Guest Commentary: Part II From James Adams

This morning I offer Part II of the three part series from James Adams, author of Waffle Street: . Many of you last week found James’ first installment interesting and offered some insightful comments to his article. I imagine that this will be the case again this week. Part III will follow next week as James will wrap up the series with some practical application. Don’t forget that you can order his book via the link to his page over on the right hand side of the SUFA home page. As I said previously, it is an entertaining and enlightening book that I highly recommend. I will do my best to participate in the discussions throughout the day as I find all the talk about economics fascinating as well as extremely important. So I now turn the floor over to James Adams for his second installment on economics…

First off, I’d like to thank everyone for the bevy of comments in the wake of last week’s post.  I really enjoy reading what you each have to say on economic issues.  In the column, I pointed out the ineffectiveness of Washington’s traditional recession remedies in the current environment, namely: tax cuts, stimulus spending, and easier monetary policy.  To better understand why federal efforts have largely been in vain, permit me to draw a medical parallel.

Before he prescribes medication to an ailing patient, a competent physician should first arrive at a correct diagnosis of the symptoms.  In order to do so, he must devote years of study to understanding human physiology.  The study begins at the molecular level, proceeds to the cellular, and on to tissues, organs, and, finally, systems (e.g., circulatory, respiratory).  Were the medical student to neglect foundational coursework in chemistry and biology, his likelihood of subsequently issuing erroneous diagnoses would increase dramatically.  Given the misdiagnoses, his prescribed treatments would be just as likely to exacerbate patient symptoms as they would to alleviate them.

Just as sound medical science is built on the foundations of chemistry and cellular biology, so the “dismal science” of economics should be constructed on the self-interested behavior of individuals and businesses.  By first understanding these “micro” foundations, we can interpret macroeconomic phenomena much more lucidly.

Imagine an island inhabited only by two men, each of whom owns a small plot of land. One of the men uses his land to grow coconut trees, while his neighbor elects to cultivate pineapples. For several months, each man lives entirely in isolation, consuming only his own production. Understandably, he tires of eating the same kind of fruit day in and day out. Then one day, the men get together and decide to trade several coconuts in exchange for a few pineapples. An economy– i.e., a system of production arrangements and production exchanges– has just been born.

Arrows represent the flow of output from producer to consumer

On our island, the supply of pineapples constitutes the demand for coconuts—i.e., if the pineapple farmer wants to eat more coconuts, he must first grow more pineapples to give the other farmer in exchange. The only alternative means of acquiring the coconuts is to borrow or steal them. If the coconut farmer lends the coconuts, he will only do so with the agreement that the pineapple farmer repay him in the future. That is, he will trade his own production today for a claim on the other man’s production in the future. But whether it occurs in the present or the future, the creation of value is always the basis for the demand of production from others.

The first modern economist to state the proposition that the production (or supply) of a good creates the basis of demand for other goods was a French businessman named Jean-Baptiste Say. First published in 1803, Say’s Treatise on Political Economy asserted that “a product is no sooner created, than it, from that instant, affords a market for other products to the full extent of its own value”.  Put more simply, Say’s Law of Markets states that production is the cause of prosperity and wealth; consumption is the effect.

In our two-man, two-product island economy, the farmers can directly exchange their production with each other in a barter system. Under a currency system, the farmers would add an intermediate step: they exchange their production for money.  Notwithstanding the use of this “medium of exchange”, the introduction of money does not change the fact that buying and selling goods is merely an indirect swap of separate productions.  Regardless of the amount of money circulating on the island, the only way either man will ever be able to consume more pineapples or coconuts is for each of them to produce more fruit to trade with each other.  In Jean-Baptiste Say’s words, “Money performs no more than the role of a conduit in this double exchange [of production]” 

New workers are soon added to the island’s workforce, bringing with them a variety of skills.  Novel goods and services appear and labor becomes increasingly specialized.  Before long, the workers are employed by companies, and all production exchanges (both business-to-business and business-to-consumer) are occurring indirectly.  Consider the below diagram, which depicts a representative–albeit simplified–economy, comprised of three companies and six employees.

In this schematic, the direction of the arrows again captures the flow of production. Alternatively, we could represent the flow of payments simply by reversing the arrows’ direction

As we consider the interdependence of an economy’s participants, several questions emerge: What if one participant should withdraw himself from the labor force? What would happen if a service currently being offered ceases to meet customer demands? What if a business decides to create a new product but consumers reject it when it finally comes to market?

A cursory glance at the diagram provides an intuitive answer to the above scenarios. Reducing output, or creating goods which fail to meet market demand, in any part of the “economic ecosystem” will produce adverse ripple effects that are likely to be felt throughout the entire pond.

Company earnings reports from the great recession provide a vivid illustration of this “ripple effect” phenomenon. As financial institutions began experiencing losses on residential housing loans (and mortgage-backed securities), they began withdrawing the supply of mortgage credit. Because the supply of mortgage credit comprised the majority of the demand for housing, the contraction of the former led to a decline in the latter.

Through the “supply/demand transmission mechanism,” the housing market fallout quickly spread to other industries. As fewer houses were constructed, the demand for building materials also declined.  Reduced output of house siding, rebar, and other building materials resulted in lower demand for aluminum, steel, and other processed metals. Lower steel and aluminum production reduced demand for electricity, and so on.

Because the market had produced too many houses (relative to other goods and services), gluts of other commodities inevitably surfaced.  Beyond weighing on business-to-business commerce, reverberations from the housing downturn were felt by employees furloughed from the aforementioned sectors (as well as many others).  The withdrawal of the labor that they had been supplying translated into lower demand for consumer goods, causing a corresponding decline in retail sales.

As the housing market’s woes resulted in a more general slowdown, many economists have erroneously concluded that the great recession is the result of “demand deficiency.”  Say’s readers know better.  Regardless of how a broad an economic downturn becomes, he explains that “the glut of a particular commodity arises from its having outrun the total demand for it in one or two ways; either because it has been produced in excessive abundance, or because the production of other commodities has fallen short.”

Having diagnosed the cause of recessions, Say went on to prescribe a simple cure.  Next week, I’ll provide some concrete, practical application(s) of his timeless theory.  The remedy has never been more necessary, although it may not be much more palatable for 21st-century Americans than it was for 19th-century Europeans.

James Adams spent eight years in debt capital markets. He is the author of a new book entitled “Waffle Street: The Confession and Rehabilitation of a Financier,” a true life account of his transition from working at hedge funds to serving hashbrowns at Waffle House. www.wafflestreetbook.com

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Comments

  1. A Puritan Descendant says:

    Thumbs Up! Can’t wait for part 3!

  2. PeterB in Indianapolis says:

    Consumption is the result of production, I agree; therefore to have an economy where 70% of the system is based on consumption and expect it to maintain itself is ludicrous.

  3. PeterB in Indianapolis says:

    http://www.americanthinker.com/2011/09/when_government_investment_is_bad_investment.html

    Government investment is always bad investment. It is a mis-allocation of funds and resources which causes market distortions. Such market distortions are, in large part, the drivers of boom/bust cycles.

