Tag: economics

History’s verdict

Economics and Moral Courage, by Llewellyn Rockwell, is one of the most intellectually inspiring articles I have ever read. It is a beautiful reminder of the transience of what we think is worldly success and accomplishment:

While Mises worked at the Chamber of Commerce because he was denied a paid position at the University of Vienna, [Hans] Mayer served as one of three full professors there, along with socialist Othmar Spann and Count Degenfeld-Schonburg. Of Spann, Mises wrote that “he did not teach economics. Instead he preached National Socialism.” Of the count, Mises wrote that he was “poorly versed in the problems of economics.”

It was Mayer who was the truly formidable one. Yet he was no original thinker. Mises wrote that his “lectures were miserable, and his seminar was not much better.” Mayer wrote only a handful of essays. But then, his main concern had nothing to do with theory and nothing to do with ideas. His focus was on academic power within the department and within the profession….

[Mayer] thrived before the Nazis. He thrived during the Nazi takeover. He helped the Nazis purge the Jews and the liberals from his department. Note that Mayer was no raging anti-Semite himself. His decision was a result of a series of discrete choices for position and power in the profession against truth and principle. For a time, this seemed harmless in some way. And then the moment of truth arrived and he played a role in the mass slaughter of ideas and those who held them.

Perhaps Mayer thought he had made the right choice. After all, he maintained his privileges and perks. And after the war, when the Communists came and took over the department, he thrived then too. He did all that an academic was supposed to do to get ahead, and achieved all the glory that an academic can achieve, regardless of the circumstances…. He played the game and that was all he did. He thought he won, but history has rendered a different judgment. He died in 1955. And then what happened? Justice finally arrived. He was instantly forgotten. Of all the students he had during his life, he had none after death. There were no Mayerians. Hayek reflected on the amazing development in an essay. He expected much to come out of the Wieser-Mayer school, but not much to come out of the Mises branch. He writes that the very opposite happened. Mayer’s machine seemed promising, but it broke down completely, while Mises had no machine at all and he became the leader of a global colossus of ideas.

If we look at Mark Blaug’s book Who’s Who in Economics, a 1,300-page tome, there is an entry for Menger, Hayek, Böhm-Bawerk, and, of course, Ludwig von Mises. The entry calls Mises “the leading twentieth-century figure of the Austrian School” and credits him with contributions to methodology, price theory, business-cycle theory, monetary theory, socialist theory, and interventionism. There is no mention of the price he paid in life, no mention of his courageous moral choices, no mention of the grim reality of a life moving from country to country to stay ahead of the state. He ended up being known only for his triumphs, about which not even Mises was ever made aware during his own life.

And guess what? There is no entry at all in this same book for Hans Mayer.

Mayer was the typical academic intellectual dwarf and richly deserves to be forgotten by history, but to me the ultimate villain of the piece is Friedrich von Wieser. Can you imagine having the opportunity to anoint either Ludwig von Mises or Joseph Schumpeter as your successor and then somehow deciding to choose neither of them? That has got to be the worst employment decision in the history of economics, and quite possibly academics. It may even have been the most calamitous if one thinks through how much unnecessary economic pain and devastation could have been prevented.

As brilliant and revolutionary as Mises was, I think I would have preferred to hire Schumpeter to head the department. His History shows that his perspective was unusually broad and saddling him with the bureaucratic responsibilities would have kept Mises free to focus entirely on research. Then Schumpeter could have gotten rid of Spann, hired Hayek, and you’d have had the greatest economics department in history despite its small size. And with that collection of highly functioning brainpower assembled in one place, it’s quite possible that they would have achieved sufficient prestige to prove capable of preventing the Keynesian ascension. What a tremendous opportunity for Mankind missed. And what an interestingly esoteric possibility for an alternate history novel….

Beyond EPIC FAIL

This account of a debate between Thomas Woods and Tom McInerney, ING Chairman & CEO Insurance Americas, fairly well sums up the disastrous ignorance of the global financial elite. Keep in mind, the clueless wonder is an Econ major from Colgate with an MBA from Tuck:

The extent to which [McInerney], ING Chairman & CEO Insurance Americas was outmatched, though, was revealed in this almost embarrassingly funny episode. McInerney had mentioned that Bernanke was a diligent and knowledgeable student of the Great Depression. So, when it came time for the Q&A, one audience member asked Woods to briefly explain the Austrian view of Great Depression and how it might differ from Bernanke’s view. After Woods did this, McIerney took the stage, and as if he were about to unload a devastating blow against Woods, said to him, “this might seem like a bit of an attack. Don’t take it too personally.” And then…. he began to rant about … the relatively small size of the country of Austria. I kid you not.

Some audience members began to laugh; others cringed, as McInerney dug his hole deeper while under the illusion that he was unleashing a deadly zinger. Woods kept trying to stage whisper that Austria had nothing to do with the school of Austrian economics, but McInerney, undeterred, plowed on. Thus, when Woods took the stage he said, “this might seem like an attack, but don’t take it too personally…” And then Woods commented that we may as well say we shouldn’t listen to Milton Friedman, since the GDP of Chicago is pretty low.

