Is The U.S. Government Buying Stocks?
By: Washington’s Blog
http://georgewashington2.blogspot.com/2010/01/is-us-government-buying-stocks.html
As I pointed out in December 2008, Nouriel Roubini wrote the month before that the government might buy U.S. stocks:
The Fed (or Treasury) could even go as far as directly intervening in the stock market via direct purchases of equities as a way to boost falling equity prices. Some of such policy actions seem extreme but they were in the playbook that Governor Bernanke described in his 2002 speech on how to avoid deflation.
Given that Roubini was previously a senior adviser to Tim Geithner, he probably knows what he’s talking about.
Now, Charles Biderman, CEO of TrimTabs, argues that the government may, in fact, have been buying stocks to prop up the stock market. Given that 25% of the top 50 hedge funds in the world use TrimTabs’ research for market timing, it is a credible source.
Specifically, Biderman writes:
As far as we know, it is not illegal for the Federal Reserve or the U.S. Treasury to buy S&P 500 futures. Moreover, several officials have suggested the government should support stock prices.
For example, former Fed board member Robert Heller opined in the Wall Street Journal in 1989, “Instead of flooding the entire economy with liquidity, and thereby increasing the danger of inflation, the Fed could support thestock market directly by buying market averages in the futures market, thereby stabilizing the market as a whole.”
In a Financial Times article in 2002, an unidentified Fed official was quoted as acknowledging that policymakers had considered buying U.S. equitiesdirectly, not just futures. The official mentioned that the Fed could “theoretically buy anything to pump money into the system.”
In an article in the Daily Telegraph in 2006, former Clinton administration official George Stephanopoulos mentioned the existence of “an informal agreement among the major banks to come in and start to buy stock if there appears to be a problem.”
Mike Whitney – in commenting on Biderman’s essay – adds another juicy quote:
Consider the comments of former Clinton advisor George Stephanopoulos who verified the existence of the PPT in an appearance on Good Morning America on Sept 17, 2000. He said:
“What I wanted to talk about for a few minutes is the various efforts that are going on in public and behind the scenes by the Fed and other government officials to guard against a free-fall in the markets . . . perhaps the most important the Fed in 1989 created what is called the Plunge Protection Team, which is the Federal Reserve, big major banks, representatives of the New York Stock Exchange and the other exchanges and they have been meeting informally so far, and they have a kind of an informal agreement among major banks to come in and start to buy stock if there appears to be a problem. They have in the past acted more formally . . . I don’t know if you remember but in 1998, there was a crisis called the Long term Capital Crisis. It was a major currency trader and there was a global currency crisis. And they, with the guidance of the Fed, all of the banks got together when it started to collapse and propped up the currency markets. And, they have plans in place to consider that if the markets start to fall.”
Biderman continues:
This type of intervention could explain some of the unusual market action in recent months, with stock prices grinding higher on low volume even as companies sold huge amounts of new shares and retail investors stayed on the sidelines. For example, Tyler Durden of ZeroHedge has pointed out that virtually all of the market’s upside since mid-September has come from after-hours S&P 500 futures activity.
If we were involved in a scheme to manipulate the stock market, we would want to keep it in place until after the “wealth effect” put a floor under the economy of, say, three quarters of positive GDP growth. Assuming the economy were performing better, then ending the support for stock prices would be justified because a stock market decline would not be so painful.
Whitney summarizes another of Biderman’s arguments:
“We cannot identify the source of the new money that pushed stock prices up so far so fast. For the most part, the money did not from the traditional players that provided money in the past.”
Huh? So, this vast infusion of liquidity–which helped the banks to avoid painful deleveraging–did not come from the usual suspects?
That’s right. According to Biderman, the money did not come from (a) companies (“which were a huge net seller”) (b) retail investor funds, (c) retail investors, (d) foreign investors …, (e) pension funds [or (f) hedge funds].
Has it happened? Has the government or it’s primary dealers really purchased stocks?
I don’t know, but Bernanke’s refusal to open up the Fed’s books – and the lack of accountability and transparent accounting standards for the big banks – isn’t helping to dispel suspicions.
And if the stock market tanks again in 2010, it might add circumstantial evidence to a short-term attempt to prop up the market by the government.
Market Watch, February 2. 2012
By Brett Arends, MarketWatch
NEW YORK (MarketWatch) — Jim Grant’s rise to power may be delayed.
The legendary Wall Street writer, publisher of Grant’s Interest Rate Observer, has been mentioned by two of the rivals for the Republican presidential nomination. Newt Gingrich said if elected president, he’d name Grant to help run a commission looking at a possible return to the gold standard. And Ron Paul said, if elected president, he’d go all-in and name Grant — one of Wall Street’s best-known gold bugs — as the new chairman of the Federal Reserve.
