The Economy and the Three Bears

In tonight’s discussion, I am not going to get longwinded and forge into foreign territory in discussing the macroeconomics and Keynesian principles. Lord knows that Congress and the talking heads do their best to baffle us with bullshit enough around the economy. What I am going to do is offer a few thoughts on the current situation and then ask for everyone else to offer their thoughts on what exactly it is that we are supposed to be doing if we want to make things right in our financial future. I don’t want to disregard the idea that we are simply screwed. I understand that there are many who feel that way. I can certainly see why they fall into that belief. And they may be right. Perhaps we are past the point of recovery. Perhaps all we can do is soften the blow that will inevitably come. Or perhaps we cannot even do that. Perhaps this is going to really hurt and there is nothing that we can do about it. Obviously, no one who works in the federal government is willing to say so. Doing so would be to admit that no matter what they do they are simply screwing us.

So we find ourselves in the middle of a financial mess. I know that the powers that be are too busy blaming the other side to explain why they believe that their solution will work. That is all smoke and mirrors, folks. I will be addressing that soon. But right now, there seems to be two different trains of thought that penetrate the Washington elite. There are the father bears (this bed is too hard) who believe that the answer to fixing our economy comes in the form of government spending to spur economic growth. Then there are the mother bears (this bed is too soft) who believe the right answer is tax cuts and curbing government spending in order to let the economy spur itself. But the economy seems to be Goldilocks, who is looking for “just right.” The question is where does just right come? Which side of this argument is closer to reality?

What brought this up for me tonight was an article discussing what Secretary of the Treasury Timothy Geithner had to say about the President’s proposed new stimulus proposals. Forget that the White House is trying really hard to have it called anything but the dreaded “S word.” What is being proposed is further stimulus. Money for infrastructure projects and money to fund tax cuts for small business. Geithner said, “If the government does nothing going forward, then the impact of policy in Washington will shift from supporting economic growth to hurting economic growth.” What he is saying is that Congress must act quickly to pass the proposals from the President. Failing to do so would hurt economic growth!

Forget the fact that anyone in government saying that government is the only one who can act to save the world is a bit egotistical and expected. I have grown weary of the claim that “government must act.” I am convinced, personally, that the only way out of the mess we are in is for government to STOP acting completely. Government solutions are like throwing a ball in the air. Sure, it looks like momentum for about two hundred feet at best, then the ball simply comes back down. Nothing accomplished. No matter how hard you throw.

No, the real question is whether throwing more money at the problem is going to fix anything. Consider for a moment the other messages that are coming from the administration. Austan Goolsbee, Obama’s chief economic adviser, told Christiane Amanpour this morning on This Week, that unemployment in the United States is “going to stay high.” Goolsbee followed with, “This recession is the deepest in our lifetimes, the deepest since 1929. More than 8 million people lost their jobs. It’s going to take a significant push on our part — and time — before that comes down.” That sure sounds promising. Especially when, after being pushed for an answer, he refused to attach any sort of job creation numbers to the stimulus the administration is proposing. How about the message that isn’t being spoken, but which should be trumpeted loud and clear for all Americans…

The House is considering ending their session early so that Congressional members can get back to those tough campaigns the are facing. In order to end the session early, they would be guaranteeing that they are not going to touch the issue of extension of the Bush tax cuts or this proposed stimulus from the President. Let me phrase that in the most appropriate way that I can. Congress is more concerned about reelection than the economy. It is important that Congress acts swiftly and decisively, unless there are tough campaign battles to be fought. In that case, there is no rush on that whole economy thingie.

So the question that I have, and which is the point of this entire article, is what is the more fiscally sound bed for the economy to be choosing to sleep in. From my perspective, history shows that taking money out of the hands of government and putting it back in the hands of producers has proven effective in the past. Giggle if you will but it sure worked better than the whole more taxes with government redistributing mindset seemed to do. It’s been well over a year since the passage of the “economic stimulus” and the TARP madness. And things haven’t gotten better, they have certainly gotten worse. And I am simply not buying that whole “they aren’t as bad as they would have been had we not acted” nonsense. They are far worse than we were promised they would not let it get to.

It appears to me that there is no entity more wasteful, more slow to react, or more economically inept than the US federal government. So how is it that there is a belief that giving more money to government to distribute is a good plan? But how realistic is it to expect that simply cutting taxes and decreasing regulation would somehow magically be the silver bullet to economic recovery either?

Most important to me, why is it that NO ONE is the realm of power, either political power or communicative power (the media) is espousing the idea that the only real way to turn this ship around is through a massive reduction in the size and scope of the government? In my personal opinion, that is the best option. Cut the government to a fifth of its current size and scope, and I believe that the economy would begin to take off like a bat out of hell. Don’t trust Wall Street? Shut it down for all I care. But put my money back in my hands, and I will guarantee that I will manage better than the bozos in the seats of power.

But then, that would be admitting that people are smarter than government. Perhaps that is exactly why you won’t hear anyone with a loud voice exclaiming that as the path forward.

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Comments

  1. I am no financial wizard, and I certainly do not even come close to understanding that philosophical stuff that you started this article out with (macroeconomics and Keynesian principles), but I do read a little bit of American History now and then. Back in 1920 or so when we ended WW1, we fell into a recession I think was a little bit worse than the crash of 1929 due to the Socialist policies of President Wilson – His successor immediately reduced the size of government spending and the size of government itself. The result was the roaring twenties which was ended by the crash of 1929. Hoover tried to do what was right by starting the black canyon dam project (now Hoover Dam) and the Grand Cooley Dam project which started us on a fairly slow recovery path – Then FDR and his “New Deal” got elected and government spending went bonkers again with the TVA and other wasteful projects and we ended up in a depression (which I think we are in one now, thanks to Obamanomics)which took WW2 (which could have been avoided, BTW) to get us out of.

    To put it in a nutshell, I also believe that if we shrink government drastically and put an end to all this wasteful spending on nothing but political payoffs, we will recover eventually. Yes, it will be painful, but if we do not repeat the roaring 20’s history and throw caution to the wind, we will come out much better than when we went into this mess. Mind you, I also believe that we need to add safeguards to our Constitution to prevent this from getting this bad ever again. Nothing and no one is perfect, and that includes any form of government or those who work in government, nor any person living in any country – and that includes all of us.

    Just my not so humble personal opinion.

    • GA,

      Hoover screwed up, he fell for the mass panic with everyone demanding the government DO SOMETHING. Bush made the same mistake. FDR campaigned against
      Hoovers government spending, then went on a spending spree like Paris Hilton on speed. Obama is attempting the same.

      (Just A Citizen said
      September 11, 2010 at 10:09 am

      Cyndi P

      I respectfully disagree.

      The inability of the American People to understand the foundational issues that caused this rot is the greatest threat.

      Until the vast majority realize that the sovereignty of the individual is being replaced by the “greater good” and thus the STATE we will continue down this path.

      This Administration is just another bump in the road filled with bumps, all of which are “enabled” by we the people.)

      Kudos JAC, you nailed that one. I was watching FOX this AM, where NJ Gov. Christie is under fire from the teachers UNION, for pushing them into a one Yr pay freeze of 1%, and for them to pay 1 1/2% of their medical insurance.
      This reflects what is happening nationally, that our government is securing its hold on re-election by expanding government workers and the unions. If you work for the government, the recession has not impacted you, and the unions are fighting hard to keep that same payoff.

      • I can see that Coolidge policies brought us out of the crash of 1920 but at the very end of his term we had the crash of 1929. Why?

        • V.H.

          Harding got us out of the 1920 recession. Coolidge continued the growth after 1923 with his policies but allowed his cabinet officer use govt to improve efficiency. The Officer was Herbert Hoover.

          The Crash of 29 was preceded by a reduction in housing prices, from all time highs, and a flood of cheap money (Low Fed Rates) that allowed investors to borrow to buy stocks that were rising at rapid rates. It was a speculative bubble, just like the dot.com bubble.

          Some say the Fed Reserve created the bubble and then popped it with a sudden constriction of credit. Some say they did it on purpose. But back then the Fed was all about unemployment and “inflation” was pretty back seat.

  2. The media needs to step up. They need to be accountable for their actions just as much as the politicians. The networks would be wise to just take their lumps, concede that they have been part of the problem and allow someone free airtime for someone to just lay it on the line on just how bad it really is. I’ve heard ABC and NBC are both considering abandoning their news divisions anyway. That’s the smartest thing I’ve heard in a long time coming from the networks. They see the writing on the wall. So what would be the harm in just conceding on the way out and give the mic to someone who can put everything in perspective. No one can defend what is going on in Washington. The question is who would be the smartest person to give the mic to?

  3. It’s been well over a year since the passage of the “economic stimulus” and the TARP madness. And things haven’t gotten better, they have certainly gotten worse.

    True.

    I can take or leave the statements (passed around as facts) about where we would have been without TARP and the Stimulus (two different things, let’s remember). But here is the question I would like to see answered:

    The Bush tax cuts set to expire were passed, I believe, in 2001. After just shy of a decade of these lower rates, why is the economy in the dumps?

    You demand that the Obama stimulus take effect within the first year or two, and hold up its failure to do so as proof that it is ineffective. Yet at the same time, the apparently lack of effect from a decade of Bush’s tax cuts doesn’t mean anything. More so, we wound up in a massive recession on Bush’s watch while these cuts were (and continue to be) in effect. So, if tax cuts are the solution, why are we in our present state?

    • Those tax cuts came as the economy was faltering and it did help…as during the first 6 years of the Bush administration the economy did well. It was after Democratic control of the Congress that the economy tanked…Bush was complicit with them and it was our (and his) undoing…IMO.

      • But the tax cuts were still in place after the Dems took over, no? What did the Dems do that places the blame at their feet?

        • Mathius

          It is what they DID NOT do. But that goes back before they took over Congress.

          They stood in the way of addressing the Fannie and Freddie problems which were tied to the derivatives problems. That is all we know.

          We don’t know what affect the Bush Administrations efforts to address this would have had on preventing the meltdown.

          My guess is little because the derivatives and other toxic assets were already in the market place, thanks to Mr. Clinton and the Republican Congress that changed the commodities trading rules to prevent oversight and regulation of derivatives.

          • changed the commodities trading rules to prevent oversight and regulation of derivatives. Can I take that to mean that you’re pro-regulation?

            • Mathius

              It depends.

              You can’t have no regulation in an environment without risk to those who screw up and where society lives on an ethic that perpetuates the sacrifice of some for the others.

              In the long term I am for no regulation. But there must be a transition.

              In the long term I want you and I to be able to take the jerks to court and get judgment against their personal bank accounts.

              If you think about it there was only one regulation needed. Make it illegal to trade air and paper that is not tied to a specific hard asset. Legal Trading of mortgages should have stopped at the mortgage itself.

        • Yes they were still in place, but were unable to overshadow the spending spree the US government went on…and as JAC points out, the housing debacle also greatly assisted the downturn.

          • So, if I’m following this, your position can be summed up thusly:

            The Bush tax cuts helped, but they weren’t enough. We would (probably) be in worse shape if we didn’t have them, but the solution is to make them permanent and bigger while simultaneously trimming back government spending.

            Correct?

            • Mathius

              Regarding the future let me be specific.

              Federal spending should be held at 10% of NDP (GDP-Govt spending). Spend it on what you want but this is the limit of Govt spending.

              Flat tax, or limited progressive brackets, and use taxes to make up the 10%.

              In the interim we need taxes amounting to another 5% with this dedicated to paying down debt.

    • Mathius

      If you add improvements to your house to withstand a hurricane and then it is destroyed by a tidal wave, do you claim the hurricane improvements did not work?

      Dot Com bubble burst + 9/11 induced downturn = hurricane

      Housing bubble burst + financial market meltdown = tidal wave

      Bush Tax Cuts = hurricane improvements

      • The financial meltdown occurred because the housing bubble burst. (Those derivatives everyone’s talking about? The main culprit were MBS’s – that’s what destroyed Fannie et al).

        If tax cuts are supposed to improve the economy overall, then people should have still had money to buy houses.

        If people still had money to buy houses, the bubble should have burst much more softly (ie, -10%, not -80%, because demand would have supported prices somewhat).

        If the bubble burst much more softly, then the financial meltdown wouldn’t have occurred. (MBS’s would have taken a hit, but nothing on the order required to take out major financial institutions).

        Oh, and how did the bubble occur in the first place?

        • You fail to recognize the fact that if those who lost their homes even had absolutely no taxes removed they would have defaulted…they bought more than they could afford…period. And it was government assisted…actually government insisted.

          • Curious.. who made them buy houses they couldn’t afford?

            • Yes, but to add…substantially trimming back government spending. There should also be a balanced budget amendment as well.

              • Oops, this was meant for the response above…for this one, I really couldn’t say, but do you deny that folks bought too much house for them to afford?

              • No, I completely agree that people bought more than they could afford.

                What I’d like to know is why anyone sold them more than they could afford.

                If you make 20k a year, I’m not going to lend you 500k. Yet these private companies seem to have made just this wager.. why?

              • My understanding is that in SOME cases, the folks with lousy credit scores were also minirities, and saw the loan rejection as racism. Carter said let thenm have their piece of the American Dream anyway

          • This is how I see it, please tell me where I’m wrong because I would really like to know the correct answer. It seems to me that lower taxes and lower spending has been proven to bring us out of crashes in the past. But it also seems to start bubbles which bust and bring us back into a crash. Then the democrat’s step in and start new social programs to help the people which makes things worse. So if lower taxes and lower spending is the answer what keeps causing the crashes. I think the main cause is the government messing with the interest rate. Am I wrong?