And this sort of thing is just one of the many, many reasons that I’m deeply unimpressed with appeals to academic, professional, or scientific authority. Perhaps McInerney should have pleaded the Courtier’s Reply as it’s almost, though not quite, as deeply stupid as his soliloquy on the Austrian economy.

And it gets worse. Thomas Woods comments: “Of course people are right to observe that relatively few people get exposed to Austrian economics. The point here is that I had just finished a 40-minute presentation on the subject.”

No wonder McInerney’s company needed a bailout. I have little doubt it will soon need another one.

The facade crumbles

The era of Fed extend-and-pretend appears to be fast approaching an end:

On Monday the Federal Reserve held a major reverse repo test, as was announced by the NY Fed and by Zero Hedge. We have subsequently received several unconfirmed reports that the conducted test has been a disaster (we have calls into the Federal Reserve to confirm or deny this, we are eagerly awaiting their reply).

In related news, Karl Denninger reports that JP Morgan/Chase is down to only $21 billion in actual cash. But don’t worry, they have lots of other assets… unfortunately, most of them are the sort that keep showing up at only 50 percent valuations whenever a bank is seized by the FDIC. All of the professional economists have been saying that the crisis is over for months now. I, on the other hand, don’t think that the next stage has even begun yet. But surely all the experts can’t be wrong… again!

Just one question

Karl Denninger notes that no one in the media seems interested in asking it:

Note that nobody in the mainstream media bothers to bring up “Prompt Corrective Action” and demand from Bair and rest the answer to one simple question: “How does a bank get into a situation where it has a 20, 30, 40, 50% loss on it’s asset base when Prompt Corrective Action and Tier Capital requirements are supposed to cause banks to be seized before ANY loss occurs?”

The present U.S. financial system isn’t merely based on sand, it’s based on the pretense of sand. Meanwhile, Mike Shedlock catalogs a surprisingly long list of stories about the incestuous Goldman-government circle before wondering why so few Americans are upset about the way a few financial interests are exercising their power to monopolize the economy for their own benefit and to the detriment of the nation, the economy, and the public. The post is well worth reading; I’m sure you’ll all be relieved to know that the responsibility for avoiding the regulatory failures of the recent past has been placed in the capable hands of the new COO of the SEC, a 29 year-old Goldman guy.

Unfortunately, since both the Republican and Democratic elite are beholden to the banks rather than to their party’s bases, there is very little chance of this coming to an end in a rational manner. A small percentage of the American people are infuriated already, but most are still fat and happily feasting on junk food regardless of their employment status. If they ever become lean and hungry, they’re not likely to sit idly by watching bankers pay themselves billions for stealing taxpayer money while they fall from the comfortable middle class into poverty.

It’s good to be a bankster now. But keep in mind, there was also a time when it was good to be a French aristocrat.

Mortgage and foreclosure fraud

Socionomics teaches that the end of a fifth wave, especially in a major bubble, is rife with fraud, forgery, and other financial shenanigans. One of the major ones that is still percolating is the massive amount of mortgage fraud that was committed by banks and other financial institutions in mass-producing home loans for securitization purposes. It increasingly appears that a statistically significant portion of the foreclosures in process are being pursued on a fraudulent basis by entities which do not actually hold the rights to the mortgage.

Helpful Guide For All States on how to research your recorded documents at county recorder and determine if there are forgeries or fraud when facing foreclosure…. More and more evidence in coming forth which indicates some of the notorious predatory lenders took shortcuts and did illegal document recordings and some with forgeries.

I’d heard rumors of some shady practices at the mortgage banks as long as seven years ago, but now it appears that documented evidence of them is coming to light. If you took out a loan any time in the last five to seven years, it’s probably worth checking out the public records to find out if your lender was one of the fraudulent ones or not. Of course, this may also explain why some banks have been so uncharacteristically slow about following through on pursuing homeowners in default; they may know they don’t actually have the right to foreclose on them.

As usual, it’s Karl Denninger who posted this first, as he is increasingly focused on the incredible amount of illegal activity taking place in the financial and federal sectors over the last year. On a tangential note, the U.S. deleveraging process appears to be continuing, as total loans and leases at commercial banks declined $146 billion in September. TOTLL is now down 6.8 percent YTD and 8.2 percent since the October 2008 peak of $7.32 trillion. This is not indicative of economic expansion, especially considering that this decline has taken place despite the Federal incentives encouraging people to take on new automotive and housing debt.

RGD: the Amazon launch

As some of you have already noticed, Amazon is listing The Return of the Great Depression, albeit with an incorrect release date of October 1st. For those intrepid readers who are interested in participating in the Amazon launch, it is scheduled for Sunday, October 25th, from 12 noon to 12 midnight Central. And, in order to provide some encouragement to those who remain undecided about picking up a copy, here’s John Derbyshire of National Review’s impression:

“Vox Day gives us a splendidly pessimistic look at the current economic mess based on a deep background in finance and global economic history. Written with style and wit – not to mention a good imitation of Dante. Read it, weep, then get on the phone to your investment advisor.”

