Archive for the ‘Economy’ Category

Stimulus: Still Stupid the Second Time Around

Saturday, February 14th, 2009

No one would ever wish for a crisis, but the one good thing about it is that everyone starts to pull together.  Unless of course, you’re not asleep and dreaming about another country in another era.

Pulling together would interfere with self-indulgent, short-sighted, partisan ignorance.  The only positive to me, is that I now know that I won’t have to worry about my immediate personal safety if I’m ever in a crowded life boat– I can relax and wait while the children are thrown overboard, maybe even before the lifeboat becomes crowded.  (Sure, they said it was just a drill, but why take chances?  Maybe they were afraid we’d panic– maybe it’s a fractional reserve lifeboat.)

What about the consumer– if the consumer isn’t confident, surely that’s an excellent excuse to live in the present? Doesn’t the future depend on living well now?

It’s very convenient to believe that an economy depends on consumption– it’s what you’d expect the self-centered and intellectually lazy to believe in.

“You mean, my idle whims and self-indulgence are good for the economy?  The world is my smorgasbord?  I don’t have to think about anything, or prioritize, or save for a rainy day?”

Sir or madam, you are correct– economics tells us so.  Logically, even your bodily functions are good for America, so drink a keg, eat a pizza, take a laxative– economics and Uncle Sam will love you the more– because by a curious coincidence, the exact economic theory that one would expect that a lazy, selfish moron would wish to be true is the exact, prevailing economic orthodoxy in America.  What extraordinary luck!

Confidence can have an impact in any endeavor, but it seems like another non-coincidence that economics shares the same obsession as pop psychology.  What matters more than confidence is reality.  You might be able to hypnotize somebody stranded in the 100 degree desert– no food, water, shelter– into believing it’s all an air-conditioned Swedish embassy party, but that “confidence” won’t accomplish much for his or her “economy”.

Stimulus is a trap.  It can only work when the confidence is already there, waiting to come out– stimulus “works” as long as you don’t need it.  If you’re in the desert and need to reassess, stimulus is a disaster– it prevents the reassessment from taking place.  That’s really all the self-styled confidence building actions of government economists come down to in the end.  Since our method to inspire confidence is to prevent analysis, that ultimately must inspire no confidence at all.

By Les Lafave

Repeal the Federal Reserve Act –

Public Works (and Won’t Works)

Friday, December 19th, 2008

The unknown cost of economic stimulus is somewhere down the unmeasured road, while stimulus’s close cousin, public works, would appear to be the next Keynesian cluster bomb to be fired at the yet defiant real world.

Illusion enablement aside, a public works infrastructure concept is a modest improvement over raw stimulus.  In public works there’s at least tangential acknowledgement that it may be a good idea to have some sort of output– contrasted with stimulus which has an even closer cousin, the broken window fallacy.

Public works has a more hopeful sound.  Stimulus could be just a giveaway to Wall Street.  Public works is stuff—concrete and steel. If Wall Street is going to get hold of public works money, at least they’ll have to work to come up with a twisted scam– it won’t be just “injected” onto their balance sheets.

But if we can’t keep that concept of output always uppermost– and the evidence so far is that we can’t– the happy, hopeful sound of public works will be another money pit.

The base assumption is already glib– that public works are just something the government does in tough times (and easy times and medium times), to create jobs, stimulate the economy, build infrastructure and give people hope.  But what are we talking about?

It’s not like we can put together teams of unemployed stock analysts and drywallers and send them off to build bridges. Subtleties like this can get lost in politics, but bridges, I’d point out, are best built by those who know how to build them. Most such people are not hanging around the donut shop waiting for Congress’s call– they’re out there now, building and repairing bridges at the rate society had previously chosen.  Stomping on a bridge building accelerator will have a lot of slippage– as for example, when a previously active engineer is lured away to teach due to an accelerated demand for new engineers.