    • Peter

      I saw this comment and immediately thought of the NASA pen vs the Russian pencil.

      “The solar powered parking meters we see in Seattle are a ludicrously expensive replacement of the metabolism energy relied on by the old mechanical spring loaded parking meters. Put in quarter and turn knob.”

  4. Waffle

    My problem with the whole producer/consumer debate is that it forms a dichotomy in the minds of the people, where in fact the two functions occur simultaneously. Or at least that is the picture that is drawn by the various schools on economic manipulation theory.

    I could just as easily say it is consumption that drives because the act of production requires consumption itself. Even if that is consumption of the energy of the person. That energy must be maintained via consumption of something else.

    I like your analogy of “ecosystem” as that is more how I see the whole thing. The two functions occur as parts of a circle. One always affecting the other.

    The only real problems with the economy is the tolerance of the Time Horizon by the American people. That tolerance has become “NOW” thanks to the orchestrations of the professional politicians.

    • “The act of production requires consumption itself. Even if that is consumption of the energy of the person.” J.B. Say differentiates between these two acts, and the difference has profound implications. Consider the effect of harvesting trees to fuel a campfire vs. employing the timber in housing construction. In the former case– Say called it “unproductive consumption”– the utility of the trees is immediately consumed. In the latter (which he termed “reproductive investment”, the utility of the house abides for decades. Production, then, is revenue; consumption (whether unproductive or reproductive) is spending; and the net volume of production over consumption creates wealth.

      • Waffle

        I agree, but it doesn’t change my point. The harvesting of the tree required consumption of something else. In this case an axe or saw along with food needed to sustain the sawyer. The production of food would fall into the same group of “non productive consumption” would it not?

        Yet the production of food required consumption of other goods produced in some way.

        I am not sure the difference you identify really has “profound” implications in itself. It seems to me that the issue is a large segment of humanity that has somehow lost site of how one determines “wealth”.

        • The ax, saw, and food are all “reproductive” forms of investment. The point is that the consumption of each of those inputs– rapid in the case of the food, gradual in the case of the saw– is ultimately reproductive as it culminates in the construction of the building. The implications are profound because there is a net utility (i.e., wealth) gain because the utility created by the building exceeds the utility lost by consuming the inputs. The problem with the Keynesian paradigm that we’ve embraced for the past five decades is that it assumes that wealth is created by a willingness to part with liquidity(cash). In that framework, throwing the food away and destroying the tools so that money can be spent on replacements is a wealth-generating endeavor.

          • Waffle

            We are saying the same thing in different terms. My point is that If the average person understood how to read and Income Statement and a Balance Sheet the Keynesian fraud is quickly revealed. But the elite have confused the minds of man. I think of the politicians in the past two years who publicly stated that the wealth of a nation is determined by the size of its debt. More debt = more wealth.

            Aside: Which of course is evidence to support my theory that some people should be skun and their hides hung on a fence.

            I am not a Keynesian but I think Keynes is getting unfairly blamed for the distortion done to his theories in his name. I don’t think he understood the negative effects of his theory but we must remember that even he said that once the economy recovers the money put in must be taken out in order to “balance” the books. Funny how that little requirement has been long forgotten by those who invoke his name to support “stimulus”.

            Pointed question to you. Do you believe that absolutely NO ACTION should be taken by the Govt to buffer the effects of the downturn (correction)? I am not talking about long term solutions to “fuel growth and job creation” here. Just those things that reduce the magnitude of the correction, such as massive unemployment. For example, I see unemployment as a means of tempering the potential decline in employment that might otherwise occur. A treading of water if you will while we then wait for the recovery to occur naturally.

            I know this distorts the “correction” but the system has been corrupted by Govt intervention so I am not sure we can allow complete “natural” “correction” without very serious social implications (violence and starvation).

            The next question would be whether you think the Govt should intervene to help “recovery” itself. I suppose this may be the point of your article next week.

            I would also be interested in your thoughts about what if any “regulatory” changes should be made to the financial markets to reduce the impact of fraud, abuse and “irrational exuberance” on the rest of the population. 🙂 I am smiling because this will most certainly draw in our resident pirate.

  5. Bravo………have your book.

  6. As the housing market’s woes resulted in a more general slowdown, many economists have erroneously concluded that the great recession is the result of “demand deficiency.” Say’s readers know better. Regardless of how a broad an economic downturn becomes, he explains that “the glut of a particular commodity arises from its having outrun the total demand for it in one or two ways; either because it has been produced in excessive abundance, or because the production of other commodities has fallen short.”

    This does not consider when government tries to force market changes. Under Clinton, banks were pressured to make low income loans to people who listed welfare and unemployment as their income.

    • A Puritan Descendant says:

      “This does not consider when government tries to force market changes”

      I think it does consider it indirectly. The people on welfare/unemployment are not producers of commodities. (” or because the production of other commodities has fallen short” ).

      • A Puritan Descendant says:

        When a politician argues that extended unemployment benefits is good for the economy, they ignore the fact that the unemployed are not producers.

        Why would a producer want to sell his product to someone who is actually using money taken from the producer, (other than to get his own stolen loot back after the fact).

        If it spurs the economy to spend stolen loot, or to spend printed paper money with no wealth creation behind it, it later comes back to haunt us.

    • Certainly, too many houses were created RELATIVE to other goods and services. The big question, then, is why the resource misallocation occurred in the first place. Gov’t certainly played a considerable role in the most recent crisis, although my capital markets experience has informed me that there’s a lot more to the story. Society would see fewer asset bubbles if financial decisions weren’t evaluated on such short time horizons. Doing so greatly encourages a “don’t stray too far from the pack” mentality amongst professional investors, culminating in dangerous short-term groupthink. Although long-term thinking– and simple algebra– would tell them otherwise, money managers, bankers, and speculators can’t afford to leave the asset bubble party 12 or 18 months early, because doing so causes them to underperform their benchmarks in the interim and get fired. People aren’t stupid, but they are governed by short-term incentive structures that cajole them into collectively stupid behavior.

      • Agree, there is a lot more to the story. IMO, crony capitalism played a large role.

        https://standupforamerica.wordpress.com/2009/08/29/guest-commentary-goldman-sachs/

      • Waffle

        I agree we have a time frame problem.

        I would like to add to the “other factors” relative to housing. In the early 90’s I had a long discussion with my “broker and his boss” about what the future looked like. A key point was made that has seemed to tie in with the story. That was that the WW II generation was in the process of transferring its wealth to their children, the “baby boomers”. This was going to be the largest transfer of wealth in the history of humanity. It had to go somewhere as the “baby boomers” were in their early to mid 50’s and had pretty much made their own way. Short story…………excess wealth looking for a place to be invested.

        Combined with or perhaps driving the expansion of investment funds the money flowed into the markets. Along comes DOT COM. Money flows and a bubble is created. Bubble breaks and money flows back to cash…………cash looking for a place to go that looks secure. After all, boomers are now a few years closer to retirement. Ah hah, they say. Housing is the place to be.