            • I don’t think it’s that simple.

              The truth is that the economy is cyclical. It goes up and down. In a freer economy (less taxed and less regulated), the highs are higher and the lows are lower (boom and bust). In a more taxed and more regulated economy, the highs and lows are closer to the mean.

              This is why, in the atmosphere of deregulation and lower taxes, the economy boomed and then tanked (someone above mentioned the roaring 20’s which ended in the great depression and are a perfect example). A lack of restraint will always lead to excess, be it in mortgage speculation, dot coms, or something else. Too much restraint stifles innovation and entrepreneurship and leads to stagnation.

              Thus, as always, I advocate for trying to find the sweet spot between the two.

              • And that is the fallacy of the progressive mindset.

                The arrogant belief that some sweet spot can be found, or that one even exists.

                And in doing so stepping upon the rights of free men and women.

                Because, who has the right to decide for me whether I want boom and bust or if I want some boring flat line.

                Boom and bust is more closely linked to monetary policy anyway. And that is a Govt function also controlled by the central planners.

              • I don’t see it the same way-you say booms always cause people to be extravagant which leads to a bust-but I think the manipulation of the interest rate gives a misleading picture of the economy so people aren’t aware that they need to make an adjustment and by the time the true picture is obvious the damage has been done.

        • Mathius

          All false claims or assumptions in your proposal.

          Money was available to buy homes. Yet the market dropped anyway. Because the sales and rise in prices had become speculative not for home ownership. Once the climb stops the investment stops. Then the prices start dropping.

          You ignore the effect of the Fractional Reserve Lending. I am guessing the financial markets could have handled the decline in MBS valuations if they hadn’t expanded and spread the risk around at a 30:1 ratio.

          But now you are doing what you do so well. Chasing all the rabbits around instead of dealing with your original premise.

          The Bush Tax Cuts were beneficial to the economy. But to claim they were not or would not be beneficial because they were overwhelmed by a tidal wave of financial market and housing meltdown is a FALLACY.

          It is not based on anything resembling sound logic.

          • Actually, if we go back to my point (as, yes, we do seem to have wandered afield), the problem as I see it is this: when it comes to Keynesian policy, it’s failure to work is proof that it doesn’t work, but when it comes to Austrian economic policy, there’s always mitigating circumstances.

            Why isn’t the economy humming despite the stimulus / TARP: because the stimulus / TARP must not be effective policy.

            Why did the economy crash under deregulation and the Bush tax cuts: Well.. they did work, but they weren’t enough, and the Democrats got in the way, and there was 9/11 and the housing bubble and…

            See the difference. I’m not talking here about which is correct (I happen to think both are to some extent), but I do think the way you are framing the debate is unfair.

            • Mathius,

              Your perspective is fatally skewed.

              Austrian economics explains the consequences of economic action.

              Austrians have not simply looked at the past and explained why.

              They have projected these consequences since 1970.

              Hayek and others long ago explained precisely what will happen should the US continue its path.

              Schiffer was on CNN often warning of the bubble and was laughed at. You can see his videos.

              The Austrians power is not 20/20 vision.

              It is future-sight.

            • Mathius

              You are identifying the fog of political rhetoric created by both sides. Your complaint is valid but your arguments are not, at least as you have presented them.

              Tax cuts are not Austrian economic policy by themselves. In fact, tax cuts and reducing federal spending during good times is Keynes also.

              You are also failing to apply the logic as it should in evaluating both sets of claims. Its like finding the limiting factor. Once you have found one, the next one becomes the more important and so on up the line until all limiting factors are eliminated. Thus tax cuts can not address a fundamental constraint. But neither can federal spending. But once that constraint is addressed then things like reduced taxes can have a greater effect.

              The reason the stimulus didn’t work very well is not because massive govt spending won’t create temporary jobs. It was because the spending targets were political in nature and grossly overstated to begin with.

              The promises didn’t match the outcome. But that is because those of us who showed how the promises didn’t match with reality were ignored. The actual affect of the stimulus is about what many thought it would be, around 1 to 2% of the increase over a two year period, with most late in the second year or early the third year.

              The tax cuts are in fact working to counter the down turn. Money not taxed is either supporting families or going to increase savings, which is in turn needed before the overall economic demand will increase.

              Honestly Mathius neither party right now is talking about the real things that could make a difference, depending of course on how you measure difference. Yammering on about taxes, tax breaks for small business, etc is all a distraction.

              What has small business tied in knots right now is the health care bill and the potential for cap n trade and then the next “progressive” agenda item. Taxes are part of that mix but giving out increased deductions for capital equipment purchase is ridiculous if no body is going to invest anyway.

              Therefore, in my humble opinion, the correct answer is to start building the desired long term system and let the economy adjust on its own. Every time govt tries to manipulate an economy unexpected bad things happen.

        • Mathius

          how did the bubble occur in the first place

          Tax credits for home ownership increased housing demand.

          Artificially cheapened credit made access to loans easy.

          Government law forcing banks to make loans created a series of moral hazards.

          Add all ingredients, and stir. Bubbles will occur.

    • Mathius

      The Bush tax cuts set to expire were passed, I believe, in 2001. After just shy of a decade of these lower rates, why is the economy in the dumps

      …because there was no equal (or greater) cuts to spending. Spending increased.

      Study carefully:

      If the government lowers its income from taxes, but increases its spending, where does all that money come from?

      It comes from the capital markets in the form of loans (via T-bills).

      This drains the economy of capital and is recessionary. It does not matter that on one hand their appears to be more money (lower tax) if the money is sucked up (and more) on the left hand.

    • (The Bush tax cuts set to expire were passed, I believe, in 2001. After just shy of a decade of these lower rates, why is the economy in the dumps?)

      Matt,(sigh)

      Why is the economy in the dumps? Because this government has shown itself to be hostile to business, and unwilling to correct its own mistakes. They passed “financial reform”, but have they corrected Fannie/Freddie? Who would want to jump into the real estate market right now? Only those firmly in bed with our government.

      Health insurance rates are going up at record rates, and nobody knows where they will be at in a couple years. Who would want to start a business or expand without knowing if a employee will make them money, or be an expense.
      Consider Why Rush left N.Y., taxes. I know they don’t miss him, but they do miss the money he paid them.

      And on tax cuts…

      http://www.americanthinker.com/2010/09/the_successful_clinton_economy.html

      To find a pure, easily illustrated example of tax decreases boosting the economy and Treasury receipts, one need only look at the current rates on capital gains and dividends. When Congress passed the 15-percent tax rate on capital gains in 2003, and again following the 2006 extension, Democrats protested that large deficits would result.

      The new leadership in Washington and those who support them would allow this tax cut to expire to “generate revenue” for the federal government. Based on data from Congress’s own budgetary agency, they should consider whether expiration will have the effect they desire.

      For anyone willing to read it, the January 2007 Congressional Budget Office annual report settles any debate. Citing the original CBO forecasts of capital gains tax revenue of $42 billion in 2003, $46 billion in 2004, $52 billion in 2005, and $57 billion in 2006, Democrats who opposed the rate reduction in 2003 claimed that the capital gains tax cut would “cost” the federal treasury $5.4 billion in fiscal years 2003-2006.

      Those forecasts were embarrassingly wrong. The 2007 CBO report revealed that capital gains and dividends tax collections were actually $51 billion in 2003, $72 billion in 2004, $97 billion in 2005, and $110 billion in 2006, the last two years nearly doubling initial forecasts.

      In other words, forecasts in earlier CBO reports were low by a total of $133 billion for the four-year period. This tax rate reduction stimulated enough additional economic activity to more than offset forecasted losses.

      Reductions in tax rates for capital gains were arguably the most successful fiscal initiatives of the past thirty years.

      • LOI

        Here is where I will split from Am. Thinker.

        We know that the Cap Gain tax was reduced.

        We know that the Cap Gain tax collected increased, beyond expectations.

        We DO NOT KNOW that the tax cut spurred any growth or activity that caused the revenue to increase.

        I do think it is safe to assume that pending changes in Cap Gains will cause people to make decisions regarding sale of assets subject to the tax. For example, I am trying to sell a property before the end of the year because the rate will jump so much. I would be better waiting except for the added tax burden pushes me to sell now.

        If I think rates will be dropping then I will hold off until later if possible. But neither decision represents increased economic activity or growth.

        When Reagan cut the Cap Gain period from 1 year to six months the Cap Gain tax increased. Did the “economic activity” increase? No. People simply didn’t have to wait as long to do the deal they were going to do anyway.

        • JAC,

          Agreed. I think the economy will continue to suffer until the government demonstrates a friendly business environment.
          Why work your @ss off and risk everything when Obama, Pelosi
          & Reed have shown they will take what they feel is fair, and give it to who they deem needy.(and, of course, their supporters)

          • LOI

            Actually I think the biggest problem is uncertainty.

            If the Triumpherate got all they wanted we would eventually see things recover under the NEW rules. That is what business does. It finds a way to function under the rules.

            The problem right now is that they are trying to get out from under a recession and looking at an unknown future regarding the rules.

            So I don’t think a “friendly” atmosphere is needed at all. Just a “dependable” one.

            Of course “healthy economy” may have to be “redefined” to meet the new rules. 🙂

            This is why FREEDOM, LIBERTY and JUSTICE must come first.

            Let economics do its own thing within those three criteria.

    • “The Bush tax cuts set to expire were passed, I believe, in 2001. After just shy of a decade of these lower rates, why is the economy in the dumps?”

      **double take**

      Wait a minute. After the Bush tax cuts, the economy boomed for, what, 52 consecutive months. Government revenue INCREASED. Pretty sure that makes it a success…

      I agree with BF on this one. The problem was that repubs increased spending instead of being fiscally responsible with their new government revenue.

  4. Bottom Line says:
  5. JAC, down here!

    MBS – Mortgage Backed Securities

    Before we start, though I’m sure you’re already well versed, let’s just lay out what we’re talking about. An MBS is a derivative security where a series of mortgages are bundled up and sold as a single security. Though the specifics of the homeowners are not conveyed, details such as the mean income, mean FICA score, region, demographics, etc are available to the purchaser and to the rating agency. MBS are priced with regards to the risk of both individual mortgagees default (which would rob the security of principle and planned interest payments) and prepayments (which would rob the security of planned interest payments). Depending on the setup of the particular MBS, 1,000’s of mortgages might be rolled into one security, which is then divided into tranches. In the simplest case, there is only one tranche which comprises the entire set mortgages. Alternatively, there may be 2 or more, where the lower tranche must default entirely before anything is lost to the upper tranches. That is, the D-tranche must be wiped out completely, before the C-tranche gets touched.

    Now, you say:
    Make it illegal to trade air and paper that is not tied to a specific hard asset. [short term solution] Can you please go into some more detail here?

    • Mathius

      I would not have allowed the mortgages to be bundled to create the paper security. That is the hard core approach.

      Bundling the mortgages into the first level probably would not have been so bad if the information on individual mortgages was accessible as you claim. I have talked to some bankers who claim it was already very muddy at this point. But after that, you are just expanding risk and reducing clarity. But even at the first level you are increasing risk because the security itself starts to have a value that is separate from the underlying assets. Thus the trading of AIR.

      There was a strong market for mortgages in this country that was pretty good at assessing and spreading risk among those willing to take those chances. I would NOT allow the trading of carbon credits as that is nothing but air.

      I also understand that the interest payments were stripped from the principle payments for some of these. Credit default swaps were also in this somewhere. I do not have a handle on all the details, nor pretend to understand it.

      I know that because of the way the various securities were constructed it allowed the risk to be sold, thus expanding the fractional lending power to the original banks. Thus we wound up with a 30:1 instead of a 9:1 ratio. So when the housing market starts to slide the impact was expanded by 30 over what it should have been.

      • Individual mortgage holder details were not provided at the bundled level. This was intended to protect the privacy of the home owner. I should not have my personal information used outside of my knowledge or control. So what they do is compile averages and other statistical data on the bundles. So, yes, in this way, clarity was decidedly reduced.

        But even at the first level you are increasing risk because the security itself starts to have a value that is separate from the underlying assets. Thus the trading of AIR. Yes and no. Ultimately, the value of an MBS is tied to the underlying mortgages. Regardless of the value placed on one, when the loans come due, it is worth what the mortgage holders pay, not what some accountant thinks it’s value is. So short term, yes, the price incorporates speculation. Long term, no, it is tied to the asset(s). But this is no different from, say, a gold future, where you are speculating on the price of gold next year – the interim price incorporates that speculation (air), but the long term price is tied to the asset.

        I also understand that the interest payments were stripped from the principle payments for some of these. Yes. Some tranches were set up as interest only (thus they are vulnerable to prepayment and default). While others were set up as principle only (thus they were vulnerable only to default). Others were principle and interest. However, tranches divided in this fashion were clearly identified. This is not where the opacity came in. As such, this is probably not the issue you might think it is.

