Back when I was taking classes for my masters degree in economics, one of the recurring themes in my studies was that investment capital was a good thing, a really good thing. Savings and capital allowed the economy to make itself better, to make itself grow. Free-market interest rate mechanisms would make sure that this capital was fully allocated and was concentrated in the places where the most good would be done. Sure, there might still be a minor role for the government, in making sure that enough information was available to help the markets run smoothly. And every now and then it could assist by keeping a “disequilibrium” from getting out of hand, e.g. stock crashes, runs on banks, and panicky halts in lending. But that was the exception, not the rule; the rule was that capital and the free market were the king and queen of the economy.
That’s what I was taught. So I can’t help but scratch my head at what’s going on today. There’s plenty of capital out there; interest rates are very low. Perhaps there’s more than enough capital than can be usefully used. But more significantly, capital these days is VERY restless. Investors seem to desire extremely short time horizons; not many have the faith to park their funds with a corporation or lend to a government or real estate developer for a long period. I see this as crisis of faith in the future; when general trust in the world starts receding, the mantra becomes ‘be ready to get out quick’!
But, you might ask, if that is true, then why aren’t long term rates much higher than short-term rates right now? On first blush, the fact that 20 year rates aren’t all that much higher than 10 year rates, and that the same holds on down through 5 and 2 and 1 year rates, all seems to disconfirm my hypothesis here. But actually, the capital economy today is largely controlled by big corporations and financial institutions with “interlocked leadership”; this common leadership seems to know not to even ask for 20 or 30 year investment terms anymore. The demand and supply for loans and investments are mostly concentrated on the short-term side.
What about the mortgage market? Isn’t that a long-term affair (typically 30 years)? The only thing that allows (or shall I say “allowed”) the mortgage markets to continue are all of those crazy bundling devices that allow such loans to be tossed back and forth between investors and financial firms like a hot potato. Long gone are the days of the town bank having enough faith in its community and its customers to hold a home loan for two-thirds of an average Joe’s working life.
So, just what is all of this short-term thinking getting us, i.e. the millions and millions of small people who were promised “the magic of the market” back in the 1980s in return for allowing government regulation in the financial, transportation, energy and communication fields to be decimated? (As opposed to modernized, which clearly was needed.) Well, we had the dot-com stock boom and bust of the late 1990s; but that really didn’t do much damage. But then the waves of restless capital that once chased internet fortunes turned to real estate. So then housing prices boomed, which made a lot of people feel good and fueled consumer spending; but it also had the effect of putting home ownership out of reach for much of the working class.
Oh, but never fear! The newly-deregulated financial market rode to the rescue with all sorts of crazy new mortgage products that would allow people who weren’t so wealthy to become property owners. It’s just too bad that those people couldn’t afford high-priced lawyers and financial advisers, and thus couldn’t have understood all of the fine print on the papers they signed. Now they are finding out that their deals weren’t so good after all, and a lot of them aren’t going to be able to keep their homes. And even those who CAN keep them will have to cut back on spending, which finally puts the brakes on the retail sector. And thus more and more people will be out of work over the next year. Let’s just hope this will be another self-correcting recession.
So, the restless capital demon has finally been driven from the real estate market by Bernacke and our other financial exorcists. But it is not dead; it has now invaded the commodities markets! Instead re-gaining faith and settling for long-term investments into American industry and government (and perhaps also responsible home-owners and real-estate developers), the capitalists continue their short-term craze, with “plays” in futures contracts for crude oil, copper, lead, wheat, soybeans, rice, corn, etc. And thus, oil prices have soared along with food prices. It’s bad enough to be paying $3 plus for gasoline, but this capital demon is now messing with our stomachs!
Well, given the obesity rates here in the USA, a lot of people could reasonably make up for increased food prices by reducing their consumption. But the food market is world-wide, and commodity speculation in the Chicago Mercantile Exchange may well mean that a family in west Africa or Bangladesh or Haiti isn’t going to get enough calories to stay healthy and productive. So, the short-term “liquidity” craze is really taking a nasty turn here. Try telling a starving family about “the magic of the market”, how everyone “on average” is better off for it.