If there’s a big ramp up, someday there will be a ramp down.  Some of the “created” jobs will be uncreated, and ripple effects will cause other loss.  (And we shouldn’t get too excited that only some of the created jobs will be lost.  We can’t know if it’s a gain over jobs that would have been created by some other plan, or by no plan.  However, the more splashy and political a job creation plan becomes, the less probable the sustainability becomes.)

A subtle ramping up in infrastructure isn’t going to be the payoff that politicians will be looking for.  They’ll want a voter attention grabbing splash.  The reaction in politics to a slower than wishful expectations infrastructure start will be to stomp on the accelerator even harder.  (Hopefully in the case of bridge building, we won’t get the splash literally.)

New projects have an unfortunate high profile over repairs and maintenance.  It seems rather muddled to consider ourselves caroholics and in need of more road infrastructure at the same time, but contradictory rationalizations are becoming an American specialty.  Thinking about interest groups now fine tuning their “infrastructure” proposals is frightening.

Congress appears to be at least as confused as anyone else.  And we can always be sure that whoever they decide to listen to, it will be based not on common sense persuasion, but on political connectedness and popularity.

Robert Poole in a Wall Street Journal piece, “Stimulus Shouldn’t Be an Excuse for Pork”, focused on U.S. Conference of Mayors requests, and concluded that, “It is clear that any infrastructure stimulus money given to the country’s mayors will lead to thousands of tennis centers to nowhere.”  Other advocates, public and private, aren’t going to have any more trouble than the mayors in seeing their porkish proposals as “infrastructure” and “job creation”.

That tradition– incorrectly considering pork spending as if it’s economically additive, has moved from the realm of the disgusting to the dangerous.  (Especially if all those tennis courts distract us from the study of safe, proper food rioting techniques.)

Consequences for off the charts government spending and borrowing are somewhere between uncertain, and certainly bad– so justifiability for public works projects on their own merit, ex any consideration of “stimulus” or “job creation”, should be a bare minimum for any infrastructure proposal.

By Les Lafave

Abolish the Federal Reserve –

Paul Krugman’s Circular Reasoning Returns

Saturday, November 15th, 2008

There was a Paul Krugman Op-Ed in The New York Times November 14, 2008 titled, “Depression Economics Returns”.

I’m not sure that I’ve ever met a pure Swede, and if I do I may not be offered a prize, but to me the title of the Nobel laureate’s editorial was the last part of the piece that made any sense.

Professor Krugman’s argument is that the character of policy action in “normal times” shouldn’t be repeated in an economic crisis like this.  Now before anyone shouts, “At last, someone sensible!”, and leaps to his or her feet to applaud, I should clarify what these characteristics of past political policies are according to Krugman.  Have you guessed them yet? They are: modesty, prudence, caution, fear of “doing too much”, “fear of red ink”, … is there anyone who isn’t laughing yet?

It’s quickly rather sobering to see Krugman write that, “… in normal times modesty and prudence in policy goals are good things”, if you consider that it’s possible that some policy makers might read the New York Times.  One can almost hear the cheer going up in the beltway, “Hurray! Finally we’ve got some abnormal times, and can let go of all that egomaniacal imprudence we’ve kept bottled up for so long!”

The irony is, that Professor Krugman’s life can’t have allowed him much conception of normalcy.  A person living a normal American life can instantly see that there’s no modesty or prudence in Washington (and will have unfortunately had to instantly see it incessantly for their entire life).  Krugman must indeed be living in a rarified, insular, policy making zone.

Since the things that Professor Krugman describe as virtuous economic policies in “normal” times haven’t been tried for about a century, and all of his recommendations are exactly what has been tried, I believe he would have been more descriptive to title his Op-Ed, “I’m a Nobel Prize Winning Economic Dinosaur; Don’t Listen to Me”.

However, since he did mention depression economics, I should mention that there was one-twelfth of a sentence (yes, I measured it) in the body of the editorial that made sense.  The phrase, with the inanities about “stimulus” on either side of it removed, was, “…greater aid to those in distress…”

(So the final version of the professor’s editorial if I’d been his editor, leaving dinosaurism aside, would be:

Depression Economics Returns

Greater aid to those in distress.”

