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The Daily Capitalist: Why 2009 Will Affect the Future for Generations to Come
This has been a phenomenal year for the economy. There have been major, fundamental changes that will affect our lives for many years to come. I don’t see these changes as a good thing for the short or long term.
These changes are generational in that they don’t occur often, and they will radically impact the economy and our well-being for decades. I thought of doing a decade review because it explains so much of why we are where we are today. But so much happened this year, that I’m glad the year is over.
1. The Triumph of Keynesian Economics
Liberals, progressives and Democrats were eagerly waiting for an economic crash so they could clip capitalism’s wings. They got their wish.
When the crash happened, most people, including most conservatives, scratched their heads and said, “Yup, it’s capitalism. Bad, but necessary system. Got to control it even more.” They ran to the Keynesian-New Deal playbook.
Very few economists stood against this proposition, and when the Democrats acted, it was right out of the Keynesian playbook: Keep interest rates low, flood the economy with credit, pass spending bills to implement fiscal stimulus and adopt more stringent rules to regulate financial institutions.
This is a result of 70 years of Keynesian economics education in America and the rest of the world. Paul Samuelson, who just died, was the father of the Neo-Keynesian econometrics movement in academia, and he and his fellow Keynesians are mostly responsible for this.
My fellow free-market Austrian theory economists lost their seat at the policy table, and in fact have been banished to the back room. We need to do something about this. Our well-being rides on it.
2. The Failure of Keynesian Economics
The only problem with Keynesian theory and its policy applications is that it doesn’t work.
I’m not unaware that many commentators and economists are pointing to recent “Green Shoots” as proof that Keynesian policies work, but it doesn’t. By their own admission, at least according to Paul Krugman and many other Keynesians, the fiscal stimulus has been insufficient to bring about a lasting recovery. Krugman worries about a second collapse when the stimulus runs out. He’s right.
What we are seeing in the economy that is labeled “recovery” comes from two things:
» The temporary effect of federal spending from the $787 billion American Recovery and Reinvestment Act of 2009
» Normal recovery behavior that occurs after every crash and that is unrelated to fiscal stimulus.
Much to the chagrin of our economic czars, there are nagging problems of deep concern. Unemployment. Falling asset values, especially in the real estate market. Lack of bank liquidity and bank failures. Lack of credit. Falling consumer consumption and rising savings. “But, it’s supposed to work, dammit!” Keynesian theory was supposed to open the liquidity trap, create jobs, and stoke the economy by taking my money and give it to someone else to spend. It didn’t work in Japan, and it isn’t working here.
The stimulus won’t last.
3. New Deal v. 2.0
The Washington-Wall Street Economics Complex is in full swing.
“Too Big to Fail” has been the motto of this administration (as well as the last one). As always, there are many political strings tied to economic policy coming out of Washington. While TBTF is not this year’s story, the bankruptcy and bailout of General Motors and Chrysler in 2009 is. It’s a bailout of the United Auto Workers and other auto industry unions and nothing more.
The bailout of the banks and major financial institutions is just the same. Yes, Citi didn’t fail and AIG was taken over, but this temporary relief will just stall a recovery. Bankrupt institutions must fail; otherwise, their balance sheets will remain fouled and valuable capital will be lost, mired in unprofitable loans.
The administration and Congress are now putting forward new legislation to further regulate businesses and financial companies. These new laws are not re-regulations, but are increased regulations that will give the federal government even more control over the economy. By asserting itself further into commerce in order to wield greater power, the center of power has moved farther from the money and commercial centers such as New York City, Chicago and Los Angeles into Washington, D.C.
These policies are political expediencies and work to undermine the best interests of the American people because they reward the very companies that ought to fail. It will delay economic recovery by propping up essentially bankrupt companies that are now relegated to begging Washington for more money.
It will be a boon for lawyers.
4. Spending Unleashed
Deficit spending will be a huge burden on our children, grandchildren and generations of our great-grandchildren. It will be bad for the economy.
As the national debt becomes a greater percentage of GDP, the taxes required to support it will be a permanent drag on the economy. This year alone, the deficit will amount to about $1.8 trillion, depending on how you count it. In 10 years, according to the Obama administration, the national debt will double.
