US Economy

[a_majoor]

I wonder how the 2010 games will fare with such an economic fracas happening all around us.

Maybe they can ski jump over the money pit ;D ;D ;D

 

[tomahawk6]

Cause and effect in action. The Clinton era Community Reinvestment Act set the stage for our current malaise by requiring banks to lend to people who were bad risks. Now Congress has decided that to pull us out of recession we will spend Trillions of dollars,essentially we are going to print money which will cause inlation on a grand scale. I remember the interest rates of the Jimmy Carter era upwards of 16% and I suspect we will begin to see those rates again in the next year or two. This is only the beginning for this spendthrift congress.

http://www.nytimes.com/2009/02/14/opinion/14ryan.html?_r=3&ref=opinion

CONGRESS has made a terrible mistake. Amid a rhetorical debate centered on words like “crisis,” “emergency” and “catastrophe,” it acted too fast. While arguments were made about the stimulus bill’s specific components — taxpayer money for condoms, new green cars and golf carts for federal bureaucrats, another round of rebate checks — its more dangerous consequences were overlooked. And now the package threatens a return to the kind of stagflation last seen in the 1970s.

To get a sense of the pressures ahead, we must first assess our fiscal health. We started this year with a projected trillion-dollar budget deficit for the 2009 fiscal year. In 2008, we spent $451 billion just to pay the interest on our debt.

With the stimulus bill now becoming law, we’re digging even deeper into debt. The headline price tag of $787 billion doesn’t include the extra $348 billion it will take to finance the new debt, or what it will cost when Congress extends the spending programs in the bill, as is likely — as much as $2 trillion more. Add in the billions that are being used to prop up the financial system, and when the dust settles on 2009, with millions of baby boomers retiring and entitlement spending exploding, taxpayers will face a financial nightmare.

From a global perspective, the picture only looks worse. As we have debated how much money to borrow and spend in hopes of jump-starting our economy, we’ve ignored the worldwide stimulus binge. China, Europe and Japan are all spending hundreds of billions of dollars they don’t have in hopes of speeding up their economies, too. That means the very countries we have relied on to buy our bonds, notably China and Japan, are now putting their own bonds on the global credit markets.

American Treasury bonds have been selling briskly on the global credit markets because they have been the calm in the storm of the global credit crisis. This has allowed advocates of borrow-and-spend to argue that for the United States, borrowing is uniquely cheap. But what happens when there is an excess supply of bonds on the worldwide markets? The cost of borrowing will rise. Today we fear deflation, but eventually our fears will turn to inflation.

It seems that no one in Washington is discussing what happens when the world begins this gargantuan borrowing spree. How high will interest rates rise? And more fundamentally, who will have the money to buy our bonds? It is possible that the Federal Reserve will succumb to pressure to “monetize” our debt — that is, print new money to buy our bonds. In fact, the Fed is already suggesting that it will buy long-term Treasury securities in order to lower borrowing costs. If it does, then our money supply, which has already increased substantially over the past year, will grow even faster.

As Milton Friedman noted, “Inflation is always and everywhere a monetary phenomenon.” It is a situation in which too few goods are being chased by too much money.

To American families, inflation is a destroyer of savings, a killer of wealth, a crusher of confidence. It calls into question the value of our money. And while we all share in the pain, the people whom inflation hits hardest are elderly people who live on fixed incomes, those in the middle class who are struggling to save for retirement and college and lower-income people who live paycheck to paycheck.

Combine high inflation and high unemployment and you have stagflation. Hindsight shows how the pain of the late 1970s and early 1980s could have been avoided, yet we’re now again planning to borrow and spend — and raise taxes — as President Jimmy Carter did. Soon we may again find ourselves watching a rising “misery index” of inflation and unemployment together. If that happens, individual earning power will evaporate, and our standard of living will decline.

To prevent stagflation, we should enact fiscal policy reforms that apply the lessons we learned from the 1970s. Keynesian stimuli based on borrowing and spending have not worked and will not work. One-time rebate checks do not increase the incentive to expand business operations and create jobs. But marginal cuts in tax rates do. We also must lower our job-killing corporate income tax rate, the highest in the industrialized world after Japan, and ease business worries by making it clear that there will be no tax increases in 2010.

