Disco. Inst. Financial Planning

i-756f569ebe93ea5a68d3c2439c339da1-200812301547.jpgDiscovery Institute boss Bruce Chapman has some ideas about your financial future.

In September, while declaring that President Bush's stock was on the rise, Disco. frontman Chapman insisted the growing financial crisis was awesome:

The disappearance of Lehman Brothers and the transformation of Morgan and Goldman Sachs into heavily regulated commercial banks presents an opportunity for entrepreneurial risk taking by someone else. … The turmoil in the markets world-wide disagregates the economy and makes new entitites possible. …

Overall, is this not a political problem as much as an economic one? Is not the risk of posturing members of Congress now at least as big a scare factor as the housing market and financial markets?

In October, he touted Disco. co-creator George Gilder's claim that "Creativity Will Revive Economy." Note, though, that despite Gilder's noteworthy "confidence and hope," his record as a financial prognosticator is rather disappointing.

And now, on vacation in Boca, he finds that things aren't so bad:

tourism statewide in Florida is down about three percent this December from last. But you wouldn't know it from the stuffed Alaska Airlines flight to Miami or the discouraging realization at Hertz's lot near Miami International Airport that all the cars are checked out--even for "Gold Club" members with reservations. In Miami, supposedly Number One Hertz, indeed, is a metaphor for a straining Boom--too many customers, apparently, and exasperated clerks. It doesn't look or feel like an eagerly aspiring company that is worried about staying on top.

Not only is Hertz having trouble with demand (during top vacation time! in a top vacation spot! who could imagine!?), but the supermarket's shopping carts are all being used, and they've sold all their copies of the London and Toronto papers. Not only that, but a fancy French restaurant is hiring help. "Don't these people know that times are tough?," Chapman wonders.

Yeah, Bruce, they do:

The Conference Board’s consumer confidence index fell to an all-time low of 38 in December, down from 44.7 in November and 38.8 in October. Excerpts of some economists’ reactions to the news:

John Ryding and Conrad DeQuadros, RDQ Economics: Continued deterioration in the labor market appears to be the major factor continuing to push down consumer sentiment, which hit a record-low reading in December (the records go back to 1977 on a monthly basis and 1967 on a quarterly basis). Along with monthly jobless claims, this report points to an employment decline of at least 500,000 in December and a further rise in the unemployment rate to possibly as high as 7.0%.

Yes indeed, last month saw a record number of job losses, with 533,000 jobs lost, the most since 1974. The Chronicle reported economist Nigel Gault, with IHS Global Insight was "gloom[y]." "The economy," he explained, "is now locked in a vicious downward spiral in which employment, incomes and spending are collapsing together." Of course, the millions of people who lost their jobs since the recession started (and the millions more who gave up on getting a good job during the "jobless recovery") are probably not trekking to Boca for a winter tan.

It is only after this stunning, we might even say Burns-like, indifference to the actual facts of the current economy, that Chapman gets to his real point, which is that he enjoys the debunked work of English major-turned New Deal denialist Amity Shlaes:

Pull up a chair, order a Tarte Tartin and pull out a paperback copy of Amity Schlaes' The Forgotten Man, "A New History of the Great Depression." It is comprehensive, readable and surprisingly droll. It will get you out of your funk about the economy and make you realize that our present difficulties are very different from those that produced hard times in the 1930s. Yet there are so many lessons in these pages, too, that make the book pertinent. Such as, 1) the importance of predictable policies and the danger of experimental ones; 2) The need for encouraging, rather than punishing, private investment, and; 3) The genius of the American economy that really does not need instruction from overseas.

Of course, Shlaes cherry-picks her numbers, choosing outdated statistics that have been supplanted by better estimates of unemployment, and ignores empirical reality. Chapman's lessons are, not surprisingly, all wrong, because they are built on sand. There was no fear of experimental policies. The major boost in unemployment and in private investment both correspond to a return from Keynesian economic policies to more orthodox economic approaches. And the New Deal built on the experience of anyone who had a good idea, whether of domestic origin or from overseas.

In the current instance, the lessons of the Japanese financial collapse in the '90s is instructive, as is the Swedish success with a brief nationalization of its banking sector. Heck, Nobel-winner Paul Krugman credits his success as an economist to … evolutionary biology. "I find in evolutionary biology a useful vantage point from which to view my own specialty in a new perspective," Krugman explains. "In a way, the point is that both the parallels and the differences between economics and evolutionary biology help me at least to understand what I am doing when I do economics - to get, to be pompous about it, a new perspective on the epistemology of the two fields." That same dynamic is as true of national borders as it is of disciplinary ones.

For instance, the idea of, and policy of, the Federal Reserve builds heavily on the example of the Bank of England. While that Bank's role in stabilizing markets evolved gradually, American policy-makers were able to step in and graft that successful model into American finance with considerably less difficulty. We do this because it works, and requires much less of that supposedly dangerous experimentation.

Not that there's anything wrong with an experimental approach to government.