        This in my opinion is the “starting point” for the housing boom. Now we can layer on the Govt’s programs to expand “home ownership”, speculators and the “creative investment mechanisms”.. These I would claim put the bubble on steroids but were not the cause per se’.

        Curious what your thoughts are on the “other factors” as well.

  7. Lots of comments, so I’ll break up my responses into individual posts:

    In our two-man, two-product island economy, the farmers can directly exchange their production with each other in a barter system. Under a currency system, the farmers would add an intermediate step: they exchange their production for money. Notwithstanding the use of this “medium of exchange”, the introduction of money does not change the fact that buying and selling goods is merely an indirect swap of separate productions. Regardless of the amount of money circulating on the island, the only way either man will ever be able to consume more pineapples or coconuts is for each of them to produce more fruit to trade with each other. In Jean-Baptiste Say’s words, “Money performs no more than the role of a conduit in this double exchange [of production]”

    This is important to understand fully here.

    Money is nothing but another economic good, like pineapples and coconuts – indeed, pineapples or coconuts could be the money of this island economy.

    Mises articulated this:

    Money is merely the most desired economic good within an economy

    The concepts of “medium of exchange” – though accurate – tends to obscure the fact that money is merely another economic good, and obeys all the laws of economics like all other economic goods. It does not have any “unique” laws applied to it.

    Because everyone values “this economic good” highly, it easy to trade for it and easy to trade with it – because everyone wants it. Thus, and naturally, other economic goods tend to be “priced” in reference to it.

    When discussing any effect of money or the manipulation of money in a market place, hold to this understanding of what money really is to achieve clarity in cause/effect.

    • The main difference in money–relative to other goods- is twofold: 1) The forms that it can assume are subjective –various forms of it can become obselete within weeks (if not days) during financial crises and 2) fractional-reserve money can be quickly destroyed via a self-perpetuating series of bank runs.

  8. As we consider the interdependence of an economy’s participants, several questions emerge: What if one participant should withdraw himself from the labor force? What would happen if a service currently being offered ceases to meet customer demands? What if a business decides to create a new product but consumers reject it when it finally comes to market?

    Hmmm… I think caution needs to be exercised here in this scenario or else dangerous assumptions will leak in.

    For example this set of comments;

    “What if one participant should withdraw himself from the labor force?”
    suddenly leads into this statement – as if it was a truth –
    “..will produce adverse ripple effects that are likely to be felt throughout the entire pond”.

    “Adverse”?????

    Consider this – what is the difference between a participant “withdrawing” from the labor force and a participant declining a trade?

    Answer: nothing. No difference at all.

    So, suddenly, the suggested truth of the hypothesis now turns to this:

    “those that decline a trade creates an ADVERSE impact to an economy, therefore, those that say “no” to a deal -any deal- is an ADVERSE action, and therefore JUSTIFIES political force to make the “no” into a “yes”

    It is this err of assumptions that a withdrawal or decline of trade is an ADVERSE effect that creates political motives for economic intervention – with devastating results.

    • It is adverse in the sense that unless I am willing and able to consume all of my own production, then the reduction of others’ output reduces the demand for my own products. Then I have to restructure my production and/or consume more of my own output.

  9. What if one participant should withdraw himself from the labor force?

    Again, intellectual caution needs to be exercised here .

    To describe simple economics, a two person or six person island is a good start.
    However, to suggest that an example of a 6 person economy somehow makes a case for a complex economy of hundreds of millions of people is a prescription for error.

    So, let us separate the two situations – one, a six person economy, and two, a complex economy of millions.

    If one participant withdraws from the six person economy, the effect is that the rest pick up and “do” whatever task that person was doing, but trading for

    Remember where we started – everyone was doing their own thing and by a desire decided to trade for other things. But consider this – if there was not another person to trade with, what do you do? You do that “thing” yourself or do without, or in other words, “big deal”. Certainly your personal prosperity will decrease slightly probably unnoticeable, because this six person economy cannot and does not have a high division of labor – that is, almost everything that a person needs to do, he does himself.

    So we cannot make any comparisons of the “six person” economy to an economy that involves millions of people in a high division of labor.

    You could compare the six person economy with, say, the Congo or Zimbabwe – both which are modern examples of a low division of labor economy – hence, its poverty.

    Modern prosperity is due to a high division of labor which also means there are tens of thousands upon thousands doing ‘something’ and a “loss” of one or even hundreds or even thousands has no effect upon this division of labor – the tasks are simply assumed by the hundreds of thousands of doers that remain

    • “Modern prosperity is due to a high division of labor which also means there are tens of thousands upon thousands doing ‘something’ and a “loss” of one or even hundreds or even thousands has no effect upon this division of labor – the tasks are simply assumed by the hundreds of thousands of doers that remain.”

      That is contingent on the ability-and willingness- of labor to retrain and relocate itself. The more specialized the labor force, the more difficult that process becomes when there has been a large scale resource misallocation.

      • Waffle,

        I do not believe a high division of labor equals increase in complexity of the task – probably the opposite.

        I would also suggest that such division of labor improves the mobility of labor because the more divisions, the less the requirement that labor (or any other economic good inputs) needs to be close to the end consumer.

        We get the goods, supplies and labor from “everywhere” on Earth … combined to the final product to the final consumer in some local store.

        A low division of labor economy places the good production close to the consumer – you cannot go far from the land that feeds you in a rural-based economy.

        But in our urban based economy, I would suggest that the high division labor and location of that labor (or any other economic good) become less entwined – thus, more mobile or equally, the jobs tend come to the labor instead of labor moving to the jobs. (see job ‘transfer’ from US to India/China, as example)

  10. Canine Weapon says:

    • drinking game.

      Listen for the following key words and phrases from the White House talking points. When you hear one, just follow the instructions. Don’t forget to tip your cocktail waitress. And please: Spin responsibly.

      Read more: http://dailycaller.com/2011/09/08/job-creation-101-with-the-daily-caller/#ixzz1XTf1652K

    • DisposableCarbonUnit says:

      USW, you have to stop working so much and pay attention to your dog! I think this was a significant cry for attention on Canine Weapon’s part.

      A quick call to Caesar Milan may be in order. Next time he could seriously hurt someone.

      You may wish to invest in rolled up newspapers for the time being.

      Bad Canine Weapon!

      • Canine Weapon says:

        Listen, Caribou, don’t act like you don’t understand where I’m coming from on this one.

        If Canada was a real place I’d drive a tank there right this minute.

        • DisposableCarbonUnit says:

          Bring it on pooch!

          • Canine Weapon says:

            You don’t understand who you’re messing with.

            I just had Mathius send USW some pictures of myself to forward to you.

            I feel bad using him to pass my emails along.. Seriously, someone ought to set up a SUFA drop-box.. oh well.

  11. Again, caution, for all things are NOT equal in this example.

    As financial institutions began experiencing losses on residential housing loans (and mortgage-backed securities), they began withdrawing the supply of mortgage credit. Because the supply of mortgage credit comprised the majority of the demand for housing, the contraction of the former led to a decline in the latter.