I’d have to admit that Times circulation could slide under my charge.)

While “greater aid to those in distress” is something for good societies to do, it isn’t directly a matter of economics.  It should be done with the “aid” and the “distress” in mind, not with any imaginary “stimulus” goals layered on top.  To pick up Professor Krugman’s normal times theme– in normal times, delusions of stimulus merely politisize the provision of aid to those in need– the aid, the politics, and the supposed stimulus are casually absorbed by economic vibrancy that has little to do with any of these other things.

In these abnormal and less than economically vibrant times, actually helping people, rather than helping economies, ideologies, corporations, houses or jobs, could provide easy policy guidance for modest government action (modest at least, by the nation busting standards of even just the current bailouts).  Too easy for Professor Krugman.  He’d rather help politicians do what they’ve always done, but with a firm warning not to be timid this time.

Why is Professor Krugman so sure that the “normal times” economic policies aren’t the cause of the abnormal economic times?  After all, those were the policies that were used, and here we are.

The radically different policies that we should try involve honest money and credit, with not only individuals, but also societies earning what they spend.

As long as it’s earned, it can probably be spent either timidly or boldly without the country crashing down on our heads.

By Les Lafave

Banking Reform –

Globalization: Spreading the Wealth (of Mistakes)

Monday, November 10th, 2008

What would the U.S. be doing now if the rest of the world wasn’t infected by our credit collapse?

Probably a good imitation of an old fashioned emerging market collapse, which is a good imitation of a fire in an over-crowded roller skating arena, just after the concession has spilled a vat of popcorn machine butter in front of the only unblocked exit.

Right now the U.S. economy is getting an odd, two pronged support from the export of the credit crisis– demand for dollars from foreigners struggling to support and pay down dollar denominated debt, plus foreign central banks throwing up their hands and cutting interest rates, narrowing the differential with U.S. rates.  (I recently saw business analysts debate whether the Bank of England would cut a half point or three-quarters of a point– they cut one and a half points.)

If not for the remnants of the dollar’s reserve currency status, the credit collapse in the U.S. would have much more of that emerging market bubble flavor (possibly without the imitation butter)– among the primary features, a crashing currency and soaring interest rates.

The circulation of the credit collapse has to seem pretty sickening overseas, but the apparent high dollar, low interest boon for the U.S. is in fact a slow motion tragedy.  Our leaders are grabbing the wrong signals with desperate enthusiasm, trying to recover the past and oblivious to the future.

As bailout and stimulus trial balloons expand absurdly, but with little or no reaction yet from the U.S. dollar and interest rates, a new level of hubris sets in.  Astoundingly (or perhaps typically, it’s hard to choose), most politicians and market players are again getting trapped by a perception of limitless American government power.

Charts of the U.S. monetary base at this point basically show a line going straight up– disinflationary head winds better not let up for a second, or we’ll need Zimbabwean advisors at the U.S. Bureau of Engraving and Printing.

On the subject of U.S. interest rates, Michael Pento from Delta Global Advisors says, “One of the major ramifications of having our national debt move above the $10 trillion mark is that the sustainability of the government, consumer spending and the economy rests on the continuation of artificially low interest rates. In fact, low rates that are the result of money printing have become our addiction… it is only because interest rates are at record lows that the debt service is still manageable.”  Pento doesn’t believe this can last.

The temporary artificial strength from U.S. dollars and bonds means that these key yardsticks are being misread by our leaders.  There should be huge storms smashing these markets every time there’s a prominent discussion of another hundred billion of stimulus or bailout– dramatic signals that even politicians and Wall Street bankers could understand. Instead, by the standards of the times, these markets remain placid.

If American politicians were giving any consideration to what could happen if foreigners turn away from the U.S. dollar, they couldn’t possibly contemplate any more “stimulus” or bailout packages.  The mind set of American leaders is that of complacently snooty parents; the U.S. dollar their sheltered spoiled brat who’s about to launch into real world competition brimful of bratty misplaced confidence.