Considering that the debt is being incurred to fund dig-a-hole-and-fill-it programs that result in almost no long-term benefit, the cost to our descendants amounts to inter-generational theft.
5. The Health-Care Bill
This is an economic game-changer.
While the bill has not yet been passed by Congress, it will and it will mark the point in history when the United States joined the group of countries, mainly European, that blend market economies with the welfare state. These quasi-socialist Nanny-state systems have long-term issues with economic torpor, permanent high unemployment and a lack of innovation. We will have the same experience.
Comparative economic studies of health-care systems similar to the proposed legislation reveal that even the best of them are running large deficits. More and more, these countries are seeking market-based solutions to bail them out as their citizens reject higher taxes. They are beginning to understand that their problems exist because their tax burdens are too high and their regulations are too rigid.
The rising federal cost of this program will be another huge burden for taxpayers, especially for young workers who will be disproportionately saddled with the cost of supporting their elders.
This bill also marks the beginning of the end of the finest medical system in the world. Just ask Silvio Berlusconi and other wealthy world leaders who come here for medical care.
6. Stock Market Gains
If 2008 was the Year of the Crash, 2009 was the Year of Recovery. In October 2007, the Dow hit its high of 14,279. In March 2009, it touched its low of 6,440. Today it closed at 10,548, a rise of about 46 percent from the low in March.
We can argue about whether the market is properly valued. I tend to agree with David Rosenberg of Gluskin Sheff that the market is overpriced relative to fundamentals as well as macroeconomic trends. Whatever.
I have two points you may wish to consider:
» Traders believe that Keynesian fiscal stimulus works.
» While market gains have traditionally created a feeling of wealth in the economy, this time is different.
With regard to the recovery based on Keynesian policies, see above.
Normally people feel better about themselves and their fortunes because their stocks have rallied. People with 401(k)s feel better about their retirement. Retired people feel better about their portfolios.
I don’t think it’s working that way this time. I sense a feeling of caution, if not dread about the future of the economy.
I live in the very wealthy community of Montecito. Money here comes from real estate, business people who have sold their companies, or financial guys (hedge-funders, Goldman types). In the past two months, our sluggish real estate market has seen a sudden and dramatic rise in listings. You would think that these folks wouldn’t have a problem with their housing, but they do.
I think many of them took (and are still taking) big hits to all of their assets: typically, commercial real estate investments, aggressive stock trading programs and venture capital deals. Combine this with falling incomes and a high debt load, and you see homes on the market from $1.5 million (formerly $3 million) to $15 million (formerly $25 million-plus). Not everyone you think is flush, is.
No offense to the great unwashed out there, but these people are big, big consumers.
If it’s not working with the “rich,” you can imagine what regular folks feel.
7. Year of the Contrarian Investors
I get a certain amount of guilty pleasure from the market success of the contrarian investors who made huge market fortunes as a result of economic turmoil. They strayed from the orthodoxy and made huge fortunes.
While this was also a 2008 story, the results of the Harvard University endowment fund is all 2009. I like to pick on Harvard because it’s a center of econometric, Keynesian economics. So, you might ask, if it was so smart, why did it take a huge hit? Why did it invest in so many stupid deals at the top of the market? Some say its portfolio is half of what it was.
Yet you have Universa Investments and John Paulson who made huge fortunes for betting against the crowd. It demonstrates that most economists and investment advisers don’t think. They behave sheep-like because they know there is safety in numbers, and they won’t be criticized if they lose clients’ money when everyone else is doing the same thing.
If you want to make money, think, don’t copy. You also might want to read anything by Nassim Taleb and Benoit Mandelbrot.
Good luck in 2010.
8. The Inflation-Deflation Debate
This is the great debate right now.
Everyone is looking at money base vs. excess bank reserves vs. M1 and are betting that either the Fed can sop up the money and credit, or it can’t. This issue has been debated in the blogosphere at great length by all spectra of economists. Krugman sees inflation. Many Austrians are predicting inflation. Most Monetarists are predicting inflation. A few such as Mike Shedlock (Mish) are predicting deflation.