As Paul wants to abolish the Fed, it would doubtless be a temporary post. But Grant says he found the offer — which came out of the blue — very flattering.
Alas, both men are trailing in the race to front-runner Mitt Romney. “Unfortunately, I haven’t heard from Mr. Romney yet,” joked Grant when I called on him in his offices down on Wall Street. “I’m sitting by the phone, I’m ready.”
Jim Grant’s ideas about the economy are attracting presidential hopefuls.
He may have to wait some time. Romney, a conventional Wall Street figure, is unlikely to tap him anytime soon.
Jim Grant is a paradox: A legendary, well-established figure on Wall Street who is not part of the Wall Street “establishment.” He is a raging contrarian. A writer from a more elegant age, Grant is also a scathing critic of “too big to fail” banks and the whole Wall Street racket — with its privatized profits and socialized losses.
The latest edition of his Interest Rate Observer carries a cartoon on the front cover, in which a banker is bemoaning his fate to a bartender: “Just one more unconscionable bonus,” he is saying over his beer, “and I would’ve been golden.”
Grant is an old-school conservative, but the cartoon could have appeared without any change in The Nation: It’s a sign of how the principled right and the principled left have often found some common cause in their critique of the amoral, expedient financial “elite.”
Entering Grant’s offices is like a step back in time. There are books and actual papers piled high on his desk. I could spy neither an iPad nor an iPhone. Grant, now in his 60s, wears bow ties and horn-rimmed glasses. He was known for many years as a “perma-bear” on the Street, and there is a giant stuffed bear by the door.
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He is best known these days — to Gingrich and Paul, among others — for his long-standing support for the gold standard. The world has moved in his direction. In 12 years, gold has risen from a derided relic trading at $250 an ounce to a hot investment at $1,750. Everywhere paper currency systems are under challenge. In 2008, the world discovered that you can’t just manufacture endless wealth out of thin air, as the gold bugs had long argued, and it is still struggling with the realization.
Many people will think of the gold standard as a relic of a bygone era, something as old-fashioned as bow-ties and stuffed animals. (My caveat: To me, that’s not an insult.) Grant, when we met, argued the reverse. He says paper currencies and our current monetary system are the ones that are out of date.
“The anachronism is today’s system,” he says. We have a “command and control, top down” system whereby the Federal Reserve imposes an interest rate on society. The Fed, in other words, tells us what the price of money should be. It is, Grant says, oddly at odds with the modern age. “We live in a world of collaborative social networks” of the Internet and Facebook, of Wikipedia instead of the old World Book, and so on. And yet when it comes to the price of money, we wait for a committee that sits in private to tell us what it should be.
This, he argues, is the cause of so many of our ills. The Fed has moved from “central banking” to “central planning,” fueling bubbles, encouraging risks, and generally upsetting the equilibrium of the economy.
It’s a good critique. I’m less certain that the gold standard would cure all our ills than I am of how flawed our current system is. Grant calls it “like tennis without a net” and says that the Fed has now inflated a bubble in Treasury bonds comparable to the housing bubble a few years ago, though he notes he’s been warning about Treasurys for several years, and so far they’ve kept going up.
Grant calls the gold standard “the least imperfect monetary system.” He notes that our present regime of purely paper currency is new: It only dates back to Richard Nixon.
I asked him, whimsically, what he’d do if he actually were to be named chairman of the Fed. He said he’d begin by communicating to the public why the present system was so wrong, and needed to be changed. He’d make the case for the gold standard.
“I would then lay out a timeline for the conversion to a constitutional dollar, a dollar as envisaged by the Founding Fathers. “ A dollar, he says, is supposed to be a fixed measure, “like a foot, or a pound,” not something that can be redefined every few weeks by the Fed.
In his ideal world, says Grant, he would lay out a three-year program to convert back to the gold standard, probably at around $2,500 per ounce of gold. He adds that he would take great care to avoid the notorious blunder made by Winston Churchill and the British back in 1925, when they went back on the gold standard at too high a price, and imposed brutal deflation on the economy. Alas, he admits, this would need an act of Congress.
He added that he would also wind down the Fed’s bloated balance sheet, selling assets for gold, and he would shut down the Fed’s open market activities completely, relying instead on the discount window alone. The Fed, he said, shouldn’t be going out into the market to provide liquidity. It should simply be there to provide temporary liquidity to solvent banks when they ask, and on the basis of good collateral.
For good measure, he’d also push for a repeal of a 1935 New Deal law that protected bank investors from runs on their financial institutions. Before the law, he notes, if a bank got into trouble, the investors were on the hook to bail it out: After all, it was their bank. The same was true of the partners in a Wall Street brokerage. The system of taxpayer bailouts, like that of paper money, is a modern innovation.