Sometime soon there won’t be enough economic actors able to suspend disbelief at the mismatch between the fatuous talk of ever expanding bailouts and stimulus plans, and the reality of destroyed real capital and already unmanageable (to say the least) debt.  We’re looking at another pop, and as scary as a stock market collapse or even a credit collapse can be, a currency collapse can be worse.

Politicians have been saying that “of course” the current economic crisis is not analogous to America’s Great Depression.  I think that secretly most now believe that this crisis is like the Great Depression, but they’re actually taking a kind of comfort from it– to many of them, the New Deal is familiar ground.

Certainly if we’re talking about its expansionary credit causes, this crisis is indeed analogous to the Great Depression.

While there are some ways in which this situation is better thus far than the Great Depression (not exactly a point of pride), there’s at least one potentially scary difference.  The New Deal programs that didn’t work the first time when government was smaller, “only” causing an unprecedented “double dip”, will not work when tried the second time, but with our enormous indebted government, will gift us a black box launcher of waves of venomous black swans (a weapon that the Pentagon may have actually been working on, but it looks like other Feds are working overtime with the mixed economy to beat them to it).

If a black box launcher of waves of venomous black swans sounds worse than a double dip, it may well be (depending on the venom of the swans).  A possible next salvo is a crack in the dollar or a spike in interest rates.  Only the box and the swans know for sure.

By Les Lafave

Banking Reform –

Fed Chairman Bernanke Clowns Around, Exceeds Stock Market Expectations

Sunday, November 2nd, 2008

Anyone who’s watched the business channels for more than an hour or two will have been well indoctrinated in the magic thinking that is the Federal Reserve mandate.

The Fed plays “an expectations game”.  In order to maximize the impact of their manipulation, the Fed will try to “surprise” the markets, because if the markets “expect” an action, they may not react.  Often it’s market analysts explaining what the Fed could do that might or might not meet market expectations, or surprise them.  We also hear members and spokespersons for the Fed adapt this habit of speaking.  You’d think they were generals in war, analyzing enemy preparations.

But if surprises work so well in that piece of the economy, why not try them everywhere?

UPS could surprise its customers by sometimes delivering next day, sometimes putting your package in storage for six months, or perhaps even delivering something when you’ve asked for a pickup.

Burger King could sell its customers dollar burgers on Wednesday, thirty-five dollar porterhouse steaks on Thursday, and plumbing supplies on Friday.

If other economic sectors would follow suit (suits being available at garden supply stores… or are they? Maybe your expectations are being managed again… ?), then you can start to see that soon we’d have an unprecedented economic boom, since according to Fed lore, no one knowing what’s going on is a sure path to success (as long as it’s not so sure that we can’t still be surprised).

Has the Fed itself fully explored all the possibilities for surprise?

Maybe Chairman Bernanke could show up at press conferences in drag or funny costumes:

“Chairman Bernanke surprised the financial press today when he attended a briefing wearing an old raincoat and a Harpo Marx wig.  Attendees were further taken aback when the Chairman answered all questions by honking a clown horn.  Reporters quickly adapted, requesting that Bernanke answer questions with one honk for yes, and two honks for no.  All market participants were adjusting to the new conditions, but then Chairman Bernanke yanked away the coat and wig to reveal a Spiderman costume, stunning markets and precipitating an enormous rally…”

While Treasury Secretary Henry Paulson may or may not be glad to see us, but always carries a bazooka, for the Fed, the talk is of how many bullets they may have left, and how they can maximize their potential for impact on the markets.

And why use bullets on the market?  Why surprise them (us) at all? This talk is of a clear effort to take a group of actors who believe one thing, and get them to believe another.  It’s the not very disguised language (in fact pretty much says what it is) of confirmed serial bubble makers.