The Fed is betting that if it pays interest on banks’ excess reserves, that they can prevent the money from hitting the economy.
This is a huge issue. The government and the Fed would love to see inflation. Rising prices would show ephemeral profits, enable debtors to pay off debt with cheaper dollars, and the economy would be back to a growth and boom-bust cycle.
I have been doing a lot of thinking about this lately, and I will credit Mish for helping me crystallize my thoughts. I plan to write an article on this soon. I don’t think inflation is imminent, but I think it’s coming sooner than Mish thinks, and not for the exact same reasons some of my fellow Austrians think. And I’m not just trying to synthesize the two poles. See No. 9.
Like Mish, I don’t see these reserves as being “excess.” They are being held by banks because they are unsure of their capital positions and they see too much risk in lending money. So, these reserves serve an economic purpose and aren’t excess, just sitting out there because the Fed forced money on them. It won’t be that easy to pry them loose from the money.
9. The Great Real Estate Reflation
The government is trying to reflate the real estate market with fiscal policies.
It’s clear that fiscal measures are having an impact on the housing market. The government, through tax policy and lending requirements (Freddie, Fannie and the FHA), is already starting to put a floor under the housing market. New rules related to commercial real estate loans (“extend and pretend”) may help stabilize the commercial real estate market.
This is not to say that the real estate market won’t have continued weakness, but I believe that these policies will have a positive impact on real estate, and it will stabilize the market and banks will be able to account for the risk in their loan portfolios. Remember that 90 percent of the working population have jobs.
I would expect this impact to take effect by late 2010. Yes, I understand the shadow market and the problems in the housing market. But don’t underestimate the power of the federal carrot.
Banks, especially the regional banks that finance most of commercial real estate and small business, will be bailed out of massive losses. This is what is holding back credit.
Combine this with inflation and we will see the beginning of the next boom-bust cycle. It won’t end well.
10. Bloggers Are Taking Over the Economic Media
Anyone can blog. Few get noticed. But great upheaval drives people to find explanations they don’t seem to get in the mainstream media. I think the Wall Street Journal, Bloomberg and The Financial Times are great at reporting the news. But people want more and different analysis than they offer, and they also want a forum where they can express their opinions.
It’s refreshing to see the bloggers that I admire do well: Calculated Risk, Barry Ritholtz’s Big Picture, Mish’s Global Economic Trend Analysis and the Naked Capitalist are now the big dogs in the blogosphere, getting 50,000 to more than 100,000 page views a month. It is also wonderful to see the Mises Institute get 1 million page views per month as people are finding that the Austrians have something to say.
I am also pleased to report that the new kid on the block, The Daily Capitalist, is growing, and now gets about 13,000 views a month. I am also proud to be a part of Zero Hedge, which has quickly become a very popular and rising blog star dealing with market dynamics and economics.
Thanks for reading The Daily Capitalist. And best wishes for 2010.
— Jeff Harding is a principal of Montecito Realty Investors LLC. A student of economics, he has a strong affinity for free-market economics. This commentary originally appeared on his blog, The Daily Capitalist.
» wrote on 01.06.10 @ 06:40 AM
“Liberals, progressives and Democrats were eagerly waiting for an economic crash so they could clip capitalism’s wings.”
Gosh, I had no idea. Did all Democrats feel this way? I know a couple of liberals in my church and I don’t remember either of them saying they were hoping for a crash. I guess I need to look at the MSM more - I bet it was just full of liberal columnists writing about how they were hoping for a meltdown. Well they got what they asked for - and they didn’t even have to wait for Obama to become president.
» wrote on 01.06.10 @ 08:26 AM
“Remember that 90 percent of the working population have jobs.”
Did you leave off a word someplace or is this some type of Yogi Berraism.
