Krugman's Economic Roundup

Wow! Do they have a Nobel Prize in journalism? No on second thought, using a term synonymous with noble together with "journalism" is a bit oxymoronic.

Anyway, Krugman's roundup of just how all - or most - of the economists got it wrong in the recent economic unpleasantness renews my faith that the American economy is still the poster child of chaos theory. Perhaps the Keynesian economists and the free-market thinkers are nothing more than strange attractors in chaos theory.

Two things not mention in Krugman's article – or maybe it was and I just missed it – was expectations of investors and the other was the Cold War.

In the collapse of the whole sub-prime based financial investment instruments, if only investors had known the true risk. These packaged risky investments did not have the diversify risk their rating would seem to indicate. The rating houses did a great disservice to the economy. They sold their souls (their credibility) to the devil for the huge revenues to be made rating this new investment. The rating house that gave the highest rating to these new untried and untested instruments got the most business, and of course, profits. Had investors known the true risk involved with these sub-prime backed instruments, the risky investments would have only been for those who like to take risk – market players.

The sub-prime backed investment sellers would not have been as able to raise money to further their risky operation by loaning more money to those that any rational evaluation tells you they cannot pay. The eventual economic collapse may have been more the usual restriction or downturn, not the wiping out of investment strategies. The rating houses work for the seller not the buyer, and it should be the other way around. Their incentive should come from how well their rating of a bond proves true, not how much business they can get from the sellers.

Next, the winning of the Cold War at the end of the previous century proved that free markets are more productive than planned economies. The strategy of détente was the most important decision made during the Cold War. It was not the forces with the strongest, most powerful army but the one with the more efficient economy that won, and this could only occur if peace reigned. Like the legend of the emperor with no clothes, communism's centralized planning, no mater how well controlled or planned, could not keep up with free markets – and with peaceful co-existence, everyone could see it and acted accordingly, and communism as a future economic concept began to die. While not all countries of given of the communist ghost, they will always be at a disadvantage against free market economies.

What lesson can we learn from this? While I like the headline: If it's too big to fail, it should be regulated. In our rush to fix what we perceive as problems in a free market, let's not do away with what drives, incentivizes, and produces the return that so recently defeated a more plotting and planning foe.

A simple tweaking is all that is needed. Re-direct the incentives for the rating houses, but leave the free market, and in this case, the free financial market alone. Had the riskiness of the sub-prime investments been shown in the lower than acceptable ratings, investors betting the rest of their lives would not have bought it, and the sub-prime back investments would have been the playground for those players looking for risk.

And we could have all lived happily ever after.

The Great Depression of 2009

There, let’s say it. Let’s get the “D-word” out there. Now we can go on.

Critiquing my recent prediction success factor for the previous year means anything I predict will not happen, or it will happen, but not the way I predicted. Just so you know.

I kicking off a “Depression09” tagged series beginning with a post from last October about why we shouldn’t be so concerned about our recent economic unpleasantness. I’ll try not to chew my cabbage twice.

I keep hearing dire predictions of a sluggish economy stretching out over years. But it is by the same people that have to have something to report as news even when they have no news to report.

Just like I had to learn all about alligators, Sunnis, and Shia after we got ourselves up to our ass in Iraq, so too I’ve had to learn about how the current economic situation came about. While it has been proven tha a free market is the goose that lays the golden egg, we fear regulation may kill both.

However, our current bond rating system is like the fox hound is working for the fox. The rating system should be working for the buyer not the seller – which if I follow the news correctly, and there a good possibility I’m not, but anyway, we are doing just the opposite.

If the sub-prime mortgage-backed bonds had been rated accordingly, a lot of value would not have been put at so much risk. If the incentive for rating companies was to profit more from satisfying buyers than sellers then a concept with a self-defeating aspect could be remedied.

Keep the markets free and change the incentive for the rating companies. That seems doable.

The lion that ate Communism could continue to roam the savanna.

Stanley Motts: This is Nothing!

As Dustin Hoffman uttered those words continuously during one catastrophe after another as they tried to Wag the Dog, so too the economy’s current unpleasantness is nothing compared with the more threatening peril of the 20th Century: Communism.

You’d think that something that was planned and studied would work better than something that is the poster child of chaos theory, capitalism in a free market economy, but that was not the case. Planned economies could not keep up no matter how much they tried to spin it. All those Orwellian movies of happy people marching and working happily along just didn’t work. The capitalist economies provide a higher standard of living to the masses that those masses in planned economies could only watch and wonder – and envy.

However, we should have told those masses longing to be free the flipside of freedom, the freedom to fail, or at least stumble badly. There can be no boom without bust. Planned economies remove the busts, but they removed the booms, also.

It’s what you make in the booms that more than offsets what you lose in the busts. To capitalists it’s the interest, profit, commission, vig, swag or whatever that makes it all worthwhile, and the freedom to pursue it, that no amount of centralized planning could ever keep up.

The planned economites look down the collective noses at this as plunder or booty and exploitation of the working class, but the free-market economites laugh and scoff as to say the working class is doing fine looking after itself, thank you very much.

Hoffman’s Stanley always knew his system would work, trivial problems not withstanding, and an economy that recently defeated an enemy that planned its demise will rise again as the sun rises in the east. And it will be a warmer day than when last it set – to wring out this analogy during this time of economization.