The overall trend behind all of this is a real problem. Consider one more point if you would. Global warming is going to require a lot of big, long-term investments to be made if our current standards of living are to be maintained. E.g., power plant operators will have to build expensive gas capture systems as to keep carbon dioxide from reaching the air; they will have to pump it underground or some such place. These expensive investments are going to require a lot of capital. Is that capital going to be adequately provided at reasonable prices (i.e., interest rate levels) by today’s “hot-potato” / super-liquidity financing systems?
I wish that I had a solution. But it’s not really something that the government can fix through a new law or regulation or agency. The real solution is a change in attitude, especially amidst the rich, i.e. the people who hold own and manage most of the capital. (Although increasing taxes on the rich and using that money for infrastructure investments, e.g. better roads, transit systems, schools, scientific research, etc. might help a bit.) Only if they calm down and start putting their faith in the long-term prospects for our economy and our nation — and back up that faith with their bucks — will this evil spell be broken. If not, then we ain’t seen nothing yet; the horsemen of economic apocalypse will ride on into the night!
Jim,
As I mentioned in my comments on your March 13 blog, I thought then that we might be in for a DEPRESSION rather than a recession. And it seems now the financial powers seem to be using the term “depression.” The Bear-Sterns problem was surely the warning on a depression as opposed to recession.
I also have a couple of comments about all the financial theory you mention. As I see it, it’s exactly THAT–theory. I think that when it comes to finances, theory is very far from what actually happens in REALITY.
One thing about the theory is (as you mention) any “disequilibrium” was an exception rather than the rule. But the problem with the theory is that there were no provisions for what to do when the EXCEPTION came into being. The EXCEPTION always seems to be dismissed as something that really won’t happen–but hasn’t history shown that the exception does happen?
Another thing: The theory STARTS with all the rich people and then states something about a TRICKLE DOWN effect. Notice that word–“trickle.” Is a TRICKLE enough for the masses of people for whom the TRICKLE is intended? The theory actually talks about a pyramid, with the small area at the top being the rich; the large area of the pyramid at the bottom being the poor–with layers of the “relatively poor” in between. And the groups that constitute the MOST people get the TRICKLE down. Isn’t it clear what is wrong with that picture?
Another thing: Democracy and capitalism have become intertwined in our society. But in reality capitalism seems to work in communist countries (China, e.g.).
Basically, I think that when it comes right down to it, the fact of the matter is that it is the RICH who benefit from capitalism and the poor or “semi-poor” (maybe middle class) scrimp along as best they can. (For instance, to my total dismay this year, I, who am on a fixed income, found that I came dangerously close to having to deal with the alternative minimum tax.) Again, what’s wrong with this picture?
As to the markets: I’ve done some study on them, dabbled in them myself. What I do know is that one might as well take one’s money to a casino. Yes, my courses in finance were back in the 1960s but some of what I learned is not hopelessly out of date yet. I remember thinking then: When it comes right down to it, the markets are all based on what people THINK (and HOPE) will happen and the CONFIDENCE people have in the markets. What could be shakier sand for a foundation that what people THINK and HOPE and the CONFIDENCE they have in the economy? I tho’t that 40+ years ago and I still think it.
As to the rich changing their attitude in order to help the economy: One thinks in terms of pigs flying. And for the proof of that this, all one has to do is look at what happened in Congress this last week when the oil powers were asked by Congress to account for their obscene profits while the ordinary person is gauged at the gas pump. I confess I didn’t follow the testimony word for word, but I saw no resulting headlines that said the oil guys were generously going to reduce the price of gas as a “big give back” to the country. Rather, their attitude was more in the line of: People have to understand…… blah, blah, blah.
And on a tangent: The obscene drive for profits (the 1990s and the “greed is good” as an example) has also gotten us into the situation where so much of the infrastructure of our nation is on its last legs. The latest is the bridges in the nation. However, how about the electric infrastructure, etc.? What I hear about our electrical infrastructure is that it hangs by a hair.