» wrote on 01.06.10 @ 10:08 AM
Jeff, great article. Can you illuminate us poor stupid yahoos out here about the fundamentals of free market capitalism? I have been ragging on people for some time now that we need to get our economy back to producing more than we consume, that the best way to do that is resource extraction and durable goods manufacturing done in a freemarket capitalist system. We used to do those things and ran a net trade surplus (like China now). That was 50 years ago and most folks alive today do not understand what value added economics means or do they understand that we have racked up $100 trillion in public and private debt as a result of consuming more than we produce. There is also a debate raging on investment wealth creation verses the value added wealth creation I mentioned above. Investments are good, but without the underlying value adding it amounts to nothing more than wealth transfer (Keynesian).
I know my models are very simplistic, but the bottom line is simple, earn what you make and spend only what you earn. Seems we don’t do much of that anymore, but if the communist Chinese can see the fundamentals clear enough to buy into a capitalist free enterprise zone in their own country to enrich themselves, we should be able to see the same potential in our economy, since we are the originators of the system.
» wrote on 01.06.10 @ 10:34 AM
“This bill also marks the beginning of the end of the finest medical system in the world. Just ask Silvio Berlusconi and other wealthy world leaders who come here for medical care.”
The finest system money can buy. What’s the problem?
» wrote on 01.06.10 @ 01:34 PM
Excellent essay. We’re fortunate to have someone thoughtful and incisive like Harding, who is willing to regularly share his insights with Noozhawk readers. Thanks.
But it’s also true that much of what Harding is most anxious about is a fairly direct result of disastrous private sector/free market outcomes, 2007-09, from market excess, fraud, failure, often based upon principles Harding has preached for years.
The creation of anti-trust, monopoly busting, the Fed itself, were reactions against the excess and fraud of the Gilded Age. The “harsh” regulatory environment Harding decries was part of FDR’s “medicine” to reign in a business sector which, during the weird final days of the Roaring Twenties, had sacrificed all moderation and integrity.
These are all expected pendulum swings, as free markets in free societies try to
right themselves from traumatic injuries sustained during wild “bubble” rides in
vehicles run by highly intoxicated senior executives and comatose board members.
Hindsight is often 20:20.
Would it be cruel to ask Harding to produce some of the warning essays from 2006-07 he issued to investors and business leaders, demanding that they rein in their worst excesses, or face the hazards of catastrophic recession and market re-regulation?
Frankly, I don’t recall many of those articles.
Would anyone be lifting old, dead Keynes out of his crypt, if the Harding/Michael
Barone/Phil Gramm/Greenspan formulae had not publicly cratered so spectacularly?
» wrote on 01.06.10 @ 02:13 PM
Long Time,
I wasn’t writing back then. Sorry. Also I’m not a Michael
Barone/Phil Gramm/Greenspan kind of guy. And that’s not how the system was cratered.
» wrote on 01.06.10 @ 03:25 PM
So we’ve joined the “European [nations] that blend market economies with the welfare state.”? As a “free market” advocate I would assume Mr. Harding prefers the uniquely American system of massively debt-ridden and over leveraged government largesse for defense, big pharma, financial services/banking, big ag, health insurance and other bloated corporations wasting hundreds of billions of tax dollars by buying off our elected “representatives”?
Me, I’ll take a strong dose of government regulation and some element of nationalized commerce any day. If we had nationalized the oil industry decades ago (ExxonMobile largest corporate profits EVER?!?!) and reined in our insane defense spending, the federal government would have a surplus and our economy would be in great shape thank you very much.
» wrote on 01.06.10 @ 04:40 PM
Jeff, long time resident is correct in his description as to how the system cratered. If you disagree, please explain your version. I believe the unabated free market caused some to become extremely greedy. The financial products division of AIG created credit default swaps which paved the way towards extreme overleveraging of mortgage assets and allowed many to simply gamble without very shaky underlying collateral. The lack of visibility and ground rules fed upon itself and this combined with over-sophisticated financial instruments that could not be properly evaluated caused the system to implode. The repo market, the hedge funds, the naked short sellers, the rating agencies all joined the game with an relentless appetite for mortgages, no matter what the quality. The MBS and securities market continued to deteriorate because individuals were only focused on short term financial gain and not what was the ethical, moral or right thing to do. Please speak up Jeff. I believe in the free market but I think the cause of the meltdown was lack of visibility, lack of oversight and lack of regulation. The Sherman AntiTrust Law needs to be enforced in terms of too big to fail and the Glass-Steagal Act needs to be renewed.