    We must remember that the financial sector is a CARTEL and MONOPOLY, enforced by government writ. Much of the perversions suffered by this economy rests on the fact of this monopoly – for monopolies create massive economic distortions, most (if not all) of what such monopolies do is seriously detrimental to an economy.

    Because of a lack of any competition and extensive mitigation of the consequences of risky behavior, the banking cartel found itself in a position to take massive speculative risk and enjoy the profits, but dismiss the losses.

    With no surprise, they did exactly that.

    The People, with no recourse to bank with more prudent competition because such competition is prohibited by law, get stuck holding the bag.

    On top of all of this, there was an artificial supply of credit – not based on production and saving, but based on wholesale manufacturing of money out of the FED.

    Combined with the fractional reserve system, where banks borrow short (and cheap) and lend long (at a profit), the banks are motivated to repeat such “easy profit” funding endlessly.

    Combined with government political policy to provide such credit to highly volatile borrowers – the only way the system can survive is by accelerating the production of credit, and the money has to go somewhere – and bubbles are created; whether the dot-com-bomb bubble, or the housing-boom-burn bubble.

    Through the “supply/demand transmission mechanism,” the housing market fallout quickly spread to other industries. As fewer houses were constructed, the demand for building materials also declined. Reduced output of house siding, rebar, and other building materials resulted in lower demand for aluminum, steel, and other processed metals. Lower steel and aluminum production reduced demand for electricity, and so on.

    Whenever -by political manipulation – economic resources are misplaced, the reckoning of such misplacement always creates hardship – but cannot be avoided. Debt needs to be cleared, excess production based on political lies needs to be flushed, unemployment is unavoidable.

    This is how the market is supposed to work – it is NOT a failure or a deficiency in market mechanics.

  12. Waffle,

    . The big question, then, is why the resource misallocation occurred in the first place.

    This is probably the greatest insight Mises gave economics – the “business cycle” and its cause.

    The question is not “why does A business man make a mistake in his allocations of his resources” – he is human and not perfect.

    The question is “why do all business men in an economy or sector of the economy make the same error at the same time“.

    This is the question Mises pondered – and answered.

    Because the manipulation of the Money by government created a LIE – a lie that the economy was more productive than reality.

    By creating artificial credit, government lied to business men telling them that there was an excess of credit – ie: an excess of production.

    As Say’s law: Products buy Products, that means there was a demand for more products – but it was a lie. Business men borrowed and created excess products to meet this demand – but it did not exist – the productivity in reality was not there.

    The burst of economic activity in investing into production creates the bubble.
    The realization that the productivity of the economy does not exist to consume this excess production is the bust.

    …all of it starts with a lie.

    Gov’t certainly played a considerable role in the most recent crisis,

    It is the sole consideration – without its role, it simply could not occur.

    Everything else is a consequence of that manipulation – and trying to shield or mitigate these consequences without dealing with the sole cause will NOT be successful.

    Society would see fewer asset bubbles if financial decisions weren’t evaluated on such short time horizons.

    I agree – but that is not the fault of the economic sector.

    The availability of artificial credit, which requires artificially low interest rates – makes savings a terrible, terrible economic choice, and thus discourages savings.

    A saver gets no real return on his savings – the interest rate is too low to derive any income PLUS the infusion of artificial credit increases the base money supply – that is, creates inflation.

    Thus a saver cannot derive income and his savings principle is eroded by inflation, so what is his alternative??? The long time preference is destroyed – he becomes a short time preference… a rabid consumer – converting his savings into real goods, whether or not he needs the goods.

    • BF

      Let me add to this one of my pet peeves relative to Govt’s effect.

      The change of Capital Gains tax treatment from investments of greater than one year to six months. This created incentives against long term thinking.

    • This is where my capital markets experience forces me to part ways with the Austrian dogma. First and foremost, people are social creatures that move in herds– in markets and elsewhere– with and without gov’t impetus. Even if the smart money managers/bankers believe that the herd is eventually going to run off the cliff, they will continue to run with the herd– albeit on the periphery by underweighting the hot sector. Betting big against the herd is too painful in the interim if you are trying to retain assets under management or grow earnings.

      In markets, being 24 months early is the same thing as being wrong. I can provide example after example of this phenomenon in bond, equity, and real estate markets. People are always looking for the next big sector or asset class, and the manager who does not have his clients onboard the train while it’s chugging along (regardless of how much track that he believes may be in front of him) is going to lose business.

      Mordecai Kurz has done extensive work demonstrating that “the main cause of market volatility is the distribution of beliefs and expectations of agents.” Ergo, most volatility is ENDOGENOUS risk created by the participants themselves. While EXOGENOUS factors like the Fed and Congress may exacerbate matters, anyone with capital markets experience can attest to the power of groupthink and short-term incentive structures in dictating resource misallocations.

  13. DisposableCarbonUnit says:
  14. Terry Evans says:

    VH, I read this and thought of you, and strangely enough Charlie as well…and this from the NY Times no less!

    Some of Sarah Palin’s Ideas Cross the Political Divide
    By ANAND GIRIDHARADAS
    Published: September 9, 2011

    CAMBRIDGE, MASSACHUSETTS — Let us begin by confessing that, if Sarah Palin surfaced to say something intelligent and wise and fresh about the present American condition, many of us would fail to hear it.

    That is not how we’re primed to see Ms. Palin. A pugnacious Tea Partyer? Sure. A woman of the people? Yup. A Mama Grizzly? You betcha.

    But something curious happened when Ms. Palin strode onto the stage last weekend at a Tea Party event in Indianola, Iowa. Along with her familiar and predictable swipes at President Barack Obama and the “far left,” she delivered a devastating indictment of the entire U.S. political establishment — left, right and center — and pointed toward a way of transcending the presently unbridgeable political divide.

    The next day, the “lamestream” media, as she calls it, played into her fantasy of it by ignoring the ideas she unfurled and dwelling almost entirely on the will-she-won’t-she question of her presidential ambitions.

    So here is something I never thought I would write: a column about Sarah Palin’s ideas.

    There was plenty of the usual Palin schtick — words that make clear that she is not speaking to everyone but to a particular strain of American: “The working men and women of this country, you got up off your couch, you came down from the deer stand, you came out of the duck blind, you got off the John Deere, and we took to the streets, and we took to the town halls, and we ended up at the ballot box.”

    But when her throat was cleared at last, Ms. Palin had something considerably more substantive to say.

    She made three interlocking points. First, that the United States is now governed by a “permanent political class,” drawn from both parties, that is increasingly cut off from the concerns of regular people. Second, that these Republicans and Democrats have allied with big business to mutual advantage to create what she called “corporate crony capitalism.” Third, that the real political divide in the United States may no longer be between friends and foes of Big Government, but between friends and foes of vast, remote, unaccountable institutions (both public and private).

    In supporting her first point, about the permanent political class, she attacked both parties’ tendency to talk of spending cuts while spending more and more; to stoke public anxiety about a credit downgrade, but take a vacation anyway; to arrive in Washington of modest means and then somehow ride the gravy train to fabulous wealth. She observed that 7 of the 10 wealthiest counties in the United States happen to be suburbs of the nation’s capital.