Yet when the bubbles inevitably occur, then the folks with the self-proclaimed power over expectations, with the bazookas and bullets, have an epiphany– it’s the market’s fault.  “Sure, we had all the advantages, privileges, power and information, but we couldn’t have foreseen that if we threw money at people, they might try to grab it.  We need more bullets to get the benighted, frightened public to trust (and borrow) again so we can re ignite the markets that we perpetually mistake for the economy.”

It should be pretty clear who provides and produces, and who makes noise and pretends.  Unsurprisingly (the actual word that the economy as a whole prefers), the people who produce goods and services are the people who produce goods and services.  It isn’t Wall Street or the banks, and it certainly isn’t the Fed or the government.

Creation of money and credit doesn’t, in the long run, produce anything except a boon for the creators and early spenders, and confusion and malinvestment for the rest of us.  Attempted management of the perceptions of the beneficiaries and victims of fiat money and credit creation may sometimes keep the game cycling a little longer— but more time spent obliviously making poor investments is a worse outcome, not a better one.

Banks and government don’t grow or manage the economy; they don’t run it, expand it, or stabilize it. What banks and government do to the economy is rape it.

And what would any rapist do to try and dodge consequences from his crime?  Blame the victim, of course.

By Les Lafave

Abolish The Federal Reserve –

Treasury Secretary Henry Paulson Considers Name Change for Office of Financial Stability

Monday, October 13th, 2008

The Treasury’s newly formed Office of Financial Stability may be renamed “The Office of Financial Stability, Tee Hee Hee”.

The change of name for the office made responsible for administration of the 700 billion dollar bailout fund under the Emergency Economic Stabilization Act of 2008, is being considered in view of market reaction to its creation.  Other possibilities include, “The President’s Working Group on Fubar”, “The Wall Street Employment Opportunity Commission”, “Malinvestment, Inc.”, or if a folksy sound polls best, “Paulson and Friends, We Inject the Capitul into Capitulation”.

Secretary Paulson said in a statement last week following the meeting of the G-7 nations (and o.k., now this part of my editorial is true), that “it’s naïve of the markets” to expect that different governments with different structures would all want the same solutions.  (The markets will probably apologize the only way they know, by naively plummeting in horror.)

But is the market’s wish really all that naïve?  Capitalism is capitalism, surely, and a capitalist solution might be better in the long run than a solution from someone’s secret police.  Secretary Paulson’s comment is an odd one for a capitalist to make– though it makes perfect sense as a comment from one of a gang of fascists, where after the quest for raw masses of power is taken care of, priorities may need a little fine tuning from one fascist state to the next.

Different structures aside (or not), the G7 has vowed to take action, and the G20 agreed (Gee, 20?).  If there was a G100, it probably would agree too– in government logic, the key to everything now is to “inject capital”, and portray confidence (with a confectioner’s coating of empathy for the little people they’ve screwed out of hopes and dreams.)

In the “naïve” logic of the markets however, this is no longer credible.  While spokespersons for the markets hopefully express support for the government moves (perhaps as a trial balloon for a job in government before Wall Street lays off everyone except a skeleton cleaning staff), the markets themselves are no longer clearing this disinformation.  There isn’t a reason for confidence when there’s now recognized massive malinvestment, and the government solution is to add more.

The plunging and “freezing” markets were actually trying to fix the systemic problem, in the same way that the necessary but unpleasant gag reflex would try to fix the systemic problem of a seven year old who just ate half a bag of Halloween candy.  However, the G7 (and the Gee, 20?), are offering up banana splits with chocolate sauce and pudding cake.

This is beyond Treasury Secretary Paulson’s capability to understand– not because he’s stupid, but because a lifetime of finely tuned self-serving bias (a Wall Street specialty) makes him incapable of seeing himself as not part of the solution.  Unfortunately for all of us, the markets and the economy will continue to try to teach him that his is not a creative power.

By Les Lafave

Banking Reform –

Treasury Secretary Henry Paulson: White Queen Redux

Thursday, October 9th, 2008

Treasury Secretary Henry Paulson is going to put capital in the banks.  In this concept, he shares a rich tradition with Santa Claus and the Easter Bunny.  (He leaves free presents, theoretically only to the relatively good, but realistically rather more arbitrarily with a bias toward the privileged, and lastly and most importantly– it’s all a fantasy.)