» wrote on 01.06.10 @ 07:08 PM
I love greed. Greed is good. Greed puts food on my table and feeds my employees. Greed gives my employees, and my family; the best healthcare money can buy. Greed has made me independent, made me wealthy. Greed pushed me to excel in everything that I do. Greed allows me to donate 15% of my net to charity. Greed allowed me to put my children into brutally tough private schools. As an incredibly poor kid growing up in the Southside of Chicago, greed gave me the burning desire to succeed. I did. And if I make the wrong decision, greed will rip my throat out. I ask for nothing less and only deserve what I earn.
You can call yourself what you want but if you believe in something for nothing, spreading the wealth, or giving a man a fish to eat without teaching him how to fish…well then, you are a Marxist and you believe in failure
Jeff – there is no way the Fed can fight the need to bring money back in through higher rates. Too much floating out there. I see the tsunami of 70’s inflation coming our way.
Good article. Daniel Petry
» wrote on 01.06.10 @ 10:13 PM
They and the unions bankrupted the state—vote the libs out when you can..
» wrote on 01.06.10 @ 11:26 PM
Working hard, playing by the rules and excelling in business and life is a wonderful part of living in a western industrialized nation. However, hating government, supporting unfettered corporate welfare, refusing to acknowledge the need for basic rights such affordable health care and a decent quality of life for the middle class and working poor is wrong and a big reason why America is on the decline. Visit countries such as England, Canada, France and Scandinavian nations and you’ll find happier, less stressed out and more enlightened citizens than a large percentage of Americans. Our news reporting is among the worst in the free world and our elected representatives are bought-off, corrupted puppets of the defense, oil, banking and health care industries. The world is moving on and stepping over our corpse and too many of us apparently are too clueless to even notice its happening.
» wrote on 01.07.10 @ 10:44 AM
As usual, Jeff Harding criticizes socialism and its milder examples in the well-known social contracts in Canada, Europe and elsewhere that provide the population with health care and other necessities of life, never mind the cowardly proposals now being edged forward by the timid Obama administration and gutless Democrats in the Senate. Yet from his white tower Mr. Harding jokingly refers to working people as the “great unwashed,” and condescends to wonder aloud “what regular folks feel.” Well, regular folks are suffering without a health care system that works, for one thing. 45K people in the U.S. die unnecessarily each year due to a lack of adequate health care coverage, and the vast majority of personal bankruptcies in this country arise primarily from the burden of paying for healthcare for major illnesses and recovery from injuries - and most of those people have some health insurance, but it simply does not provide adequate coverage. And ask anyone who has been unemployed for months and can’t find a job, and they are no doubt happy to take a job created by a federal program. Mr. Harding’s favorable opinion of the Chinese conversion from “communism” to “capitalism” kind of reminds me of the pigs in “Animal Farm.” Some recipients of government welfare (like big corporations, imprudent investors, big banks) are “more equal” than others. But I imagine that Mr. Harding would scream bloody murder if he or his investor buddies were thrown into a re-education camp for 10-20 years by a Chinese-style kangaroo court just for pissing off someone in the government. A fine way to run a “daily capitalist” system. John Douglas
» wrote on 01.07.10 @ 03:36 PM
I like the comments which always assume that I’m something other than I am. Usually these commenters assume I like W. Bush, Big Government, the Washington-Wall St. Economics Complex, bailing out all my “friends,” oppressing the masses, etc. ad nauseam. Yet I am accused of stereotyping their gods? Hmmm.
I especially liked the comments of Brutality and John Douglas. I know where you get your ideas and facts because you are spewing the SOS that many progressives and liberal Democrats feed you. All I ask is that you think for yourself for once.
If you think we live in an era of unfettered capitalism, all I can say is, Don’t Bogart that joint, my friend. Our economy and the financial markets are among the most heavily regulated in the world. Yet we still had a crash. The excuse is that the government didn’t have enough power. Government always wants more power. The crash was caused by the government, and now you guys want to give the keys to the truck to the same drunks that got us into this mess.