UPDATE: Prediction time – Vox vs 43 expert economists:

The group asked 43 top economists last month if they believe the battered U.S. economy has pulled out of the worst U.S. downturn since World War II. Those surveyed include economists from leading Wall Street firms and major corporations, as well as from highly respected universities and research firms. Thirty-five respondents, or 81%, believe the recovery has begun. Only four, or 9%, believe the economy is still in a recession. The other four say they’re uncertain.

Thus spake Vox: the economy is in a depression, not a recession. It is occurring at a scale which the experts, with their myopic focus on irrelevant bottom-line quarterly GDP, have failed to recognize. The separation between the much-manipulated economic statistics and the real economy has become too great to credibly paper over, which will lead to either a complete junking of the very concept of GDP as a credible measure of economic activity, or more likely, a significant redefinition of GDP to enable it to more accurately reflect the real economy.

Positive GDP in the third and potentially fourth quarters does not mean the economy is growing, only that the government attempts to expand credit had limited success in pulling future consumption forward; such success will only last as long as the government-expanded credit programs continue to expand.

As per request, I am in the process of putting together some objective metrics that can be tracked in lieu of relying upon GDP and used to falsify my contentions, but note that positive quarterly GDP reports are not sufficient to formally indicate that a recession is over. Nor is there anything such as a “W-shaped recovery and recession”, that’s nothing more than economic posterior-covering and ignores the larger scale view.

Banking 2009 update

Bank failures: 98
Total Deposits: $7,566 billion
Failed Deposits: $90.1 billion
Failed Assets: $108.2 billion
Estimated Losses: $26.4 billion
Actual Losses est: $51.2 billion

Failed Deposits/Total Deposits: 1.19 percent
Estimated Losses/Failed Deposits: 29.3 percent
Actual Losses/Failed Deposits: 56.8 percent
Total loans & leases: -6.3 percent

DIF balance Q3 reported: negative
DIF balance FDIC est: -4.8 billion
DIF balance actual est: -15.3 billion
FD/TD 1930: 1.65 percent
FD/TD 1931: 3.60 percent
FD/TD 1932: 1.99 percent
FD/TD 1933: 8.55 percent
AL/FD 1930-1933: 28.88 percent

FD/TD 2008: 3.21 percent
AL/FD 2008: 14.99 percent

September’s figures

Bulls can fly

This chart is the sort of indicator that inspires me to construct phrases such as “larger in scale and scope”. Notice that the P/E ratios are significantly higher than they were prior to the 2000 crash.

Busted!

Paul Krugman has been writing about how he knew the stimulus package would be too small. But what size stimulus package did he actually recommend in November 2008?

I wrote this morning’s column partly because I had a hunch that the Obama people might be thinking too small on stimulus. Now I have more than a hunch – I’ve heard an unreliable rumor! So let’s talk about stimulus math, as I see it…. When I put all this together, I conclude that the stimulus package should be at least 4% of GDP, or $600 billion.

The stimulus package which Krugman is now saying he knew was too small was $787 billion. Needless to say, his response was completely predictable. Note also that he thought GDP was going to be $15 trillion in 2009… it was $14.2 trillion in the second quarter. That must be one hell of a jobless, but V-shaped recovery he’s anticipating, as it would require 11.3 percent economic growth over the third and fourth quarters.

Thanks to MM, who dug this one up from the NYT archives.

Mailvox: the government as economic actor

BT wants to know the difference between government stimulus and private investment:

I know you are vehemently opposed to the government intervention in free market. Now, I understand what can happen if Government dictates the prices and directly regulate demand and supply like the old communist countries. But what is wrong with government playing as yet another individual player in a free market? For example, can we not consider the stimulus package just like an investment from a private party? I believe that if a wealthy individual throws in 700 billion dollars into the market, that can indeed pull up a sinking economy. So, why not the Government act as such an individual? I guess the discussion should be more about the source of the Government funds. If the 700 billion is something that Government “saved” from the tax money, then it is “good money” that cannot devalue the currency and hence the stimulus is good. On the other hand, if Government prints these 700 billion, then currency gets devalued. But again, if this surplus 700 billion can create an economic activity that nullify the price devaluation, then printing money is also worth it, right?

The reason is two-fold. First, government money doesn’t come from nowhere, it is either taken out of the private economy or printed. Printing the money is bad because it directly reduces the value of money through inflation. It would have to generate at least $700 billion in new economic activity just to break even; since the calculated multiple of World War II government spending was 0.8, this means that inflation-based government spending is always a net loser even when it is considered to have been successful.

If the spending is tax-based, then this requires that the $700 billion in government-dictated economic activity be more effective than the $700 billion in private economic activity it replaces. Given that government spending tends to go to places like Goldman Sachs, ACORN, and various government bureaucracies, there can be no doubt that this is very seldom going to be the case. The government is an economic actor, it’s just a crude and extraordinarily inefficient one.

The essential problem is that very few people spend other people’s money with anything close to the same degree of care and efficiency that they spend their own. This is particularly true of the sort of narcissistic, superficial individuals who are drawn to careers in politics. In the immortal words of PJ O’Rourke, giving money and power to politicians is like giving car keys and whiskey to teenage boys.