We should also re-establish the sound dollar. For the past decade, the Federal Reserve has manipulated interest rates and vastly over-expanded the money supply — and in so doing fueled the housing bubble that precipitated our current crisis. To end uncertainty about the economy, to keep interest rates down, and to give Americans the confidence they need to take risks and ensure future growth, we should make price stability a priority, guaranteeing the value of the dollar.

Finally, we should tackle the entitlement crisis, which will be a $56 trillion liability that we have not figured out how to pay for. As members of the baby boom generation retire, and health care costs continue to spiral out of control, Social Security, Medicare and Medicaid will collapse. By reforming those programs and bringing their costs down to sustainable levels, we will show the world and the credit markets we are serious about reducing our debt. Then our credit will improve, the cost of necessary borrowing will drop, and we can stave off stagflation.

Paul D. Ryan is a Republican representative from Wisconsin.

 

[Rifleman62]

tomahawk6, do you think that the "we won" Congress/Senate, Nasty Nancy, let alone the POUS, will allow mortgage rates  (and interest rates) to go that high again? If there is trouble now with mortgage foreclosures, wait until interest rates go up. I remember getting a new mortgage in Canada as a result of a move in 1981. It was 21 1/2 %

Ran into a young lady (3 young kids) in San Antonio who had gone back to work because their mortgage renewal increased by $900 per month. It was a big surprise to her and the husband!!! They did some big time negotiating and got the bank to renew for a increase of $500 per month vice the $900. That's just the increase. Interest rates are low now, so you can imagine a sub prime renewal at 16%.

I don't know how the US government will do it, but they will have to keep interest rates low. Nationalize the banks??

 

[tomahawk6]

Socialism doesnt work just look at the UK,France,Germany et al. Nationalising the private sector is bad policy and doesnt work. Corporations are in the business to make money for their shareholders who is a beaucrat responsible to ? As for interest rates if a government wants to attract buyers for their paper they need to offer a good rate or the investor goes elsewhere.

If I offer you 6% for a $10,000 loan and the guy across the street offers you 10% who are you going to loan the money to ? We have seen an explosion in food prices because Congress mandated ethanol to be used. Unintended consequences. If oil prices surge like they did last summer that might be enough to push the US into depression. I hate to say it but if you are unemployed you arent going to make enough on unemployment to pay the mortgage as well as life's other necessities. A number of people should never have been given a mortgage and if they wont pay their mortgage how will they pay their property taxes ? I dont know about Canada but if you dont pay your property tax the locality takes your property and sell it  at auction.

 

[Rifleman62]

Shareholders/investors in many, many businesses are in the hurt locker now. Corporations/CEO's have not done well. The gov't must balance a good rate with a rate that will not put it's citizen out (in) the streets. The question still stands: how will the US gov't keep interest rates low??

I think people in the US would be surprised as to what country holds the US debt.

Rep Barney Frank is another of my favs in the Congress. But, I should not cast stones looking at our MP's.

 

[KingKikapu]

maybe socialism hasn't made its mark, but unfettered capitalism has certainly made more than it's share of clusterf&@ks in the last few decades.

 

[tomahawk6]

At least in the case of the US our problems have come from government interference in the market place.

 

[KingKikapu]

There is no such thing as a free market.  Ever.  The closest thing currently in practice is Ebay.  World markets don't even come close in comparison.


The US market, like every other international trade market, has quotas, fines, tarrifs, arbitration disputes, dumping and a myriad of other things holding it in check.  But that isn't the reason for this fracas.  In the case of the current crisis, it wasn't just government interference in the market place (such as the Clinton administration's decision to impose mandatory lending to low rated individuals), but also the decision of the government to highly deregulate the market under the eye of Greenspan.

Both the 80's stock market crash and the Asian Tiger crisis of the 90's were products of a combination of regulation, deregulation and improper safety checks and balances.  I don't see this new one as being much different.

 

[a_majoor]

maybe socialism hasn't made its mark, but unfettered capitalism has certainly made more than it's share of clusterf&@ks in the last few decades.

Actually all the clusterf***s are caused by regulatory failure; where the State interferes with the marketplace. Clever demagogues then try to blame the free market, which is only reacting to the signals and distortions of State interference.

WRT interest rates, if there is a mismatch between the supply of money and credit and the demand, then interest rates will rise. Even if notional interest rates are suppressed by government fiat, you will still be operating in a high interest rate environment. Based on recent historical evidence (the Carter Administration), the end result will be a moribund economy, high unemployment and high inflation. High real rates of interest in the early 1980's were imposed by the Fed under President Reagan's economic plan to crush inflation and have "high quality" money rather than devalued high quantity money.

