The Obamanation

[Undertoad]

To go further. We had easy access to capital and it was good times. A lot of stuff got built around here. We got big box stores, cool big-ass convenience stores, a bunch of new neighborhoods and the tax money built a nice new extension on the schools.

Now we have difficult access to capital and it's bad times. Does that mean the good times were fake? Well for one thing, all that stuff didn't go away. The box stores will get new names on them and the houses will be foreclosed on, but it just means other businesses will move in and other people will move to the houses.

The hard access to capital is because of a market failure leading to a crisis. Here's where the philosophers come in. It seems that crisis is inevitable. We had a market failure in 1929. We built protections. Now we have one in 2009 and we wonder if the protections failed.

Maybe it's more like a river; some rivers flood every 10 years, some every 50 years and some every 100 years, but the flood is inevitable.

So markets make us rich, but every 4 generations there's a major upset and a bunch of people suffer. Should we A) stick to the markets because the good times are very good, and not lost simply because bad times come? B) Stifle the markets so that there is less chance of upset, but not so many good times either?

Should we not build on the flood plain, where all the grains grow? Should we move to the mountains where there are no floods but very little grows?

I would say that the non-upset market is the norm, so productive that it pays off enough to make it worth it when the bad times show up.

[tw]

Originally Posted by Undertoad

To go further. ...
Now we have difficult access to capital and it's bad times. Does that mean the good times were fake? Well for one thing, all that stuff didn't go away.

Simply see the same thing in the 1920s. What made the roaring twenties possible? Innovations. Things like the electric motor, lights, and motor car. But these innovations existed in the 1800s?

Yes, after letting innovations sit stifled for a few decades, suddenly new products became fashionable. And then with those new products, the 1920s was a time of making more of those products and getting richer. Well the 1920s was also a period when the status quo again got good enough. And so financial markets boomed based only on economic activity - no longer on newer and more productive economic activity. Financial markets cannot tell the difference. But a shortage of innovation eventually results in recession.

In short the bean counter mentality of profits replaced the product oriented concept of innovation - new and better ways. People started getting rich by only doing more of the same rather than seeking better ways. But what made it worse - any protection from so much fraud was being removed under the name of deregulation. SEC had long been stripped of any real enforcement powers by simply not paying its people sufficiently - see Harvey Pitts testimoney before Congress. Financial instruments were created without any real basis in assets. Markets such as CA energy and oil were even being manipulated without regulatory knowledge or prosecution. Even loans were make routinely without zero due dilligence.

Unfortunately that 1920 economic collapse was so massive as to destroy a financial system that supported innovation. Remember, finance never creates innovation. But innovation always requires some financial support. Without that financial support, even those who innovate are stifled.


Example: how long did it take to build the Empire State Building including removal of the existing hotel on that property? 18 months. They were phenomenal innovators. But when the finance service industry collapses, innovators who created the Empire State Building never made a profit.

An innovator should make a profit. One without innovative products will always lose money (ie GM). But a profit does not mean innovation (again 1990s GM). Appreciate the complex concept.

Innovation was not happening (sufficietly) in 2000s America to justify those profits and salaries. Notice drug companies now with so few innovations in their pipeline. Major steel companies whose profits from obsolete technology plants were created only by a massive worldwide demand for steel. Expect those 'fear to innovate' steel companies (which does not include Nucor) to be hurting. Essentially most innovation is still coming from the west coast companies. We have yet to see how much innovation out there has been stifled by a corrupt finance industry.

We do know that late 1990s and 2000s profits were more often created by Enron style accounting - ie CA energy crisis, oil prices, LTCM and other hedge funds, GM that averted being saved by bankruptcy in 1991 by playing these money games, etc. IOW money games made possible profits of 2000s when necessary product innovations and productivity really did not exist.

And then we diverted more otherwise productive efforts to put 300,000 soldiers half way around the world which we have yet to pay for. This too meant more profits without anything productive.

As in the 1920s, finance only saw a shortage of productive economic activity too late. When finance finally discovered its empty shell, it collapsed and destroyed itself. In America, companies like GM that should have been in bankruptcy in 1991, instead, used those same money games to invent profits for another 15 years. GM continued to make crap products (no innovation) for 15 years before spread sheets finally made reality obvious.

2000 was not a productive decade for America. Too many of those good economic numbers were inventions created by money games and not by new innovative industries and products. The problem should have been obvious with LTCM and Enron. Instead we ignored it so that even the insurance industry (AIG) could create money where no real profits existed.

A major difference between 1920 and 2000; 1920s took out every industry. So far, America's productive industries (ie centered around a concept called the Silicon Valley) have remained innovative. We really do not yet know yet how many industries are still being innovative. Financials are still trying to catch up with economic realities. We should eventually know by the depth or length of the resulting recession if we can remove distortions created by government stimulus.

There have been other recessions with shortages of innovations. But only two were masked by massive financial fraud that continued to make money on myths rather than products - 1920 and 2000. During those periods, finance industry profits were massively higher than those of any other industry. Which makes no sense in an honest economy. Finance people are nothing more than glorified bankers. Even your stock broker is nothing more than a salesman. They are service people - not the innovators that make an economy prosperous and powerful. When that industry has higher profits, fraud and corruption is widespread. As in 1920 and in 2000.

[sugarpop]

Originally Posted by Undertoad

To go further. We had easy access to capital and it was good times. A lot of stuff got built around here. We got big box stores, cool big-ass convenience stores, a bunch of new neighborhoods and the tax money built a nice new extension on the schools.

Now we have difficult access to capital and it's bad times. Does that mean the good times were fake? Well for one thing, all that stuff didn't go away. The box stores will get new names on them and the houses will be foreclosed on, but it just means other businesses will move in and other people will move to the houses.

The hard access to capital is because of a market failure leading to a crisis. Here's where the philosophers come in. It seems that crisis is inevitable. We had a market failure in 1929. We built protections. Now we have one in 2009 and we wonder if the protections failed.

The protections failed because we've slowly gotten rid of them over the past 30 years. It's called deregulation.

Maybe it's more like a river; some rivers flood every 10 years, some every 50 years and some every 100 years, but the flood is inevitable.

So markets make us rich, but every 4 generations there's a major upset and a bunch of people suffer. Should we A) stick to the markets because the good times are very good, and not lost simply because bad times come? B) Stifle the markets so that there is less chance of upset, but not so many good times either?

Should we not build on the flood plain, where all the grains grow? Should we move to the mountains where there are no floods but very little grows?

I would say that the non-upset market is the norm, so productive that it pays off enough to make it worth it when the bad times show up.

Why would you think there were not so many good times under market regulation? I think that's wrong. There may not have been as many multimillionaires or billionaires, but the middle class was very strong. The American dream of owning a home and having a decent, well paying job was attainable for most people, even without a college education, because manufacturing was the backbone of the American economy. Health care was affordable and in most cases it was a benefit provided by the employer. And while there was still a lot of wealth concentrated at the top, it was spread much more evenly through the middle, and the people at the top did not own SO MUCH MORE of it. IMHO, that is a huge part of the problem... there is too much wealth concentrated at the top, among a very small percentage of people.