I agree that "free markets" do not necessarily create price stability.
Government plays a critical role in the capitalist system.
I think you overstate the seriousness of the credit bubble in the US,
however. The new economiy is not merely a bubble. The new economy of
information processing has resulted in real productivity gains. This is
an opinion of mine, but it's also what the current crop of numbers say.
It will take a long time for us to determine to a certainty whether the
productivity gains were real, of course.
Although the bublble has been pricked, the economy underneath has still
grown in real terms. What we need now are more labor saving inventions.
We'll soon have them in the form of further technological innovation, I
feel. A prediction: Bluetooth wireless systems are going to be
absolutely huge within 2 years.
Is the US credit system heading for disaster? It's not clear how that
will happen. As for the oncoming real estate crisis, I haven't heard
about that before.
Finally, you criticize the Fed. I disagree with your assessment. The
Fed was far too tough on inflation in 1999 and 2000. It should have
kept interest rates steady or lowered them, not raised them. There were
no signs of inflation. The economic slowdown exists because the Fed
kept rates too high, not because they kept them too low.
Andrew Hagen
[EMAIL PROTECTED]
On Mon, 21 May 2001 03:49:21 +0000, Rob Schaap wrote:
>G'day Andrew,
>
>> Some highlights from the piece: the short-term price spikes (in US
>> energy commodities) will be resolved through ordinary operations of
>> the free market.
>
>Heh heh ... what ordinary operations would that be? And the *what* market?
>
>> ... the Bush and Cheney plan is anti-free market.
>
>So's the world's belief that a central banker's ambiguous utterances and
>boringly repetitive panic cuts are all that matters in valuing stocks ... And
>its implicit corollary that the finance sector is too big to be allowed to
>take its overdue bath ... And its implicit corollary that an American central
>banker will always have a few hundred basis points available for pruning.
>Indeed, I see this credit-induced faith in limitless credit has affected
>Bloomberg, too - they greeted yesterday's news that the US trade deficit had
>blown out (thanks mainly to consumer goods, of course, no-one's actually
>buying capital goods any more) as evidence of recovered health ...
>
>> In my view, the energy subsidies and environmental rollbacks open the
>> door to a widespread, populist attack on the Administration. I'll
>> guess that 4/5ths of Americans will be greatly offended by the energy
>> subsidy plan once they know the details.
>
>Not as offended as they will be when they wake up bankrupted by the bankrupts
>who hawked 'em bankrupt funds in a system that bankrupted itself coz there was
>nowhere left to hedge ...
>
>Apposite excerpts from *Feeding the Financial Beast* by Doug Noland
>May 18, 2000
>Complete article at:
>http://www.prudentbear.com/Comm%20Archive/markcomm/051801.htm
>
>...
>
>If the Fed is truly targeting faltering capital spending and profitability,
>especially within the highly maladjusted technology sector, it is making a
>major policy error. It was specifically the enormous financial bubble that
>developed post-1998 that led to massive and unsustainable over spending
>throughout the expansive high tech
>industry. It is also worth again addressing (as somewhat of a follow-up to
>last week�s commentary) the powerful interplay between financial and
>technological innovation that has certainly not been given its proper due
>elsewhere. The unusually large margins afforded new and innovative products
>and services throughout the technology sector not surprisingly garnered
>extreme business and speculative interest. This keen attraction, combined with
>a contemporary credit system with a newfound capability and penchant for
>creating virtually unlimited money and credit, provided an absolute financing
>and spending powder keg. Consequently, a flood of money was available to throw
>at virtually any technology enterprise. This, not surprisingly, led to scores
>of negative cash flow and hopelessly unprofitable ventures receiving funding,
>whose expenditures provided enormous revenues that sustained
>artificially outsized industry revenue and profit growth. The more profits,
>the larger the flood of finance, and the greater the over spending. It was a
>textbook bubble, with monetary excesses fueling the boom through funding both
>uneconomic enterprises (that would not survive come the bursting of the
>financing bubble) and over investment that would ensure an abrupt margin
>(profitability) collapse at the first sign of business slowdown. A bust in
>proportion to the historic excesses of the previous boom was unavoidable. In
>sum, increasingly dysfunctional monetary processes that were both creating and
>directing massive financial excess at the sector assured its eventual collapse.
>
>Most unfortunately, the Greenspan Fed absolutely fails to address the true and
>clearly potentially disastrous underlying dilemma for the U.S. system:
>entrenched monetary processes that hopelessly perpetuate financial excess,
>self-reinforcing market distortions and dangerous economic maladjustments. The
>Federal Reserve simply refuses to govern a dysfunctional wildcat financial
>sector that has grown to momentous size and power, and whose self-serving
>pursuits propagate unrelenting and increasingly precarious lending and
>speculative excess. The great danger comes not from a slowdown in capital
>spending or a consumer who wisely chooses to temper his unsustainable
>borrowing and spending after many years of binge, but to the gross financial
>excess that runs unabated with the acquiescence and extreme accommodation of
>the Federal Reserve. Instead of moving to harness an out of control credit
>system that assures recurring credit-induced booms and busts, failed Fed
>policy only Feeds the Financial Beast. Indeed, this is a financial system, and
>leveraged speculating community especially, that blossomed directly from the
>Fed�s early 1990s accommodation and hasn�t looked back since. The resulting
>enormous speculative and banking profits afforded the financial players in the
>early 1990s, however, looked like a pittance compared to the windfall
>following the Fed�s 1998�s "reliquefication." Not only is the Fed loath to
>control this monster that it has been so instrumental in nurturing, it has now
>reached the point where the Fed is granting additional rewards for previous
>reckless excess. This has gone much beyond an issue of moral hazard. This is
>outright negligence.