A second BTW is an unintentionally hilarious piece in the Atlantic Monthly by Richard Florida, who suggests the suburbs and exurbs will fail while cities like Toronto will succeed in this environment. His record of predictions is pretty "impressive"; his "Creative cities" index fails to predict which cities will attract workers and jobs [in fact a high "Bohemian Index" is almost a negative indicator of attraction] while his second book "cooked the books" by including the suburbs and exurbs which explicitly reject his sort of "creative cities" approach in the economic statistics of "creative cities" in order to make it look like the program is working. I wonder how he will explain the string of Municipal bankruptcies in the US as they fall to high expense civic union pay and benefits packages coupled to declining tax bases cause by workers and investors fleeing the "creative cities" for the low tax and low regulatory environments of the "burbs"?

If there is a silver lining in this, the nonperforming mortgage assets and underfunded union pensions may destroy enough wealth to trigger a massive deflation when they implode; canceling out much of the Obama administration's inflationary damage.

 

[Kirkhill]

There is no such thing as a free market.  Ever.  The closest thing currently in practice is Ebay.  World markets don't even come close in comparison.


The US market, like every other international trade market, has quotas, fines, tarrifs, arbitration disputes, dumping and a myriad of other things holding it in check.  But that isn't the reason for this fracas.  In the case of the current crisis, it wasn't just government interference in the market place (such as the Clinton administration's decision to impose mandatory lending to low rated individuals), but also the decision of the government to highly deregulate the market under the eye of Greenspan.

Both the 80's stock market crash and the Asian Tiger crisis of the 90's were products of a combination of regulation, deregulation and improper safety checks and balances.  I don't see this new one as being much different.

So what you are saying is that government created instability by constantly changing the rules of the game.......I believe you, tomahawk6 and Thucydides (and I) are in agreement.

Money flees uncertainty......mine certainly does.

 

[KingKikapu]

So what you are saying is that government created instability by constantly changing the rules of the game.......I believe you, tomahawk6 and Thucydides (and I) are in agreement.

Money flees uncertainty......mine certainly does.

Yeah I guess I am saying that, but with the added caveat that an open, fully free market runs counter to the mandate of any governmental body, plus it's completely unobtainable.  The primary purpose of a government is to provide for and protect its citizens, not the neighbours.  That obviously runs counter to what economics has taught us, but special interest groups, lobbyists, unions, and any other social division within nations will necessitate political parties all across the spectrum that mess that certain point up.  That is the catch of a society: we band together for our collective safety at the risk of internal discordance.

Even if someone figures out how to unify all of the nations of this Earth under one banner, that still won't change that certain subsets of society will require different needs than others, and they will also shift with age.  Some are older and more prone to illness; others are younger and require support via education.  How do we deal with the various conflicting needs of different religions?  What about the differences of individualistic and collectivist cultures?  Somebody will always have an agenda that is different to that of the fellow beside them.  We are not an ant colony, or a hive.  Even under a unilateral government, I still can't see how free trade will exist while the individuals of the population are so fundamentally different in views/needs/whatever.

So yeah, I agree that constant government intervention messes things up, but I also don't see that ever changing.  We are a product of both our personal wants, and our desire to band with others for protection.  All that ever changes is whether we head to more of a capitalist or a socialist bent.  I doubt we'll ever make it to either one of them fully.

 

[Kirkhill]

I am still much of the opinion that the market, free or otherwise, is much like the weather: everybody talks about it but nobody does anything about it.......with this difference, in the case of the market it isn't for lack of trying.

Although these days we seem to feel equally free to try to change the weather.  I don't expect any better luck with that than with the market.

Trying to corral the market is like trying to corral water, or the wind.  You can direct portions of the market to your benefit but you can't stop the market.  Equally you can't start the market.  Happily that is unnecessary as the market continues, world without end amen.  As long as people communicate they trade.  I needed my wife to make kids.  Likewise she needed me.......after that discussion all transactions are easy. 

The major flaw in the reasoning of communist and socialist governments is that they tried to stifle capitalism.  All they have ever succeeded in doing is causing their citizenry to revert to barter to gain those things they need by operating outside the monitored system:  free Ladas and ongoing loyalty in return for a postion in the bureaucracy and a season's pass to GUM's department store (and loyalty only guaranteed until a better offer is available).