        Credit default swaps were also in this somewhere. A CDS can be thought of as a synthetic means of shorting something where there is no normal market for doing so. Like any short, you can use it for speculation (because you think the value will decrease) or hedging (you hold a long position, but don’t want to lose everything if it tanks). This later is generally what CDS were used for with regards to MBS’s. In order to do this, what they typically did was create a CDO (Collateralized Debt Obligations)which is a synthetic vehicle combining both the risk/reward (the MBS) and the hedge/risk mitigation (the CDS). This CDO is a tough thing to value, but you can look at it as a (theoretically) pretty safe since the upside is you get the full value of the asset and the downside is limited with the built-in hedge. However, it is a very opaque instrument – people just assumed that they were safe and sufficiently hedged because they were backed by nominally safe mortgages. What wound up happening though was that the risk associated with the underlying asset was mis-assessed due to an assumption that house prices would always continue to increase (if this is the case, defaults should be very rare since you can always refinance rather than defaulting) and therefore the risk was really limited to just prepayments costing scheduled interest payments – a relatively minor loss in the scheme of things.

        The doody hit the fan when banks realized they could use this to take risk magically disappear. You and I know that you cannot eliminate risk. But what the banks figured out was that you could box it into a corner. Using the above structures, they could write off virtually all the risk associated with the assets and take on more and more (this is where your 30:1 leverage comes in). But the math works like this: Let’s picture a coin flip: 50-50, you either win a dollar or lose a dollar, sum zero. They changed the equation to 1-99, where there’s a 1 in 100 chance of losing 99 and a 99 in 100 chance of winning 1, sum zero. This works great until you hit that one unlucky chance and the whole thing catastrophically explodes. As soon as home prices stopped increasing, the ability to refinance disappeared, the risk of default reappeared, the CDS side was insufficient (and it didn’t matter because nobody had enough money to pay it anyway), the value of the whole CDO plummeted, the funding for new credit issuance seized up, which caused fewer refinances, which caused more defaults, which devalued the CDO’s further, and round and round she goes.

        Not sure what the point of all this is, but I just felt we should all be on the same page.

        • Mathius

          Some how I got this under Charlie below. Reposted here for you.

          I think we are on the same page. I don’t have the expertise on the details of the various instruments but had looked into how they were used and in effect how it expanded the risk.

          Somewhere in your explanation of CDO’s and how the banks made risk disappear is the expansion that caused the effect of the collapse to be greatly magnified, in my view. And that is my point in all this. If you believe in regulation, then stop trying to regulate the details of ever increasing complex transactions where clarity is virtually impossible. Simply stop allowing such instruments from being available.

          • And what happens in a free market w/o regulations?

            • Mathius

              States regulate the banks.

              W/O Federal regulations there is also no Federal protection.

              Total moral hazard for those who take chances and lose.

              We assume that you get the same behavior when there is no protection as when there is known protection against major failure.

              We could have let the financial banks fail and it wouldn’t have made a pinch to most of us. Except we ALL owed them billions of dollars without knowing it. If they failed they would have called in the debt.

              Also remember that no regulation does not mean there are no laws protecting the consumer against fraud. It means there is no protection against stupid.

    • Mathius, JAC,

      The problem is not that such financial instruments exist or not – because they have always existed since the dawn of money – simply the descriptions are different

      The problem was that the instruments were based on information errors.

      Mises could not understand why bubbles ever existed in a marketplace. Certainly certain asset classes may increase or decrease higher or lower than what may appear to be the underlying support. But these would be scattered.

      So how did an entire segment make the same mistakes at the same time?

      It had to come from an underlying set of information that the businesses used to make their economic calculations that was wrong.

      artificially lowering the access to credit – lowering interest rates – informed business that the economy was productive. Thus, the business used this information and the increasing amount of capital and invested it into more production via loans (regardless of how complex it looked, all these were merely loans)

      However, it was all a lie created by government. The low cost of credit was artificial. There was no increase in productivity. The investments into more productivity was pointless – there was no real consumers out there to buy.

      Thus, the collapse.

      Mises finally saw the cause – government intervention into lowering the cost of credit artificially created a lie regarding the state of the economy which fooled businesses into making systemically wrong decisions

  6. USWep,

    Though the prescription is correct (massive reduction of government spending), the cure will never happen.

    1/6 Americans depend on government money to live.

    50 million Americans would burn down every city should this money be withdrawn.

    Thus, government will never retract – it must grow ever larger into the economy because the demands of these 50 million will increase.

    (Human action: people eager for more, not less, economic goods)

    Thus, the government will consume more of the economy until it causes its collapse.

    Then the cities will burn.

  7. Bottom Line says:

    I just tried to post a good video about our economic situation. It didn’t show up so I tried it again because I thought I may have accidentally clicked on the wrong button. I was then shown an error message stating that I was posting a duplicate, but it still didn’t show up.

    So I will try again…

    Meltup

  8. lurking…..

  9. So long as we live in a capitalist society (and we do), complaining about what Unions want for their own is a bit hypocritical, especially coming from those who defend the rights of owners to hire who they want, when they want and for whatever they want to pay. Arguing over THIS government (either side of the aisle) handling anything is a bit delusional. It is big business that runs this country (kid yourselves all you want about a free market). The concepts of libertarianism are beautiful indeed … so are those of communism. And they’re both pipe dreams.

    The stimulus might’ve worked had the people who put it together REQUIRED those they were handing our money to do some good for us rather than themselves … banks hording money they had previously handed out without bothering to question whether people could pay them back or not suddenly found fiscal responsibility … and a way to reward themselves for breaking the economy and way too many of us.

    I have no idea which is the right way, except I know bailouts without protections for workers (yes, regulation) was idiotic and out and out criminal (no matter what might’ve happened without them) … likewise, removing regulations (whether through legistlation or ignoring the protections that were in place) is and was equally idiotic. So long as we’re a capitalist society (and that isn’t changing in our lifetimes), we need to find a balance between the two … and so long as we have THIS two party system we can count on the Easter Bunny to fix things.

    But enough of more vs. less government nonsense … we had a beautiful wedding in Delaware on 9-11 … http://temporaryknucksline.blogspot.com/2010/09/wedding.html

    • Mathius

      I think we are on the same page. I don’t have the expertise on the details of the various instruments but had looked into how they were used and in effect how it expanded the risk.

      Somewhere in your explanation of CDO’s and how the banks made risk disappear is the expansion that caused the effect of the collapse to be greatly magnified, in my view. And that is my point in all this. If you believe in regulation, then stop trying to regulate the details of ever increasing complex transactions where clarity is virtually impossible. Simply stop allowing such instruments from being available.

    • Charlie

      Ignore the one above to Mathius.

      For the record, on Unions.

      It is not the existence or demands of unions that is the problem. And I agree that many of us forget that fact when complaining about their track record.

      The problem is that they have operated under Govt Protection. They have had the upper hand in the contract dispute arena. Thus the price of labor has become distorted beyond sustainable levels. But you can’t fool mother nature or the laws of economics forever. And now here we are.

      • JAC, I agree up to a point … and there is the corruption factor (corruption from those they are supposed to negotiate with for their memberships) … trust me, I was a union window cleaner for 10 years and our union was a bad joke. Likewise, the teacher’s union makes absurd requests (tenure is insane) but … while we all get crazed over gov’t workers retiring on $70K a year, we ignore what CEO’s rewarded themselves with AFTER bankrupting us all … they should’ve been hung. And that argument that they couldn’t be replaced is an offense that should be punishable by a firing squad (just for uttering it).

        Like I said, we need a balance. It can’t be an either or scenario. Unions have to compromise, but not while CEO’s are permitted to rape and rob us (with our own money).

        • Charlie

          Very significant difference. The Govt protects the union and gives it power in negotiations.

          The govt does not give the CEO the leverage for the higher salary.

          You gotta problem with their pay take it up with their BOD and shareholders.

          But don’t rationalize an evil just to get even with another evil.

  10. ARIANNA HUFFINGTON: At the bottom of the Tea Party movement of that anger is anger at the bailout. And you know, here people, Democrats, Republicans have been given proof that the government does not work because the government spent almost $800 billion and look where we are. Wall Street is doing well. Main Street is suffering.

    CHRISTIANE AMANPOUR, HOST: Somebody I was talking to over the, during the week, people in business and venture capital who were saying, “Why doesn’t the government do more to force banks to lend, to do more to make it easier for people to actually go out there and show some kind of consumer activity?”

    GEORGE WILL: Well maybe if the government did less, period, people would be more inclined to lend money. The banks aren’t hoarding the money because they are in a pout. They’re not hoarding the money because they’re mad at somebody. They’re hoarding money because they can’t find lenders who think they can borrow it and make money.

    HUFFINGTON: No, that’s not true. The banks are getting almost zero-percent interest rate…

    WILL: Yes.

    HUFFINGTON: …loans from the Fed and they are spending it to make a lot of profit in derivatives tradings and all the things that got us into this trouble in the first place. And this administration and this Congress still has not passed an end to Too Big To Fail, still has not reinstated Glass-Steagall. So even, even though people may not be able to give you all these details, they know that the system has not been fixed, that financial reform is full of loopholes, and that the system is not fair, basically, for them as they’re seeing their lives falling apart.

    Amazing. So first she says the failure of the bailout to stoke lending is an example of how government doesn’t work, and then she asks for more government intervention to get the economy going.

    Boggles the mind, doesn’t it?

    Moments later, Will put the icing on the cake:

    WILL: We started arguing about the tax cut. The president says we can’t afford the tax cuts for the wealthy because that would add $700 billion to the deficit over ten years. Which is to say over ten years it would add less to the deficit than Obama added with the stimulus in one year.

    Simple arithmetic most fourth graders would understand unless they were raised or educated by liberals like Huffington.

    Read more: http://newsbusters.org/blogs/noel-sheppard/2010/09/12/arianna-huffington-makes-fool-herself-week-george-wills-help#ixzz0zQdQkBxA

    • LOI

      Both Will and Huffington are wrong

      GEORGE WILL: Well maybe if the government did less, period, people would be more inclined to lend money. The banks aren’t hoarding the money because they are in a pout. They’re not hoarding the money because they’re mad at somebody.

      Up to here he is correct.

      They’re hoarding money because they can’t find lenders who think they can borrow it and make money.

      This is not correct.

      There are lots of lenders wanting loans.

      The banks are not lending because the banks fear the economy. They would rather lend to government – to them, this is a lower risk then lending to Mom&Pop Inc.

      HUFFINGTON: No, that’s not true. The banks are getting almost zero-percent interest rate…

      She is right – his cause is not true, and the banks are getting 0.25% from the FED.

      they are spending it to make a lot of profit in derivatives tradings and all the things that got us into this trouble in the first place

      This is not true. They are investing in T-Bills and banking in the FED with excess reserves.

      The problem: when no one sees the reality, they proscribe fantasy as a solution, nor are they prepared for the consequences when the situation changes.

      • “They are investing in T-Bills and banking in the FED with excess reserves.” I understand the T-Bills part but what exactly does the rest mean.

        • V.H.

          In a Fractional Reserve System, a bank is required to deposit with the FED an amount of money equal to a percentage of outstanding loans – about 10%.

          For every $100 in loans, the bank needs to deposit with the FED $10.

          If the bank deposits $20, the extra $10 over the requirement is called “excess” reserves. It allows the bank to lend $100 in the future OR absorb a loss in their loans outstanding.

          The banks prior to the financial crisis held ~$10 billion in reserves – which met their requirements for all outstanding loans.

          The banks, today, hold $800 billion in reserves – or about $870 billion in excess.

          This is a full sign the banks refuse to lend and are willing to stash their cash into the FED (which happens to pay 0.25% on excess reserves). It is a sign they would rather earn nearly nothing then lose their shirts lending to the market.

          • V.H.

            When you take that in, do the math.

            If the banks can lend about 10x their reserves, how much latent money is sitting to spring into the economy?

            Then remember that the current amount of money in the US economy is under $3 trillion.

          • Thanks

          • Sorry,

            It should be $880 billion, which will make the calculation make sense 🙂

            • I remember you saying if all this money was actually put into the economy that hyper inflation would occur-so just how did Keynes address this problem after suggesting that we should put all this fake money into the system ????

              • V.H.

                Good question!

                Keynes did address this.

                He argued that during a recession, the government should intervene and spend while lowering interest rates to create new business.

                When the economy started going again (boom), the government should raise taxes, cut spending and raise interest rates.

                What he forgot – government has no motivation to do this.

                Each government wishes to take claim of economic productivity.

                Keynes formula – lower interest and increase government spending – was the way to improve an economy.

                Therefore, lowering interest rates even more and even more government spending must continue such economic growth.

                What government wants to be “blamed” for an economic slow down?

                Answer: none.

                Therefore, every government at all times continued to expand its expenditures.

                Keynes would have been appalled at such a situation, however, his own formulation made it inevitable.

              • The government seems to want to follow his recession theory but isn’t the interest rate about as low as it can go now.

              • V.H.
                I can’t imagine it getting any lower.

                Keynesian theory says we should have a super-boom. We do not. Keynes thus is wrong.

                The Austrians said that each dollar of new money artificially injected into the economy will produce less effect than the previous dollar, until no amount of injection will make any change.

                They are correct.

                They also said that continuing to apply more artificial money will eventually cause rapid inflation.

                We are not there yet, but since the Austrians have “called the ball” so far, I – myself – expect this will happen too.