It’s true that Secretary Paulson may be able to improve bank capital, in the sense of benefiting the entries on the bank’s balance sheet, but not in the sense of giving a productive capability that didn’t exist elsewhere and now has come into being out of nothing. What Paulson can give is only a representation of real capital.

The Department of the Treasury can “inject capital” (Paulson’s words from his statement of October 8, 2008), in the same way that the Federal Reserve can increase the money supply, but can’t increase (or even maintain) the purchasing power of the new money at the same time.

There are some who’d argue that the balance sheets that Secretary Paulson can manipulate do matter– that “injecting” “capital” (it’s hard to choose which of the prior sets of quotation marks to invest with the most sneering invective; please feel free to curl your lip at both), into banks will buy time until the economy rebalances.

This can only have the appearance of truth when the economy isn’t overextended (i.e., it only works when it doesn’t matter).  The markets are “frightened” and there’s a “liquidity freeze” because of the recognition that real capital has been overextended and wasted.

The markets recognize that the only thing to do is sort through the rubble looking for salvage– that when you’re overextended you have to find a way to prioritize– while Paulson and the government are convinced that they can spin the rubble in really fast circles and make it look like something shiny.

We mistake paper money for real purchasing power and real savings, when in fact it can only potentially represent these things, and that dependent entirely on government trustworthiness.  We mistake the bank balance sheet capital (now demonstrating how real it really wasn’t with the astounding speed with which it can disappear) for actual resources and capacity to produce– again it’s only a representation (and again an unstable one, since it’s considered capable of whimsical “expansion” to “stimulate the economy”).

Treasury Secretary Henry Paulson has asked for patience.  He wants us to trust government, and share his confidence (his favorite word as things fall apart) that strength will be restored to the American economy.

Secretary Paulson doesn’t deserve our trust and belief; the government doesn’t deserve our trust and belief, and it’s not because they’ve asked for this all along and failed all along– it’s because they’re lost now, and can’t possibly find their way in the future since their compasses are backwards.

It’s not good for Americans to have confidence in something that’s doomed to fail– it’s better to question folly than to have confidence in it.  If for example, confidence in mortgage finance and real estate value was yet ongoing today in a continuation of yesterday’s real estate bubble, then the confidence would be moving us from stunningly stupid waste of capital and opportunity, to supersaturated thermonuclear stunningly stupid waste of capital and opportunity.  Economic confidence is very far from deserving the knighthood that government perpetually offers it.

While it’s true that economic and political systems require trust, that only works when they also require trustworthiness.  It’s not a duty for Americans to unquestioningly accept government foolishness and waste, no matter how insistently the government tells us that questions are destabilizing.  The reason our system can fall apart from too much questioning is not because it’s built on trust (which we might have a duty to maintain); it’s because it’s built on leverage (which we do not).

Now I’ll give you something to believe.  [the Queen remarked]  I’m just one hundred and one, five months and a day.’  `I can’t believe that!‘ said Alice. `Can’t you?’ the Queen said in a pitying tone.  `Try again: draw a long breath, and shut your eyes.’  Alice laughed.  `There’s no use trying,’ she said `one can’t believe impossible things.’  `I daresay you haven’t had much practice,’ said the Queen.  `When I was your age, I always did it for half-an-hour a day.  Why, sometimes I’ve believed as many as six impossible things before breakfast.’   (Lewis Carroll)By Les LafaveAbolish The Federal Reserve –

Can’t Wait to Get My Piece of the Bailout Profits

Thursday, October 2nd, 2008

The hubris of assuming that all you need to do to make a profit is find a spread between borrowed and lent funds should sound familiar– that’s how Wall Street (with a little grease from the Fed) got us into apocalyptic trouble.

