{"id":289,"date":"2008-04-03T21:21:00","date_gmt":"2008-04-03T21:21:00","guid":{"rendered":"http:\/\/jimgworld.com\/blog1\/2008\/04\/03\/289\/"},"modified":"2015-01-07T21:14:53","modified_gmt":"2015-01-08T02:14:53","slug":"289","status":"publish","type":"post","link":"https:\/\/jimgworld.com\/blog1\/?p=289","title":{"rendered":"Capital Attitude Changes Needed?"},"content":{"rendered":"

Back when I was taking classes for my masters degree in economics, one of the recurring themes in my studies was that investment capital<\/span> was a good thing, a really good thing. Savings and capital<\/span> 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 \u201cdisequilibrium\u201d 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. <\/p>\n

That\u2019s what I was taught. So I can\u2019t help but scratch my head at what\u2019s going on today. There\u2019s plenty of capital out there; interest rates are very low. Perhaps there\u2019s more than enough capital than can be usefully used. But more significantly, capital these days is VERY restless<\/span>. 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 \u2018be ready to get out quick\u2019! <\/p>\n

But, you might ask, if that is true, then why aren\u2019t long term rates much higher than short-term rates right now? On first blush, the fact that 20 year rates aren\u2019t 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 \u201cinterlocked leadership\u201d; 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.<\/p>\n

What about the mortgage market<\/span>? Isn\u2019t that a long-term affair (typically 30 years)? The only thing that allows (or shall I say \u201callowed\u201d) 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\u2019s working life.<\/p>\n

So, just what is all of this short-term thinking getting us, i.e. the millions and millions of small people who were promised \u201cthe magic of the market\u201d 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\u2019t 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. <\/p>\n

Oh, but never fear!<\/span> The newly-deregulated financial market rode to the rescue with all sorts of crazy new mortgage products<\/span> that would allow people who weren\u2019t so wealthy to become property owners. It\u2019s just too bad that those people couldn\u2019t afford high-priced lawyers and financial advisers, and thus couldn\u2019t have understood all of the fine print on the papers they signed. Now they are finding out that their deals weren\u2019t so good after all, and a lot of them aren\u2019t 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\u2019s just hope this will be another self-correcting recession.<\/p>\n

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 \u201cplays\u201d in futures contracts for crude oil, copper, lead, wheat, soybeans, rice, corn, etc. And thus, oil prices have soared along with food prices. It\u2019s bad enough to be paying $3 plus for gasoline, but this capital demon is now messing with our stomachs! <\/span> <\/p>\n

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\u2019t going to get enough calories to stay healthy and productive. So, the short-term \u201cliquidity\u201d craze is really taking a nasty turn here. Try telling a starving family<\/span> about \u201cthe magic of the market\u201d, how everyone \u201con average\u201d is better off for it.<\/p>\n

The overall trend behind all of this is a real problem. Consider one more point if you would. Global warming<\/span> 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\u2019s \u201chot-potato\u201d \/ super-liquidity financing systems? <\/p>\n

I wish that I had a solution. But it\u2019s 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<\/span> 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\u2019t seen nothing yet; the horsemen of economic apocalypse will ride on into the night!<\/p>\n","protected":false},"excerpt":{"rendered":"

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 […]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[7,23],"tags":[],"_links":{"self":[{"href":"https:\/\/jimgworld.com\/blog1\/index.php?rest_route=\/wp\/v2\/posts\/289"}],"collection":[{"href":"https:\/\/jimgworld.com\/blog1\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/jimgworld.com\/blog1\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/jimgworld.com\/blog1\/index.php?rest_route=\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/jimgworld.com\/blog1\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=289"}],"version-history":[{"count":2,"href":"https:\/\/jimgworld.com\/blog1\/index.php?rest_route=\/wp\/v2\/posts\/289\/revisions"}],"predecessor-version":[{"id":5087,"href":"https:\/\/jimgworld.com\/blog1\/index.php?rest_route=\/wp\/v2\/posts\/289\/revisions\/5087"}],"wp:attachment":[{"href":"https:\/\/jimgworld.com\/blog1\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=289"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/jimgworld.com\/blog1\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=289"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/jimgworld.com\/blog1\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=289"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}