>
>It is now simply a sad case of waiting to see when, where and how big and
>destabilizing the next bust; unrelenting monetary excess assures it.
>Certainly, nowhere are the excesses more pronounced than throughout the real
>estate sector. And like the gas that was thrown on the smoldering technology
>boom back in 1998/99, the Fed today fosters even more outrageous excess
>throughout mortgage finance. It is certainly worth noting that with the
>adopted Greenspan strategy of cutting rates early and quickly, there will be
>few bullets left when the massive real
>estate bubble bursts, taking consumer spending and the general economy down
>with it. We are today in the quite early stages of what will eventually prove
>a protracted period of economic decline.
>
>For now, the contemporary mortgage finance sector and real estate markets with
>ingrained inflationary expectations provide the Fed a powerful policy tool.
>Countrywide Credit made the following release Tuesday afternoon: "Countrywide
>Home Loans national call centers have seen a 400 percent spike in calls from
>consumers immediately following the Federal Reserve�s announcement this
>morning. This is the fifth rate drop by the Federal Reserve this year. Recent
>rate decreases have generated significant interest from consumers who are
>purchasing or refinancing their homes. In addition, many homeowners see this
>as a chance to open home equity lines of credit many of which are based on the
>declining Prime Rate."
>
>Borrowing against home equity is clearly playing a critical role in sustaining
>the consumer-spending boom. Today�s larger than expected trade deficit of
>$31.2 billion saw record consumer goods imports. MarketNews International
>reported that March imports into the Port of Los Angeles were up 15% year over
>year. Quoting the port�s director of business development: "I�ve been to the
>shopping centers and everybody
>still has bags and bags -- at least in Southern California." The article
>continued, "His retail clients have already suggested that the port should
>prepare for strong activity in the third and fourth quarters. (The director)
>argues that whatever consumer spending has been lost to higher energy prices
>may well be offset by the recent surge in mortgage refinancings.
>�Unfortunately, all that does is give consumers a second chance to get into
>debt since they don�t stop spending.�"
>
>...
>
>The unfolding California energy crisis certainly illuminates some
>very fundamental and critical misunderstandings. First, the popular notion
>that the marketplace (almost like magic) creates stability and prices that
>tends toward equilibrium is patently false in an environment dictated by
>rampant money and credit excess. Indeed, credit-induced bubble economies are
>specifically dominated by forces
>cultivating disequilibrium. Second, the perception that the mechanisms and
>strategies of contemporary finance reduce risk is absolutely fallacious.
>Derivatives, in particular, provide a mechanism for individual players to
>mitigate/hedge risk. It is a completely different proposition, however, for
>the system as a whole ("fallacy of composition"). There is no way an entire
>market can hedge, as outside of the market there are no parties with the
>wherewithal to remunerate in the event of large system-wide losses.
>
> The general perception (actively marketed by Wall
>Street) that risk can be mitigated by derivatives has and continues to play a
>major role in this bubble. As we have witnessed repeatedly in various markets,
>the availability of derivative "protection" changes behavior, inducing
>participants toward riskier activities that significantly augment risk for the
>system as a whole. Furthermore, credit bubbles foster exponential debt growth,
>asset inflation and resulting speculative excess, as well as severe
>marketplace and economic distortions that as well grow exponentially over
>time. It is critical today to appreciate that Credit Bubbles generate risk
>exponentially, and Fed policy is greatly exacerbating this process. And while
>there is much finger pointing today in California, the State�s energy crisis
>is very much the consequence
>of boom-time erroneous notions and credit bubble excess. It is as incredible
>as it is alarming to see how quickly California went from expecting huge
>budget surpluses, as far as the eye could see, to financial crisis.
>
>...
>
>And with the system under considerable stress due to the collapsing of the
>technology bubble, the aggressive financial players have unwavering (and
>justified) confidence that the Federal Reserve will continue to accommodate
>history�s Greatest Credit Bubble. This is the Fed locked in policy disaster.
>Monetary policy has been left to court a dysfunctional
>relationship with the masters of financial excess, a circumstance that to this
>day fosters momentous financial and economic distortions that absolutely
>assures financial and economic crisis.
>
>...
>
>It is certainly our view that the Fed is pursuing the course of greatest risk,
>the senseless perpetuation of the Great Credit Bubble.
>
>
