Interesting interview on the global economy

[Fransisco]

As to the Mideast, if the Arabs put down their guns there would be peace. If Israel put down her guns there would be genocide.

[parsley]

Had some experience with our Chinese student.

Only a few get picked to attend University. He didn't know what an oven was. He had never driven a car or even a motorbike. He had no idea of conveniences, or how to make them work He was dazzled by materialism. Arrest is arbitrary in China. There is no rule of law. He intended to leave his wife and child, so he could stay in Canada. Quite a few are muslim. Entirely different value system. Few on AV are ready for this lifestyle. Pars

[liberty]

Peter Schiff has an excellent article in the December 27th Wall Street Journal:

http://online.wsj.com/article/SB123033898448336541.html

This is my favorite quote, especially the part about stimulus packages being the economic equivalent of miracle weight-loss programs:

"It would be irresponsible in the extreme for an individual to forestall a personal recession by taking out newer, bigger loans when the old loans can't be repaid. However, this is precisely what we are planning on a national level.

I believe these ideas hold sway largely because they promise happy, pain-free solutions. They are the economic equivalent of miracle weight-loss programs that require no dieting or exercise. The theories permit economists to claim mystic wisdom, governments to pretend that they have the power to dispel hardship with the whir of a printing press, and voters to believe that they can have recovery without sacrifice."

[TOM4CWB]

Liberty,

This attitude... is as wrong as the folks who would throw away our manufacturing infrastructure, and just give it up to India and China.

We will have to pay... for generations... and we will pay.

The simplistic attitude exposed here... is a part of the problem as well.

How can we afford to transition to a 'green economy'?

We will have to work for it... produce it... and pay for it.

The pain we are going through now... is the beginning of the down payment... that CAN take us to a new system... that is sustainable... if we choose to conserve and actually plan for a ZERO growth economy in the developed world.

[liberty]

"The pain we are going through now... is the beginning of the down payment... that CAN take us to a new system... that is sustainable... if we choose to conserve and actually plan for a ZERO growth economy in the developed world."

I'm not sure what the "new" system that Tom is talking about here actually is....he seems reluctant to come out and define it.

In any case, I'll define what I mean by economic growth: an increase in the division of labor. Growth is all about creating more output per unit of input through the employment of labor-saving tools and capital. Capital arises as a result of savings and investment, and deferring consumption.

This process is like that of a farmer who forgoes several vacations or a new house so that he can save up for a new combine. The new combine's increased productivity expands the profitability of his farm, eventually allowing the farmer to build a much better house in the future. That is the payoff for hard work and saving.

Today's economy is like a farmer who spends the proceeds of his crops on vacations and a new house, while allowing his machinery to deteriorate. At some point, the productivity of his farm will decline to the point where he is broke. We are close to that point today.

The root of our economic mess lies in over-consumption and a lack of savings and investment; i.e. spending money on consumer goods like houses, TVs and SUVs that generate no income on their own, but in fact consume resources in order to sustain them. At the same time, not enough people are saving in order to provide funds for capital investment anymore.

It's a myth to suggest that capitalism is an unsustainable system. As I noted above, capitalism works to gain more units of output per unit of input. Think of the miniaturization revolution as it applies to computers. Today's desktop computers have more data processing power than old IBM mainframes that take up the space of a house. Consequently, the computer revolution allows us to use less resources, not more. Had central planning determined the course of the IT revolution, we'd likely still be wasting huge amounts of resources on archaic mainframes.

In the case of depleting resources, capitalism, through the price system, provides incentives (profit) to find alternatives to resources whose supply is decreasing. Free markets are precisely what is needed for a sustainable system.

[Fransisco]

Well said Liberty!

[classicalliberal]

I agree, well said Liberty. I have an article from the Economist magazine (best magazine in the world other than Hustler...). Capitalism for all of it's flaws, is by far the best system out there for the majority of humanity.

Capitalism at bay
Oct 16th 2008
From The Economist print edition

What went wrong and, rather more importantly for the future, what did not

ONE hundred and sixty five years ago, a Scottish businessman set out his plans for a newspaper. James Wilson’s starting point was “a melancholy reflection”: “while wealth and capital have been rapidly increasing” and science and art “working the most surprising miracles”, all classes of people were marked “by characters of uncertainty and insecurity”. Wilson’s solution was freedom. He committed his venture to the struggle not just against the protectionist corn laws but against attempts to raise up “barriers to intercourse, jealousies, animosities and heartburnings between individuals and classes in this country, and again between this country and all others”. Ever since, The Economist has been on the side of economic liberty.