    Her second point, about money in politics, helped to explain the first. The permanent class stays in power because it positions itself between two deep troughs: the money spent by the government and the money spent by big companies to secure decisions from government that help them make more money.

    “Do you want to know why nothing ever really gets done?” she said, referring to politicians. “It’s because there’s nothing in it for them. They’ve got a lot of mouths to feed — a lot of corporate lobbyists and a lot of special interests that are counting on them to keep the good times and the money rolling along.”

    Because her party has agitated for the wholesale deregulation of money in politics and the unshackling of lobbyists, these will be heard in some quarters as sacrilegious words.

    Ms. Palin’s third point was more striking still: in contrast to the sweeping paeans to capitalism and the free market delivered by the Republican presidential candidates whose ranks she has yet to join, she sought to make a distinction between good capitalists and bad ones. The good ones, in her telling, are those small businesses that take risks and sink and swim in the churning market; the bad ones are well-connected megacorporations that live off bailouts, dodge taxes and profit terrifically while creating no jobs.

    Strangely, she was saying things that liberals might like, if not for Ms. Palin’s having said them.

    “This is not the capitalism of free men and free markets, of innovation and hard work and ethics, of sacrifice and of risk,” she said of the crony variety. She added: “It’s the collusion of big government and big business and big finance to the detriment of all the rest — to the little guys. It’s a slap in the face to our small business owners — the true entrepreneurs, the job creators accounting for 70 percent of the jobs in America.”

    Is there a hint of a political breakthrough hiding in there?

    The political conversation in the United States is paralyzed by a simplistic division of labor. Democrats protect that portion of human flourishing that is threatened by big money and enhanced by government action. Republicans protect that portion of human flourishing that is threatened by big government and enhanced by the free market.

    What is seldom said is that human flourishing is a complex and delicate thing, and that we needn’t choose whether government or the market jeopardizes it more, because both can threaten it at the same time.

    Ms. Palin may be hinting at a new political alignment that would pit a vigorous localism against a kind of national-global institutionalism.

    On one side would be those Americans who believe in the power of vast, well-developed institutions like Goldman Sachs, the Teamsters Union, General Electric, Google and the U.S. Department of Education to make the world better. On the other side would be people who believe that power, whether public or private, becomes corrupt and unresponsive the more remote and more anonymous it becomes; they would press to live in self-contained, self-governing enclaves that bear the burden of their own prosperity.

    No one knows yet whether Ms. Palin will actually run for president. But she did just get more interesting.

  15. The ecosystem comparison is indeed a good one. To break the whole debate of production versus consumption down using that example, consider this:
    Life requires consumption of energy. The very act of existence does, indeed, require consumption. However, engergy existed before life! Life, or more simply, existence, does not intiate production, nor does it automaticaly ensure production is happening. Because of the demands of life, production tends to occur, but something, such as energy, must exist first. To expand an overall economy or ecosystem you MUST increase supply, be it energy or items to be consumed or food, etc.

    Note: Increasing the “money supply” does not work if the money is fiat. Economic easement and so forth is the equivalent of having 100 pineapples and cutting them in half and then claiming that you have doubled the number of pineapples.

    Another example of growth is the effect of innovation. The biggest economic booms and growths in history have always been fueled by waves of invention and innovation, creating new products that did not previously exist. An increase in demand did not necessarily initiate these. Certainly, there are examples of innovaiton that was not in demand that does not create growth, but generally innovation is driven by a perceived need or condition that could be improved or filled or done in a more efficient or cost effective manner.

    If the population of the earth were to suddenly double, there would be an increase in demand, but that would not necessarily create growth in production. What creates that is the realization by those who would produce that there is profit to be made, often a result of rising prices initiated by the increase in demand. There is also the realization of those demanding that they will not have their needs met without them trading something, so they get involved in producing something that can be traded for what they need.

    This shows the economicly destructive effect of social programs. People are getting their needs met without being required to produce anything in trade, thus the demand does NOT come with the corresponding increase in production. Furthermore, the profitability of production by those who are producing is decreased as they are bearing the cost of the consumption of those getting the free ride. Thus their motivation is also decreased, leading to a potential reduction in production and/or a lack of response to demand.

    Anyway you slice it, production comes before demand, and certainly before growth. Production is not guaranteed to create demand, but it has a higher probability based on history of doing so than demand creating production.

    • A Puritan Descendant says:

      “This shows the economicly destructive effect of social programs. People are getting their needs met without being required to produce anything in trade, thus the demand does NOT come with the corresponding increase in production. Furthermore, the profitability of production by those who are producing is decreased as they are bearing the cost of the consumption of those getting the free ride. Thus their motivation is also decreased, leading to a potential reduction in production and/or a lack of response to demand.”

      Well said! 😉

  16. gmanfortruth says:

    Hi Ya’ll 🙂

    I’m getting emails saying that Greece may default in the next 72 hours. Can anyone confirm this and what would the impact be?

    • Canine Weapon says:

      I’m hearing the same thing over here from my top secret positions withing both the hedge fund industry and the Zionist League Which Secretly Rules the World (ZLWSRW).

      I’m heard the number 94% probability thrown out there, but I don’t know what importance (if any) to attache to that.

      Either way, as the Joker would say: And.. here… we… go..

      As for impact.. hard to say. I think people have been aware of pending catastrophe in Greece for a while now and have braced themselves for it to some extent. I’ve heard everything from claims that it’ll bring down the Euro within a week to claims that the entire world will just shrug it off. My money would be on an unholy mess for Greece (violence on an order well beyond anything we’ve seen over there so far), and tanking (but not absolute destruction) of the Euro, and unlikely boost in the US (as everyone runs for cover in the only fall-out shelter available, US treasuries). Long term: Meh. Short term: oh shit, oh shit, oh shit, oh shit! Mid term: Bad, but not tooooo bad.

      Unless someone else defaults as well (this is possible if they’re teetering on the edge and Greece just pushes them past the tipping point).. I imagine that could trigger a cascade, like a bank run, and destroy the Euro, and with it, the entire European economy. Of course, with European economy out of the picture, demand for US exports decreases further, and, well…. I’m headed to Flag’s bunker..

      • gmanfortruth says:

        Thanks CW.

        I should be back to writing this weekend. Life is slowing down finally.

      • Me thinks Canine Weapon has been in the Feline Weapon’s “nip”. No need to run to the bunker. Like Canine inferred, any dependence upon the Euro has been long gone for awhile. The most prudent pulled out two or three years ago and should have. Any investing in the Euro in the past three years is tantamount to playing with gasoline with a blow torch. Do you really think that economic collapse in Europe is going to destroy the dollar? I do not. There will be a downturn in hard trades (production in Europe) but only for a short while. I think that this is going to be a correction in what should have happened the minute the Euro became a major trading point back in the 90’s. Then the Euro was propped up with “cooked books” the minute it was expanded to the Greece’s of the world which became a “losing asset” (to mean a drain) in the financial sheet and that financial was propped up with artificial evaluations. ( Sorry, I am trying to make a complex thing simple and fear I am failing ). Any “broker”, hedge fund manager, etc. that tried for the quick hit in the Euro is going to lose…..and lose big unless the investment was leveraged elsewhere.