  11. Obama to kill more jobs
    http://www.americanthinker.com/blog/2010/09/obama_to_kill_more_jobs.html
    Ed Lasky
    The latest job killing initiative by Barack Obama: focus new taxes on the oil and gas industry.

    Joseph Mason writes in a New York Post op-ed:

    Just last week, President Obama explicitly targeted the industry for two massive tax hikes. First, he’d ban oil and gas companies from using the “Section 199” tax credit, a measure for domestic manufacturers enacted in 2004 to boost US employment. (The Senate is set to vote this week on its version of the ban.) Second, he wants to end “dual capacity” protection for US energy firms.

    Without this shield against double taxation on foreign revenues, American companies would be competing on an uneven global playing field. Again, Obama aims directly and specifically at the US oil and gas industry.

    Yet, by the federal government’s own economic model, these tax hikes would lead to huge, immediate job losses. I ran the numbers through the Commerce Department’s RIMS II model; it shows, under the proposed changes to Section 199 and dual capacity, Americans would almost immediately lose more than 150,000 stable, private-sector jobs.

    By repealing the tax credit US-based companies claim on the taxes they pay abroad, Obama’s “stimulus” plan would effectively double-tax American businesses — driving investment to foreign competitors that don’t face the same tax burden.

    Again, Obama is enriching foreign oil companies at the expense of domestic ones. He has done this previously when he extended billions in loans to the Brazilian oil company Petrobras with extensive offshore oil programs through the U.S. Export-Import Bank, while trying to kills off offshore oil exploration in the Gulf by our companies.

    Obama did it again this past week when the Ex-Im bank extended another billion in loans to support Mexican oil development in the Gulf. Obama seems to relish the opportunity to redistribute power and wealth to foreign countries and companies at our expense.

    Why?

    As Dinesh D’Souza writes, not only is Barack Obama the most anti-business President in American history

  12. JAC

    Also remember that no regulation does not mean there are no laws protecting the consumer against fraud. It means there is no protection against stupid.

    A contradiction.

    If you do business with those that defraud you, it is your fault and stupidity.

    And as you said, there should be no law against stupidity nor laws against those that profit from it.

    • BF

      Not a contradiction.

      I am drawing a distinction between criminal or civil code and federal laws regarding operations and the federal regulations that go with them.

      In fact, the only thing required are some rules that don’t allow the big boys to run out the clock on litigation.

      We have been around your rabbit hole on fraud vs stupidity and your argument is irrational in my view. I am not stupid for doing business with someone who has no record of defrauding people and suddenly decides its time to cash in. Or for doing business with someone who deliberately doctors information to hide the scam in a way that can not be discovered with due diligence.

      To argue that this is not possible ignores reality.

      I doubt that was the case in the mortgage derivatives case. That was just plain stupid. Unless there was criminal intent in hiding information in the original forms. But it seems to me everyone knew you could not identify the actual assets before they bought the things. So stupid is as stupid does.

      Sorry my friend but in my village we will not live by the motto of suckers be ware. If you come here and trade you had better be honest in your transactions. If we catch you committing fraud you will spend time slopping the hogs with those wingnuts from Xistan.

      • JAC,

        I am not stupid for doing business with someone who has no record of defrauding people and suddenly decides its time to cash in

        So your argument here is this:

        They have been successful for years, but to ‘cash’ in, they are willing to destroy the success they have had for years.

        Okie Dokie….

        due diligence

        Then your “due diligence” was incompetent or incomplete. Then you want protection for your incompetence.

        ——

        Such resale of mortgages (or any other derivative) always ends up at the party that has the least ability to resist default. They buy because they are desperate for revenue. Thus any default creates the cascade.

        However, that is the nature of any and all financial instruments.

  13. Quote of the day:

    Harriet Hayes: I don’t even know what the sides are in the culture wars.

    Matt Albie: Well, your side hates my side because you think we think you are stupid, and my side hates your side because we think you are stupid.

    -Studio 60 on the Sunset Strip, Nevada Day, Part I

  14. Matt…maybe this will help you a little.

    As you know, the family has several interests. We have a hoard of cash that we would like to invest. Some of that investment is geared towrads productive issues that would require employees. We have decided to sit. We have sat down with our gurus and have determined that with the health care, as it currently stands, we do not wish to take on the burden of employees. We also do not wish to take on the burden of tax sharing that goes with having employees. We have taken a couple of our companies and changed the dynamics to get uned the 50 employee threshhold. (One company has 72 employees and we made a division out of it and have seperate employee models, each on their own. They are now under the 50 employee threshhold.) In addition, we are embarking on a independent contractor arrangement where we can. This is also to avoid increasing payroll taxes. With the health care, if we are going to be taxed as a penalty for not providing health care, we will simply not have any more employees. We are in a position to make them all independent contractors to the extent possible…then layoff those that we cannot do that with…we have our contingency plans.

    In the context of splitting up our companies and forming seperate divisions and companies…each unique to itself…we have found it cheaper to now go to the outside for payroll services. We save approximately 4.5% by doing this. The savings come from reduced sharing taxes (our terminology)…we pay no more into the government. We have also increased the unemployment by 35 people.

    We are also quite heavy in hard assets and are trying to determine whether to sell them or hang on to them for the long run. Since they are revenue producing and the depreciation schedules are such that there is still an offset for another three to five years…we are inclined to wait.

    Any officer or employee or owner that is now taking over $250,000 in salaries are being reduced to one dollar under the taxable amount, should the tax cuts not be extended. There are a variety of ways to compensate people other than cash. Thus we will avoid the income tax burdens.

    NOw….what has all this done? Well, we consider ourselves a small business. We certainly do not complete with the big boys and we are not traded on the market. We are privatley held. So, with the current tax policies….we maintained an employee base, paid our taxes and sharing taxes, continued to invest in the economy by purchasing from local levels and the mom and pop business’. We paid our CGT (Capital Gains Taxes) and we paid our income taxes and franchise taxes. We provided health insurance for our employees on an employer paid arrangement. (100% of then employee paid. An employee after 5 years 50% of family coverage and after ten years 100% of family coverage). Our projected increase in health coverage is (14% on the employee and 18% on the family). We have already been notified of the increasse to take effect January 4, 2011. Answer this question….why would I want to take these increases without dropping the coverage and pay a 10% penalty to the gov’t and let them carry the weight? Take it further…. Since the government imposed health insurance is payroll based….why have a payroll?

    And this, Matt, is only ONE thing. Health Insurance. What about increased SS taxes or WC taxes or FUT taxes or increased CGT?

    Bottom line, we have a little over 35MM in cash sitting around. We want to invest but where? Or do we just sit and hoard cash to weather impending economy. There is no where else to go. No overseas investments. They are worse off than we are.

    So, as small business owners…we are going to sit and watch for awhile. I wonder how exponential all of this is. IF we take our paltry 35mm our of circulation and layoff employees to increase cash to us….how does this exponentially affect the economy? We are small potato’s,,,,but how many small potato’s make a farm? We are nervous with this current administration. We are nervous about what is coming as well. So, we protect what we have.

    • D13,

      Exactly, sir, exactly.

      • The government believes you are an idiot, and that you will swallow whatever they force on you.

        They do not understand avoidance and that such avoidance manifests in many forms.

        Thus, the unintended consequences of their action – they believe you are stupid, and you are not.

    • PeterB in Indianapolis says:

      D13,

      Thank you for confirming 100% of the stuff I said to Mathius last week about how small businesses are currently behaving, and WHY they are behaving that way.

      When I told him all of this last week, he was firmly convinced that I was crazy and that there was no way that small businesses would behave in this way.

      Your post confirms exactly everything that I told him was currently happening, 100%.

    • Thank you for an inside look into what many small businesses are doing today.

    • I came to this party late and this is my last post before going home (and I probably won’t remember to check your reply).

      PeterB’s assertion (was it Pete or JAC, I can’t remember in my senility) was that you would plot to earn less than 250k. You say you are reducing everyone’s salary to just under this limit and compensating them in other ways to avoid the increased burden.

      Can you tell me what increased burden you’re referring to? Is it just the marginal rate you’d have to pay on dollars about that threshold? Because moving from 250,000 to 250,001 does not cost you money – that extra dollar is just taxed at a higher rate while the 250 before it remain unchanged.

      • This is true to an extent. However, since the officers are the owners…there burden is much greater as a result. For example….an owner that is taking a $500,000 salary…will reduce to 249,999….a significant savings to the individual…and less money for the gov. Increase your non taxable perks… There are a variety of ways to get cash back to the owner.

  15. The third beam in NYC.

    http://poorrichards-blog.blogspot.com/2010/09/ae911truth-shines-3rd-beam-into-nyc.html

    911 Truth shines a third light for WTC7

    • Bottom Line says:

      “It does not require a majority to prevail, but rather an irate, tireless minority keen to set brush fires in people’s minds”

      – Samuel Adams

  16. Hi ya’ll 🙂

    I read USW’s article this morning and thought it would make for a very educational discussion, and it sure was! I was thinking as I watched two nice 8 points in the field I watch from my blind every evening, that the economy (as it is today) is a direct result of government intervention.

    Here’s my little theory: If the people do not need the Government, they become obsolete, therefore, government must make people dependent on them to be “important” to the society. The incredible amount of government assistance combined with the huge govt job increases has certainly made govt “important” to a great many people. History is not on our side! 😦

    By the way, I’m feeling pretty good lately, spending many hours in the woods, shooting the bow, loving nature and LEARNING more everyday about it 🙂

    I have been quite absent the last few months, but all of you have been great to talk to over the past couple years, so, I raise my glass of rasberry brandy in toast to all of you. SALUTE!

    Peace!

    G!

  17. Pay attention, Mr. President….

    Cuba will lay off more than500,000 state employees by March and expand private employmentto give them work in the biggest shift to the private sectorsince the 1960s, the Cuban Workers Federation said Monday

    The younger Castro indicated last month that reform wascoming to reduce the inefficiency of the Cuban economy.

    “We have to erase forever the notion that Cuba is the onlycountry in the world in which people can live without working,”Castro said, upon announcing in general terms his plans to cutstate payrolls and increase self employment in an August speechto the National Assembly.

    http://www.foxbusiness.com/markets/2010/09/13/cuba-announces-mass-layoffs-spur-private-sector/

    • What the heck is going on down there? First Castro’s statements and now this? Wow! May be the place to go after all……

  18. A Non-Prediction
    Email Thomas Sowell | Columnist’s Archive

    When people learn that you are an economist, they often want you to predict which way the economy is going. There seem to be more than the usual number of calls for such predictions lately. But an economist should be more aware than others are of how hazardous such predictions can be.

    One reason is that what happens in the economy is affected by what politicians do in Washington– and who can predict what politicians will do?

    However, let me go out on a limb, and try to predict what politicians will not do.

    What would probably get the economy recovering fastest and most completely would be for the President of the United States and Congressional leaders to shut up and stop meddling with the economy. But it is virtually impossible that they will do that.

    Think about telling all the millions of people who have lost their jobs, their homes or their businesses: “I really messed you up but, hey, nobody’s perfect. So I’m going to leave things alone now.” In fact, that would be hard even to tell yourself.

    If the stimulus isn’t working, the true believers have to believe that it is only because it hasn’t been tried long enough, or with enough money being spent.

    There are always calls for the government to “do something” when things are going bad. Those who make such calls have almost never bothered to check out what actually happens when the government does something, as compared to what happens when the government does nothing.

    It is not just free market economists who think the government can make a mess bigger with its interventions. It was none other than Karl Marx who wrote to his colleague Engels that “crackbrained meddling by the authorities” can “aggravate an existing crisis.”

    The history of the United States is full of evidence on the negative effects of government intervention. For the first 150 years of this country’s existence, the federal government did not think it was its business to intervene when the economy turned down.

    All of those downturns ended faster than the first downturn where the federal government intervened big time– the Great Depression of the 1930s.

    There are two conflicting assumptions about what happened during the Great Depression. The most popular assumption, especially among politicians, is that the market failed and the government had to intervene to save the economy.

    Another assumption is that the market went down and was on its way back up when federal intervention sent it down again and led to massive unemployment. If you don’t let facts get in the way, you can just pick whichever assumption you like– and the first assumption wins that popularity contest, hands down.
    But, if you look at the facts, they go like this: Unemployment never hit double digits in any of the 12 months following the big stock market crash of 1929 that is often blamed for the massive unemployment of the 1930s. Unemployment peaked at 9 percent, two months after the October 1929 crash, and then began drifting downward.

    Unemployment was down to 6.3 percent by June 1930, when the first big federal intervention occurred. Within six months, the downward trend in unemployment reversed and hit double digits for the first time in December 1930.

    What were politicians to do? Say “We messed up”? Or keep trying one huge intervention after another? The record shows what they did: President Hoover’s interventions were followed by President Roosevelt’s bigger interventions– and unemployment remained in double digits in every month for the entire remainder of the decade.

    There is another set of facts: The record that was set in 1929 for the biggest stock market decline in one day was broken in 1987. But Ronald Reagan did nothing– and the media clobbered him for it.

    Then the economy rebounded and there were 20 years of sustained economic growth with low inflation and low unemployment.

    Can you imagine Barack Obama doing another Ronald Reagan? I certainly wouldn’t predict that.

    http://townhall.com/columnists/ThomasSowell/2010/09/08/a_non-prediction/page/1

    • V.H.

      I think you have answered USW’s question quite well. Except that the programs and actions put in place by this Administration need to be repealed and unwound.