You can't stop the sun. You can't stop the wind. You can't stop rivers. You can't stop the market.

You CAN perturb your neighbours by blocking their sun.  You can perturb the neighbours by channeling the wind across their deck.  You can greatly discomfit your  neighboursby diverting or damming his water, until the diversion or dam breaks. You can really upset them by denying them access to the market.

Politicians don't create markets.  They can change the shape of the market......and while some shapes are inherently stable and will survive in the absence of politicians, others are inherently unstable and can only survive with constant intervention.  Still others are so unstable as to not be able to survive no matter how much intervention occurs.

While I accept that some interventionist economies produce good outcomes for some of the people some of the time, the mere fact that they are propped up by people making decisions, decisons that inevitably will discomfit at least some of the people some of the time will result in a coalition of increasing size, of people discomfited by the people making decisions that are seen to be for the benefit of still other people.

When the coalition of the discomfited becomes larger than the coalition of the adjudicators and the clients then the system becomes unsustainable and change happens....sometimes suddenly and violently, sometimes slowly and imperceptibly, and the rules change.

Far better, from my point, to intervene as little as possible, by preference not at all.  Government should not be greedy and attempt to divert or control the whole market, a sysiphian task unlikely to be successful, but simply be a good little parasite and establish a thief line that will continue to generate a revenue stream indefinitely.  With that thief line then they can exercise their desire to do good, and stay in power.

The Masai milk and bleed their cattle for sustenance.  They are careful not to bleed the cow over much.  It becomes a less than successful survival strategy if they do.

 

[tomahawk6]

http://seattletimes.nwsource.com/html/nationworld/2008746731_apaschinausstimulus.html

China editorial slams 'Buy American' provision
Measures in a $789 billion U.S. stimulus package that favor American goods are a "poison" that will hurt efforts solve the financial crisis, an editorial by China's official news agency said.

BEIJING —
Measures in a $789 billion U.S. stimulus package that favor American goods are a "poison" that will hurt efforts solve the financial crisis, an editorial by China's official news agency said.

Provisions in the U.S. stimulus bill approved Friday favoring American steel, iron and manufactured goods for government projects are protectionist measures that could trigger trade disputes, said the editorial issued late Saturday by the Xinhua News Agency.

"History and economics have told us, facing a global financial crisis, trade protectionism is not a solution, but a poison to the solution," the editorial said.

U.S. labor groups that pushed hard for inclusion of the measures have argued that their main purpose is to ensure that U.S. Treasury dollars are used to the fullest extent to support domestic job creation.

China has promised to avoid "Buy China" protectionist measures in its own multibillion-dollar stimulus effort, and appealed to other governments to support free trade. Deputy Commerce Minister Jiang Zengwei said in early February that China would "treat domestic and foreign goods equally so long as we need them."

Protectionism was a key concern of weekend meetings of the Group of Seven industrialized nations in Rome. U.S. Treasury Secretary Timothy Geithner assured G-7 finance ministers on Saturday that the stimulus package would not violate the United States' commitment to free trade.

Xinhua's editorial said protectionist measures taken during the Great Depression of the 1930s caused trade wars, hurting international trade.

President Barack Obama is expected to sign the economic stimulus package on Tuesday in Denver, Colorado.

The package, aimed at combating the worst economic crisis since the Great Depression, was Obama's first major victory in Congress.

Requirements known as "Buy American" were softened as the bill progressed through Congress and after strong criticism from abroad. Senate and House negotiators agreed to a version that would require the government not to violate trade agreements when implementing the law.

 

[a_majoor]

The economy is like a complex ecosystem, and the Free Market is a pervasive influence like gravity that influences everything else. The various influences that KingKikapu cites are like dams being thrown up on a river. Gravity still influences the flow of water, and the local plants and animals react in various ways to the presence of the dam and new water features, but the dam itself does not change the underlying gravitational field nor the evolutionary responses of the flora and fauna.

Looking at the old Soviet Union or the economies of National Socialist Germany or Fascist Italy, you can see the forces of the Free Market operating, as various black markets, barter systems and other responses like internal migration take place as a reaction to State intervention. Blighted areas can exist in almost any economy, especially when the State freezes or malinvests assets for political purposes. The "projects" in American cities are a perfect example.

