Wednesday, December 17, 2008

Depression with a Side of Hashbrowns

First of all, let me be the first to congratulate Ben on an excellent post. He's exactly right. And so is Ron Paul. Not a whimper. We're sprinting headlong down the Road to Serfdom, and not a whimper. On a related note... My wife and I had breakfast with some old friends the other day. It was a lot of fun to see them, and I really enjoyed the time. But it was also quite depressing. There were three others, a couple and a single friend, plus me and my wife. Two are consultants with a major consulting firm, one a software specialist who writes code for banking applications. No slouches here: I would wager there wasn't a single person at the table with an IQ under 120. Quite possibly, 140. All are highly successful, youngish folks on the 20-30 borderline. Very decent, kind, well-meaning people. They are wonderful folks. All have extensive business experience, and the two consultants have extensive economics training. My wife and I, on the other hand, are only chemists. Naturally, the sorry state of the economy came up. Could you expect any less of a conversation I was involved in? This drew a rousing discussion in which a great number of opinions were expressed. Sadly, all opinions except mine were predictably mainstream. The fault of the crisis lies with banks who made stupid loans. Of course, those people who took the loans were stupid, too, but they're not the real problem. On and on. No mention of the Fed, or monetary policy, or Fannie Mae or Freddie Mac. No mention of currency manipulation. No mention of government subsidy, supression of interest rates, or price-distorting market intervention. Alas, they are not Austrians. The unanimous solution, it seemed, save my lonely vote: there's gotta be more regulation. Its the only way. This has gotten out of hand. When I suggested that the blame was with the Federal Reserves manipulation of interest rates and flooding markets with easy credit, I drew mostly blank stares. My comment that fractional reserve banking should be outlawed was accepted in that way that one accepts the rantings of a crazy man, or a professor rattling off some equation on a subject far removed from anything anyone had ever begun to consider prior to his rash outburst. Simply leave him be, there's no help for him. Maybe he's right; who could possibly say with a statement like that? The conversation continued amicably, but I could tell I was not speaking their language. I must say, I now have greater sympathy for the Mogambo Guru. This does not bode well. These are smart people, sophisticated people, yet honest people, the best the business world has to offer. But they don't get it. They're hopelessly sucked into the Keynesian delusion. They can't see the forest for the trees. They believe the deflation talk, that we need monetary stimulus to stabilize prices. They want to preserve the system as it is. They want to go back to the boom, the boom that didn't work. They now see that the system is broken; what they don't see is that the system has been broken for a long, long time. There is no fixing it. There is no going back. It will be replaced, or it will be destroyed, and then replaced. My guess is the latter. Sadly, their recommendations would almost precisely mirror the actions of Herbert Hoover as a previous generation wrestled with similar questions. Wage and price controls. Tighter regulation. We need planning and leadership to get things back under control. It'll work about as well today as it did back then. But nobody knows, because they don't study their history. To the world, Herbert Hoover was a defender of laissez-faire. It doesn't matter what the record is, because nobody reads it. Herbert Hoover was actually a brilliant man. He was a mining engineer, and actually managed to rather successfully streamline food distribution during WWI, as I mentioned before. But he didn't understand that economics is not the same type of problem as the flow of a fluid through a system of pipes, or the workings of an engine. It is not physics. There is a lot of faith placed in folks like me, engineers and scientists, the techies and supposed experts of the world. Even economists are considered part of the priestly sainthood, capable of incredible feats of taming the natural world. It is a myth. I am a scientist, and I am telling you: we don't know as much as is claimed, and are not capable of half of what we are credited with. If we knew what we were doing, we wouldn't still be blowing up chemical plants and space shuttles. On top of that, we are just as prone to delusion as anybody else. Many Ph.D.'s believe in global warming. Before that they believed in eugenics, at least until the Nazis took it "a step too far." Go back as far as you like, you'll find one discredited delusion after another. They attempt to bury their faults, but you can find them if you look. These people should know better, but they don't, and they never learn. They are only human. Just like everyone else. Ben Bernanke and Hank Paulson, the modern high-priests of the church of economics, have about as much hope of fixing the current mess as Ozzy Osborne. Less, actually, as Ozzy would probably just let everybody do as they like, and go off to have a beer for himself. The sad thing is, we had it pretty good. Things weren't so bad not too long ago, back when we ran things on the basis of legal rights and natural law and the like, and just let the chips fall where they may. It was a decent life. Not perfect, but decent. But we thought we could do better. We thought we could engineer a better world than the one God gave us. John Maynard Keynes told us we could. Karl Marx concurred. We engineered ourselves one nightmare after another, and yet still cling to the notion that we can engineer our way out. We can't do it. It's not in our power. Engineering and regulation are the problem, not the solution. Who will do the regulating? Barney Frank?
"These two entities—Fannie Mae and Freddie Mac—are not facing any kind of financial crisis," said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. "The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing."
Chris Dodd?
Just last week, Senate Banking Chairman Chris Dodd (D-CT), who has taken more money from Fannie and Freddie than any other politician, again defended Fannie and Freddie and advocated for their resurrection.
Who will stop folks like Bernard Madoff? The SEC?
A U.S. House of Representatives panel plans to convene an inquiry in January into the failure of securities regulators to unearth an alleged $50 billion securities fraud by Wall Street veteran Bernard Madoff, a key lawmaker said on Wednesday. Madoff, a former Nasdaq Stock Market chairman, was arrested last week and charged with running a massive Ponzi scheme. He is accused of defrauding banks, investment funds, charities and wealthy individuals who invested in funds he controlled. The Securities and Exchange Commission has come under fire for not uncovering the scandal until senior employees of Madoff went to authorities.
This stuff cannot be stopped. It doesn't matter who is in charge. It doesn't matter what the rules are. Human nature cannot be regulated. It cannot be engineered. It is what it is. We deal with it as it comes. We had a system that worked. At one time, we dealt with it pretty well. We are not dealing with it well now. I'm glad I saw my friends last weekend. It makes me happy to see them. They are really great people. They really are the best the world has to offer, but they are just as lost as all the rest. They don't get it. If they don't, nobody does. The best don't get it. There is no hope left.

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