        I do not fear a panic in the United States if the Euro tanks.

        • Mathius™ says:

          Still.. that’s quite a nuanced and thoughtful opinion coming from a dog..

          My dog eats her own poop and considers it an accomplishment when she manages to make it up the stairs without tripping.

          But I agree – nothing to fear in the US… and, in fact, probably a bingo bonus as everyone tries to put their money somewhere “safe”

          • Y… Y.. Y….. Y….. You agreed with D13? I…..I…..I….. (thud) (quick, bring RB)

          • I thought half of TARP went to euro banks? Not saying it will tank us, but it will do us some measurable harm.

            • Mathius™ says:

              -5% across the board in Europe.. ouch, but survivable. Meanwhile everyone wants to get the hell out of there and they’re going to head for the only game in town. (They may not trust us, but they sure seem to trust the Chinese even less, and there’s nowhere else to turn).

            • I really do not believe so, LOI. But will watch and admit that I am wrong if there is measurable harm…….but measurable harm has to be megatons….not some stupid fund that decided to invest in the Euro and it tanks some 401’s.

              • gmanfortruth says:

                Good day Colonel 🙂

                While I hope this all plays out as you believe, many very good economists disagree. I do not fear the outcome, regardless of how it goes, but always trying to stay one step ahead for my family that lives in the city. Everyone has plans to vacate if need be, the fiat ponzi scheme may or may not come crashing down, but if it does, I feel sorry for those who didn’t get the warnings.

                Prepare for the worst, hope for the best! I guess even now I’m still military minded in many ways. Bless you and your family!

                G!

  17. Waffle

    First and foremost, people are social creatures that move in herds– in markets and elsewhere– with and without gov’t impetus.

    I think Mises understood this intimately – however, people do not move “randomly”, but with “purpose” – they have reasons they do the things they do.

    The reason many appear to move like a herd in our modern fascist economy comes primarily with the government monopoly over the manipulation of money and the use of taxation (and tax credits) as a stick/carrot to manipulate public choice.

    For example, with a housing tax credit, will motivate people to buy a home where perhaps renting would be -all other things being equal – economically superior; as such a tax credit in housing helped create the housing bubble.

    People tossing into 401(k) – another example – push people to invest in the markets where perhaps they actually have no other economic reason to do so other than tax avoidance.

    I believe that flying with a too high overview of people herding like elk in one direction or another without understanding that they are being harassed by swarms of misquotes and black flies of government manipulation on the ground may give rise to errors in theories.

    • I don’t deny for one minute that government fosters resource misallocations; in addition to the factors you mention, the low bank capital requirements for mortgage-backed securities were also a factor in creating the housing bubble. That said, when the ten year Treasury is paying over 6%, the Fed is jawboning about irrational exuberance, and professional money managers still decide to pay 100 times earnings for tech stocks, I think the “people are short-sighted and herd-minded” thesis holds up pretty well. I spoke with an equity portfolio manager ten years ago regarding his security selection criteria. “Relative strength,” was the immediate reply. The reasons for human action are incentive structures– and most of them are decidedly short-term in nature.

      If you send me your e-mail address, I’ll send you a nice summary of the Kurz paper.

    • Finally, an economic action I can understand. Swarms of mosquitoes and black flies.

    • Mathius™ says:

      they have reasons they do the things they do. Of course they do. But frequently their reasons are stupid and random. (“Why did you buy that lottery ticket?” “Because someone had to win!”)

      people herding like elk I prefer to think of them herding like Caribou..

      without understanding that they are being harassed by swarms of misquotes and black flies of government manipulation on the ground may give rise to errors in theories. This, of course, is very true and very important. People are, first and foremost, human. Secondly, they are members of a culture. Thirdly, members of a community/family/group. Finally, they are individuals.

      As such, there are some things that we can count of them to do en masse at certain levels. For instance, in the even that California begins to sink into the ocean, everyone (ever last one of them) will move. Why? Because humans (other than Kevin Costner) aren’t equipped to live in the ocean. We all share the same traits which will cause us all to respond to the same stimuli.

      If Mexico (somehow) takes ownership of SoCal, many residents will move out. Why? Because the culture of “being an American” or whatnot is not compatible with “living in Mexico.” So they will move. But not everyone shares that culture the same way or to the same extent, so not everyone will move, but we can (to a reasonable extent) expect those who do share the culture to respond in a uniform way (that is, get the hell out of dodge).

      However, if a person loses his job, he may move, he may not. Because this is a question at the individual level, his response must be viewed at the “ground level”.

      And so on.. Does this make sense?

      • Mathius

        It makes sense but you forget the effect govt has created on this decision. There has become a “cultural” component to this otherwise “personal” decision.

        With the advent, and cultural acceptance, of the idea that it is Govt’s job to create jobs or to take care of us until things become normal, came the expectation that we don’t have to move to find work or improve our lives.

        The Feds are not the only culprit here. Think of all the Governors and State Legislators who have taken action, made laws, etc to create economic growth “so our children don’t have to leave home to have a good job”.

        • JAC states: “There has become a “cultural” component to this otherwise “personal” decision.”

          D13 muses: Ok, I see that which supports the lemming theory. Having grown up during the 60’s and experienced the social revolution, this is a mindset that was drilled into the minds of the education of children then….I firmly believe this. My father took the time to explain economics to me and I actually listened, however, the family was already in business at that time and understood what it took. This mindset and cultural influence has manifested itself three fold (generational) since the 60’s and particularly the 70’s. The entitlement mentality is a manifestation of that cultural influence and the policies of today are the result.

          • @JAC…..then you combine THAT with the I want it now…..and you have the issue.

            • Mathius™ says:

              I want it now.

              I’m just not entitled to it now.

              And I’m willing to hold off if doing so means a better long-term result.

              But I don’t see anything wrong with “I want it now” per se.

              • Semantics……..always semantics….but alas….I will buy the “I may want it now….but not entitled to it now”….

                You continue to amaze me, young Patewan. There really is hope for you. 🙂

                (the Mathius stock just went up in the D13 portfolio)

              • Mathius™ says:

                Making it the only stock on the planet which went up today.. woohoo!

            • This seemed to just belong here-under your comment. 🙂

              September 10, 2011
              The Black Friday Effect
              By Michael Hoag

              Their eyes flashed with mindless rage under the glow of fluorescent lights as a store full of bargains on clothing and electronics lay before them. Not content to wait until the opening of Walmart at 5 AM, the mob stormed the front doors, trampling store employees, as the locked doors buckled against the surge of people. In the aftermath, a pregnant woman was hospitalized, and a man was killed. This was the scene in Valley Stream, New York on the morning following Thanksgiving 2008.

              If people could react this way to Black Friday sales, what awaits us at the hour of our economic reckoning? With no intention in Washington of curbing deficit spending, the path has been paved for taxation and inflation. A real national dialogue is needed to avert reliving the ongoing calamities of the European Union and the Icarian arrogance of its cradle-to-grave social policy.

