Posts Tagged ‘Wall Street’

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 –

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 –

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 –

Painful Opportunity

Friday, August 22nd, 2008


The home page of the Fed says, “The Federal Reserve, the central bank of the United States, provides the nation with a safe, flexible and stable monetary and financial system.”

So you can’t say bankers don’t have a sense of humor.

However, in a more “normal” cycle, most people wouldn’t see the joke. Usually, the economy’s actors are too busy getting paid off by apparent short term benefits of fractional reserve banking for any mainstream attention to the system’s contradictions and historical failings. That’s one bright spot today in otherwise dark times– a spotlight on the Federal Reserve System while many of its defenders may be feeling ridiculous (and broke).

Economist Jesús Huerta de Soto traces the historical beginnings of fractional reserve banking to exactly that key “buying off” point where government and banks saw opportunity in partnership:

“At first the bankers did this [reduce reserves below 100% on demand deposits] guiltily and in secret, since they were still aware of the wrongful nature of their actions. Only later when they obtained the government privilege of making personal use of their depositors’ money (generally in the form of loans, which at first were often granted to government itself), did they gain permission to openly and legally violate the principle. The legal orchestration of the privilege is clumsy and usually takes the form of a simple administrative provision authorizing only bankers to maintain a reduced reserve ratio. This marks the beginning of a now traditional relationship of complicity and symbiosis between government and banks… by sacrificing traditional legal principles they could take part in an extremely lucrative financial activity…”As in any corrupt system, some of the lucrativeness needs to be shared to establish and maintain a critical mass of support.  Academics in their turn are paid off to think and promote happy, status quo thoughts (or even angry, pseudo anti-establishment status quo thoughts).  No soul searching required, since for any but the most critical thinkers who happen to be thinking about critical pieces, there’s lots of latitude for intellectual self-accommodation.  An economist for example, can say that populist programs are too big, or one is better than another; it’s only when the economist says that the whole system and the rabbit hole it rode in on is absurd that he or she will be largely cast out from opportunities touched by government or banking, (which in a kind of six degrees of Ben Bernanke, is most of them). 

With this support (and as slightly more widely noted and decried), the purchase of complacency with debt continues through the economy, in government programs, contracts, loans, speculative opportunities and tax policies, where (almost) all actors, big and small, at least appear to get their share of something for nothing.  Lately there are some folks saying “Hey, Wall Street and banks are getting special treatment!”  That’s also rather droll.  But a person ready to see that much may be a step or two from seeing that the Federal Reserve was indeed built from special treatment, among other unsavory qualities.

I recently read an article by financial analyst John Rubino at, (Time to Start Honing the Message), which I found inspiring even as it pointed out a problem: critics of money and banking have gotten used to mainstream society ignoring or even scoffing at their message.

It’s not easy to keep going when explanations of your economic worldview only cause people to call you a crackpot. To make matters worse (or at least mixed from a memetic persistency point of view), the three dimensional economic worldview of the “crackpots” quietly makes money, while the one and two dimensional views of the crackpot critics is causing them to be rather entertainingly stunned by events over and over again.

To me, this opportunity is starting to feel irresistible. It’s more melodramatic and more insulting than I’m comfortable with, but I’m finding the metaphor also hard to resist: for the moment, the lights are on and the cockroaches are scurrying. The bugs in fractional reserve banking and fiat currency systems are as nakedly apparent as they ever get. But if the past is a rough guide (as it generally is), then with even a weak recovery, myths of how we got in and out of the extra deep cycle will start to set, if not sufficiently impeded.

Rubino warns that populism will be speaking loudly, and also puts the coming battle he sees in stark terms: a fight to avoid living in a dictatorship.

So in view of the above and for my own modest anti-dictatorial contribution, I intend to be better prepared for dialogue (assuming I haven’t become too geeky to be in any social settings). When someone says, “I can’t put gas in my car anymore”, or “That’s odd, trading in my bank’s stock has been halted at sixty-three cents”, I’ll forgo the smartass comment and attempt a non-patronizing, cheerful (or as appropriate, commiserative), discussion of first principles.

I intend to keep to this plan until my mother (the probable last holdout) starts calling me a crackpot, or my social calendar is permanently buried. (I hope I don’t have to report back for at least a few days.)

By Les Lafave

Banking Reform –