UPDATE: This is an interesting observation.
I have a friend who is a currency trading legend (and also a major AEI money man) whose conservative credentials are beyond doubt. He’s a little older and can remember what it was like to trade the markets during the Carter administration. When I was lamenting Obama’s impending election with him last year he said to me, in a glass half full fashion which is typical of him:
“It’s never easier to make money in the markets than when there is a Democrat in the Whitehouse who thinks he’s smarter than everyone else”.
Wretchard has an excellent post today on the state of the nation. The comments are also excellent. He begins with Peggy Noonan’s column in the Journal last week.
Among the things swept away in 2008 was public confidence in the experts. The experts missed the crash. They’ll miss the meaning of this moment, too.
The biggest threat to America right now is not government spending, huge deficits, foreign ownership of our debt, world terrorism, two wars, potential epidemics or nuts with nukes. The biggest long-term threat is that people are becoming and have become disheartened, that this condition is reaching critical mass, and that it afflicts most broadly and deeply those members of the American leadership class who are not in Washington, most especially those in business.
Noonan was an Obama fan last year and dismissed Sarah Palin as unworthy of consideration for vice-president. An election followed in which Joe Biden, a fool if I ever saw one, was elected to that office instead.
Wretchard writes:
Peggy Noonan adopts a meme that has been sweeping the blogs of late, the idea that America’s elite is broken; so broken she says, that it doesn’t know it’s broken. In a WSJ article, she describes the current and disastrous reign of “callous children”; people who have “never seen things go dark” and are leading their nation into the abyss. For the first time, she says, the national mood is one of despondency. There are no solutions because the problems come from within. The heirs have grown strange and wayward. They have gone off into the dark to return at whiles speaking in odd voices. Noonan describes the sense of loss she feels in the current economic and political crisis.
Noonan continues:
they don’t feel anxious, because they never had anything to be anxious about. They grew up in an America surrounded by phrases—”strongest nation in the world,” “indispensable nation,” “unipolar power,” “highest standard of living”—and are not bright enough, or serious enough, to imagine that they can damage that, hurt it, even fatally.
We are governed at all levels by America’s luckiest children, sons and daughters of the abundance, and they call themselves optimists but they’re not optimists—they’re unimaginative. They don’t have faith, they’ve just never been foreclosed on. They are stupid and they are callous, and they don’t mind it when people become disheartened. They don’t even notice.
One of the comments, obviously by a physician, reminds me of my own experience.
He pointed out that, in a wild city-county hospital such as ours, there was indeed a need for speed quite often but that, also, it was very, very easy to just keep doing more. “You can always think of something else to do but the critical question is: ‘Should I?’ ”
This also comes up in end-of-life care but the point is, in government as in medicine, you’re often judged by how much you do and seldom on the need for it. Hence tax-spend-elect, etc.
What we used to say was “Don’t just do something, stand there.” It was a play on a cliche we’ve all heard but it contains the same concept. There are times when doing nothing is better. The comments also contain an example that I have thought of many times but never see mentioned in the newspapers. The Clinton intervention in vaccines.
The Law Of Clintonian Consequences
August 2003 – [In] August 1993, when Congress passed Clinton’s Vaccines for Children program. The plan, promoted by the Children’s Defense Fund, was to use federal power to ensure universal immunization. So the government agreed to purchase a third of the national vaccine supply (the President and Mrs. Clinton had pushed for 100 percent) at a forced discount of half price, then distribute it to doctors to deliver to the poor and the un- and under-insured. As a result: Where 30 years ago, 25 companies produced vaccines for the U.S. market., today only five remain, and there is only one producer for a number of critical shots. Recent years have brought shortages of numerous vaccines, including those for whooping cough, diphtheria and chicken pox.
October 2009 – Where is the H1N1 vaccine manufactured? There were four manufacturers’ products approved for use by the US FDA and CDC:Melbourne-based CSL Ltd.; Novartis AG based in Basel, Switzerland; Sanofi Pasteur of Sanofi-Aventis SA, based in Paris; and MedImmune, LLC, the Maryland US based Subsidiary of London’s AstraZeneca.
The Clintons were fended off when they tried to take over US healthcare but they did manage to take over vaccine manufacturing. We see the results today with no US vaccine manufacturing remaining and a shortage of vaccine.
I also think this is an interesting observation:
Obama is the fourth consecutive Ivy League President. There have been 18 Presidents over the last 100 years. From Taft to Reagan, 14 Presidents and 80 years gave us 4 Ivy Leaguers at the helm. Since then, it’s been 4 out of 4. And it’s been badly downhill with them.
