In fact, riding our economy can be likened to riding a vehicle. In such an economic parable, Europeans love soft and forgiving shock absorbers. Their economies are never great and never bad. They’re always “morose.” By contrast, we American love feedback, like to be in close contact with the roadway, we appreciate a smooth ride on long stretches of spanking new asphalt, but when road conditions deteriorate, boy, we certainly feel that pothole. This harsh feedback however, has for effect to make us take instant corrective action. We don’t want our cool “mag” rims to be ruined or the dozen eggs that was lying on the back of our pickup truck to shatter into a premature omelet. Instead, Europeans will be more likely to blame the Chinese wheel manufacturer or the chicken that laid the egg. So the bottom line is that our threshold for pain has been significantly lowered over the years, that we’re now addicted to pain-free living, and this in the long run could mean death by denial.
Friday, October 31, 2008
Keynesian economics and shock absorbers
My good friend Bill Bocquet took the time to write such a good series of thoughts about the current economic crisis (reproduced in the comment section following this posting) that I fell compelled to respond in today’s blog. Well, I certainly agree with him that the Fed should have let some of the banks and institutions fail, but the pain would have been enormous on the pampered, American people. Who wants to have dental work performed on them without anesthesia these days or who wants a drive a car without air conditioning in Florida or heated seats in Minnesota? I don’t like Phil Gramm, think he’s a fascist, but have to agree with him when he says that "We have sort of become a nation of whiners…” 
In fact, riding our economy can be likened to riding a vehicle. In such an economic parable, Europeans love soft and forgiving shock absorbers. Their economies are never great and never bad. They’re always “morose.” By contrast, we American love feedback, like to be in close contact with the roadway, we appreciate a smooth ride on long stretches of spanking new asphalt, but when road conditions deteriorate, boy, we certainly feel that pothole. This harsh feedback however, has for effect to make us take instant corrective action. We don’t want our cool “mag” rims to be ruined or the dozen eggs that was lying on the back of our pickup truck to shatter into a premature omelet. Instead, Europeans will be more likely to blame the Chinese wheel manufacturer or the chicken that laid the egg. So the bottom line is that our threshold for pain has been significantly lowered over the years, that we’re now addicted to pain-free living, and this in the long run could mean death by denial.
In fact, riding our economy can be likened to riding a vehicle. In such an economic parable, Europeans love soft and forgiving shock absorbers. Their economies are never great and never bad. They’re always “morose.” By contrast, we American love feedback, like to be in close contact with the roadway, we appreciate a smooth ride on long stretches of spanking new asphalt, but when road conditions deteriorate, boy, we certainly feel that pothole. This harsh feedback however, has for effect to make us take instant corrective action. We don’t want our cool “mag” rims to be ruined or the dozen eggs that was lying on the back of our pickup truck to shatter into a premature omelet. Instead, Europeans will be more likely to blame the Chinese wheel manufacturer or the chicken that laid the egg. So the bottom line is that our threshold for pain has been significantly lowered over the years, that we’re now addicted to pain-free living, and this in the long run could mean death by denial.
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That economic crisis is one for the text books. Every body is becoming a Keynsian again, which is how I was educated (at Fordham, with the Jesuits, what else? The text book at the time was Samuelson's). You know, there is one immutable law: to whom does the crime profit? Except in this case, look for the big losers.
If you consider the first level victims, they are neither you nor I, not even the people below us. If that would have been the case you would have had people in the street of NY or even Park City. When Lehman Bros or Morgan Stanley bit the dust, no big uprising, right?
So, who could have been the victims; the commercial banks? Sure, but only at the secondary level. Ask yourself, who really lost fortunes and could afford to keep quiet about it?
There are a lot of tears (albeit discreet) in strange countries like Saudi, India, Iran, China, Korea, even Tanzania, to say nothing of Ukraine and Russia. I even hear about hara-kiri in Japan. The poor bastards got nailed twice in a row thinking real estate in any form could not go down!
I am told that Ahmadinejad is in one of the best Iranian hospital recovering (?) from some illness. A shame he had his wallet where is rhetoric was. The mullahs may not let him survive the fiasco.
What do you think?
The rest is just consequences, what some of us call collateral damage. This is sad, but unavoidable.
A few years ago, Malou and I, from different approaches, worked on the creation of the Basel accords (Malou State side, in DC, and me in Europe, in Basel). The goal was to create a regulatory capital adequacy requirement for the banks. We both pushed for a total inclusion of risk assets in the adequacy ratios but we were both overridden by the banking lobby. The definition of risk assets stayed on the credit ratings. This is when the analysts started rating MBO's AA or even AAA, since "they were issued by Freddy Mac." Good joke, but if you know analysts, you know that their sense of humor is directly proportional to their IQ and their IQ is directly proportional to their hat size (or if you are not familiar with hat sizes, to the cc of their lawn mowers engines). IQ wise, they are in strong competition with bankers, with a de facto ceiling of 50.
Any way, keep your money within the FDIC insured limits, don't borrow what you cannot afford to repay, live within your means and don't sell your stocks if you don't need the money. Sounds familiar? I could still hear my grand mother!
Actually, if you have some cash you won’t need for a few years, buy what are today standard commodities: retail, transports, armament, wireless, electronics (US made only). Basically, the same sectors following the Crash of '29. Remember, some of the great fortunes were made then.
Despite what you may think, I am still a Keynesian, and I still believe that Smith was right. There is no such a thing as a free lunch, and the markets balance themselves ... as long as we talk about real wealth. This last part we tend to forget. Derivatives and off-off balance sheet instruments are not real wealth, and that is where the system crashes. Things like MBO and options on future options? Come on! One would own more wealth holding weather options (don't laugh, they exist, and they are doing very well - not that I own any myself - , thank you).
In short, we will survive. We Americans have a healthier attitude when faced with a crisis than do the Europeans. For at least two years, Malou and I have been astonished by the fact that the French and Belgians (sample taken mainly out of our respective families and local acquaintances) did not feel some kind of crisis looming. In short, there was no problem any where. Now, say since June, the first reaction was "What is happening?", then came "It’s an American problem," after that it was "What will the government do?" and finally "Lets go on strike, that will teach them!"
I never really understood who "them" were, but again, most of our countrymen never understood that (at least since the revolution) the government was them. Even my mother, an educated person with a whole life teaching, who ended up director of a Sallanches middle school, still does not see that the government's money is her own. When I try to explain it to her, she smiles, says yes dear and probably writes me off as contaminated by capitalism. I can just imagine her, slightly embarrassed, telling her cleaning lady "I had a nice son, I gave him the best education I could (you bet, she sent me to Cluses), and he has gone totally mad."
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