Whenever the Free Market is free of State intervention, the results are outstanding. History has multiple examples: the tiny Greek polis outmatched the mighty Persian Empire, Democratic Athens was able to continue fighting Sparta and her Allies (backed by Persian money) for almost a decade after the Athenian army and fleet were decimated in Syracuse, the Serenìsima Repùblica Vèneta could hold her own against the Ottoman Empire, Elizabethan England outmatched the Spanish Empire, and in modern times the Irish created the "Celtic Tiger" by reducing taxes and regulations, and the Asian "Little Tigers" are far freer than their counterparts in the region.

Limited State intervention in the economy is desirable; the State should exist to protect free speech, property rights and support the Rule of Law; once we establish that, all else is superfluous and driven by rent seekers who want to loot their neighbours.

Thus endith the sermon!

 

[a_majoor]

Welfare devolution; the Achilles heel of the "progressives"?

http://www.slate.com/blogs/blogs/kausfiles/archive/2009/02/15/the-welfare-issue-is-alive-alive.aspx

The Welfare Issue is Alive, Alive!

1) A Times of London story highlights worries about the Thermidorian welfare reform backsliding in the stimulus bill. Sample:

    Douglas Besharov, author of a big study on welfare reform, said the stimulus bill passed by Congress and the Senate in separate votes on Friday would "unravel" most of the 1996 reforms that led to a 65% reduction in welfare caseloads and prompted the British and several other governments to consider similar measures.

2) I get an "Even ... liberal blogger" cite. Hahaha. Take that, Even the Liberal New Republic.

3) But the reference to liberalism isn't irrelevant, because the now-undermined welfare reform was the key to rebuilding confidence in (liberal) affirmative government. As Bill Clinton recognized, voters may well have been willing to let government spend, but they didn't trust  old style liberals not to spend in actively destructive ways, like subsidizing an isolated underclass of non-working single mothers with a no-strings cash dole. It's a 75-25 values issue. Work yes. Welfare no. Even if welfare spending was only a tiny portion of the liberals' spending agenda, it poisoned the rest of it. Only when Clinton's New Democrats  put an ostentatious "time limit" on welfare and required work did they regain the public confidence necessary to increase other kinds of spending (on work-related poverty-fighting benefits like the Earned Income Tax Credit, day care and Social Security, for example.)

A reemerging "welfare" issue is a potential killer, in other words, for Obama's big remaining plans, especially health care. If Dems seem determined to reinstate dependency--or at the least blind to the dangers of dependency--voters aren't going to trust them to spend trillions on universal health insurance  and fortified pensions. It's hard to believe Obama doesn't realize this.

4) If not, he may soon. I don't think the debate about welfare has been settled by the stimulus' bill's passage. I think it has just begun. I'm not saying this in a morale-maintaining way--"this fight is not over," "Where do we go from here," etc." I mean that, in fact, there has so far been no debate about welfare the way there has been a debate about pork and Keynesian spending. Before the stimulus bill passed, its welfare provisions were hardly mentioned in the NYT and WaPo. They were just bubbling up from The Atlantic's 's website to a Newsday blog last Friday, as Congress was voting.

Now that the bill has safely passed, even the liberal MSM may feel the obligation to mention them in public. Maybe even in actual print. Reporters have to cover something. More on pork? Welfare seems fresher.

5) In any case, the rump Congressional GOP and talk radio conservatives can force their hand. Why should opponents of the welfare-expanding provisions stop harping on them? Has Obama been asked about his welfare un-reform at a press conference yet? I don't think so. He will have more press conferences. It won't be an easy question to answer. (Reporters could also ask his HHS secretary ... Oh wait. Never mind.)

Welfare is a liberal sore spot that, if Republicans play it right, could become a bleeding open wound for the administration. Voters probably thought they'd settled the dole-vs.-work issue back in 1996. Obama will be fulfilling the crude GOP stereotype of his party if he even waffles on reopening it.

Remember that Newt Gingirch rode the welfare issue to power after haranguing about "the liberal welfare state" for a few election cycles. The new welfare debate, if it happens, won't necessarily be that prolonged.  The main question is whether the Administration can effectively paper over the meaning  of what's in the stimulus. If not, Congress is still in session. It seems to me there is a real chance for Republicans to get it to "revisit" that part of the bill, as they say in Washington. Obama may decide he needs to excise the most poisonous part of the stimulus to save the rest of his New New Deal.