You seem to have forgotten why we had a revolution here once. If you really open your eyes you will see that government has been by far the institution that has been the most egregious violator of human rights.
Your idea of human rights is to allow the government force me to do what you want me to do by the point of a gun. To suggest otherwise is ignoring reality. You might think twice about granting government more power in light of its history.
The health care you so laud and admire is nothing but a coercive system to deprive us of choice and give us a third rate system. You say that 45,000 people die each year because of lack of health insurance, but this is a lie. The study referred to was propounded by physicians favoring a single payer system. The study was criticized for being fatally flawed.
Why you would want the government to give you “free” health care is beyond me. All you are saying is that you want to force other people to pay for your health care and that you wish the government would run it. The government can’t run anything efficiently and the UK, Canadian, and other systems you praise are all inefficient and losing lots of money. Many are turning to market based solutions to “fix” their systems. Canadians needing health care come here. How could you wish this on anyone? I guess it’s OK to foist a crappy health care system on everyone because it’s egalitarian? Why not extend these controls to food and see what happens.
John and Brute, what you wish for is Animal Farm. I say, throw off the chains.
» wrote on 01.07.10 @ 07:39 PM
To those who have excelled and achieved, what did you do for your above average intellect, or for family members that functioned or pushed you to study.
Where were all these free market voices when we were bailing out the banks? Where were you when Reagan trippled the deficit and requested a greater deficit than congress passed seven out of his eight years in office. Why has the annual deficit gone down under every democrat fopr tghe last sixty years, prior to Obama.
Where were you when Bush doubled the national debt.
Oh year you were too busy getting rich from the profits of deregulation.
Get real, Bush handed off a country that threatened to drag the world into a global depression. Where were the Re[ublicans whop are so belicose now about debt, when Bush was destroying the nations economy.
» wrote on 01.07.10 @ 10:50 PM
Jeff Harding - finally. When one begins to think that pedantic ignorance is a genetic trait of humanity I read a truly accurate piece that disproves that. Rather than tweak…you try to educate. Frustrating sometimes, but sometimes you do change a single mind. And that is progress and well worth the effort. Good letter. I look forward to more. Daniel Petry
» wrote on 01.09.10 @ 06:12 PM
In regards to health care in the US, Mr. Harding is certainly entitled to his opinion, but not to his own set of facts.
What choice do you really have in the present US health system? Assuming you are not wealthy, you depend on your employer to offer one or perhaps two plans, take it or leave it. In those plans, you can sometimes chose to pay more money and actually select your own doctor; otherwise, you can go to the doctors on the plan list, or pay for it all yourself. Under many single-payer systems, you get to chose whomever you want.
And when you lose your job, you can chose to spend all your unemployment benefits on Cobra coverage, or go without health insurance. In a single payer system, if you are still breathing, you have access to health care. People want health care, not health insurance.
Mr. Harding may not like the realities of the US system being rated 37th overall and 55th in fairness of financing, but that is what the World Health Organization says.
We spend twice the average of other industrialized nations, and have worse outcomes in most areas, while leaving 47 million plus without insurance.
And although our insurance and drug companies may be the most profitable in the world, they do that in the most inefficient system on earth, often using unethical methods.
The “free market” will never solve this problem if our goal is to provide care equitably and affordably. Our local Libertarian Columnist Randy Alcorn admits this, and Fredrich von Hayek, leading Libertarian philosopher, sees the logic of a wealthy society providing care for its members, including health care. See
http://pnhp.org/blog/2008/09/15/f-a-hayek-on-social-insurance/
So I sincerely hope that Mr. Harding never has to face a serious medical condition where he will actually have to experience how badly the system works. If he does, he may find himself a “sick bed” convert to health care reform.
Peter Conn
[Noozhawk’s note: Mr. Conn, could you please e-mail me at {encode=“wmacfadyen@noozhawk.com” title=“wmacfadyen@noozhawk.com”}. The address I had for you kicked back. Thanks! — Bill Macfadyen]
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