A Busted Formula By: Eric Sprott & David Franklin

This analysis by Eric Sprott shows the folly of relying on government bail outs to "stimulate" our way out of the recession. As he concludes,

The key point to remember with bailouts and stimulus is that it’s ultimately your money that the government is spending – and your children’s money. The numbers strongly suggest that your money isn’t being spent wisely. We need real jobs and real growth, not bigger, more leveraged banks. The market isn’t oblivious – it can see what’s happening. Gold’s recent strength in lieu of seemingly ‘deflationary’ economic data confirms the market’s doubts over government intervention in the financial system.

Is the market striking?

Anyone who has read Ayn Rand’s epic novel Atlas Shrugged would remember the question people asked throughout the story, “Who is John Galt?” The question expressed the confusion and resignation people felt as the United States slowly deteriorated under the yoke of government controls and edicts. John Galt helps to accelerate this decline by recruiting the leaders of various industries to join him in a strike against the forces in government and society who supported confiscating and usurping the wealth they created. Along these lines a Human Events article by Dr. Arthur Robinson titled John Galt Effect proposes that the “men of the mind” (to borrow Ayn Rand’s term) are withdrawing their abilities and contributions in face of growing government intervention in the economy.

As the pendulum of politics now swings toward tyranny in the United States and dangers to those whom they love increase, these men and women partially turn their talents more toward their personal responsibilities. Part of their thoughts, efforts, and ingenuity are lost to society -- and this loss cannot be recovered by either negative or positive incentives.

Throughout our country today, the men of the mind (women, too) are watching the awful scene in Washington and its reflection in state and local capitals throughout the United States. They understand the consequences of the government oppression that has dogged their own footsteps for many years and that will grow much worse in the near future. So, they are taking actions to protect themselves and their families.

We have no way to measure the societal effects of this distraction of the men of the mind. There are immediate effects upon our well being and long term effects from the things that they are no longer working full time to create.

While I agree with the sentiment expressed by Robinson’s piece it is extremely difficult to prove his claims. However, this piece in Forbes DigitalRules, Stocks Hate Obeynomics, seems to provide some empirical support for Robinson’s case.

The results are clear. The market hates Obama’s stimulus package and just about everything related to Obamanomics. … Stocks are down 27% since the Nov. 4th election. Stocks have plummeted more than 40% since Obama sewed up the Democratic nomination in June.

Capital is on strike. And why wouldn’t it be? Private capital has no idea what the future holds in terms of taxes, regulation, trade, deficits and the value of the dollar. None whatsoever.

Capital has figured out one thing, however. The politicians in Washington most hostile to private investment are running the show.

…

Here’s a question. Why did President Obama let an economic fool and earmark liar like David Obey write the stimulus plan that is so disliked by a majority of Americans and positively hated by the stock market? This is the mystery, isn’t it?

… David Obey is its chief architect, after all. During Obey’s near 40-year career in the House, he has nearly always voted for more government subsidies and less trade, according to the libertarian think tank Cato Institute. Let me repeat: The most anti-libertarian Congressman is in charge of the legislative wing of Obama's economic plan.

If you voted for Obama, you might ask: Why? And where is Austan Goolsbee? Even George Will liked the University of Chicago economist and pro-market centrist who was held up as Obama’s economic brain during the presidential campaign.

Goolsbee is missing in action. His ideas are missing in action. They’ve been replaced by the socialist hack David Obey. And the market has noticed.

As I’ve mentioned before, Obama’s proposed solutions to the current economic mess consists of continuing to apply the same Keynesian policies that got us here. The electorate bought the message of change and (appropriately) rejected the legacy of the last eight years. However, the market has seen the future and doesn’t like it. It doesn’t believe the promised “change” is fundamentally different. We can only hope that the state of the country four or eight years from now will bear no resemblance to the dismal collapse depicted in Atlas Shrugged.

Blanking out about the Bailout

ABC News ran a piece titled Stimulating Phoenix: City Looks for Bailout which detailed the dire housing market in Phoenix. At one point the narrator says that:

"Builders began to believe that they could build almost anything and there would be someone there to buy it," said Robert Mittelstaedt, dean of Arizona State University's business school. "I call it builders gone wild. So now we have 50,000 to 60,000 empty homes in the Phoenix metropolitan area."

The story leads you to believe that all of the builders in the Phoenix area (as well as throughout the rest of the country) mysteriously chose to build houses, offices, apartment buildings and condo complexes when they were not economically justified. As I’ve written in an earlier blog entry when virtually everyone in a market behaves the same way this usually is a sign they are responding to common signals or incentives.

When the pricing system works as it should the information necessary to make good decisions is readily available. When something prevents the pricing system from working correctly or if it is distorted to send false information, most if not all businessmen will act on this false or distorted information. However eventually reality has a nasty way of not abetting these attempts to rewrite the facts. But when it does what would have been a minor correction instead becomes a catastrophe. (For more detailed explanation of the business cycle and the current economic debacle see the Ludwig von Mises Institute web page.)

In the case of the real estate market two predominant forces helped create an environment in which normally prudent businessmen chose to pursue projects that proved to be unsupportable. One was the Federal Reserve’s setting interest rates (the price of borrowing money) lower than what would be the market rate. With inflation factored in the interest rate actually was negative. And second, the aggressive marketing by the management of Freddie Mac and Fannie Mae as “safe” investments because they were government backed. In both cases, the market signals were masked or completely shunted, leading investors, builders and entrepreneurs to conclude that their projects would be profitable. (Yes, greed played a role to but greed alone doesn’t explain what happened. The threat of losing one’s shirt in ill-advised investments tends to offset the desire to profit.)

Of course, these factors are rarely if ever mentioned in the news pieces and in the political debates. It’s more fun and much easier to find a convenient and well-worn villain: the greedy businessman. Of course, the same demagogues conveniently ignore the fact that at one time the greedy bankers “redlined” (didn’t offer loans) certain people and had to be “encouraged” via the Community Reinvestment Act to make such loans.

A number of premises escape scrutiny in the rush to pass the stimulus package.

1. Should a central group, The Federal Reserve, set interest rates?
2. Should the government force banks to suspend or abandon normal prudent underwriting in order to serve a goal of having everyone become home owners (regardless of whether they can afford it)?
3. Should the government redistribute tax dollars from those who behaved responsibly to those who didn’t?
4. Is it really the purview of government to bend or break economic principles to foster home ownership?

As long as we don’t put these questions under the harsh light of critical thinking we are doomed to not learn any lasting lessons from this fiasco.

Stimulus Package: Saving us from … our saviors?

Historic' Stimulus Is Egregious Waste
Taxing The Truth

These two editorials from Investor’s Business Daily touch on the errors of the stimulus package. In earlier blog posts I’ve discussed how government policies that encouraged banks to loosen their lending policies and the role of Freddie Mac and Fannie Mae have helped set the stage for the current crisis. Seeing all of the drama and demagoguery surrounding the stimulus package brings to mind an analogy: our current situation is similar to a doctor injecting poison into the victim’s blood, causing a person to almost die, then the same doctor heroically tries to “stimulate” the victim’s heart back to life. We’re supposed to gratefully grovel to the same person who induced the illness in the first place! It would be funny if it wasn’t going to cost us nearly a trillion dollars.