“We want to reconnect the taking of risk with the bearing of risk,” says Grant. “Our financial titans, especially at the upper echelons, all too often take risks but they do not bear risks.” As people, they are probably no worse than their predecessors, he adds, but today “the consequences of failure are much less severe.”
A decade ago, Jim Grant looked old-fashioned to many on Wall Street. Today, his views look much more in step with the times. His fortnightly Interest Rate Observer, famously, warned about the looming catastrophe in housing debt and mortgage-backed securities as early as 2005 and 2006. Sales are now booming.
Unlike most modern journalists, Jim Grant does not give away his work for free: Instead he charges $965 a year to subscribe. Conventional wisdom keeps telling me this is a doomed business model, but we all know about CW. Grant says paid subscriptions are up an astounding 82% since early 2005, to near-record levels. Apparently quality still sells. I hope that, in this too, he may prove an “old-fashioned” holdover who is ahead of his time.
Brett Arends is a senior columnist for MarketWatch and a personal-finance columnist for the Wall Street Journal.
Market Watch – February 2, 2012
Jan. 31, 2012, 12:01 a.m. EST
Short China: Its commodities bubble is set to pop
Commentary: Empire-building, overpopulation, greed, hoarding
By Paul B. Farrell, MarketWatch
SAN LUIS OBISPO, Calif. (MarketWatch) — Commodities guru Jim Rogers wrote: “Bull in China, Investing Profitably in the World’s Greatest Market.” A former partner of hedge genius billionaire George Soros, he blamed the Fed for igniting two catastrophic financial bubbles back in 2007. So he shorted Fannie Mae, banks and home builders, abandoned America just before the 2008 meltdown, and moved to China.
But should you follow his lead? Forget America? Invest in China, the “World’s Greatest Market?” Maybe follow Rogers earlier advice in “Hot Commodities: How Anyone Can Invest Profitably in the World’s Best Market?”
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After all, China is the hottest economy on Earth. And commodities are so red-hot China is “buying up the world” to lock up commodities essential to feed China’s skyrocketing growth to 2050 and beyond.
But gamble on China? Risk your retirement nest egg? Compete against China for global commodities?
Don’t. This is a no-win scenario: for China, the USA, the world and you.
OK, so you’re mad at Wall Street for losing over $10 trillion of America’s retirement assets in the dot-com crash and subprime meltdown. And you know they’ll do it again. But buy China? No. When China collapses (and it will) you better not have your retirement invested over there. They’ll nationalize it, devalue it, wipe you out.
China’s super-ego bubble will collapse, like Rome, all great nations
Yes, China’s hot economy will crash and burn in the coming years. It is the “World’s Greatest Market” today. But they are also the “World’s Greatest Egomaniacs.” They will self-destruct. Why? Simple math, psychology, history: Bubbles always pop.
In “Zero-Sum Future,” Gideon Rachman sees a global paradigm shift, says the New York Times. A “win-win” optimism that dominated the world from 1991 to 2008, where “everyone benefited from growing wealth,” has been “replaced by a zero-sum game in which one nation’s benefit comes at another’s expense.”
Get it? China wins. America loses. Except this new game is rigged. Both are linked as “Chinamerica.” But in a delicate balance with all nations: One collapses, all collapse.
China’s economy looks fabulous today: Not only will it be bigger than America’s in the next decade, by 2040 China’s GDP will reach $123 trillion, estimates Nobel economist Robert Fogel in Foreign Policy. In fact, China will be three times bigger than the entire GDP of the world back in 2000, going from a “poor country” back then to “super rich” nation with a $85,000 per-capita income. By 2040 China will have 40% of global GDP, compared with America’s 14%.
Quite a reversal: Back in 2000 America’s GDP was 22% of the world’s, China just 11%.
Still, gambling with Jim Rogers on China (and against America) is a bad bet. Here’s why: Both history and psychology warn of a global collapse coming, not just in China, although they are leading the way with raging growth.
Remember: “one of the disturbing facts of history is that so many civilizations collapse,” warns environmental anthropologist, Jared Diamond, author of “Collapse: How Societies Choose to Fail or Succeed.” “Civilizations share a sharp curve of decline. Indeed, a society’s demise may begin only a decade or two after it reaches its peak population, wealth and power.”
China’s population growth igniting huge commodities bubble
Population is the ticking time-bomb, accelerant, tipping point, the trigger. The United Nations predicts that by 2050 world population will reach 10 billion from 7 billion today. But many experts warn that the planet’s resources cannot feed 10 billion people.
While America adds 120 million by 2050 for a 400 million total, China will add 320 million for a 1.4 billion total. And India will add 600 million to top at around 1.5 billion. Meanwhile, experts warn that a global population over 8 billion is inviting collapse.
