Thursday, January 22, 2009

Minyans and Animal House

Here are two great reads from Minyanville.

First, The New World Order

…The news flow of late has been staggering. An additional $350 billion in TARP funds, the $825 billion stimulus package, another $20 billion for Bank America (BAC) and Merrill Lynch (MER) and the systematic dismantling of once-venerable institutions such as Citigroup (C).

Conventional wisdom dictates that the only solution is to induce fresh spending with fertile credit, a last ditch effort to shock the economy out of its coma and pave the way to better days. That is a fundamentally flawed assumption, for sustainable growth will arrive by way of debt destruction rather than credit creation.

Interest rates on bank deposits are near zero and the Federal Reserve guided them there for a reason: they want to remove incentive to save and jumpstart the spending cycle. While saving is an intuitive individual solution, it’s the death knell of an economic ecosystem measured by the sum of its parts and reliant on the velocity of money.

What we’re witnessing isn’t a garden-variety one-and-done recession; it’s the cumulative comeuppance of a massive credit bubble rooted in faulty monetary policy aimed at avoiding small, corrective recessions. Conventional wisdom has been wrong about what's been happening the last 20 years so shame on us if we rely on the same people who never saw the bubble building in the first place to guide us through it.

The answer to a debt bubble isn’t to create more debt. That’s as absurd as saying we should have created more technology stocks in 2000 or more homes in 2006. As it stands, we’ll be adding another $2 trillion to the national debt this year, an obligation that will invariably be passed to future generations.

Our current course has ominous ramifications for the dollar. As the greenback is the world reserve currency, those implications extend throughout the global landscape. A currency holds a nation together and the economy—perhaps society at large—assumes more, not less, risk as a function of the path of our attempted fix.

…While efforts at job creation will result in more cash in people’s pockets, that cash will be worth less as the government borrows more. Sustainable and realistic solutions require an overall reduction of government influence as we take our free market medicine of time and price. That is, if the free market capital structure is to survive.

The underlying problem is that we have no savings to support sound lending. In their desperate attempt to fix the problem, the Federal Reserve created more imbalances and prolonged the inevitable. They are shifting private debt into public debt but their only end game is to print more currency.

A balanced economy needs a savings pool commensurate with its debt pool. Any solution that deviates from that equilibrium will lower the standard of living for our children. It took years to deplete our collective fortunes and it will take years of saving, coupled with painful debt destruction, to establish a stable foundation for economic growth.

Second, Op-Ed: Capitalism Placed on Double Secret Probation

If there had been such a hearing, we might have at least gotten to hear a defense similar to the one given by Eric “Otter” Stratton, perhaps presented by a Wall Street executive:
Ladies and gentlemen, I’ll be brief. The issue here is not whether we broke a few rules or took a few liberties with derivative securities - we did. (Wink). But you can't hold all of Wall Street responsible for the behavior of a few individual companies.

If you do, then shouldn’t we blame the whole financial system? And if the whole financial system is guilty, then isn’t this an indictment of our legal institutions in general? I put it to you: Isn’t this an indictment of our entire American society?

Well, you can do what you want to us, but we’re not going to sit here and listen to you badmouth the United States of America! Gentlemen!

Unfortunately, we never got to hear such inspiring words, and government is doing exactly what Otter argued against. It is punishing everyone for the poor business decisions made by a few. By handing out bailouts and running massive fiscal deficits, it is we taxpayers and future generations who are being held responsible for others’ mistakes.

…The rejection of capitalism as a failure might be frustrating, but there could be a silver lining. After all, John “Bluto” Blutarsky sustained a GPA of 0.0, yet went on to marry the beautiful Mandy Pepperidge and have a successful and illustrious career in the United States Senate (he even became president, by some accounts). Perhaps capitalism, having been deemed a failure, has a bright future ahead in US politics.

For those who are not so optimistic and think that the battle between socialism and capitalism is over, and that the parade of socialist interventions will commence with the President Obama's inauguration, I will leave you with the inspiring speech given by Bluto after the Deltas were kicked off campus:

“Over? Did you say over? Nothing is over ‘til we decide it is! Was it over when the Germans bombed Pearl Harbor? Hell no! And it ain’t over now! Cuz when the going gets tough…the tough get going. Who’s with me!”