Now, as our host ably demonstrates, not every Ivy League grad is a bungling fool. Many highly capable people come out of those institutions. However, I suspect the Ivy League environment, along with all the other self-elected “elite” environments such as Hollywood and MSM newsrooms, fosters the worst aspects of the public-minded who pass through.
The Contemptuous Boor (Obama, Clinton, Wilson) become the Arrogant Crusader, convinced they’re not only better than everyone else, but called by destiny to lead the masses to the promised land against the ignorant fool’s wishes. The Obliged Nobles (both Bushes, Taft, perhaps FDR) learn to ignore feedback, feel no great need to explain their policies, and become unintentionally disconnected from the people they want to lead, leaving them confused and disheartened.
I think there is something to this and I fear that Noonan was infected with the Noblesse Oblige like the elites she supported. I fear we are still headed for very serious trouble. I don’t see how we can repay the debt that is being incurred. In theory, the federal reserve money being created can be recovered by the Fed in the same manner it was created. That will require political will that I just don’t see in the present generation of politicians of both parties. The political left seems to have taken leave of its senses but maybe Noonan and Wretchard’s explanations are the answer. This reminds me of another recent column I read online. It is called Lament for a Nation.
Mikhail Gorbachev was to the late great Soviet Union, what Barack Obama is to the surviving United States — the leader who reforms so many things so quickly that his country suddenly disappears. One recalls the speed with which the first Soviet head of state to be born after the October Revolution became its last head of state. It took him about three years: just less than the time of one U.S. presidential term. (Though he had already taken three years to warm up, as General Secretary of the Communist Party.)
The results produced by these leaders may be quite similar.
[T]hey do have one major thing in common, and that is the belief that, regardless of what the ruler does, the polity he rules must necessarily continue. This is perhaps the most essential, if seldom acknowledged, insight of the post-modern “liberal” mind: that if you take the pillars away, the roof will continue to hover in the air.
Gorbachev seemed to assume, right up to the fall of the Berlin Wall and then beyond it, that his Communist Party would recover from any temporary setbacks, and that the long-term effects of his glasnost and perestroika could only be to make it bigger and stronger.
There is a corollary of this largely unspoken assumption: that no matter what you do to one part of a machine, the rest of the machine will continue to function normally.
A variant of this is the frequently expressed denial of the law of unintended consequences: the belief that, if the effect you intend is good, the actual effect must be similarly happy.
Very small children, the mad, and certain extinct primitive tribes, have shared in this belief system, but only the fully college-educated liberal has the vocabulary to make it sound plausible.
The Obama administration, and the Democratic Party for the most part, seem to believe that citizens exist to pay taxes. I suppose they really believe they can take over US healthcare and not end up like the Clinton vaccine program. Many incompetent people believe they are capable of things they cannot do successfully. These people, as Noonan says, are the product of a period of prosperity previously unknown in human history. The United States was formed of poor immigrants who came seeking their fortunes, escaping a world that did not allow success for those without the right connections. We were extremely fortunate to have the men who wrote our Constitution and who operated the government in the early years.
George Washington was the greatest of them all in that he refused to be a king when it was offered to him. He retired to his farm when his work was done. He even declined a third term when it would have been a mere formality. It is fashionable now, in this era of poor scholarship and deluded ideals, to dismiss the founders as slave owners and abusers of the Indians. Children are taught that Columbus Day should no longer be celebrated because Columbus brought genocide. They are even taught falsehoods, like the myth of infecting Indians with smallpox by infecting blankets. That was allegedly attempted by one English officer in the colonial period and didn’t work. In fact, the first contact between the populations of Europe and America brought rampant infectious diseases to both. The Indians got smallpox and the Europeans got syphilis. Few of these poorly educated academics acknowledge, let alone teach, that slavery is alive and well right today among the Arabs who were the original African slave traders. Slavery was a common practice in the age of human and animal power and had nothing to do with race.
The economics of the progressive movement are still incomprehensible. Teddy Roosevelt had valid targets as the monopolistic trusts of his era were inefficient once their original valid purpose was accomplished. Building of railroads and the first steel mills needed capital and that was more easily accumulated by trusts when the stock market was rudimentary. JP Morgan was able to almost singlehandedly stop the Panic of 1907 because he could gather the men who controlled the nation’s capital in his library. That was the last time it could be done.
“Morgan planned to leave for Europe in mid-March 1907, but the combination of monetary shrinkage [largely due to financing of the Boer and Russo-Japanese Wars] and a rumor that Roosevelt would make some dramatic new move against the railroads called him out of his ‘Up-Town Branch.’ He went to Washington on March 12 and spent two hours discussing ‘the present business situation’ with the President. As he left the White House he told the press that Roosevelt would soon meet with the heads of leading railroads to see what might be done to ‘allay public anxiety.'”