So China can’t wait. America can’t wait. The world cannot wait that long to start planning for a civilization-ending catastrophe. But sadly, they will wait, till it’s too late. An ancient historical pattern is repeating. Rome collapsed fast. Why? Throughout history, tone-deaf politicians believe their own press releases, ignore obvious warning signs, fail to plan.
Remember Fortune magazine’s report on a 2003 Pentagon study that predicted “climate could change radically and fast,” creating “the mother of all national security issues.” Population unrest would result in “massive droughts, turning farmland into dust bowls and forests to ashes.” And “by 2020 there is little doubt that something drastic is happening” with warfare defining human life.”
China’s ‘buying up the world … shopping spree’
Which bring us back to China and a Time magazine warning: “Be Very Afraid of The China. Its economy grew on real estate mania and easy money — does this sound familiar.” Worse, China’s arrogant leaders are now convinced that America has fatally sabotaged itself the past decade, handing China the role as the world’s superpower.
In fact, China is closer to collapse than America. USA Today warns of America’s “Latest Export to China: The American Dream.” They are infected with our “virus.” And the new “Chinese Dream” is turning into a nightmare of capitalist greed.
Financial historian Niall Ferguson warns that while China is “gloating on our misfortunes” they are ignoring their domestic problems, pollution, real estate costs, market speculation, wages, employment, overpopulation, and more. China’s “headed for a collapse of its own.”
China’s recent high-speed train crash is a metaphor of an out-of-control ideology. Their exploding population is depleting more and more commodity resources, prompting BusinessWeek to ask: “Is China Inc. intent on buying the world? It sure looks that way,” calling the trend “China’s Shopping Spree.”
China is obsessed, blindly planning ahead to feed, clothe and house 300 million more people, fast. Imagine the social disruption of building 100 new cities the size of Chicago … in one generation. With no plans to slow down their exploding population and economy, China is guaranteed to trigger a global collapse.
China’s leaders, blinded by a global empire-building obsession
In late 2010 The Economist ran a similar cover story: “Buying Up The World: The Coming Wave of Chinese Takeovers.” Yes, China’s already buying huge commodity-resource rights on every continent. BusinessWeek described one such acquisition this way: “The deal is simple: Australia gets money, China gets Australia.” Yes, an entire continent. Warning, selfishly hoarding the world’s commodities will backfire.
Ironically, China’s buying with a trillion in surplus reserve dollars they got funding our wars and credit-card debt. Example: in one two-month “Shopping Spree” a “car maker Beijing Automotive and appliance giant Haier have invested or shown interest in investing in oil fields in Iraq, GM’s Opel car business in Germany, an upscale appliance maker in New Zealand, and a Japanese department store.”
Then China’s “Sinopec paid more than $7 billion for a Swiss oil company,” and also made a “rumored bid for a Spanish-owned Argentine oil producer that would be twice that.” China is now more capitalistic than Wall Street’s too-greedy-to-fail banks.
Short China, hedge fund guru warns investors
But the questions linger: Should you buy stock in China Inc.? Buy into China’s raging commodity business?
Hedge manager Jim Chanos has been reading the tea leaves for a long time and sees too heavy a government footprint in their economy: crony capitalism, state-owned companies favorites, massive municipal debt, overbuilding of luxury condos, stadiums, poor construction, environmental pollution, lax regulations, subsidized prices, bad accounting, currency manipulation, and more.
Chanos has been warning investors to ignore the hype. He tells BusinessWeek investors to “Short China,” this bubble is collapsing.
China’s leaders ‘driving a fast new sports car off a cliff’
Diamond says we need leaders with “the courage to practice long-term thinking, and to make bold, courageous, anticipatory decisions at a time when problems have become perceptible but before they reach crisis proportions.”
Unfortunately, history warns us that leaders are too often self-interested, short-term thinkers, lacking courage and interest in the future. They rarely plan far enough ahead. Eventually they’re caught off-guard, and their worlds collapse, often fast. They respond best during crises, but invariably with too little, too late, as another civilization dies.
Niall Ferguson put it this way: What if history is “at times almost stationary but also capable of accelerating suddenly, like a sports car? What if collapse does not arrive over a number of centuries but comes suddenly, like a thief in the night?”
But does it matter if China collapses before America? No. Either one will take down the other, igniting a global collapse. But our bets are China’s first, those obsessed power-hungry ego-maniacs have convinced us they’re the loudest ticking time-bomb.
So protect yourself, invest in America … and “Short China.”
Collectivism or Freedom?
Collectivism or Freedom
by Alex TokarevJune 14,
All collectivist systems need to have a single social goal. They must harness the energy of all people and plan the use of all resources to fulfill a common purpose. Collectivist leaders treat people as armies. Life in the Darwinistic world of class conflict is like a battle for survival between biological species. Losing means death; winning is everything. Such philosophy, of course, is abhorrent to the true liberal since the conscious pursuit of “social” goals inevitably conflicts with personal freedoms. Collectivism, according to Nobel Prize-winning economist Friedrich Hayek, refuses “to recognize autonomous spheres in which the ends of the individuals are supreme.”