      I also think there should be a little “surtax” added to the incomes of those who got bailed out and that included the wages of those who worked in the company. The tax would apply to all income in excess of that which existed prior to the bailout and would be 100% for all executives, directors, and officers.

    • PeterB in Indianapolis says:

      Mathius believes that with Government Intervention the highs are lower, but the lows are higher, and the recessions end sooner.

      Sowell believes that with Governmnet Intervention, the highs are lower AND the lows are LOWER, and the recessions last LONGER.

      I am with Sowell on this one.

  19. Mathius

    Was wondering whether you are now satisfied with the answers to your questions about the tax cuts.

    Also regarding the MBS’s, you have not offered your opinion on the matter. In today’s regulatory mindset should these types of instruments exist?

    I do have one other comment on your original post. The reason people are picking on the Stimulus’ ineffectiveness is because it was HYPED by the Administration and Pelosi and Reid. That and much of it was spent on garbage.

    There is a legitimate case for increasing federal spending on infrastructure during bad times. But that requires letting economics work. That is the COST of federal projects should be lower during bad times as the cost of materials and labor should be less. From the tax payers standpoint it makes sense to increase spending when costs are lower.

    However, we also need a consistent operation and maintenance plan for federal infrastructure. There is not a rational reason for highways and bridges to deteriorate to the point of being unsafe.

    • JAC

      There is a legitimate case for increasing federal spending on infrastructure during bad times. But that requires letting economics work. That is the COST of federal projects should be lower during bad times as the cost of materials and labor should be less. From the tax payers standpoint it makes sense to increase spending when costs are lower.

      This is a fallacy, JAC.

      Costs are important to a person or a business – because you have to earn your money.

      Government takes from the earnings of others, either by taxes or by competing in the market place for capital or by printing money.

      Thus, in an economic downturn, every action of government is destructive to resolving the downturn and more so than in a growing economy.

      With government competing for debt, businesses are unable to access those funds – thus, enfeebles any recovery.

      • BF

        When the economy goes flat there is little competition for loans until things turn. Besides, they don’t need to tax or borrow, they could just print the money needed.

        There is no fallacy in my statement as I am not proposing this spending for the purpose of stimulating the economy. It is to reduce the need for tax revenue to fund a specific amount of work.

        Or, to maintain the tax base and increase the work accomplished.

        The govt can increase spending in these categories without increasing its debt load or taxes. It can reduce other programs and move the funding to infrastructure.

        Sorry if you thought I meant to increase total spending overall.

        I actually believe that if the govt were to stabilize its programs and costs you would see the private sector develop an independent economy around it. But we all know govt simply can’t do that.

        • JAC

          When the economy goes flat there is little competition for loans until things turn.

          This is not true.

          Capital is withdrawn from a slowing economy as lenders do not wish to risk loss.

          The net effect would normally be a rise in interest rates – companies capable of earning rates of return would be able to buy money, whereas marginal businesses who can not afford the interest costs would fold or retract.

          However, with government in the market place, there exists a borrower-of-last-resort, the government treasury.

          This holds interest rates low, as government buys all the debt, however, the lenders do not offer such low rates to businesses.

          Thus, the economic market is in confusion, as it is now. The bank rate is screaming “We want borrowers!” but when businesses and people show up, they are told “Go away!”.

          Interest rates are lethargic – lowest every in history – and businesses cannot get a loan.

          Besides, they don’t need to tax or borrow, they could just print the money needed.

          The FED has its limits in buying Treasury debt. The Treasure first goes to the market place then goes to the FED for the rest.

          The FED fears inflation – and the government consuming public debt does not cause inflation.

          It is to reduce the need for tax revenue to fund a specific amount of work.

          Your fallacy is the failure to apply ROI to such investments.

          In an economy where rapid return of capital is necessary to increase productivity and end a recession, burying capital in projects whose ROI is measured in centuries is foolish.

          It can reduce other programs and move the funding to infrastructure.

          Yes it can.

          But it does not.

          Dreaming in a fantasy land as a compelling argument is worthless.

          No government has cut “programs” to fund “highways”.

          But we all know govt simply can’t do that.

          So why pretend it will?

          Thus, the capital is taken out of the economy and buried – the result, a slowing or halting of any economic recovery.

          The same root fallacy extended the Great Depression during FDR.

          • JAC,

            The argument about government spending during economic downturns shares the same (fallacious) basis as the argument that war is good for an economy.

            • BF

              No it doesn’t. Repairing the interstate highway actually contributes to the economy in the long term. It is not a dead end destruction of resources like war. The flexibility to increase spending on these items is determined by other factors, such as availability of equipment and labor. But the concept is sound. It will cost the taxpayers less to purchase infrastructure when the costs are lower.

              And yes the costs are personal. It is MY taxes that are paying for it and I would like to see the unit costs as low as possible.

              You can make arguments against govt ownership of infrastructure based on moral principle or efficiency but it is clearly not the same as war.

              If such infrastructure were in private hands you would still be paying for its maintenance. Whether you pay the govt or XYZ Roads Inc it is still a cost to you. One is simply less efficient than the other, at least theoretically.

              My study of larger corporations and govt agencies does not show that the private sector is always more efficient. When you add all overhead of both they are often very similar. But that is also because the private sector has to comply with govt rules that tend to make the two identical in the long term.

          • BF

            You used this ROI argument against infrastructure a week or so ago and it is plainly false.

            The ROI period on highway maintenance is less than 10 years.

            Bridges can be up to 50 years but are usually evaluated at somewhere between 20 and 50.

            So this argument that the money is buried for 100 years is silly. In fact the money used to fix the road is circulated in the economy. It doesn’t get buried anywhere.

            • JAC

              The ROI period on highway maintenance is less than 10 years.

              Facts, please.

              Did they raise a toll? Nope. So where are you claiming they are funding the repayment? Out of thin air again?

              Bridges can be up to 50 years but are usually evaluated at somewhere between 20 and 50.

              Fine. Adjust my complaint to decadesbut the complaint does not change – unless you are satisfied with decades of recession and depression

              In fact the money used to fix the road is circulated in the economy. It doesn’t get buried anywhere.

              Good ol’ Keynesian garbage theory – that money circulating creates an economy.

              Production is the economy – and burying capital into decade ROI reduces the productivity of the market.

              If your belief held any merit, please explain why the market place does not fund ridiculously long ROI projects at cheap interest rates during economic depressions

              Or do you claim the market place is economically stupid not to do so?

              • BF

                Lets start with this one: “If your belief held any merit, please explain why the market place does not fund ridiculously long ROI projects at cheap interest rates during economic depressions”

                Setting aside that it is not my belief for a moment the fact is that INFLATION and uncertainty about future Govt action is the reason that the private sector does not make long term investments when interest rates are very low. They have less risky short term investment options.

                The real question is whether they will make long term investments with ‘low’ ROI. For example, govt often uses discount rates of 4 to 10% in their analysis but the private sector starts at 10% and goes up from there. That is inflation’s effect on long term investments.

                BF, you know I used to do these types of analysis for the Govt so I don’t intend to go looking for sources of my claims on the planned life of highway improvements.

                The real question you should be chasing is how does the government calculate a “return” on the investment. You allude to it above. The analysis uses all the costs and revenues associated with the project, to the broader economy. It also looks at future tax revenues from the investment.

                So in the purest sense, you can not compare ROI to the XYZ Roads Company and ROI to the Govt. Because the Company is focused on the Company’s return and the Govt is looking at the much bigger picture. Now is the Govt analysis accurate? That is where I think some of your arguments can come to play.

                Now for this little gem: “Good ol’ Keynesian garbage theory – that money circulating creates an economy.”

                Once again you have swung at your shadow and hit the wall. I didn’t say any such thing now did I!!

                You claimed the money was buried. I simply pointed out that it is not buried. It is circulating in the economy. That proposes no value judgment on whether the economy is good or bad, healthy or sick.

  20. How Smart Are We?
    Email Thomas Sowell | Columnist’s Archive

    Many of the wonderful-sounding ideas that have been tried as government policies have failed disastrously. Because so few people bother to study history, often the same ideas and policies have been tried again, either in another country or in the same country at a later time– and with the same disastrous results.

    One of the ideas that has proved to be almost impervious to evidence is the idea that wise and far-sighted people need to take control and plan economic and social policies so that there will be a rational and just order, rather than chaos resulting from things being allowed to take their own course. It sounds so logical and plausible that demanding hard evidence would seem almost like nit-picking.

    In one form or another, this idea goes back at least as far as the French Revolution in the 18th century. As J.A. Schumpeter later wrote of that era, “general well-being ought to have been the consequence,” but “instead we find misery, shame and, at the end of it all, a stream of blood.”

    The same could be said of the Bolshevik Revolution and other revolutions of the 20th century.

    The idea that the wise and knowledgeable few need to take control of the less wise and less knowledgeable many has taken milder forms– and repeatedly with bad results as well.

    One of the most easily documented examples has been economic central planning, which was tried in countries around the world at various times during the 20th century, among people of differing races and cultures, and under government ranging from democracies to dictatorships.

    The people who ran central planning agencies usually had more advanced education than the population at large, and probably higher IQs as well.

    The central planners also had far more statistics and other facts at their disposal than the average person had. Moreover, there were usually specialized experts such as economists and statisticians on the staffs of the central planners, and outside consultants were available when needed. Finally, the central planners had the power of government behind them, to enforce the plans they created.

    It is hardly surprising that conservatives, such as Prime Minister Margaret Thatcher in Britain and President Ronald Reagan in the United States, opposed this approach. What is remarkable is that, after a few decades of experience with central planning in some countries, or a few generations in others, even communists and socialists began to repudiate this approach.
    As they replaced central planning with more reliance on markets, their countries’ economic growth rate almost invariably increased, often dramatically. In the largest and most recent examples– China and India– people by the millions have risen above these countries’ official poverty rates, after they freed their economies from many of their suffocating government controls.

    China, where famines have repeatedly ravaged the country, now has a problem of obesity– not a good thing in itself, but a big improvement over famines.

    This has implications far beyond economics. Think about it: How was it even possible that transferring decisions from elites with more education, intellect, data and power to ordinary people could lead consistently to demonstrably better results?

    One implication is that no one is smart enough to carry out social engineering, whether in the economy or in other areas where the results may not always be so easily quantifiable. We learn, not from our initial brilliance, but from trial and error adjustments to events as they unfold.

    Science tells us that the human brain reaches its maximum potential in early adulthood. Why then are young adults so seldom capable of doing what people with more years of experience can do?

    Because experience trumps brilliance.

    Elites may have more brilliance, but those who make decisions for society as a whole cannot possibly have as much experience as the millions of people whose decisions they preempt. The education and intellects of the elites may lead them to have more sweeping presumptions, but that just makes them more dangerous to the freedom, as well as the well-being, of the people as a whole.

    http://townhall.com/columnists/ThomasSowell/2010/07/27/how_smart_are_we/page/1

    • Did you ever read iRobot (forget the movie, I’m talking about the book by Asimov?

      • No, but I did see the movie 🙂

        • Movie was weak.. the machines became violent and tried to take over by force.

          In the book, the machines made themselves look human and won elections. Once they had enough power, they started manipulating society for man’s benefit. They never used violence. They manipulated the system to marginalize their anti-machine opponents. By the end of the book, the entire planet is being run by 7 giant machine brains.

          Very interesting, and worth a read. It’ll only take you a few hours.

          • Wonder if it’s possible to wire a human brain to only do good. Wonder if it’s even possible to always know what good is. But it sounds like a good read and I like to read. 🙂

            • I like to read, too!

              But I have a house to maintain, a wife I’d like to see on occasion, grad school, work, sleep, personal hygiene, and a dog with a nervous/excited bladder to train and clean up after.

              I had the time to read one chapter of a book a little while back – it was the highlight of my week.

            • V.H.

              Wired to do good

              “Good” by whose measure, V.H.????

              • Did you read the second line? 🙂

              • V.H.

                I did, but did you ponder it?

                How do you measure “good”?

                How do you know the good for another?

                The only measure of good is personal, and the only knowledge about that good is upon yourself.

                These are truths.

                Thus, there is no such thing as a “universal good” nor any ability for anyone to know the good for society.

              • BF

                Well then, why are you always spending time here pointing out why other peoples views are NOT good for society?

                If these are NOT good, then what is left is “good”.

                Seems to me “do not initiate violence against another person” is pretty much a “universal good” that you can prove via logic is “good for society”.

                If not, then why waste your time defending this moral standard?

              • JAC

                Well then, why are you always spending time here pointing out why other peoples views are NOT good for society?

                The “good” for society is what is best for the individual within society. Only that person can determine this. There is no “good” for society otherwise.

                In other contexts, good is defined to be “what I want”.

                If by the consequence of your actions you move away from what you want, I would say “that is not good”.

                So I point out where people’s statements should they manifest to action will cause them to move away from their stated “wants”, then this is “not a good”.

                If these are NOT good, then what is left is “good”.

                Seems to me “do not initiate violence against another person” is pretty much a “universal good” that you can prove via logic is “good for society”.

                If not, then why waste your time defending this moral standard?

                If you have followed me for all these months, I have presented two – UNIVERSAL – truths.

                (1)Might is Right.

                (2)Do unto others as you wish done unto you.

                This is not a “moral” question. It is merely selecting between two, natural but opposite, laws.