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Favorite burns quote: "Never have so many suffered so much so so few could be so happy!"

I have a naive question --

If all this money (or wealth, or whatever) is "lost," who found it?

Are there some people (apart from Madoff, I guess -- but even he isn't sitting on $50 Billion dollars in a Swiss bank account, is he?) who have actually profited from the economic collapse?

Or is all the wealth imaginary?

"Whatever the market will bear" is a concept I understand. No baseball player is worth $25 million a year, but then Sylvester Stallone doesn't get paid $20 million a picture because he's a great actor. They putt butts in the stands, attract eyes in front of the television or something.

But apart from those people who, y'know, actually make something, where is wealth created? Seems like the only things that have new value are commodities -- there's a new crop of corn every year, more oil pulled out of the ground, more gold mined -- and manufactured goods which take commodities and transform them.

If it's all perception -- the Tinkerbell Economy -- then how is anyone's investment strategy different from Madoff's Ponzi Scheme, or hedge funds or Enron or anything else? All this "lost wealth" is a chimera? Is capitalism -- or economics, at least -- nothing more than a house-of-cards?

And if that's the case, is the solution to the economic crisis simply shuffle the deck and start on a new one?

Someone told me this story long ago:

It's about a small European village where, one day, a fisherman spied a basket floating in the river. He pulled it ashore and inside was a tiny baby!

The village was astounded! All came out to tend to the needs of the baby, to change the diapers and provide food and a warm place to live.

Next day, two baskets came floating down the river. Well this was amazing but the villagers again turned out to provide for the foundlings.

Next day four baskets, four babies...

The villagers got together and established committees and recruited volunteers and donations and facilities to deal with what, sure 'nuf, soon became dozens, then scores, then hundreds of baskets of babies floating down the river.

And by this time, the village was so busy and wrapped up with what was happening, no one could get away and walk upstream to find out who was putting babies in baskets in the river.


I know next to nothing about economics, but for a long time I've wondered if capitalism just doesn't work. Just as, after a good run, mercantilism didn't work. Just as barter worked for a while and didn't. Just as going out and killing or raping or marrying the tribe that's good at hunting so your tribe that's good at gathering can get some protein. (That last/first system seems to be evergreen, though, now that I think about it. What were those Iraqis thinking, living atop all our oil?)

So you end up with the stock market and the commodities markets and futures and hedge funds and side bets and what ends up mattering isn't the actual wealth, but the perceived wealth. What isn't there anymore isn't there anymore because it never existed? It was all illusion in the first place?

Is that any way to base a civilization?

By MonkeyHawk (not verified) on 30 Dec 2008 #permalink

The only people who made really money were those who shorted the stocks - essentially betting that prices in the market would decrease. There always will be accusations that a few powerful interests started the slide by dumping their holdings in particular stocks to get a slide going while simultaneously heavily shorting the same stocks. I have yet to see evidence of this. The few smart ones simply knew that the market would have a major tumble because the housing market bubble could not continue.

And a lot of the money that seemed to disappear was almost imaginary. The problem was that the investments in the mortgage market were bought on very low margins. That means that large investments were bought on small investments that were leveraged heavily - like an investment of $5 million would allow you to buy $50-100 millions worth of investments. This was how the big investment banks got into trouble. When the value of the mortgage investments fell drastically, they were liable for the whole amount invested.

When times were good, a $5 million investment that was leveraged to $50 million would increase to say $75 million. You paid back the borrowed $45 million and made $25 million in profit from your $5 million investment. If you did the same thing and the $50 million total investment decreased in value to say $30 million, then you are out your initial investment of $5 million and also are liable to pay the lender $15 million. And the guys that "loaned" the $45 million probably didn't have the money anyway. They may have been doing the same thing and counting as credit those investments of theirs that were also leveraged. If you don't have the $15 million, then your long turd gets tranched [sliced and diced] by the rotating cooling device. And that's what happened.

Also, I don't think Madoff had anything to do with the market's demise, it's just coincidence. He just had a Ponzi scheme. Early investors were "rewarded" with profits that were actually the investments of those who came in later. I believe that most of Madoff's ill gotten gains ended up in Caribbean bank/tax havens

Is capitalism -- or economics, at least -- nothing more than a house-of-cards?

It is if those who have heavy investments get too greedy and regulators are blind and toothless. As Greenspan found out to his dismay. When there is lotsa money to be made, somebody will unfortunately try to dissect that goose to get the golden eggs before anyone else can.

By natural cynic (not verified) on 30 Dec 2008 #permalink

I think Madoff just spent the money on whatever, and so it is lost to the investors.

As for money lost on the CDSes and other exotic instruments, I'm not sure that all of it ever existed. Part of the problem (and only part) is that these things were highly leveraged, bought with borrowed funds. In those cases the money didn't really exist, so everyone is SOL.

In some cases, the loans were backed by mortgages. The problem being that the notional value of the house declined rapidly, causing the money that financed the deal to simply vanish, leaving everyone scrambling.