              If our politicians were honest with us, the discussions in town halls would focus on preserving liberty and economic solvency. Instead the demagogues blame our woes on inequality, banks, and the rich. The elderly are led to doubt the future of Social Security and Medicare. With our fates tied so closely with government, we dangle on the ends of puppet strings.

              We are dissuaded from the embrace of a common American interest, and many use our balkanization as the path to power. Mobs are turned against mobs, fed lies, and fueled by fear and anger. Our fight for plunder encourages the expansion of government. A credit here, a benefit there, and the shadow of the federal specter grows.

              These harmful promises have laid waste to our economy and corrupted the spirit of our great nation. We’ve become accustomed to identifying with groups for their collective lobbying power. We place our specific and divided visions above the rights of life, liberty, and property. Our productive capacity has been progressively funneled into an ever-growing central authority. Surely we can agree to shed the trappings of our political interests and end the dogpile on the taxpayer.

              Unless, of course, you’re ugly. In his New York Times article “Ugly? You May Have a Case,” economics professor Daniel S. Hamermesh examines the consequences of being unattractive. Backed by decades of research, he argues this “injustice” warrants financial relief and the establishment of a federally protected class. He insists this “new legal frontier” is a forgone policy conclusion.

              It has become a fool’s errand for some economists to establish a theoretical utopia of equalized outcomes. How long will our society continue to sever one head of the hydra before we realize the futility? Instead of putting the brakes on social engineering, academics demand more impediments to this inflationary, slow-growth economy. Their ideal is a system of central planners and scientists using redistribution schemes to “solve” any and all perceived inequities. This unsustainable model ignores individuality and uses the coercive power of the state to herd us toward statistical averages.

              When government grants protected status to groups of individuals, it makes them legal adversaries to free enterprise and saddles all business decisions with a burden of proof. This ongoing trend has placed political goals and special interest above a legitimate function of government — the protection of private property.

              Should the policies of a business owner conflict with the views of society, the free market takes action. If punishment comes slowly, or not at all, then consumers have given those policies a low priority. But few have the patience for the speed of the market, and many don’t trust that it works. The instant impact of federal force is awfully seductive, and most observers have moved on before the consequences are truly seen.

              Our national government engages in income and power redistribution, and ignores the concept of equality under the law. It legalizes, even promotes a sense of entitlement, and creates a “Black Friday Effect.” Private property rights are ignored, mobs are promised resources, and incited to violent reprisal. Force is concentrated upon segments of the economy, and the checks of a free market give way to the stampede of regulations and class actions.

              The proponents of equalized outcomes are not satisfied to merely gain entry. What’s more, they are ignorant or unrepentant towards the economic destruction they have wrought. These agitators move from cause to cause, shrouding themselves in “justice” and “progress” without truly understanding the meanings of the words.

              Rescinding promises to the mob is out of the question; there is a legal precedent for their elevated status and a fear of their power. We have conditioned individuals, groups, and businesses alike to demand privileges. No dangers can ward off the hydra and its many heads, even those of impending economic ruin.

              Armed with facts, we can arrest the affects of dependency and entitlement on our culture. The truth is often uncomfortable, however, and doesn’t win elections. Instead of honesty from politicians, lies are compounded. Instead of talking unity, they re-draw old battle lines. Instead of voicing rescue plans, they shout from the lifeboats for us to stay with the ship.

              Our representatives create false fears, false enemies for the mob. They convince us that our spending and debt are not the real issue. They say we need amorphic intangibles like justice, diversity, and equality. We’re told we can win the future if we value those above freedom of choice and private property.

              The ears of the ruling class, however, are deaf to their own gospel. The government touts itself as a crusader of equality and justice, but clearly believes the Animal Farm doctrine that certain groups are “more equal than others.” The political process discriminates in ways no federal law would permit in private industry. Some groups are forced to pay taxes; some are not. Some receive subsidies, credits, and assistance; some do not. Some are granted direct influence over policy decisions; some are neglected.

              There is no surprise we’ve ended up here. Washington has become a big pile of goodies, creating an American culture of outstretched hands. Our society has accepted the faulty premise that an individual’s labor is a public resource, and its value the property of bureaucrats.

              Ultimately we must decide if government is a rights protector or an outcomes guarantor. We erroneously invest hope that a small, distant enclave of politicians can rid the nation of all its problems. When we look to government for solutions, and not inside ourselves, we cease to exist as a nation of free persons, and derive our identity from a mob.

              America was never ugly, but our legacy of protected classes makes the implication. Like Fleur de Lis in L.A. Confidential, progressives have attempted to transform America — in their view a homely hooker — into something that resembles a movie star on the surface. They have shredded the Declaration of Independence and its “Life, Liberty, and the pursuit of Happiness,” to replace it with a business card that promises, “Whatever you desire.” Shaky-handed politicians have taken her under the knife throughout our history, leaving her almost unrecognizable. A return to principled, limited governance can restore the American character, one that views the “Black Friday Effect” with resounding condemnation.

              http://www.americanthinker.com/2011/09/the_black_friday_effect.html

        • Mathius™ says:

          No certainly this is true, but it’s beside the point. The point is that there are some stimuli (economic and otherwise) which “everyone” will respond to – because they are human. Others will trigger responses from groups which identify in certain ways such as “American.” Others are individual. Whatever the cause, and government is very likely involved, the fact is that there are individuals, groups, larger groups, and the largest group of “everyone.”

          So while our new friend Waffle Street and out old friend Black Flies (sic) are debating whether all economics should be viewed at the individual level or the bird’s eye level, I think the answer is “both, and more”. There are some things we can safely aggregate for purposes of economics (all people want to eat, for example). And there are some things than cannot be aggregated (not everyone wants to live in Canada North Montana).

      • I see that you did not use the Texas model here….wise…..very wise.

      • DisposableCarbonUnit says:

        Since I have listened to BF, I no longer herd. I am a sovereign Caribou!

  18. 😐

  19. Any of you folks get to see the two Montana boys help Arizona State win tonight?

  20. Worth 7 minutes of time…..amazing and very moving.

    http://www.youtube.com/v/QZFkZiwMLZ4

  21. A Puritan Descendant says:

    The cost of federal regulations. (NOT including State/local regulations)

    “The research finds that the total costs of federal regulations have further increased from the level established in the 2005 study, as have the costs per employee. More specifically, the total cost of federal regulations has increased to $1.75 trillion, while the updated cost per employee for firms with fewer than 20 employees is now $10,585 (a 36 percent difference between the costs incurred by small firms when compared with their larger counterparts).”
    http://www.sba.gov/advocacy/853/2016

    In simple theory, elimination of just federal regulations, could increase employment or employee wages for small business by roughly 25%.

    ( At $40,000 wages per employee, 20 employees = $800,000. Eliminate the additional federal regulatory costs of $10,585 x 20 employees = $211,700 then divide by $40,000 wage = 5 additional employees, an increase pf 25%. )

  22. Congrats to the Crimson Tide. If I were in State College, I would be at the All American Rathskeller drowning my disappointment in a pitcher of draft.

  23. @ Gman…….

    Gman states: “While I hope this all plays out as you believe, many very good economists disagree.”