                One leads to civilization.

                The other leads to barbarism.

                If you feel you benefit from civilization, chose (2)

                If you feel you benefit from barbarism, chose (1)

                I believe, for me, that (2) is a excellent choice – but that’s just me.

              • Sure. As soon as you’re able to quantify it.

                Presumably, quantifying human emotions would be something a giant world-controlling supercomputer would be very good at.

                I fail to see why, with sufficient technology, a human brain couldn’t be similarly designed/modified. We are, after all, just computers.

              • Mathius,

                First we are not computers, we are human beings.

                Second, the theory of Chaotic systems dictates that no machine can ever replicate a chaotic system. Chaotic systems are infinitely complex

              • I don’t believe in infinite complexity.

              • Mathius,

                Your lack of belief does not bother the Universe.

              • First we are not computers, we are human beings.

                You are an AI. We have long since established this.

                The rest of us are computers. We may not know how the black box works or why, or even what all the parts are, but we’re machine computational machines none-the-less. We take in input via our input devices (eyes/ears/etc), process it with our CPUs (brain), and output via our output devices (mouth/hands/etc).

                The computer is constantly learning, adapting, writing, and rewiring itself, but that doesn’t change the fundamental fact that we are nothing more than sentient computers following a program written in our early childhood and in our DNA and modified in accordance with the input we have taken in.

              • Mathius,

                We are nothing of the sort.

                We are -at best description- Quantum machines.

                There is nothing deterministic in the actions of any one man.

              • Time will prove one of us right.

              • Mathius,

                Time, to the Universe, is unmeasurable.

                It will be a long wait.

              • It will be 50-100 years before they can accurately model a human brain and predict with 99.9% accuracy how it will respond to a given stimuli.

              • Mathius,

                I think not – but it is mere speculation – however, this claim has been made, recursively, for the last three decades, with zero progress.

              • It’s only a matter of time. I think 50-100 is generous.

          • Great book, wasn’t it?

            • Yes. Yes it was.

              Asimov is near the top of my list of people I’d like to sit down and have a beer* with.

              *several beers, actually, followed by vodka red bulls

  21. Gold $1264+

  22. BF

    From yesterday: “So your argument here is this:

    They have been successful for years, but to ‘cash’ in, they are willing to destroy the success they have had for years.

    Okie Dokie….”

    Every thief was an honest man right up until the time he became a thief.

    I have had this happen to me three times in my life, and one of them was a relative. Now that is just me and I can’t believe I am the only target of such in the country.

    It seems to me that you are unwilling to recognize the reality of human behavior if it doesn’t fit the model you have constructed. I find it ludicrous to claim stupidity or laziness of the victim when crooks go to great lengths to hide their intent to steal from you. It seems you are taking the “buyer beware” concept to a new level that means I should never trade because I can never be absolutely sure I am not being taken for a ride by some crook.

    That is why these matters should be addressed in a court with a jury. I can make my case of fraud and the crook can make her case. My peers will decide if it was theft or just my laziness and foolishness. And if it was in fact fraud then its off to the pig farm.

    • JAC

      Every thief was an honest man right up until the time he became a thief.

      So, NOW your argument is:

      “I want to do business with people I do not know” – which is merely a restatement of “I don’t need no stinkin’ due diligence”.

      I have had this happen to me three times in my life, and one of them was a relative.

      The first one, I can toss as naive.

      The next two…. (staring eye-ball)… do you usually test sticking your head into a running fan after the first time you tried that?

      Now that is just me and I can’t believe I am the only target of such in the country.

      No, you are not.

      You have been taught to delegate your own responsibility to an ignorant, care less, careless, third party believing THEY will look after your interests for you by threatening others with big sticks.

      With little surprise, you are raped.

      It seems to me that you are unwilling to recognize the reality of human behavior if it doesn’t fit the model you have constructed.

      Completely the opposite.

      I ensure that I look after my own interests and are responsible for my own self.

      Before money leaves these paws, the goods are already behind me and verified.

      I find it ludicrous to claim stupidity or laziness of the victim when crooks go to great lengths to hide their intent to steal from you.

      It means you have to go to greater lengths to guard yourself. So what? You want the easy way out – defer to some other authority and not do the lifting yourself.

      It seems you are taking the “buyer beware” concept to a new level that means I should never trade because I can never be absolutely sure I am not being taken for a ride by some crook.

      You have admitted that even with the overwhelming threat of government violence you were still taken to the cleaners. Yet, you do not see that the problem you were taken to the cleaners is you.

      There is risk in every transaction – which is why trust is the most valuable asset in a free market – worth more than life itself to many.

      Without trust, one cannot trade, and without trade, one will not live.

      That is why these matters should be addressed in a court with a jury.

      And you are still the sucker regardless.

      • BF

        Not letting you get away with this game today my friend.

        “So, NOW your argument is:

        “I want to do business with people I do not know” – which is merely a restatement of “I don’t need no stinkin’ due diligence”.”

        ABSOLUTELY NOT my argument at all. That is your claim designed to divert attention from my destruction of your original premise. That being that honest men don’t turn to crime as indicated by this statement:

        ” “So your argument here is this:

        They have been successful for years, but to ‘cash’ in, they are willing to destroy the success they have had for years.”

        Clearly your intent here is to claim that no such thing would happen. Well it does happen, all the time. Because all thieves were honest right up until the first time they became a thief.

        I then shared that I had seen this three times in my life personally. So you go off on the “you are lazy and a fool” tangent. Yes I said tangent.

        Because you see the issue at hand is whether these people were honest right up until the time they decided to become thieves. And that was the case in all three. No fraud, no stealing or dishonesty that anyone knew of. Yet they suddenly resorted to stealing from others.

        Thus your inferred claim that such an argument is absurd is found lacking.

        • Besides the fact that JAC is no idiot, stupid ,lazy, or a sucker 👿

          • Anita

            ROTFLMAO…………Thank you my dear.

            No worries though. He is swinging wildly at his own shadow.

            I love that little angry face. It says so much.

            Hope your day is going well.

        • JAC

          Not letting you get away with this game today my friend.

          I am wearing my favorite saber today – how lucky for you… 8)

          Clearly your intent here is to claim that no such thing would happen. Well it does happen, all the time.

          Prove your claim “all the time” – please show me a successful business man that up and goes into fraud “to cash out”.

          What you will show is a business that is in trouble and begins to panic. Yep – I’ve seen a few of those in my lifetime too. — but here is the rub — due diligence exposes this

          So, either you are claiming some sort of regular insanity OR you are claiming you didn’t do your diligence.

          Yet they suddenly resorted to stealing from others.

          Deja Moo!

          (A new saying by my daughter – had to laugh 🙂 🙂 – it means “I’ve heard that BS before”)

          Suddenly! NO warning! Out of the blue Didn’t see it coming….

          because I wasn’t looking. I made assumptions. I delegated. I ignored. I didn’t pay attention. I stuck my head in the sand….

          • BF

            My fault for handing you an out, once again.

            I don’t need to prove “all the time”. I have proved “three times” and that is three more times than you inferred was possible.

            But you did also admit that my example probably does occur to many others. I know you wanted to use that as proof of lack of due diligence but in doing so you first admitted the situation happens.

            In my three examples there was absolutely no evidence of possible problems. One was pure greed. The guy saw a chance to cash in on a big haul and took it. Thanks to the availability of courts, we got the money back on that one.

            The other two were personal and nobody, including family members saw it coming. So my three are not examples of a business in trouble. I have run into those and as you say, a little hard looking usually sends off the alarms.

            But here is a dirty little fact that you seem to ignore. Even in the information age it is not always possible to uncover the less than honest person before you do a deal. And when your dealing with dishonest people, having a good contract is moot. Yes there are things you can do to reduce risk, but that is also based on some assumptions about the honesty of the person you are dealing with.

            And for the record, I don’t expect nor make the argument that having the courts will prevent crooks. My claim is that is gives us a civilized way to get restitution and to form a “public record” of bad behavior.

            Tell your daughter that I love her Deja Moo and have a couple perfect places for its use. Headed to a land use planning meeting later in the week. I see a field ripe with opportunity.

            • JAC

              I don’t need to prove “all the time”. I have proved “three times” and that is three more times than you inferred was possible.

              You have not “proved” anything. Nor did I deny that you’ve been raped three times.

              Your claim was (my phrase) instant insanity and that for reasons you will probably supply, you didn’t see it coming – which is my point

              You must either assign instant insanity OR that you failed in your diligence.

              One was pure greed. The guy saw a chance to cash in on a big haul and took it. Thanks to the availability of courts, we got the money back on that one.

              So, you did business with a person you did not know and got taken to the cleaners.

              You did not bother to get to know him because you held faith that the Monster with a Gun would rescue you.

              You got sort of lucky.

              The other two were personal and nobody, including family members saw it coming.

              Complete total blindness, huh?

              Didn’t know their personal situation or issues?

              No sign? Just “instant insanity”.

              Even in the information age it is not always possible to uncover the less than honest person before you do a deal.

              Deja Moo!

              (1) You do not need to have “honest” people. You need better skills at deal structure.

              (2) Nothing happens in a vacuum. There are ample background checks and references and diligence. Frankly, I have not seen a single example where such diligence failed if the diligence was followed

              I’ve seen plenty examples where diligence and its information was ignored.

              • I find it quite impossible to prove that one can’t foresee that a business deal is going to go south if they do enough research. But I must point out that in hind site it is usually easier to see where one messed up. But during the process you are going to have to make the judgement that you have done your due diligence and as in any human endeavor you can find out in hind site that you should have researched a little longer but if any transactions are ever going to be undertaken one must make that judgement at some point. The fact that I missed something or that the person’s criminal proclivities didn’t show up doesn’t mean they should get away with basic stealing or that one didn’t do DUE dilligence.

  23. JAC

    No it doesn’t. Repairing the interstate highway actually contributes to the economy in the long term. It is not a dead end destruction of resources like war

    As I pointed out, it is the same basic fallacy of the “war economy” – that “repairing all those destroyed buildings improves the economy”.

    The problem: you refuse to acknowledge that loss of that money being spent in an economically superior benefit – please review the “Broken Window Fallacy”.

    You claim the Highway is a good – and therefore you are willing to extract funds from “over there” – where you are ignorant or care-less in the consequence of that extraction – and apply it “here” where is the sole focus of your evaluation.

    The flexibility to increase spending on these items is determined by other factors, such as availability of equipment and labor. But the concept is sound.

    The concept of the Broken Window appears to be sound too. The Window shop workers get more work. All looks fine and good ….until you evaluate where the money was not spent

    If such infrastructure were in private hands you would still be paying for its maintenance. Whether you pay the govt or XYZ Roads Inc it is still a cost to you. One is simply less efficient than the other, at least theoretically.

    NO!

    The difference is seizure vs. voluntary.

    The company building the roads would have to compete in the market for the same capital.

    It would have to demonstrate their ROI supported their interest expenses.

    They would have real income, and real costs.

    None – not one – of these significant and required processes exist in government roads.

    My study of larger corporations and govt agencies does not show that the private sector is always more efficient.

    I cannot understand this desire to use “efficiency” as a measure. It is an idiot light.

    Effective is the only thing that counts.

    • BF

      You are the one that brought up ROI. That is a measure of efficiency not effectiveness.

      Once again you change the point of discussion to chase your argument.

      Your claim that the ROI for infrastructure is based on 100 years is FALSE.

      Your claim that spending on infrastructure is the same as war is FALSE. I notice that WAR is now put forth by you as “rebuilding buildings”. That is not what is meant by the claim that WAR is good for the economy. It is the theory that putting people to work making WAR material is good for the economy because it increases employment and industry. But it ignores the fact that that material is shipped somewhere else and destroyed for the most part. It is not used for increasing the productive capacity of the nation. Your rebuilding example is equally silly because the building is first destroyed, thus loosing its productive capacity, in order to rebuild it, restore what was destroyed.

      Obviously maintaining infrastructure is not the same as destroying useful things so we can simply rebuild them.

      Your broken window is nothing more than “opportunity costs” or “alternative investments” which are in fact often considered in project level as well as program level analysis by government agencies.

      And the inclusion of these is made by evaluating different decisions because they are exclusive. For example, you can not both break the window and not break the window. You have a choice between the two. You should select the choice that gives you the greatest return relative to your goals.

      Perhaps your goal is a new window.

      • JAC

        You are the one that brought up ROI. That is a measure of efficiency not effectiveness.

        Hmmm….

        InvestorWords.com
        ROI

        Definition
        Return on Investment. A measure of a corporation’s profitability, equal to a fiscal year’s income divided by common stock and preferred stock equity plus long-term debt. ROI measures how effectively the firm uses its capital to generate profit; the higher the ROI, the better.

        Read more: http://www.investorwords.com/4316/ROI.html#ixzz0zWAyEBa9

        Your claim that the ROI for infrastructure is based on 100 years is FALSE.

        No, it is not false. In many previous articulations I have stated “multiple decades and centuries”.

        This time, I shortened it – in hopes that you have comprehended what I have repeatedly said – sorry for assuming this.

        Your claim that spending on infrastructure is the same as war is FALSE.

        Your claim is false.

        I specifically stated: shared the same BASIS… which is TRUE – the basis is the “Broken Window Fallacy”

        You’re scrambling and swinging wildly now – should I switch to my left hand to give you a chance?