In The Road to Serfdom, Hayek warned against the dangers of social engineering. He recognized that individual ends could coincide, though this happens mostly on a small scale. In such cases, people should be free to enter into voluntary alliances (such as rock bands, joint stock companies, and professional associations) for the pursuit of their identical goals (fame, money, knowledge), exit the alliances when their views come in conflict with the ideas of other members, and dissolve the alliances when they have exhausted their usefulness. But what is not kosher is to force people to contribute without agreement on common ends (like pouring billions of taxpayer dollars in subsidies for human sacrifice at the Planned Parenthood priesthood).
Hayek pointed out that “people are most likely to agree on common action where the common end is not an ultimate end to them but a means capable of serving a great variety of purposes.” This explains why the state’s role as an umpire is not controversial to Milton Friedman, and why even libertarians like John Stossel are comfortable with delegating to civil magistrates the function of protecting his life, liberty, and property. It also explains why we cannot allow the state to expand beyond those limited spheres without giving it a license to suppress or arbitrarily take away any of our human rights.
Haves and Have-Nots
WORLD
FEATURES | Issue: “Realities: 2011-2020″ January 15, 2011
Haves and have-nots
NEXT DECADE CHALLENGE | Our definition of who fits what category will change in the next decade | Mindy Belz
The International Monetary Fund made an odd decision last summer. While Greece was in economic meltdown, its workers rioting in the streets—with Ireland and other parts of Western Europe signaling more global economic bad news to come—the IMF actually raised, mid-cycle, its forecast for average economic growth around the world.
If you are a European, North American, Mexican, Japanese, or a Russian, economic growth of 4½ percent in 2010 would have been big, big news. But if you live in China, India, Brazil, or Thailand, that rate barely begins to tell your story.
Much of the world that we think of as the “haves”—particularly the dominant economies of the United States, Canada, Japan, and Germany—are growing at miniscule rates compared to countries in Asia, South America, and even Africa. The alleged have-nots, meanwhile, have powered through global recession by actually increasing their economic growth rates, with China leading the way at a whopping 2010 rate of 10.5 percent. India followed closely at 9.4 percent, with Brazil, Thailand, Malaysia, and even Vietnam not far behind. The United States, meanwhile, experienced an economic growth rate of 3.3 percent in 2010, which put it slightly ahead of Australia, New Zealand, and countries of Eastern European, while behind Mexico, Russia, and the Middle East. Germany, Japan, France, and the United Kingdom are barely keeping their places on the chart.
What this means is that the coming decade will see economic influence and economic decision-makers increasingly emerge from Asia and the global south—where the engines of production are running hotter and barriers to entry are falling faster.
To orient oneself in the 20th century it was important to understand a world centered on the Atlantic Ocean; to find one’s way into the 21st century a map centered on the Indian Ocean will be essential. “Asia and the global south’s high rate of growth, even discounted by faulty statistics that overvalue state-induced investments, almost double that of the developed world,” said Alejandro Chafuen, president of the Atlas Economic Research Foundation.
The paradox, Chafuen told me, is that “some countries with very weak rule of law are growing much faster than the developed world.” This once ran counter to everything we capitalists knew. But capitalist countries have changed. “China and India score very low on indices of economic freedom,” said Chafuen. But developed economies with better records of economic freedom “are trapped by heavy interventionist systems that shackle production and investment. In addition, their policies on entitlements are unsustainable and create increased uncertainty.”
The bottom line: The world producers of goods and services see the costs of corruption in Asia and the global south as lower than the costs of regulation and expanded welfare states of the developed north.
Chafuen, an Argentinian by birth and graduate of Grove City College who founded the Hispanic American Center of Economic Research and recently received a Global Leadership Award from the World Congress of Families, is a renowned realist who sees plenty of room for optimism in what may seem like a bleak picture: “The gradual move towards more respect of private property and market incentives, in countries in all continents, is bringing millions up from poverty.” What the latest IMF numbers suggest is that global indicators for growth abroad—despite the longest recession since World War II—are better than ever before. But the United States and much of Europe will not be able to capitalize on the growth if they maintain a high tax, high regulatory environment. What the United States can offer in the new global economy will be stability, and an ability to increase for investors what Chafuen calls its biggest treasure—”a rule of law respectful of personal and economic freedoms.”