There is another theory, that I subscribe to, that the cause of the Panic was the enormous insurance losses from the 1906 earthquake in San Francisco. The 9/11/2001 attacks may well have led to the 2008 collapse in a similar scenario. Alan Greenspan’s encouragement of the real estate bubble may have been an attempt to prevent a collapse but it made things worse. The Federal Reserve Act of 1913 and the Glass Steagall Act of 1933, which founded the FDIC, were in response to the Panic of 1907 and the collapse of 1929 but the results of Fed intervention is now the subject of dispute. The Obama administration seems to be trying to reinflate the housing bubble with predictable results. Look at the slope of that curve !
The end of World War I brought a vicious recession in 1920 that the Harding Administration treated with a variation of “Don’t do something, just stand there.” The story is here.
The economic situation in 1920 was grim. By that year unemployment had jumped from 4 percent to nearly 12 percent, and GNP declined 17 percent. No wonder, then, that Secretary of Commerce Herbert Hoover—falsely characterized as a supporter of laissez-faire economics—urged President Harding to consider an array of interventions to turn the economy around. Hoover was ignored.
This makes the point that Hoover, far from the “do-nothing president” of left wing histories, was a progressive like Wilson and FDR. His response to the 1920 recession would have been similar to what he did in 1929-32. Who knows how that would have turned out ?
Instead of “fiscal stimulus,” Harding cut the government’s budget nearly in half between 1920 and 1922. The rest of Harding’s approach was equally laissez-faire. Tax rates were slashed for all income groups. The national debt was reduced by one-third. The Federal Reserve’s activity, moreover, was hardly noticeable. As one economic historian puts it, “Despite the severity of the contraction, the Fed did not move to use its powers to turn the money supply around and fight the contraction.” 2 By the late summer of 1921, signs of recovery were already visible. The following year, unemployment was back down to 6.7 percent and was only 2.4 percent by 1923.
It is instructive to compare the American response in this period to that of Japan. In 1920, the Japanese government introduced the fundamentals of a planned economy, with the aim of keeping prices artificially high. According to economist Benjamin Anderson, “The great banks, the concentrated industries, and the government got together, destroyed the freedom of the markets, arrested the decline in commodity prices, and held the Japanese price level high above the receding world level for seven years. During these years Japan endured chronic industrial stagnation and at the end, in 1927, she had a banking crisis of such severity that many great branch bank systems went down, as well as many industries. It was a stupid policy. In the effort to avert losses on inventory representing one year’s production, Japan lost seven years.”
Japan would do the same thing when the real estate bubble of the 90s popped. What followed has been called the “lost decade” but it isn’t over yet.
The role of the Fed in the present crisis is the antithesis of the Harding-Coolidge treatment of the 1920 recession, not called a depression only because of its prompt resolution.
Ludwig von Mises and F. A. Hayek both pointed to artificial credit expansion, normally at the hands of a government-established central bank, as the non-market culprit. (Hayek won the Nobel Prize in 1974 for his work on what is known as Austrian business cycle theory.) When the central bank expands the money supply—for instance, when it buys government securities—it creates the money to do so out of thin air. This money either goes directly to commercial banks or, if the securities were purchased from an investment bank, very quickly makes its way to the commercial banks when the investment banks deposit the Fed’s checks. In the same way that the price of any good tends to decline with an increase in supply, the influx of new money leads to lower interest rates, since the banks have experienced an increase in loanable funds.
This fed the real estate bubble in 2001 to 2007 and, I suspect, this was an effort to avoid a crisis due to the twin catastrophes of 2001 and the end of the internet bubble of the 90s.
What is the common thread in these stories ? The federal government has grown enormously during the past 70 years as the progressives assumed more and more power to deal with self-identified problems. The elites who took on all this responsibility were no more competent than their forebears who tried to deal with slavery and ended with a Civil War. Teddy Roosevelt was wise enough to call in JP Morgan and even had his Secretary of the Treasury transfer government gold to private banks to help Morgan deal with the crisis. Can anyone visualize Obama asking businessmen ( like Boeing ? ) to help with a financial crisis ? The people in the administration, like Geithner and Rubin, are politicians like Obama who switch back and forth between government and financial institutions that depend on government for their success. Rubin engineered the Mexican Bond Bailout that made his New York banker friends whole but screwed the Mexican middle class that it was purported to be assisting.