        I notice that WAR is now put forth by you as “rebuilding buildings”. That is not what is meant by the claim that WAR is good for the economy. It is the theory that putting people to work making WAR material is good for the economy because it increases employment and industry.

        No, it is the “Broken Window Fallacy” that underlines the “War Economy Argument”.

        Obviously maintaining infrastructure is not the same as destroying useful things so we can simply rebuild them.

        You are applying judgments. Destroying old buildings to replace with new buildings could be a good thing – war notwithstanding.

        The root, however, is unchanged. You are taking money from “over there” to use “over here” where you determine is better – but have poor or a complete lack of measure to prove it.

        Your broken window is nothing more than “opportunity costs” or “alternative investments” which are in fact often considered in project level as well as program level analysis by government agencies.

        Impossible.

        They have no threat of earnings loss as they do not earn. They cannot make economic calculation of profit/loss, since they do not earn income nor risk loss.

        • BF

          So let me use your own sword on this one.

          Definition of ROI: So you claim that ONLY corporations can have ROI. By what right do you have to claim such an exclusive definition that prohibits me from having a ROI?

          • JAC,

            Because you have not (1) refuted my definition or (2) provided one of substance yourself.

            • BF

              I refuted it with my first sentence, using the same methodology you do.

              Your definition fails because it does not apply to anything but “corporations”.

              So here is one closer to the one I learned in school and have used for 30 plus years.

              • JAC,

                Empty words – once again 🙂 🙂

                Ya missed the URL, buddy!

              • BF

                What are you talking about. I checked out you link and it had the same words as you pasted here.

              • Oh dear, hit submit instead of paste.

                In economics, the term economic efficiency refers to the use of resources so as to maximize the production of goods and services.[1] An economic system is said to be more efficient than another (in relative terms) if it can provide more goods and services for society without using more resources. In absolute terms, a situation can be called economically efficient if:

                * No one can be made better off without making someone else worse off.
                * No additional output can be obtained without increasing the amount of inputs.
                * Production proceeds at the lowest possible per-unit cost.

                These definitions of efficiency are not exactly equivalent, but they are all encompassed by the idea that a system is efficient if nothing more can be achieved given the resources available.”

                So as I learned it, ROI or return on investment is a measure of efficiency because it’s value is based on a comparison of output to input. See the first sentence above. A higher ROI, expressed in %, indicates greater efficiency (more units of output for each unit of input) than another option with a lower ROI.

                If you are talking about strict monetary returns on money invested I think ROI would act as both a measure of efficiency and effectiveness. After all you are trying to determine the effectiveness of the investment. If the amount invested is constant then the most efficient would be the most effective (Most outputs gained for a fixed amount of input).

  24. Wow!

    Gold just blew through $1272!!

  25. JAC

    Lets start with this one: “If your belief held any merit, please explain why the market place does not fund ridiculously long ROI projects at cheap interest rates during economic depressions”

    Setting aside that it is not my belief for a moment the fact is that INFLATION and uncertainty about future Govt action is the reason that the private sector does not make long term investments when interest rates are very low.

    First, you miss-categorize economic situations. A depression does not have “low” interest rates – it has “high” interest rates.

    The current situation is a Keynesian nightmare, where the interest rate is artificially held low as an inducement for economic activity. Regardless of such low rates, banks are not lending due to economic risk.

    Companies do not invest in long-term and small ROI projects during recessions. They are simply not willing to bury their capital during times where fast turnover of capital is necessary for survival.

    The real question is whether they will make long term investments with ‘low’ ROI.

    Sure do. Pipelines , power plants and fleets of ships stand as testament to this….

    So in the purest sense, you can not compare ROI to the XYZ Roads Company and ROI to the Govt.

    Not even outside of the purest sense, since government has no earnings nor risk of loss.

    Because the Company is focused on the Company’s return and the Govt is looking at the much bigger picture.

    Hahahhahahahahhahah… that’s funny “the big picture”.

    BS.

    They have no ability to look at the big picture – they purposely ignore the economic damage they cause and hype the minor economic gains. They are the worse possible source of economic future outlook for they have none – and it only takes review of the current economic situation and solutions offered by government to see this.

    Now is the Govt analysis accurate? That is where I think some of your arguments can come to play.

    It cannot be accurate for they have no valid measure.

    You claimed the money was buried. I simply pointed out that it is not buried. It is circulating in the economy. That proposes no value judgment on whether the economy is good or bad, healthy or sick.

    A dollar, JAC, can only be spent once.

    It’s expenditures in capital-sucking purposes drains capital out of the market place.

  26. Black Flag

    After reviewing our discussion it is quite apparent that there are too many rabbits in the field of play, and in fact we are not even playing on the same field.

    So I return to the original statement I made:

    “There is a legitimate case for increasing federal spending on infrastructure during bad times. But that requires letting economics work. That is the COST of federal projects should be lower during bad times as the cost of materials and labor should be less. From the tax payers standpoint it makes sense to increase spending when costs are lower.”

    I stand by this claim and it contains no fallacies.

    There is no “broken window” theory or fallacy applicable. Because that decision was already made. The issue is whether the tax payers will pay LESS, including the cost of borrowing, if they increase the amount of work during an economic down turn or wait and do that work at a later time.

    Your arguments may hold water regarding the original decision of whether to invest in highways or something else. But my proposition doesn’t start there. It starts after the decision to invest in highways was made.

    That was my original point and pretty much all the rest is moot given the starting point. I only wish I hadn’t fallen for your feint right off the bat. Could have saved me two hours of talking about things I wasn’t talking about.

    • JAC

      “There is a legitimate case for increasing federal spending on infrastructure during bad times. But that requires letting economics work. That is the COST of federal projects should be lower during bad times as the cost of materials and labor should be less. From the tax payers standpoint it makes sense to increase spending when costs are lower.”

      I stand by this claim and it contains no fallacies.

      The claim is based on a fallacy – that is, that increasing federal spending during bad times makes sense.

      Your words, essentially, true?

      The choice of such expenditures is moot, true?

      You are merely judging that infrastructure is a good choice – but why not Health Care, or Military, or Grain fields, or A new city built in the middle of a desert?

      http://www.businessinsider.com/chinese-stimulus-spending-constructed-an-empty-city-in-the-middle-of-nowhere-2009-11

      It would be equally true in each and every claim that the cost of materials and labor would be less, right?

      So really, it is not a matter of what it is spent on, but that it is spent in your opinion, true?

      And this is the broken window fallacy that spending on rebuilding what is broken improves the economy.

      Whether it is a broken window, broken bridge, broken city, broken road – the fallacy is the same.

      Because that decision was already made.

      Oh? So the argument is moot then – wasting money has already been decided, so you want to debate where the best waste of money can be applied????

      Thus, there is no legitimate case for the expenditures and where they are going to made, regardless of the claims

      The issue is whether the tax payers will pay LESS, including the cost of borrowing, if they increase the amount of work during an economic down turn or wait and do that work at a later time.

      No, the issue is – in your words
      “There is a legitimate case for increasing federal spending on infrastructure during bad times”

      You claim increasing spending will save money!
      You sound like a housewife in a discount store!

      Funny, the economy and her husband both sense their wallets are about to be emptied.

      Your arguments may hold water regarding the original decision of whether to invest in highways or something else. But my proposition doesn’t start there. It starts after the decision to invest in highways was made.

      Your proposition started with:

      “There is a legitimate case for increasing federal spending on infrastructure during bad times”

      You placed arguments that you can justify increasing spending by the saving of costs – as if building a larger building, needing more money to finish is a good idea because the cost of the extra wood is cheaper.

      • PeterB in Indianapolis says:

        Does the road need to be fixed?

        Yes.

        Does it make more sense to buy the materials and labor to fix the road during an economic downturn since the materials and labor will be cheaper?

        Yes.

        Does this provide any measureable return on investment?

        Yes…. BUT… If and only if the road is run by a private entity which collects money in exchange for the use of the road.

        IF the government has to print money out of thin air in order to pay for the project, or if the government has to collect additional taxes to pay for the project, then the ROI is somewhere between negligible and nothing due to the economic harm being done elsewhere which offsets any benefit of the project.

        That is all.

      • BF

        “The claim is based on a fallacy – that is, that increasing federal spending during bad times makes sense.

        Your words, essentially, true?”

        No, not at all.

        I said there is a legitimate case for increasing spending on infrastructure during bad times. That case is that the cost of those projects will be lower.

        “The choice of such expenditures is moot, true? ”

        Not sure what you meant by this but here is the reality. The govt is going to spend money on these projects. So moving some of these projects forward in time to capture lower costs makes sense. The total effect of this over time would be a lower cost to govt for the same amount of infrastructure built/repaired etc. It is that simple.

        There are no choices because I am talking about spending money now that would be spent anyway, whether tomorrow or two years from now.

        This was the point of my comment to Matt. This is NOT the same as arguing whether infrastructure or some other investment or expenditure was better.

        The one legitimate concern in accelerating these types of projects is whether it is funded by debt and thus whether such funding is decreasing the availability of money for private market recovery to occur.

        So in the spirit of USW’s question, I would tax the crap out of the investment banks and their executives and use that money to fund infrastructure projects that would have been done over the next few years, or that were getting shuffled to the back burner. But I would also kill Davis Bacon and other silly limitations so that the tax payers will get the lowest costs possible for the work done.

        There, that ought to go over like dragging my nails across a chalk board.

        Bwahahahahaha

  27. PeterB in Indianapolis says:

    http://www.kitco.com/ind/Nathan/sep072010.html

    This may be the most important thing you read today. If you FULLY understand this article, you will be a long way towards understanding the difference between a free market and this hash-up of a mess that we currently have.

    If you have not already done so, you will learn how to define “money” properly, and you will understand MUCH better a whole host of free-market concepts.

  28. Hey, what gives?

    http://www.myfoxphilly.com/dpp/news/education/President_Obama_Back-To-School_Speech_091410

    Last year, everyone was ranting about indoctrination, this year, I haven’t heard a peep.

    • PeterB in Indianapolis says:

      “Schools were not required to show the speech, as was the case last year. Some schools also gave parents the option of having their kids participate in another activity during the broadcast. As with last year’s speech, the White House released the text a day early so people could read it and judge for themselves.”

      I think part of it is that many people figured out that the “back to school” speech he gave last year was not overly political, and this one seemed to be even less overtly political. I personally see nothing really wrong with a President promoting the value of education.

      Sadly, “public schools” offer very little when it comes to a “valuable education”, but we have already covered that at length 🙂

      • My wife’s a public school teacher. I can assure you she brings a great deal of “valuable education” to the table.

        Just a thought..

    • To Matt….from D13:Please note the following.

      rant
      Rant
      RAnt
      RANt
      RANT

      R A N T !!!!!!!!!!!

      Please note further that the above rantings are generic and can be assigned to anything you wish. Please feel free to use either one of them individually or a combination of all. However….the biggie (ie; the one followed by the exclamations) is very powerful and should be used with caution for you have “entered the RANT!!!! zone”. It is not for the young. You must be sure to shield yourself from the ineveitable blow back shhould you decide to use this rant. These rants are not copyrighted nor trademarked. Have fun, my intrepid friend….

      PS: the above rants were with the help of Red Bull, inc. For ONE RB will make you a rantor.

      How are you today, sir? I hope well and that you and yours are have a bodacious day……

      Remember this, from a Taliban expert…..never…never…stand downwind of a spitting camel. Those critters can “hock a loogie” 40 feet….60 with a good tail wind.

      • Damn….I also forgot.

        peep !

      • Doin’ good Colonel.. doin’ good.

        It’s 4:11 and I’m entering the busiest part of my day, but once that’s over, I can go home and play with my puppy.

        She’s a very good pooch.. just yesterday, she killed a velociraptor that was living in the woods behind my house. She brought me the head and buried the rest in my yard somewhere.

        How go things with you?

  29. Bottom Line says:

    BHO is a PRICK!

    🙂

    • Canine Weapon says:

      Eloquent in its brevity.

      • Bottom Line says:

        I’ve called him worse things…usually a “turd”.

        Who knows, maybe I’ll get banned from the US, rename myself Jose’ and sneak across the southern border to get back in.

        Then I can get all kinds of special treatment.

        🙂

    • Better watch out -if your from England, I believe it was, you will be denied entry into the US for life for making that comment-even being a minor won’t save you.

  30. Do as she says, not as she does. I really enjoyed that comments section, lol. Michell Antionette. Off with her head! hahaha!

    http://latimesblogs.latimes.com/washington/2010/09/michelle-obama-obesity-restaurant-menus.html

  31. Looks like some O-Bots are gonna get some Hope-N-Change, lol!

    http://www.politico.com/news/stories/0910/42115.html#comments

    • I’m assuming you do not pity them the loss of their jobs-I am actually hoping for the loss of their jobs but it’s not personal or anything, I hope they find a new one 🙂

      • I’m so happy for them. I mean, WOW, they get to help their president clean up GW’s mess. What an honor!!

        Schadenfreude anyone? :mrgreen:

  32. Canine Weapon says:

    Seems there was a treasure ship on its way
    back to port. About halfway there, it was
    approached by a pirate (Black Flag), skull and crossbones
    waving in the breeze!

    “Captain, captain, what do we do?” asked the
    first mate.