P.S.: No, the stimulus bill doesn't fully unravel welfare reform--after 1996, welfare is no longer an individual "entitlement," for one thing (a term or art that triggered a whole slew of court-enforced rights). The time limits and work requirements are still at least formally in place. States can still do what they want, in theory, within much broader limits than under the old AFDC program. Many states, with little money to spare, may still refuse to try to expand their caseloads (even if they now have an 80% federal subsidy to do it). A debate on the issue might, in fact, help ensure that states don't go crazy and recreate the bloated and socially disastrous welfare caseloads of the three decades before 1996.

More important, the debate would stop the Money Liberals in the Washington "antipoverty community"--e.g., Peter Edelman and the Center on Budget and Policy Priorities crowd-- before they can complete the rest of their agenda, which does involve unraveling welfare reform (eliminating work requirements, for example). Preserving Clinton's biggest domestic achievement isn't something you should want "even" if you're a liberal who believes in affirmative government. It's something you should want especially if you're a liberal who believes in affirmative government.

 

[retiredgrunt45]

When the government(s) gave the big banks that blank (welfare) check, welfare reform flew out the window, never to be seen again, for a very long time. I think both the Dems and Repubs know that who ever tries to open this particular Pandora's box is in for a very harsh lesson in reality, because they themselves have created the largest (welfare state) on the planet and what do you say to millions of outstretched hands.. At this point it would be insteresting to watch what would happens if they said "No"...

 

[Kirkhill]

There is a really excellent article in this month's Walrus.  Unfortunately you have to buy the magazine for the complete article.

What Would Smith Say?
The financial meltdown, through the eyes of the father of capitalism

by Peter Foster
Published in the issue.

In the middle of the nineteenth century, Robert Owen, a British mill operator who sought to overturn the nascent capitalist system, found his collectivist schemes crumbling. He turned for support to the dead, proclaiming that he had the backing of Benjamin Franklin, Thomas Jefferson, Shakespeare, Shelley, Napoleon, the Duke of Wellington, and the prophet Daniel — not to mention the dearly departed Duke of Kent, whom Owen complimented for never being late for a seance.

Owen was an important figure in the development of anti-capitalist sentiment. Marx and Engels were among his early fans. The fact that he was actually a capitalist is not as peculiar as it might seem; so was Engels. Many capitalists have claimed to be exceptional in being motivated by more than the desire to make money, elevating themselves by impugning the motives and short-sightedness of their competitors, and in the process supporting the claim that capitalism is a system based on greed and exploitation. This demonic characterization would perhaps surprise Adam Smith, the kindly eighteenth-century bachelor frequently dubbed “the father of capitalism.” His great book, An Inquiry into the Nature and Causes of the Wealth of Nations, is widely regarded as the seminal work on economics, his master metaphor the market- guiding “invisible hand.”

If you go to the museum in Smith’s birthplace of Kirkcaldy, Scotland, which lies across the Firth of Forth from Edinburgh, you will find displayed, in the inconspicuous nook devoted to him, a quote from the economist John Kenneth Galbraith. “With Das Kapital and the Bible,” it says, “The Wealth of Nations enjoys the distinction of being one of the three books to which people may refer at will without feeling they should read it…There is so much in the book that every reader has full opportunity for exercise of his own preference.” Galbraith, who rejected Smith’s market-oriented world in almost every way, was on this point gallingly correct.

As an iconic figure, Smith tends to be as much channelled as quoted. His ideas are often twisted, much as Owen mangled Shakespeare and Jefferson. Even his fans are guilty of the charge. For example, Smith made only one reference, itself tangential, to the invisible hand in The Wealth of Nations. It was later free-market enthusiasts who embraced and glossed the term.

In the wake of the international credit crisis, Smith has often been recalled either as the face of a system that doesn’t work, or as a fan of more extensive government regulation. On one side, for instance, a headline in BusinessWeek last October read, “Forget Adam Smith, Whatever Works.” On the other, disgraced New York governor Eliot Spitzer — who, as the state’s attorney general, had been the grand moralizing scourge of Wall Street — wrote, in a self-exculpating piece in the Washington Post, “Those who truly understand economics, as did Adam Smith, do not preach an absence of government participation. A market doesn’t exist in a vacuum. Rather, a market is a product of laws, rules and enforcement. It needs transparency, capital requirements and fidelity to fiduciary duty. The alternative, as we are seeing, is anarchy.”