Mexico is still paying on bonds it used to buy bad debt from banks that faced failure after the currency fell as much as 65 percent in December 1994 and Treasury-bill rates shot up to more than 80 percent. The government wasn’t able to ease the credit crunch, and the bailout also altered Mexico’s financial system, eventually putting the country’s four largest banks and 77 percent of all banks by assets in foreign hands.
The lesson to be learned was not the lesson learned. Moral hazard was greater than ever as the New York banks learned that the US government would bail them out. The Mexicans got the shaft. It is no wonder that the New York bankers all support Democrats. Now, in Reverend Wright’s words, “The chickens have come home to roost.” The elites and the politicians have no clue about the extent of the crisis they created this time. What is worse, they seem to be ignoring it and are intent on spending more money and taking over more of our lives. That way lies disaster.
I’m not the only one who is very worried.
[I]nside the Beltway they seem to be pixilated (the old definition) these days with Magical Thinking. Both the White House and Congress somehow believe – despite all evidence that big, top-down and bureaucratic initiatives no longer work in our Web 2.0 world – that they can grab entire sectors of our economy and impose on them a whole new regime that will magically work without any unexpected and catastrophic side-effects. No business in America, from the corner dry cleaners to a Fortune 500 company would ever contemplate something this crazy, at least not without preparing the most detailed road map imaginable and getting every employee on-board – not passing massive and sweeping laws that nobody has read, whose consequences are unclear, and the majority of the citizenry is against.
By the same token, the lesson I’ve learned from thirty years working in a volatile place like Silicon Valley is to pray for the best-case scenario, but prepare for the worst. The smart companies around here scale up fast during the good times, but are always worriedly looking ahead for the next downturn. That’s why, Cisco’s John Chambers told me a few months ago, he hoarded cash during the last boom – just so Cisco would be able to navigate through this current crash, keep its employees and outrun its weakened competition.
The best-case scenario for this economy right now is that the Stimulus (or the proposed second one) actually works, the U.S. economy rights itself, and grows sufficiently fast over the next five years to absorb all of this new debt and produce enough new jobs to bring unemployment down to reasonable levels. And it is upon this best-case scenario that we are now preparing to embark on one of the most sweeping eras in government-run social engineering in our nation’s history.
It won’t work and, if the stock market crashes tomorrow, it will begin to be obvious. The 250 point drop Friday looks suspiciously like another warning of a black Monday. We’ll know in 24 hours.
What an outstanding post you put together. I know how much work went into it. One thing I’d add is that the Austrian crowd that I come across here and there are calling the current conditions a secular change in contrast to a typical business cycle low. Meaning instead of mere economic ebbs and flows, we should witness global power shifts financially, politically, and militarily. Most of these people are calling for a West to East shift that does appear logical, but with the interconnectedness of the global economy there will be winners and losers in all corners of the world.
Over dinner last night with a relative who’s a CPA in San Diego, I learned that not one of his clients [and they are successful business and professional types] are optimistic from here. Some are pulling back, some are staying even, but none are expanding or expecting to for the foreseeable future.
For me, these current conditions are a result of turning capitalism into financialism, and not just the US, although we certainly took the lead in creating and marketing “unique” debt instruments. That’s why I believe we have come to see debt creation treated as capital creation, or false wealth. I don’t see any way out of this without a major systemic collapse, much like the implosion of your typical banana republic writ large. The unholy alliance of the Fed and Wall Street, Treasury, and Congress cannot turn the bus around. It’s beyond their pay grade. So my expectations are for a gradual slip sliding erosion of the US as a super power with the always present danger of a misstep leading to major calamity. Some veteran observers I’ve been reading for awhile think that kind of calamity would most likely take the form of a financial and resource world war, and not a military one. Sounds about right to me.
So far so good, Dr. K.
I don’t think the economy is in great shape, no, but the future is never as bad as we fear, nor as wonderful as we hope.
Wow, Dr. K! A very long piece! I’ll have to finish it later. My lunch hour is over.
Yes, I’m the same norcal, although now I live in Reno.
Eric,
What about if the future is set to be WORSE than even Mike fears…???
(BTW, Mike is right on the money.)
BILL
Well, the market didn’t crash yesterday. I’m probably too pessimistic. It’s an occupational hazard. The surgeon with whom I started practice, and who is still a friend although we didn’t continue our association, used to say, “Show me an optimistic surgeon and I will show you a surgeon with a lot of complications.”
I think the American people are smarter than they think they are and will throw this bunch out next year. I sure hope so.
There was a spam comment here for a while by a pussy who used a fake ISP to post. I could trace it but there is no point in chasing losers.
I’m reading a book about the crash that is posing a theory that the lack of regulation led to 1929 and 2007-2008. I’m not sure I believe it yet but she is making some good points.