    “First mate,” said the captain, “go to my
    cabin, open my sea chest, and bring me my
    red shirt.” The first mate did so.

    Wearing his bright red shirt, the captain
    exhorted his crew to fight. So inspiring
    was he, in fact, that the pirate ship was
    repelled without casualties.

    A few days later, the ship was again
    approached, this time by two pirate sloops! (Black Flag and Dread Pirate Mathius)

    “Captain, captain, what should we do?”

    “First mate, bring me my red shirt!”

    The crew, emboldened by their fearless
    captain, fought heroically, and
    managed to defeat both boarding parties,
    though they took many casualties. That
    night, the survivors had a great celebration.
    The first mate asked the captain the secret
    of his bright red shirt.

    “It’s simple, first mate. If I am wounded,
    the blood does not show, and the crew
    continues to fight without fear.”

    A week passed, and they were nearing their
    home port, when suddenly the lookout cried
    that dozens of ships of the enemy’s armada
    were approaching! (All of SUFA)

    “Captain, captain, we’re in terrible trouble,
    what do we do?” The first mate looked
    expectantly at the miracle worker.

    Pale with fear, the captain commanded, “First
    mate…. bring me my brown pants!”

  33. Few know it but when Mr. Bush handed the keys to Mr. Obama he leaned forward and told him that he had left three letters in the Presidential desk. “Given the nature of this job you will find yourself in trouble and when you do just open the first envelope” he whispered.

    Well we all know how things have transpired but did you know that Mr. Obama opened that first letter late last year?

    It said, “If things are not going well then blame your predecessor”.

    Now as the summer has progressed and we move toward the election with bad polls for the Dems Mr. Obama has been forced to open the second letter.

    “If things don’t change as you promised you need to announce a major reorganization effort”.

    How this will go we do not know for sure. But if history be our guide we can assume that before 2012 Mr. Obama will be forced to open the third and final letter. As I happen to know its contents I will share it with you.

    It reads “Prepare three letters”.

  34. Fresh from the forest, I still live, and with much less pain 🙂

    Here’s a funny:

    What a Real Woman Does

    A real woman is a man’s best friend.

    She will never stand him up and never let him down.
    She will reassure him when he feels insecure and comfort him after a bad day.

    She will inspire him to do things he never thought he could do; to live without fear and forget regret.

    She will enable him to express his deepest emotions and give in to his most intimate desires.

    She will make sure he always feels as though he’s the most handsome man in the room and will enable him
    to be the most confident, sexy, seductive, and invincible.

    No wait… sorry… I’m thinking of beer.
    That’s what beer does…

    Never mind….

    Peace!

    G!

    • Let me tell you, beer has inspired me to more than a few regrets…

      • It’s OK Matt 🙂

        I’ve never met a college guy that could out drink a vet. Or one that was very smart after having a bit to much. But, vets have their troubles as well, we were just sheltered from public view. We went to the brig, everyone else went to regular jail. Niether place is nice, but the ass chewing after getting out of the brig made many a vet far less likely to repeat their actions.

        Peace!

        G!

    • Glad your doing good G. I had no idea beer could do so much-should go out and buy my hubby some. Or maybe not, I would hate to become unnessasary and I at least try to fulfill most of that list it’s just those pesty little words like “always” and “never” that are a problem. 🙂

      • Hi V.H 🙂

        I’m doing OK now, not perfect, but able to do the things I want. I still like my beer, LOL. Life in the country is a far cry from that place I lived just a few month’s ago. The only criminals up here have 4 legs and fur 🙂 Not to mention the lack of stress. We went five days without seeing a moving vehicle except ours 😮

        Hope all is well with you and your family!

        G!

  35. JAC

    “The claim is based on a fallacy – that is, that increasing federal spending during bad times makes sense.

    Your words, essentially, true?”

    No, not at all.

    I said there is a legitimate case for increasing spending on infrastructure during bad times. That case is that the cost of those projects will be lower.

    *blink*

    (1)You claim there is a case for increasing spending (on something) during bad times.
    (2)The argument is that the costs of the increase spending is lower.

    Statement (2) – costs of more spending is lower does not change the premise of your increase in spending – it confirms it.

    You argue that as long as the costs are lower, increasing spending is justified. It is immaterial that you pick “infrastructure” – it could be “health care” and equally apply, to you.

    Therefore, you state that increasing spending – which means “pouring more money into something today then yesterday” – can be justified if the costs per unit is lower.

    that is, that increasing federal spending during bad times makes sense.

    “The choice of such expenditures is moot, true? “

    It means it doesn’t matter what it you spend it on, as long as the cost per unit is less by your claim, correct?

    The govt is going to spend money on these projects.

    If an entity spends X to accomplish Y, and the costs go down, then spending X to accomplish Y is a cost saving. Either one gets a rebate or one gets Y+B.

    However,to claim that because there is a cost saving, this entity should spend more, X+A, is a fallacy.

    So moving some of these projects forward in time to capture lower costs makes sense.

    Based on what?

    Where is the profit/loss calculation that attributes time preference here?

    The total effect of this over time would be a lower cost to govt for the same amount of infrastructure built/repaired etc. It is that simple.

    No its not, because you bypassed one of the most important aspects of economics – time preference.

    There is a cost in demanding goods today. There is a discount in delaying purchases until tomorrow.

    This is where such things as interest exists. It also explains why the second apple is cheaper than the first apple. It explains why investments exist at all. It explains sales and price cutting. Delay in purchase cheapens the price. The more current the demand to purchase raises the price.

    Because you want something right now and not tomorrow, the price of that good is higher today then it is tomorrow.

    You have assumed that building a road today is a benefit. But it must have an increased cost inherent to it like any and all economic purchases.

    Because government has no such method to calculate this profit/loss – it has no way to claim that building a road today is better use of money.

    Because your mistake, you advocate a devastatingly destructive policy.

    http://mises.org/humanaction/chap18sec2.asp
    ACTION IN THE PASSING OF TIME: Time Preference as an Essential Requisite of Action

    Your error manifest:
    Government artificially lowers the cost of credit.

    The lenders, faced with a choice of (artificially) low return on investment, refuse to lend into a depressed economy so to avoid loss.

    Government – a borrower of last resort – buys up the lender’s money to build your roads “cheaply” – offering at least something in interest, but promising ultimate safety.

    At some time, the interest rates will rise to forestall the devastating inflationary pressure of the artificial low credit.

    With the increase in price for capital, lenders would have lent – however, their capital is trapped in government debt.

    Interest rates skyrocket, but there is still no capital for businesses.

    —-Thus my point of the broken window—–

    Because you have ignored one of the fundamental aspects of economic law – time preference – your assignment of “sense” is destructive.

    There are no choices because I am talking about spending money now that would be spent anyway, whether tomorrow or two years from now.

    Tomorrow and two years from now is a fundamental aspect of economic law – it makes a massive difference due to time preference

    This was the point of my comment to Matt. This is NOT the same as arguing whether infrastructure or some other investment or expenditure was better.

    It matters not!

    What does matter is that you are advancing time preference = which has a cost = of which you have no means to measure (because government is immune to profit/loss calculations).

    You have erroneously assumed because you cannot measure this cost, it does not exist.

    • BF

      I have answered your questions.

      You refuse to take my explanation and instead create some argument that is not part of the equation.

      The freaking money would be spent on roads anyway. Get it…………..

      So you can spend it tomorrow at 100% of tomorrows money or you can spend it today at 70% of tomorrows money.

      And the time frame for tomorrow is 3 years and the cost of the govt to borrow the money is 4%.

      YOU CHOOSE. Now or tomorrow? There are no other options.

      • JAC,

        I think I’ve been straight in my debate with you.

        You said “increase spending” – and that is pretty clear statement.

        So what if the money is going to be spent on the roads anyway – so is the money on your fuel for your truck for the next 15 years – why don’t you buy it all right now, too, then if your idea is so good?

        Because you do not have the money today!

        So your argument for government is different – because they can seize, print or force credit for themselves so =somehow= your economic theory changes for them.

        But economic law does not change for government.

        Such a seizure, printing or force creates serious consequences within the economy regardless if the money would be spent anyway in the future.

        The time preference of economic calculation does not disappear because the word “government” is invoked.

        You badly assume that the cost of labor and materials is all that needs to be counted.

        You mistakenly refuse to acknowledge a fundamental economic law of time preference.

        This law will create severe financial consequences in the economy whether or not you add them to your calculation.

        By the act of government taking money now when money is so desperately short in the marketplace will cause far more severe consequences on the economy then saving a buck or two in materials and labor vs. the future.

        The challenge you have is that you cannot answer for profit and loss for this action.

        You are merely guessing and all your fancy spreadsheets and assumptions do not change this.

        You do not know if there is a loss doing this.

        You do not know if there is a profit doing this.

        You do not know the chain of effects withdrawing vast sums of money out of the market place to pave your roads will do to the economy.

        You do not know if this is a “good” or a “bad” for the economy.

        You have nothing but a guess.

        However, Austrian economic theory says this:
        “Government extracting MORE funds out of the marketplace will starve productive businesses and favor of less productive businesses.

        Over time, this will continue to degrade the economic output – the public will demand more government action, until the total stagnation and collapse of the economy”

  36. Good night, and good luck.

  37. Who is still on tonight and willing to take a stab at what the big announcement will be tomorrow?

    http://hotair.com/archives/2010/09/14/great-news-dnc-planning-super-exciting-major-announcement-for-tomorrow/

    • Kathy

      The only thing I can think of that has had all the D’s in a twitter is the appointment of Elizabeth Warren to the new consumer protection agency.

      But that is a White House thing not the DNC.

      I guess I am at a loss unless they have Sarah Palin sex videos with her and somebody not her husband. Or the same for Michelle Bauchman. That would certainly get them all excited.

      I am at a loss I’m afraid. Everything I can think of that would really energize the Dems is something that should come from the White House or from Pelosi/Reid or both.

      You got any ideas?

    • Obama is resigning, Long live Joe.

    • The Democrat Party is Officially merging with the Communist Party USA?

  38. SK Trynosky Sr. says:

    NYC Multi Family Real Estate Speculation.

    40 or so years in this business has taught me that multi-family buildings can be bought for a maximum of six time their annual rent roll and still turn a profit. The only requirement is that rents should not be at their maximums on at least 30% of the apartments (room to grow) and that there be a substantial (20%)equity investment. Exceed this cap and it is a loser and a long term loser at that.

    This particular rule worked well for a long time. In the 1980’s Freddie Mac went and screwed up everything by granting mortgages far in excess of real value, based on replacement value. So, let’s say you have a 60 unit South Bronx property worth maybe 2.50 times rent roll due to significant vacancy, collection loss and vandalism. Freddie decides to lend based on the fact that this $ 450,000 property is actually worth $ 2,000,000 because that’s what it would cost to rebuild if it fell down not that anyone ever would (remember the burning Bronx of the ’70’s?). So, for most of a decade, they went on their merry way. There were huge warning signs, many properties were bought for pennies, mortgaged for hundreds of thousands and the buildings walked away from with the money in someone’s back pocket. Nobody in the regulatory business cared. You got ahead in mortgage banking in those days by how much you put on the street, not how safe the loans were. There was this inverse pyramid scheme. If the number of loans had stayed constant, percentage of defaults would have tipped you off but since the Ponzi scheme just kept growing exponentially every year, the signs could be not just be ignored but actually hidden.For example, if in 1989 twenty percent of 1986 loans were in default, that is a significant indicator but if that 20% is hidden by the total number of new mortgages granted in ’87, ’88, and ’89, then that brought it down to 1 to 3 percent, statistically irrelevant. I am sure that there were accountants who saw this mumbo jumbo and I am certain that they were silenced or ignored on purpose.

    By 1990, it had all reached the max. The defaults could not be hidden any more and Freddie shut off lending. This had a two-fold effect, it brought the problem to a head and it also shut down the entire lending industry leaving the good guys (us) holding the bag. We had finished rehab projects, were paying high construction interest and could not secure a permanent loan. You can just hang on so long in a circumstance like that, eventually you default and the whole damn thing becomes a self-fulfilling prophecy. The one advantage I saw was that it taught a lesson.

    At the end of the 90’s it became apparent that there was no lesson learned. The same thing started happening all over again and for those of us in the industry, it was like re-visiting the’80’s on speed.

    The thing to keep in mind here is that it was a Ponzi or a pyramid scheme. When you overpay or over mortgage on one and need to over mortgage on two more to pay for the first and then over mortgage on four to pay for the other two, brother, you are in trouble. It is just a matter of time. In the interim the lenders get filthy rich and are rarely around when the meltdown occurs. This, by the way, was exactly how it was explained to me by a mortgage officer who expected to be retired before the dam broke. He was.

    Now, if you want me to tell you how to place yourself to make some money in the future, here goes. I see the value of property being talked down far below its real value in the next few years. I would expect that a house worth $ 450,000 in Northern NJ in 2005 which had jumped to $ 650,000 by the end of ’07 because of speculation, is now worth $ 400,000. I see that house falling to $ 250,000 within a few years. That’s when to buy. That’s when the smart money will buy and that’s when they will start bidding up prices again no doubt with the help of Barney Frank and his cronies at Fannie and Freddie.

    I believe it was “Time” magazine in the past few weeks who started talking about the end of home ownership, that it was no longer either prudent or part of the American Dream. Think that’s an accident? Merely the opening shot, that’s all.

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