Canada’s finance minister, Jim Flaherty, took a more nuanced approach when he wrote in the Financial Times, “The open market system did not fail in this crisis. However, some forgot Adam Smith’s maxim that the invisible hand needs to be supported by an appropriate legal and regulatory framework.” But what does “appropriate” mean? And is the present crisis the result of market anarchy, or of counterproductive regulations pursued by grandstanding and often-hypocritical politicians such as Spitzer? There’s the rub.

Will the real Smith please stand up?

Adam Smith was born in 1723, less than two decades after Scotland entered into commercial and political union with England. Smith’s father, who died before his birth, was a prominent lawyer and public official. Smith had an extended education, even by today’s standards, first at the University of Glasgow and then at Oxford, where he spent six unhappy years. He returned to Edinburgh to begin the life of a public intellectual, and was soon appointed to a professorship at the University of Glasgow; he taught there for thirteen years. In 1759, he published a well-received book, The Theory of Moral Sentiments, which led him to a three-year tutorship of the Duke of Buccleuch. The position came with a life pension, enabling Smith to return to his mother’s house in Kirkcaldy to work on his magnum opus. When it was published in 1776, it made his name.

The Wealth of Nations is long and discursive, and promotes the critical, controversial, and counterintuitive view that the pursuit of commercial self-interest without government interference yields the greatest improvements in the general welfare. “It is not,” he famously wrote, “from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.” Smith wasn’t suggesting that butchers, brewers, and bakers lacked the milk of human kindness, or a sense of family or community. It was just that we should recognize that arm’s-length commercial exchange benefits all participants, and that enormous good is done by allowing self-interest free rein under the rule of law.

Two human tendencies — to trade and to specialize — serve as the engines of productivity growth in Smith’s system. He used the famous example of the pin factory to demonstrate how specialization within an organization could also enormously boost output. A single unskilled worker, he pointed out, would have trouble making a single dress pin in a day, but ten people coordinating their activities with fairly rudimentary equipment could produce 48,000. Widespread and free trade was desirable, he argued, because larger markets spurred specialization and thus further productivity increases, although he expressed concern about the mind-numbing work to which the division of labour might lead. .....

For me the money quote is here:

.... The world has changed greatly since Smith's day, but his principles remain intact because they are rooted in human nature, which has changed not a whit, particularly when it comes to the urge to power.  Some suggest that Smith has been made redundant by stunning technological and institutional advances he could not possibly have foreseen.  But complexity, if anything, bolsters his argument about the fundamental inability of governments to enhance the free economy, except by protecting property rights and guarding their citizens from real, tangible threats........

People have been writing for at least 4500 years and their written record, of stories and fables and business transactions, have been  recording the unchanging nature of man and woman.

Governments and empires and city-states have come and gone but we're still here and we're still doing the same things the same ways.

 

[retiredgrunt45]

Governments and empires and city-states have come and gone but we're still here and we're still doing the same things the same ways.

So true, but you would think that we would have got a clue by now... Seems the human race is destined to bring upon its own demise over and over again. If your a history buff, almost every great civilization was brought down by two undeniable factors, "greed & corruption" and theres no exception to that rule today. As long as theres something to attach vallue to, humans will always strive to gain that value using these two factors.

A prime example is the big banks. On the verge of bankruptsy they were handed hundreds of billions of tax dollars. What happended? They gave themselves a generous helping of that money in "bonuses". I don't think they could help themselves, its part of their Psyche. Years of greed has ingrained this type of thinking and they found absolutely nothing wrong with it, "It was business as usual" stated William R. "Bill" Rhodes, Senior Vice Chairman of Citigroup Inc when he was called to testify in front of congress. Greed is the dark side of capitalism and greed always cultivates corruption and were witnessing both in there purest forms here and now.

I think that if anything 4500 years has taught us one thing, humans are creatures of bad habits and we all know that bad habits are sometimes very hard to overcome, especially when theres a benefit attached to it. 

 

[tomahawk6]

Many of the banks were forced to take tax payer money. Now the government wants to run the banks. Hope they run them better than they have Freddie and Fannie.

 

[retiredgrunt45]

Many of the banks were forced to take tax payer money. Now the government wants to run the banks. Hope they run them better than they have Freddie and Fannie.

I guess you'll find out in about four to eight years... Couldn't be any worse than what the banks did to themselves.