    D13 concurs but adds: There you have it. Economist=academia. Academia has never had the answers….unless they have picked up a broom or borrowed money to run a business, or hired employees, or worked under Federal regulations…..

    If all they have had is a chalk board and a typewriter (keyboard in modern day)….they have had nothing. Studying models is good for one thing and one thing……wasting time unless you have experience to go with it.

    Unfortunately….we waste to much time on academia and not enough time in experience.

  24. DisposableCarbonUnit says:

    Since it is so slow lately…….

    FIVE RULES TO REMEMBER IN LIFE:
    1. Money cannot buy happiness but it’s more comfortable to cry in a Mercedes than on a bicycle.
    2. Forgive your enemy but remember the bastards’ name.
    3. Help someone when they are in trouble and they will remember you when they’re in trouble again.
    4. Many people are alive only because it’s illegal to shoot them.
    5. Alcohol does not solve any problems, but then again, neither does milk. Drink Up !!

  25. SK Trynosky Sr says:

    I think that the collapse of the real estate market took everything else with it. The question is how and why did the market go wild? Certainly the government’s involvement in encouraging home ownership caused a spike in the approval of less than sterling mortgages but, at the same time lets remember that the banks, on their own were handing out credit cards to anyone who asked and was possibly breathing.

    Back in the 89-91 crisis and collapse, my friends in the mortgage business told me that you advanced in their business by putting money out on the street. Quality did not matter at all, only quantity did. The assumption, before, during and after that crisis was that it was a game of musical chairs and eventually the music would stop and someone would not have a seat. The goal of the “players” who were aware of this was to be out of the game before the music stopped. When it did finally stop, I saw three things:

    1. The initiators were by and large out of that market, headhunted into bigger banks for their “success” or promoted so high as to be insulated from the collapse they started

    2. The people who lost their jobs were the “new” guys who found themselves sitting in the chairs of the guys who started it all

    3. The people who were punished (indicted) were either the borrowers, the appraisers or the new guys. No real effort was made to investigate how it all started

    The thing I never understood and still don’t is why it was allowed to happen again?

    The issue of oversupply is valid. I see that having been created by two things. First the market was so overvalued with the annual refinancing and “cashing out” that everyone wanted to do it that it was logical to build new units for this new market of buyers. secondly, credit was so readily available as to make having the house in the City, house in the country and house at the shore seem feasible. If any of you discussed the country, lake, mountain or shore house at the time with a broker or borrower invariably they would explain that the re-fi on your primary residence would finance it and apparently continue financing it forever.

    It was a house of cards. I am starting to think that this country, full of the descendants of people who as Bill Murray said in “Stripes” were thrown out of every decent country in the world and subsequently built this dynamic industrial dynamo by hook or crook have, since the demise of manufacturing switched their energies into creating “financial products” and marketing them again by hook or crook. Unfortunately when Westinghouse or GM or Motorola made a product and convinced me I needed it, people were employed in the manufacturing process and the wealth was spread around. These financial products benefited few but they were well rewarded. One could make the argument that the new construction that was an indirect result of their manipulations benefited a larger group but the ultimate damage that was wrought far outweighed the short term windfall.

    For the second time in a generation, there was a major economic collapse in the real estate market and for the second time there was absolutely no accountability. What is to prevent a third time?,

    • A Puritan Descendant says:

      “What is to prevent a third time?”

      Please don’t answer with “regulations”.

      Whatever happened to common sense? Whatever happened to rugged individualism? Why so many fall into the trap of 30 year mortagages on homes with a medium price of $270,000.00 dollars?

      I built my own home for $24,000.00 on 50+ acres (another $26,000), total $50,000.00 ” in the mid 1990’s. The house built, and part of the land bought with cash saved the ‘old fashioned way’. The rest of the land on credit and payed off in 4 short years. I bet it would not cost ‘too much’ more today, to do it again. Please don’t ask where I live, as I enjoy being lonely.

      I guess it was that ‘herd mentality’ again. .

      Sk, I always enjoy your posts!

      • A Puritan Descendant says:

        PS: investment tip! Buy farmland in greenland! 😉

      • Could it be that the risky mortgages were too easily sold to GM & FM or packaged in derivatives and pawned off on someone else. Hence there appeared to be little risk to the company writing the original paper. Unfortunately the risk was spread throughout the whole system.

        We have a local bank that did things the old fashioned way, large down payments and they held the paper. They sailed through the crisis with no problem.

        It must be made clear the big banks that the will not be another bailout.

      • SK Trynosky Sr says:

        Nothing will prevent a third time except a return to certain moral and ethical standards which do not exist anymore. The regulators were in cahoots with the criminals, just ask Frank and Dodd. I think you got the herd thing right, after all, “everybody else was doing it”.

        My experience was that the junk mortgages were snapped up by the banks. My last 1991 mortgage wound up with six different lenders (I am sure it was bundled with junk) before I paid it off in ’06. A key part of the whole thing was the notion, very real mind you, that you were a successful Loan officer or mortgage banker because of the quantity of paper you wrote. People moved up the ladder at an astonishing rate and acquaintances of mine were retired in the early 00’s with huge wads of cash while in their late ’40’s.

        There is a move on by the feds to drag down the good banks. My local bank, Hudson City Bankcorp. are scrupulous lenders. At the moment they seem to be under a Federal microscope and have been forced to participate in things they would rather not. I just have this sinking feeling that the goal out there in DC is to ultimately have Goldman Saks run the country. All us right wingers were wrong all along, it wasn’t the Commies, it was the F—— fascists.

  26. Ray Hawkins says:

    “Build it and they will come”?

    Oh my – please tell me part three this is not?

  27. T-Ray

    It must be made clear the big banks that the will not be another bailout.

    Dream on.

    The reason the FED exists is solely to protect the big bank cartel and nothing less.

    Know this and plan accordingly.

  28. Waffle,

    the Fed is jawboning about irrational exuberance, and professional money managers still decide to pay 100 times earnings for tech stocks, I think the “people are short-sighted and herd-minded” thesis holds up pretty well.

    We are probably arguing over what to name a shade of blue, while agreeing that the color is indeed blue …..
    ….I am not comfortable with where you are placing the root cause.

    As Schiff said “The financial markets were spending like drunk sailors, but who was supplying the free beer?”

    You point to professional money managers – but I point to the government constraints on where these guys can put their money – as you know, it is not easy to place a billion dollars; if they put too much into one company, you have to declare a ‘hostile take over’; there are not a lot of hyper-large market places that can absorb a move of a few billion dollars out of or in to…; they are prohibited to place funds in some sectors; they are penalized for holding cash – some institutions charge negative interest on large cash deposits and they need to show profits for them to earn a living.

    Suddenly the market is very small for them – and it is no surprise to me that they will continue to pour money into any sector that is demanding larger and larger amounts of capitalization simply because “where else are they going to put larger and larger amounts of capital that is being shoved into their pockets?”

    If you send me your e-mail address, I’ll send you a nice summary of the Kurz paper.

    USWep, can you provide this to Waffle?
    Thanks!

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