Now economic liberty is under attack and capitalism, the system which embodies it, is at bay. This week Britain, the birthplace of modern privatisation, nationalised much of its banking industry; meanwhile, amid talk of the end of the Thatcher-Reagan era, the American government has promised to put $250 billion into its banks. Other governments are re-regulating their financial systems. Asians point out that the West appears to be moving towards their more dirigiste model: “The teachers have some problems,” a Chinese leader recently said. Interventionists are in full cry: “Self-regulation is finished,” claims France’s Nicolas Sarkozy. “Laissez-faire is finished.” Not all criticisms are that unsubtle (the more pointed ones focus on increasing the state’s role only in finance), but all the signs are pointing in the same direction: a larger role for the state, and a smaller and more constrained private sector.

This newspaper hopes profoundly that this will not happen. Over the past century and a half capitalism has proved its worth for billions of people. The parts of the world where it has flourished have prospered; the parts where it has shrivelled have suffered. Capitalism has always engendered crises, and always will. The world should use the latest one, devastating though it is, to learn how to manage it better.

Extreme measures in the defence of liberty
In the short term defending capitalism means, paradoxically, state intervention. There is a justifiable sense of outrage among voters and business people (and indeed economic liberals) that $2.5 trillion of taxpayers' money now has to be spent on a highly rewarded industry. But the global bail-out is pragmatic, not ideological. When François Mitterrand nationalised France’s banks in 1981 he did so because he thought the state would run them better. This time governments are buying banks (or shares in them) because they believe, rightly, that public capital is needed to keep credit flowing.

Intervening to prevent banking crises from hurting the real economy has a strong pedigree. Wilson’s son-in-law, Walter Bagehot, recommended that the Bank of England lend generously (but at a penalty rate) to illiquid banks (but not to insolvent ones). In modern times governments of every political stripe have had to step in. Ronald Reagan and Margaret Thatcher oversaw the rescues of Continental Illinois and Johnson Matthey. In the 1990s the Finns and Swedes nationalised banks—and privatised them again later. This rescue is on a different scale. Yet the justification is the same: the costs of not intervening look larger. If confidence and credit continue to dry up, a near-certain recession will become a depression, a calamity for everybody.

Even if it staves off disaster, the bail-out will cause huge problems. It creates moral hazard: such a visible safety net encourages risky behaviour. It may also politicise lending.

Governments will need to minimise these risks. They should avoid rewarding the bosses and shareholders of the rescued banks. They must not steer loans to politically important sectors. And they should run the banks on a commercial basis with the explicit aim of getting out of the banking business as quickly as possible (and at a profit). From the taxpayer’s point of view, it might make sense to limit dividend payments to other shareholders until the government’s preference shares have been paid off. But governments need to avoid populist gestures. Banning bonuses, for instance, would drive good people out of companies that badly need them.

The politicians all claim they understand this. Of course, they have no intention of revisiting Mitterrand’s mistakes, of trying to run the banks themselves, or of taking stakes elsewhere. Yet already voices (including Lady Thatcher’s Tory heirs) are pushing to limit executive pay. It will be a brave president who goes to Detroit and explains why the 45,000 well-paid folk at Morgan Stanley should get $10 billion of taxpayers' money, but the 266,000 people at General Motors should not. Brave too would be any politician who proposed deregulation as a solution to a public-sector problem.

Smoot-Hawley in the rear mirror
Given this, it is inevitable that the line between governments and markets will in the short term move towards the former. The public sector and its debt will take up a bigger portion of the economy in many countries. But in the longer term a lot depends on how blame for this catastrophe is allocated. This is where an important intellectual battle could and should be won. Capitalism’s defenders need to deal with two sorts of criticism. One has much more substance than the other.

The weaker, populist argument is that Anglo-Saxon capitalism has failed. Critics claim that the “Washington consensus” of deregulation and privatisation, preached condescendingly by America and Britain to benighted governments around the world, has actually brought the world economy to the brink of disaster. If this notion continues to gain ground, politicians from Beijing to Berlin will feel justified in resisting moves to free up the movement of goods and services within and between their economies. Arguments for market solutions in, for instance, health and education will be made with less conviction, and dismissed with a reference to Wall Street’s fate.

In fact, far from failing, the overall lowering of “barriers to intercourse” over the past 25 years has delivered wealth and freedom on a dramatic scale. Hundreds of millions of people have been dragged out of absolute poverty. Even allowing for the credit crunch, this decade may well see the fastest growth in global income per person in history. The free movement of non-financial goods and services should not be dragged into the argument—as they were, to disastrous effect, in the 1930s.

A second group of critics focuses on deregulation in finance, rather than the economy as a whole. This case has much more merit. Finance needs regulation. It has always been prone to panics, crashes and bubbles (in Victorian times this newspaper was moaning about railway stocks, not house prices). Because the rest of the economy cannot work without it, governments have always been heavily involved.

