Thursday, January 15, 2009
- Ignoring The Economic Alarm
It ain’t over yet. Like a ripple in a pond, the financial crisis has spread to the limits of the modern economy and what started as a ripple is now on its way back to the center much amplified. Business have reacted to the slowdown by cutting costs (firing people and cancelling orders) which caused others to fire people, and so on and so on. And now the consequences of that have caused the banks to raise their estimates of foreclosure and lower their estimates of growth.
In the meantime we’ve all apparently forgotten what a market is. We think, in keeping with what we’re told by our politicians and the idiot press, that the stock bond and currency markets are a great casino occupied by fat cats and their victims. We’re told that the people who work there are ‘parasitic paper pushers’ who don’t really add anything to the economy. We’re told that they’re designed to be unfair to the little guy, and that the big players have built the system to ‘exploit’ the widows and orphans. None of that is actually so.
In reality the financial markets aren’t a Casino, they are an alarm system. They use the wisdom of crowds to look into the future and make a prediction about the effect of the current government policy. They are the place where people exchange information about how optimistic they are about the future of the economy. They are the only truly honest place where we get everyone’s best estimate. The polls and the press are all twisted to reflect what the politicians want them to, but there is no twisting the market.
It isn’t really possible for any individual to manipulate the market. People have tried of course, and the financial graveyard is littered with their bodies. People will tell you different because they were ‘so sure’ of something and when the market went the other way on them it’s easier for them to claim that it was manipulated than it is for them to admit that they were wrong. Liberals blame the hedge funds, and conservatives blame George Zoros, but neither is right. That’s just their hurt egos and their envy of wealth.
The fact is, the only entity with the required authority to distort the behavior of the market is the government. By changing the rules in a foolish or inefficient way, they can make the whole herd run one direction or the other. But the markets are an alarm system. And the more the government tampers with the alarm system the less effectively it sounds the alarm. That’s what happened with the ‘credit crisis’. Government rules distorted the behavior of the free market, so when too much easy money was made available, the alarm never went off.
We haven’t learned that yet. We still believe in fairy tales. We still believe the childish silliness that ‘hope’ alone can change immutable laws of nature. We think that ‘green jobs’ will save the economy by raising the cost of energy; that a windmill can power steel factory; and that ‘government’ is the only thing that can save us now. We believe that the best way to create economic growth is to take money from the most productive people and give it to the least productive. And it’s the stated policy of our government to spend as much taxpayer money as possible on the people whose poor credit caused this whole problem in the first place. The harder the government tries to “solve” this crisis the worse things will get.
The alarm is going off, but we’re still ignoring it. A good friend of mine, a blisteringly intelligent man with decades of experience in finance told me last night that he thinks national unemployment will go to 12% before we hit bottom. That’s roughly one person in every eight. And what no one in the press seems to want to mention yet is that the job loss will be much heavier in the blue states than the red. It’s the adolescent policies of liberals that have created this problem so the bluer the state, the worse the stats. In a way, that’s the good news. The lessons of the recession will be learned by the people who need to learn it the most.
Hopefully it will make us all grow up a little and quit ignoring the alarms.