—with reporting by Kristin Chapman
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January 15, 2011, Vol. 26, No. 1
The Party’s Over
The Party's Over
Server System
Server system
The strength of capitalism, says writer George Gilder, is that success depends on taking others into account | Marvin Olasky
Associated Press/Photo by E. Pablo Kismicki
George Gilder jumpstarted Ronald Reagan’s supply side revolution with Wealth and Poverty (1981), which put forward not only a practical but a moral argument for capitalism. Over the past two decades Gilder, born in 1939, has similarly pioneered discussions of new technology. His uniting of a Christian ethos with business success garnered a furious reaction from philosopher/novelist Ayn Rand. Here are edited excerpts of our recent interview.
Ayn Rand, in her last public speech in 1982, just before she died, attacked you furiously. What got her goat? Altruism. She thought I was ascribing altruism to capitalism. Altruism in her theory is the foundation of socialism, and she thought capitalism is supported by egoism or by individual fulfillment above all. She was blinded in part by her atheism. If you read her books, her characters lead sacrificial lives in order to serve others in many instances. But her objectivist philosophy denies the existence of God, and she found my Christian orientation obnoxious. I said businesses succeed by serving others.
ARTICLE CONTINUES BELOW
Many on the left also equate capitalism with egoism, and for that reason hate it. Capitalists do not get to follow their own dreams, whatever they may be. Academic intellectuals can propagate their ideas whether anyone wants to hear them or not. They can enforce their whims if they join the government—but capitalists cannot succeed without serving others. Profit registers the difference between the value of the output to the customers and the value to the producers. If the capitalist just makes things that he wants, he’s unlikely to triumph. This is offensive to a secular society that believes there can be no ideal greater than personal pleasure and personal fulfillment.
Personal fulfillment is good, financial fulfillment is evil? A lot of people think that capitalism can sometimes be productive, but it also has a moral cost. Profit means that you succumbed to greed. But those who look out for No. 1 are often not investing. They’re buying gold or espousing theories of how to invest in a period of catastrophe or how to benefit from the coming great depression. These guys are really anti-entrepreneurial. Their vision does not lead to bold investment in the face of obstacles. It doesn’t lead to creative enterprise. It leads to a retreat from the marketplace. Capitalists have to operate in economies that are full of predatory governments and vicious people. They have to learn how to prevail over these obstacles—that is what entrepreneurs do.
We need a different definition of investing . . . Investors succeed by giving. This is what the investment process is. You give before you get a return; you are not guaranteed a return. Your success is completely dependent on how other people respond to the product you offer. One of the great delusions of economics is that supply and demand are equally balanced sides of economic transactions. No: What matters in economics is supply. Supply creates its own demand. Demand is like gravity. It exists everywhere: People demand things. But they can only receive products if they offer productive services. Production, innovation, invention, enterprise, service: Those make possible economic growth and advancement.
Why does the left associate self-interest with capitalism rather than socialism? Self-interest is an all-purpose agency. To say it drives capitalism: How does that distinguish capitalism from any other system? Self-interest certainly could be said to drive socialism as well, because what a greedy, self-interested person wants is guaranteed returns. He thinks he is entitled. He seeks guarantees from the government. What is more greedy than a public-service union controlling the government and getting 70 percent greater salaries and benefits than comparable private-sector workers because of their political clout? Entrepreneurs don’t have guarantees. They are willing to rise and fall on the basis of what other people think of their work.
But entrepreneurs still have self-interest—didn’t Adam Smith write, “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” It is true that you should take care of yourself. It is an important obligation of human life and of Christian life. Ultimately you are clearly dependent on God, but part of that dependence means taking care of yourself, well enough that you can be a worthy proponent and servant of the needs of others. Christians shouldn’t become a burden on the rest of society. I think Christians are not a burden: They are a source of the bounties that the rest of society enjoys.
I’ve seen your connecting of profit and entropy, the term from thermodynamics that can be used more broadly as a measure of disorder, change, innovation . . . Creativity is what matters in economics. It is what makes economies grow. The interest rate is the predictable yield, but profit is the unexpected, variable yield from an investment. In other words, profit is entropy in economics. Paul Romer, the leading advocate of entrepreneurial economics, sees an entrepreneur as a reassembler of chemical elements, or a developer of new combinations of atoms. Other theorists describe the entrepreneur as an opportunity scout. He is looking for opportunities in the material environment, or looking for demand configuration.
Entrepreneurs increase entropy? Entrepreneurs create new things, and whether they succeed or not is dependent on the willingness of other producers to exchange their production for the output of the entrepreneurs. If they produce high-entropy creations, they get a big response. The customers are surprised by the new iPod or whatever it is and are willing to exchange the fruits of their own production for the production of the entrepreneur.
And entrepreneurs can best increase productive entropy when they know what to expect from government policy? In my information theory terms, you need a low-entropy carrier—no surprises in the carrier—to bear high-entropy information. The carrier is the rules, the rules of the road, the laws. If laws are multiplying and changing all the time, that stifles the kind of creative activity that can overcome our U.S. debt predicament.