Without doubt, modern finance has been found seriously wanting. Some banks seemed to assume that markets would be constantly liquid. Risky behaviour garnered huge rewards; caution was punished. Even the best bankers took crazy risks. For instance, by the end of last year Goldman Sachs, by no means the most daring, had $1 trillion of assets teetering atop $43 billion of equity. Lack of regulation encouraged this gambling (see article). Financial innovation in derivatives soared ahead of the rule-setters. Somehow the world ended up with $62 trillion-worth of credit-default swaps (CDSs), none of them traded on exchanges. Not even the most liberal libertarian could imagine that was sensible.

Yet the failures of modern finance cannot be blamed on deregulation alone. After all, the American mortgage market is one of the most regulated parts of finance anywhere: dominated by two government sponsored agencies, Fannie Mae and Freddie Mac, and guided by congressional schemes to increase home-ownership. The macro economic condition that set up the crisis stemmed in part from policy choices: the Federal Reserve ignored the housing bubble and kept short-term interest rates too low for too long. The emerging world’s determination to accumulate reserves, especially China’s decision to hold down its exchange rate, sent a wash of capital into America. There was something of a perfect storm in which policy mistakes combined with Wall Street’s excesses.

Heavy regulation would not inoculate the world against future crises. Two of the worst in recent times, in Japan and South Korea, occurred in highly rule-bound systems. What’s needed is not more government but better government. In some areas, that means more rules. Capital requirements need to be revamped so that banks accumulate more reserves during the good times. More often it simply means different rules: central banks need to take asset prices more into account in their decisions. But there are plenty of examples where regulation could be counter-productive: a permanent ban on short-selling, for instance, would make markets more volatile.

Indeed, history suggests that a prejudice against more rules is a good idea. Too often they have unintended consequences, helping to create the next disaster. And capitalism, eventually, corrects itself. After a crisis investors (and for that matter regulators) seldom make exactly the same mistake twice. There are, for instance, already plans for clearing houses for CDSs.

Turning back the incoming tide
Sadly another lesson of history is that in politics economic reason does not always prevail—especially when the best-case scenario for most countries is a short recession. “Barriers to intercourse, jealousies, animosities and heartburnings” loom.

But it need not be so. If the bail-outs are well handled, taxpayers could end up profiting from their reluctant investment in the banks. If regulators learn from this crisis, they could manage finance better in the future. If the worst is avoided, the healthy popular hostility to a strong state that normally pervades democracies should reassert itself. Capitalism is at bay, but those who believe in it must fight for it. For all its flaws, it is the best economic system man has invented yet.

[agstar77]

Check out YouTubevideo of U.S. Comptroller on 60 Min. He paints a very bleak picture of the U.S. currency and economy if something is not done now.

[cottonpicken]

The course of direction cannot,will not be changed,the western fake captilist economies are toast.

[Fransisco]

I think cottons right here. They've had a long run trying to control and or fake the free market. That run looks like its coming to an end but not before agstars buddies dig the biggest hole ever.

Look out for Obamanomics in 2009!

[FarmRanger]

Thanks for the article classicalliberal. I would guess that it’s largely because of stupid and/or overregulation that caused the Fannie and Freddie debacle. Definitely not free market capitalism.

Keep posting, I enjoy having a non-smug “smart guy” educating me. ;-)

[TOM4CWB]

FarmRanger;

Freddie and Fanny... were the Clinton's answer to a US housing program.

By the time Bush finished they lent out $5 Trillion... with $100 billion equity... privately held... impossible to justify.

Isn't this the new 'gold' standard?

Gold would have to go to $32,000/ounce... to back all the currency being traded...

Of course Freddie and Fannie could not work.... without the US treasury/FED backing it!

Then in July...when the shorted hedge funds... got caught after the bail out (of Freddie/Fanny)... they had to take the commodity long positions off... it was a chain reaction.

Talk about leverage.

5 trillion is a drop in the ocean... compared with the derivative markets... until everyone wants to balance their accounts!

Then it is armageddon!

[classicalliberal]

Cottonpicken, I can't seem to figure out where your politics and economic philosophies are. Would you share with me which side of the politics and economics you are on? I think that it is great that there are other opinions on here. It would be pretty boring if all I would say is I agree TOM4CWB or "right on" Francisco, etc.

[classicalliberal]

No one in the media, which is not surprising, has brought up the fact that Freddie and Fannie are products of the Democrats and until recently, had been putting political pressure to back the mortgages on people of minorities and low incomes so that they can buy homes. There is a guy who used to work a local small grain company who said that he sold his house in Kansas City to move back to Canada to someone who made doulbe minimum wage and who's wife did not work and had several children. He said that the house was sold for almost $300,000. People who can't afford houses should know enough not to take on the kind of debt that if the interest rate changes slightly, like the subprime mortgages, that it would put them under. Either the bankers didn't tell who they were lending to that the interest rate would change in two or three years to an inflated higher level, or the people getting the mortgages didn't read the fine print close enough. I would never enter into something like that without wanting to know what my payments would be under various interest rates.

[cottonpicken]

economics-austrian
politics-american constitution/old repulican


Have you studied either?