So… Congress is going to take over the financial industry’s disastrous investments, and their disastrous methods, and then, being the nation’s experts on profit, quickly turn a profit.  It’s only a matter of deciding how to divvy up the loot.

Mutual fund manager John Hussman points out that if the Paulson plan means buying the distressed assets at distressed prices, then balance sheet deterioration continues: “The only way that buying the questionable assets will increase capital on the liability side of the balance sheet is if the Treasury overpays for them.”

In other words, you can’t have it both ways– will it be a bailout, and lose money, or will it fail in its purported mission, and make a profit?  (This is politics– it’ll lose money.)

But after all, there’s no other choice right?  Without money and credit created out of nothing so that we have exponentially expanding debt as a stable base for the economy, and a congress to direct it all, there’d clearly be no economic activity at all.  We’d all sit on our butts, suffering C-Span withdrawals– building, creating and doing nothing.

The few lonely voices who predicted this credit collapse years ago, are now even more lonely.  Jim Rogers and Peter Schiff, for example, say that doing nothing is indeed an option– the best of a lot of bad options.  American T.V. bookings for them appear to have actually gone down.

Producers had booked them in the past to keep panel discussions lively.  It wasn’t possible that they could actually be right (they were saying bad things about Wall Street and government).  Now it’s either too embarrassing or too scary to invite them back.  The expanded crisis coverage is dominated instead by those analysts who, with stunning brain-deadness, were forecasting even two months ago that there wouldn’t be a recession.  By and large it’s these incorrect forecasters now demanding our attention again to tell us “there’s no other choice”.

The old saw that if you’re in a hole, the first thing is to stop digging, can’t be heard over the sound of turning shovels. Congress will manage to stagger into some sort of active crisis role.  A bad bailout package is unlikely to be their last effort to throw sand in the gears, but they can always unload their failures on “the free market” (which they badly and intensively regulate).

By Les Lafave

Abolish The Federal Reserve –

Why There’s No Such Thing as Gouging

Monday, September 29th, 2008

As I go out at 5.30 a.m. on a Sunday morning to cruise for gas in Atlanta, I think about how different things might be if any southern governor could tell the difference between capitalism and a donkey’s or elephant’s ass.

This isn’t an efficient use of resources.  It’s a waste of my time, the station’s time (where, when gassed, most are ad-libbing line-up systems of tape and cones that appear to require extra staff), the government’s time (where state governments now seem committed to investigate hundreds of cases of “gouging”).  It’s a waste of gas, since it takes gas to cruise for gas.

It’s also risky.  A shortage of gas could become a shortage of trucking capacity, which becomes a shortage of food, which becomes a shortage of emergency services when there’s a surplus of riots.

The simple cure for shortages are market prices.  However, even as Hurricane Ike lined up offshore, southern governors and officials lined up on T.V., with promises of punishment for “gouging”.  They were always much more clear that gouging should be reported and prosecuted, than they were about what it actually was– certainly from the tones of voice though, whatever it was, it sounded pretty bad.

Certainly it’s not fun to have a price double or triple overnight.  But I can now tell you from direct experience that it’s even less fun to obsess over your gas gauge as you pass empty gas stations one after the other.

There’s also the potential that while price spikes are short term, price fixing shortages are forever.

If prices can go anywhere, they generally only have to test the upper limits once, and it’s over fast.  Exploitable profit opportunities get filled, if you don’t block them.  We may not know exactly how they’d materialize, but they always do: more storage at the refinery or the gas station (or somewhere in between); more trucking capacity lined up when there’s a storm; more spent on storm and disruption modeling by industry; new refineries built in different locales.  Users may also decide to store a little emergency fuel for next time– a positive “hoarding” effect.

Without the price mechanism, it’s a different story– we get stuck– in this case, potentially literally.

On Saturday, as I was passing out of gas cars, I also saw lots of game day college road trip football flags.  Important, certainly. But I would have liked to see that proven case by case at market prices– gas money can also be used for beer kegs at a T.V. party– a well known college substitution effect that a good governor, if there are any, would do well to remember.