And on a totally different (yet somehow tangentially related topic), I must mention that the latest I’ve heard on the Darfur situation is that all the genocide that is going on in Africa is due to the fact that a supply of WATER the size of Lake Erie has been discovered underneath the desert in the Darfur area; it seems the oil powers mean to gain control of that water, a massive need in the desert. Thus, the native Darfur people(s) are being slaughtered by the native Arabs; to be followed by the native Arabs to be next in line when they have done the “dirty work” for the governments who want to take over–namely, the oil powers. (This from the book THE TRANSLATOR by Daoud Hari.) Suddenly all the slaughter in Africa makes sense.
As I say: To wait for/expect a change in attitude on the part of the rich–I mean the REALLY RICH–is in the “when pigs fly” department.
MCS
Comment by MCS — April 4, 2008 @ 12:00 pm
Jim,
As I mentioned in my comments on your March 13 blog, I thought then that we might be in for a DEPRESSION rather than a recession. And it seems now the financial powers seem to be using the term “depression.” The Bear-Sterns problem was surely the warning on a depression as opposed to recession.
I also have a couple of comments about all the financial theory you mention. As I see it, it’s exactly THAT–theory. I think that when it comes to finances, theory is very far from what actually happens in REALITY.
One thing about the theory is (as you mention) any “disequilibrium” was an exception rather than the rule. But the problem with the theory is that there were no provisions for what to do when the EXCEPTION came into being. The EXCEPTION always seems to be dismissed as something that really won’t happen–but hasn’t history shown that the exception does happen?
Another thing: The theory STARTS with all the rich people and then states something about a TRICKLE DOWN effect. Notice that word–“trickle.” Is a TRICKLE enough for the masses of people for whom the TRICKLE is intended? The theory actually talks about a pyramid, with the small area at the top being the rich; the large area of the pyramid at the bottom being the poor–with layers of the “relatively poor” in between. And the groups that constitute the MOST people get the TRICKLE down. Isn’t it clear what is wrong with that picture?
Another thing: Democracy and capitalism have become intertwined in our society. But in reality capitalism seems to work in communist countries (China, e.g.).
Basically, I think that when it comes right down to it, the fact of the matter is that it is the RICH who benefit from capitalism and the poor or “semi-poor” (maybe middle class) scrimp along as best they can. (For instance, to my total dismay this year, I, who am on a fixed income, found that I came dangerously close to having to deal with the alternative minimum tax.) Again, what’s wrong with this picture?
As to the markets: I’ve done some study on them, dabbled in them myself. What I do know is that one might as well take one’s money to a casino. Yes, my courses in finance were back in the 1960s but some of what I learned is not hopelessly out of date yet. I remember thinking then: When it comes right down to it, the markets are all based on what people THINK (and HOPE) will happen and the CONFIDENCE people have in the markets. What could be shakier sand for a foundation that what people THINK and HOPE and the CONFIDENCE they have in the economy? I tho’t that 40+ years ago and I still think it.
As to the rich changing their attitude in order to help the economy: One thinks in terms of pigs flying. And for the proof of that this, all one has to do is look at what happened in Congress this last week when the oil powers were asked by Congress to account for their obscene profits while the ordinary person is gauged at the gas pump. I confess I didn’t follow the testimony word for word, but I saw no resulting headlines that said the oil guys were generously going to reduce the price of gas as a “big give back” to the country. Rather, their attitude was more in the line of: People have to understand…… blah, blah, blah.
And on a tangent: The obscene drive for profits (the 1990s and the “greed is good” as an example) has also gotten us into the situation where so much of the infrastructure of our nation is on its last legs. The latest is the bridges in the nation. However, how about the electric infrastructure, etc.? What I hear about our electrical infrastructure is that it hangs by a hair.
And on a totally different (yet somehow tangentially related topic), I must mention that the latest I’ve heard on the Darfur situation is that all the genocide that is going on in Africa is due to the fact that a supply of WATER the size of Lake Erie has been discovered underneath the desert in the Darfur area; it seems the oil powers mean to gain control of that
Comment by MCS — April 4, 2008 @ 12:00 pm