We grow ourselves out of debt? If you have a positive, pro-enterprise government and a solid, predictable currency—a low-entropy carrier—the value of American assets will increase immensely and greatly reduce the burden of our current debts. The 1970s were just as bad as things are now, and change in policy completely turned it around. It can happen again today. The Tea Party people are the spearhead of that transformation.
They’ve surprised some mainstream journalists . . . Entropy measures the degree of surprisal in a communication: How much is unexpected, surprising? If I give a speech and if everything I say you knew already, no information has been transmitted. It’s a zero entropy communication. Politicians seem so boring because they poll their audiences before they speak, and thus manage to achieve totally boring zero entropy communication: No surprise.
How does your understanding of creativity lead you into the critique of Darwinian materialism that you’ve been doing? The essence of Darwinian thought is that at the beginning is matter, and everything else that happens derives from a random selection among random mutations in material systems. Darwinian theory is just another materialist theory. There are tons of them—Marxism, Darwinism, Freudianism (based on the pleasure principle which is basically a materialist concept). All these theories have collapsed in the 21st century. Creation is a fact. The entire universe is oriented to produce creative human beings in the image of their Creator. His presence pervades it. All of the universe is perfectly designed, in some sense, to support human minds.
To hear Marvin Olasky’s complete interview with George Gilder, click here.
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December 04, 2010, Vol. 25, No. 24
Democrats Vote Down 5 Percent Rule
In a bid to stem taxpayer losses from bad loans guaranteed by federal housing agencies Fanny Mae and Freddie Mac, Senator Bob Corker (R-Tenn) proposed that borrowers be required to make a 5% down payment in order to qualify. His proposal was rejected 57-42 on a party line vote because, as Senator Chris Dodd (D-Conn) explained, “passage of such a requirement would restrict home ownership to only those who can afford it.”
A revolutionary idea, to be sure.
More Than Money….
Here is a great article underlining the importance of the morals behind economics.
More than moneyCOVER STORY ARTICLE | Issue: “2010 Books Issue” July 03, 2010
WORLD’s 2010 Book of the Year makes a compelling case that the clash between free enterprise and socialism is a moral battle | Marvin Olasky
WORLD’s book of the year is The Battle: How the Fight Between Free Enterprise and Big Government Will Shape America’s Future (May 2010, Basic Books). This succinct work by Arthur Brooks, president of the American Enterprise Institute, is the right book at this moment in U.S. history.
Honoring a book on current political and economic questions is unusual for WORLD. Our books of the year in 2008 and 2009 were The Reason for God and The ESV Study Bible. We generally rate timeless higher than timely—but sometimes we have to pay attention to the immediate. Samuel Johnson said, “Depend upon it, sir, when a man knows he is to be hanged in a fortnight, it concentrates his mind wonderfully.” As the United States careens toward a crucial fall election, The Battle is concentrating minds.
Furthermore, it’s vital for us to understand that the economic issues Brooks analyzes are not just about money. They involve how we live. The Battle shows how Washington power-grabbers have used financial fears to tell Americans how to live—and it shows the rest of us how to fight back. Brooks, like Thomas Sowell, is able to make economics not part of the valley of the shadow of death.
He begins by noting the centrality of enterprise in American culture—and maybe, thanks to our immigrant ancestors, even in our DNA: “Think about it. Immigrants tend to be entrepreneurial, willing to give up security and familiarity for the possibility of prosperity and success. . . . Only a small minority of people from any particular community tend to migrate away from their homeland. . . . America’s vast success might be explained in part by our genetic predisposition to embrace risks with potentially explosive rewards.”
Brooks then skillfully explores polling data to show that at least 70 percent of Americans favor free enterprise, think the top federal tax rate should be 20 percent or lower, and believe that American business success is crucial to have a strong country. Only 22 percent of Americans feel positively about “government regulation of business” while 95 percent have a positive image of small businesses. Given a choice between government policies that promote opportunity and those that “promote fairness by narrowing the gap between rich and poor, spreading the wealth, and making sure that economic outcomes are more equal,” only 31 percent choose the latter.
Those stats lead Brooks to posit two basic coalitions of Americans: The 70 percent coalition opposes big government and supports free enterprise, and a 30 percent coalition opposes free enterprise and prefers government solutions. The 30 percent now control the White House and Congress because they control media and academia: “These are many of the people who make opinions, entertain us, inform us, and teach our kids in college.”
The evidence of media and academic bias is well known to most WORLD readers; for example, Brooks notes that only one out of 12 American Economic Association members supports free-market principles (and only one out of 33 supports them strongly). These professors are having an impact. One poll last year showed that only 13 percent of Americans over 40, asked to choose between capitalism and socialism, chose socialism. Adults under 30, though, “were almost evenly divided, with 37 percent favoring capitalism, 33 percent socialism, and 30 percent not sure (and thus open to persuasion).”