I cut my Saturday driving short, but I’d promised to watch a junior tennis match on Sunday, and probably would have paid pretty much anything for a few gallons of gas.  A promise to a teenager may pass unnoticed or disdained, until the one time it mysteriously becomes tragically important.  So I found my early morning gas station.  The station unlit– it didn’t need lights to do brisk business at 6 a.m. at $4.39 per gallon. Regular gas only, but my car seemed grateful.

The ease with which a relatively minor storm of populism can sweep away simple lessons of economic common sense, apparently permanently, is disturbing.

To put it in Sesame Street terms– prices are our friends.  They need to move around in order to help us.  We also need to keep in mind some pretty simple business facts.  A demand that a station not “gouge” will most often be a demand to lose money. Selling a week’s worth of fuel at yesterday’s profit margin in one morning blaze of glory, and then going dark for a few days until you hope to get more– that amounts to making a “fair” profit for a few hours, and then losing money for a few days– repeat that often enough, and it’s a recipe for going out of business (and perhaps making the shortage worse next time.)

Les Lafave

Nothing to Fear But Government Telling Us Not to Fear

Tuesday, September 9th, 2008

FDR (from whom the title of this piece is bastardized) may not have understood the natural regulatory power of fear, but for modern day politicians, there’s really no excuse.

The seizure of Fannie Mae and Freddie Mac is the flambéed cherry on history’s biggest lesson in moral hazard. Government guarantees pretty much have to die a violent death.  Not only can fear not be segregated from its milder first cousins, caution and diligence– but on occasion fear’s closest relation is to common sense.

It would be easier to stomach the incessant repetition of, “there wasn’t any other choice”, if it was followed up with “and we must make sure we never put ourselves in this position again”, but that’s not what we hear about the “rescue” of Fannie Mae and Freddie Mac.

We also hear little about who’s to blame.  Whether it’s spoken or implied, the incantation is “fix it first, and worry about the blame later.”  It has a soothing, logical ring to it, but it would only be sensible if the repeated, seemingly well-adjusted attitude was for unforeseen, unrelated problems– not for the same mistakes over and over.  (Having one credit crisis, Mr. Secretary Paulson, may be regarded as a misfortune, to have them in most decades looks like carelessness.)

“By lending at up to 90 percent of the value of a property, or by insuring such a 90 percent loan, the government was putting itself in a potentially costly position.  If house prices fell by more than 10 percent, the ‘equity’ of hundreds of thousands of home-owners would be wiped out.  ‘Under such circumstances,’ as Fortune noted in 1938, ‘the FHA might very well find itself the unwilling landlord of half a million or more houses.’”

The quote above is from a footnote in James Grant’s “Money of the Mind”, copyright 1992.  He’s describing the birth of the FHA and FNMA/Fannie, and as you see, also quotes a 1938 article from Fortune.It’s almost as if the danger was right there to be recognized seventy years ago, and we’ve spent all seventy doing nothing but piling on more risk until the whole thing exploded…

Human error and bias– this isn’t something that government predicts, mitigates or solves– this is what government creates, adds to, and joins in.  It’s in politics, more than any other endeavor, that today’s exaggerated fear will be more important than tomorrow’s real disaster.  It was there in the decisions seventy years ago when Fannie Mae was born, and it’s here today in Fannie’s death throes.

Whether we “fix” the problem, blow it up, or ignore it into submission (all while, regardless, opportunities wither and capital stalls and depreciates)– it’s fixing the blame, not fixing the problem, that’s the important piece.  The blame isn’t a side issue to deal with when things settle down.  When somebody skips right by the blame to supposedly deal with the problem, one suspects a thin analysis, an uncertain conscience, or both.

If we don’t succeed in taking a look at the cause of credit cycles (the blame), then we’ll continue to blow up the economy, if not human society in its entirety, once or twice a century.  And the prospect that someday we may be too befuddled or enervated to pick up the pieces again can’t be comfortably disproved.

By Les Lafave

Banking Reform –