, and I was looking at some things that most Germans wouldn't allow themselves to see at the time. (I won't mention some of my less successful predictions :)

From a bird's eye view it looks as if China is in a counterrevolutionary swing to the right. With political unrest, that pendulum could reach its limit and begin moving back to a center that has, probably, shifted towards the totalitarian, egalitarian left permanently. Mix this with a 2500 year old native grown Confucian authoritarianism, combined with a "China is the center of the universe" mentality, and we could see trouble in the future.

For one thing, Asia itself has big political problems, even though they seem to be in party mode at the moment. Consider: Japan is rearming. The Korean civil war has not truly ended since it started in 1951. China is circling Taiwan like a shark in love.

Most China scholars agree that one major reason Chinese leaders embraced Marxism was as a shield to allow the Chinese people to turn from their ancient feudal culture towards Western humanist culture, and especially towards our political, economic and social institutions, while keeping the West out of its internal affairs, which they were unable to do in the past.

As in Japan, this has worked on the surface but underneath the surface, Confucianism and Taoism continue to have a very strong influence, just as Christianity has a strong influence, under the surface, in the West. Chinese feudal culture, along with the Chinese language and character system, will tend to isolate China from the rest of the world and especially from the West. The Chinese have deluded even themselves into thinking that they are a Western style economic system. But they aren't.

This is a very complex subject and I've only scratched the surface.

(For example, Russia believes that its culture and civilization forms a true bridge between Asia (including Islam) and the West. But, of course, that is another story. (And, ominously, it involves "the roof of the world" Afghanistan and environs.) )

I'm going to have another cup of coffee. Maybe I'll cheer up.

Obama to Reduce Budget Deficit on 'Fewer' than Expected Bank Failures

Unfortunately, most human beings have slept in the arms of illusion for most of human history. It is, basically, a waste of time and money to try to wake them from their pleasant dreams, and usually dangerous for the waker and sleeper alike.
The rest of us have the luxury of trying to predict the future with facts and reason and we should be grateful for that.
But we also have to factor in the effect of the sleep-walkers and the manufacturers of their dreams on the economy which we might as well call the Tulip Effect. It is real and perennial.
Self-identified conservatives are right to call us bleeding heart liberals when we try to disturb their sleep. Let them dream on in peace.
Profits will come in the long run but our timing will be about as good as our ability to predict the behavior of crowds.
It's the dream makers we need to fear the most, as history clearly shows. You are right to watch them closely.

The Case for Shorting Bank of America

Patel, you're just one more smart, reasonable guy trying to make sense out of the nonsensical.

I thought BofA should have gone bankrupt a generation ago when its stock got almost as low as it did recently.

But then I came to my senses and realized that Americans would never allow Bank of America go bankrupt simply because of its name. Most Americans think Bank of America is an American national treasure even though you and I know it is a very poorly run private cash generating machine for its top executives and should have been allowed to die a natural death with all those other financial institutions. (Whatever happened to SKF?)

After BofA bought another moribund entity, Merrill Lynch, I thought it was certainly finished .... for about five minutes.

Shorting Bank of America is just one more crap shoot.

Wall Street Breakfast: Must-Know News

Just a quick comment on the Microsoft Word issue.

Microsoft used its virtual monopoly of PC operating systems, Windows, to get a monopoly of other, non-related systems such as Microsoft Word and Microsoft Internet Explorer.

They did this by using several unfair advantages. For example, in the beginning, they included Microsoft Word for free with every copy of Windows and, in addition, they would not share vital information about their operating system to vendors of other word processors such as Word Perfect which was almost forced out of business.

This has actually been standard practice in American financial history, for example, with such companies and Standard Oil, etc.,etc. but most of them were broken up into smaller competitive businesses in the period just before World War I. The resulting system was called oligarchy capitalism. The previous one, monopoly capitalism.

That's why we call the present owners of American businesses oligarchs. Microsoft Corporation is a mastodon, just as IBM was a generation ago, in that it is a virtual monopoly in PC operating systems. In an age of virtual regulators, that isn't surprising. Obama is now kicking up a lot of political dust now, and breaking up Microsoft is probably part of a plan.