Here’s one more troubling survey result: “In a January 2010 Gallup poll a majority of young adults between the ages of 18 and 34 held a positive view of socialism.” Brooks notes that generational memory may be significant here: Older people identify socialism with Soviet tyranny but younger ones know it only through seemingly harmless college professors. In any event, “this is an enormous opening for the 30 percent coalition.” That coalition gets its way not only by propagandizing the young but by bribing them: Most pay zero in income taxes and, in the Obama plan, won’t have to pay back student loans if they work for the government (where wages on average are 73 percent higher than those in the private sector).
Brooks also explains how the fall 2008 financial crisis won the presidential election for President Obama and allowed him to develop a narrative with five key claims that many Americans still believe, even though all five are false: “Government was not the primary cause of the economic crisis. The government understands the crisis and knows how to fix it. Main Street Americans were nothing more than victims of the crisis. The only way to save the economy is through massive government growth and deficit spending. The middle class will not pay for the stimulus package; only the rich will.”
This evidence is now familiar to many WORLD readers: We’ve noted the key role of Fannie Mae and Freddie Mac, both government-sponsored enterprises. The Senate killed a reform bill in 2005 that would have required the duo to eliminate investments in risky assets. (The two biggest recipients of campaign contributions from Fannie and Freddie political action committees and employees: Sens. Chris Dodd and Barack Obama.) Banks buckled under pressure to make risky loans, and “many borrowers, far from being victims, were often too ready to take loans they shouldn’t have, chasing the lure of easy profits on rising house prices.”
The Battle then goes beyond money to note that, “The main issue in the new American culture struggle between free enterprise and statism is not material riches—it is human flourishing.” Brooks notes that “the 30 percent coalition charges the majority with money-grubbing selfishness” but is itself “fundamentally materialistic.” Leftists “believe that it should make no difference whether income comes from redistribution and government edict or from enterprise and excellence as judged by the free market. This is an ideology driven by raw materialism.”
Brooks emphasizes the differences in worldview: “In contrast, the 70 percent majority maintains a worldview that is primarily nonmaterialistic. It understands money as just a proxy measure of true prosperity and personal fulfillment. It emphasizes creativity, meaning, optimism, and control in one’s own life and seeks to escape from under the heavy hand of the state. . . . When we reduce the idea of work to nothing more than a means of economic support, we strip it of its transcendental meaning in our lives.” Brooks argues that productive work is crucial to happiness: “Americans prefer to find meaning in their jobs rather than through their after-work pursuits.”
Brooks here should do more about the importance of biblical faith, since many people who have “earned success” apart from a sense of God’s sovereignty and love hit a wall of meaninglessness as they age. Nevertheless, he’s right to note that most Americans want equality of opportunity, not equality of outcome: “If you are in the 70 percent majority, you believe that everyone should get a chance to succeed. . . . If this leads to income inequality—above some acceptable floor—so be it.” He quotes Abraham Lincoln: “I don’t believe in a law to prevent a man from getting rich; it would do more harm than good. So while we do not propose any war upon capital, we do wish to allow the humblest man an equal chance to get rich with everybody else.”
That leads to a political plank for the present: Since the 30 percenters “have concealed the central pillar of their ideology—income equality—under a misleading definition of fairness,” the rest of us should “expose this fact and reclaim the language of fairness for the free enterprise system.” It’s vital to make distinctions: “Legal equality, political equality, religious equality—almost all Americans would agree that these values are vital to our nation. But equality of income? That’s a fundamentally different kind of equality.” We want fair trials but not a right to be declared innocent. We want all people to have the right to vote but not “the right to see their chosen candidate elected to office.”
Brooks notes that the 30 percent coalition’s use of the word “fairness” is duplicitous: “It implies that equality of outcome is a core American principle, when in fact what Americans believe in is equality of opportunity and the potential to earn success.” He is right to insist that the 70 percent coalition cannot cede to the minority the fairness issue and merely argue for free enterprise on the basis of economic efficiency: “Fairness should not be a 30 percent trump card but rather their Achilles’ heel. Equality of income is not fair.” A fair system rewards hard work and excellent performance, and gives people on the bottom a chance to rise not by bringing down the top but by striving for excellence.
So who will defend excellence and fight covetousness? Brooks doesn’t defend the Republican Party’s tendency to compete with the Democrats in the race to pander: Voters, he rightly notes, “did not repudiate free enterprise or conservative principles in November 2008. Rather, they punished an unprincipled Republican Party. That leads to a conclusion: “There is a very real threat before us that the 30 percent coalition may transform our great nation forever. One can only hope that the threat will clear our thinking enough to bring forth leaders with our principles at heart and the ideas to match.”
World Debt Bubble Explained
Here’s a pretty interesting youtube video I ran across. British game show gets it right!