In other words, follow a command economy. You, or your politician of choice, gets to choose, based on his personal opinion, which industries are "necessary" and which are not. You then change the law to try and socially engineer the success of your pet industry. Given that this has been tried numerous times in the last 100 years or so, and has never worked as a basis for sustainable long-term prosperity, what makes you think it will work now? The whole reason free markets exist is because over the long-run they work. Unlike central planning, they have a natural corrective to excess and bad decisions in the form of the price mechanism. Wall Street and real estate speculation are already getting royally shafted by the market process, for example. If manufacturing really is the future of the USA, then there is absolutely no need for you or anyone else to try to socially engineer that situation using central planning. Demand will arise for those products if they are really desired by people, business, and governments - and thus prices will rise and encourage increased production. The sector will boom and become a major player again without a single piece of law needing to be changed. No central planning is required for the economy, that is the beauty of the market system. It tries everything, most stuff fails, and the stuff that works gets rewarded. No central planner could ever have conceived of most of the innovations that have occured in the lat 200 years, let alone successfully orchestrated their emergence. To try to turn the clock back to industrial policy and a command economy would be to ignore 50 years years of economic devastation through the middle of the 20th century in the countries that adopted that policy either fully or in part. In recent years there was too much unsound lending and speculation by incompetent buffoons. The market is already taking care of them. Whatever sound areas are available for investment, capital formation, growth and future employment is beyond the understanding of almost all individuals (if not, you could become rich by investing in them now), but they will arise. In 1990 how many predicted the tech boom? During that recession I'm sure people were bemoaning the collapse of real estate, banks going under, the S&L crisis. The Buylosellhis of this world were undoubtedly wailing and moaning about how terrible things were - right before the biggest 9 year boom in the history of the world. The difference this time is people have lost faith in the free market system. You have people like yourself advocating de facto socialism-lite, other people wanting class warfare, all of which flies in the face of 200 years of economic history, proven facts and outcomes as a result of two distinct policies - free market capitalism vs planned economy socialism. The latter has never, ever worked. Why should now be any different? Other countries have had terrible busts before, pursued (by intent or by accident) a hands off policy, and emerged fairly quickly and stronger as a result. Asia 1998 for example, or Brazil 2002, or the UK and US in the early 80s, or Japan and Germany after WWII. Several of those were MUCH WORSE than our current crisis, yet the recovery was strong, relatively swift (given the magnitude of the crisis), and long-lasting. History shows that hands-off works, works fast, works well, and works long-term. History shows the opposite leads to stagnation at best (Japan), depression at worst (FDR, 1970s UK, Argentina, the communist bloc etc). Call me strange but I vote, based on the historical record and available facts, for a hands-off policy.
I agree with him. S&P 400 (maybe lower). 10%+ unemployment. A lost decade of economic stagnation. Class war, maybe real war. If anything, Volcker is too optimistic.
No I don't support gigantic government spending. I support government coordination and regulation of financial markets (and financial markets only): temporarily taking control of "too big to fail" institutions when markets fail and become inefficient -- then handing back things to the markets when they can handle the responsibility. Big difference. Government spending always ends up in sub-optimal resource allocation, which by the way is a similar result you get from perfectly free markets that fail and become inefficient, misallocating resources over long time periods.
Well I see a few issues here. Firstly it's not clear to me what you mean by co-ordination and regulation. What specific government action is going to occur that will be any different to the operation of a liquidation with a receiver appointed by bankruptcy court? How would this hypothetical action help things? Will any recession/depression be 1 day shorter because of this? Will a single job be saved or created in the long run, without eliminating one or more elsewhere? Secondly, let's look at some political realities. I don't see this kind of minimalist lender of last resort policy being followed. What I see is huge stimulus bills, increased taxes, massive government borrowing. Even if there was some government action that would theoretically help things, which I am not convinced of, in the real world how likely is it to occur? The political class simply does not have the skills or knowledge to operate or regulate financial institutions or financial markets in a better way than leaving them to their own devices. Remember that from 1980 to 2008 we were *incredibly regulated* in the financial sector. In the US you had the SEC, CFTC, FINRA, the Fed, finance committees in Congress, and others I probably have overlooked. What did they do? They didn't even see the crisis coming, let alone do anything to stop it. Their collective numbers, budget, and brainpower (lol) couldn't even stop a one-man Ponzi scheme bigger than the economy of Albania. The only people who spotted the collapse were a few traders, hedge fund managers, and investment commentators - a class of people that is currently being demonized and possibly taxed out of existence by the politicians and public. You want these clowns to take over the whole financial system, you think that's going to *help* things? I think it's more likely to make things even worse. Third, I notice you assume the existence of "optimal resource allocation". Would you care to define that please? Optimal according to who? Optimal resource allocation cannot even be defined in hindsight, let alone in advance. It presupposes some objective universal standard of value, impossible in a world where even 2 people cannot agree on the importance of everything. One thing free markets do is allocate resources according to what people are willing to pay for and work for, which so far is our best measure of what they actually want. Sometimes they may get it wrong and regret their decisions - the price mechanism then takes notice of this fact and reallocates back to their new preferences, as expressed by what they now choose to do with their money. To say that resources are misallocated on the long term under a free market is to say that people don't know what is best for them, a rather dangerous conclusion, and in any case what is the alternative - dictate to people what they do? That's not a free society.
I thing that you have written a very good piece here Cutten, very good indeed. Where are you going to go from here. US gov. is underway with a stimulus package that clearly is against your better judgment and it is committed to throw even more and more credit into the arena to address the credit created problem. Even when I write this phase it sounds stupid. So imagine what it must feel like when one day Pres O wakes up to the realisation that path he has been told to pursue is wrong. And so the question remains, where are you going to go from here. regards f9
Just to confirm how fast global trade and major economies are collapsing read this. Japan's exports have almost halved in January. These are great depression grade statistics! If they aren't exporting we aren't importing, no shipping required impacts ports, trains, trucking, no retail sales.... http://www.bloomberg.com/apps/news?pid=20601087&sid=aTCZ_f77WEqw&refer=home Japan Exports Plummet 45.7%, Deficit Widens to Record (Update1) By Jason Clenfield Feb. 25 (Bloomberg) -- Japanâs exports plunged 45.7 percent in January, resulting in a record trade deficit, as recessions in the U.S. and Europe smothered demand for the countryâs cars and electronics. The shortfall widened to 952.6 billion yen ($9.9 billion), the sharpest decline since 1980, the earliest year for which there is comparable data, the Finance Ministry said today in Tokyo. The January drop in overseas shipments eclipsed a record 35 percent decline set the previous month. Gross domestic product shrank at an annual 12.7 percent pace last quarter, the most since the 1974 oil shock, and economists predict the slump will drag into this quarter. Toyota Motor Corp., Sony Corp. and Hitachi Ltd. -- all of which forecast losses -- are firing thousands of workers, heightening the risk the recession will deepen. âThe drop in exports is unbelievably bad,â said Yasuhide Yajima, a senior economist at NLI Research Institute in Tokyo. âThe pressure on companies to cut jobs and investment is rising and that will make the recession deep and protracted.â The yen traded at 96.56 per dollar as of 9:01 a.m. in Tokyo from 96.72 before the report was published. The decline in exports was in line with economistsâ predictions. Japanâs economy, the worldâs second largest, may shrink a record 4 percent in the year starting April 1, faster than this yearâs projected decline of 2.9 percent, according to the median estimate of 15 economists surveyed by Bloomberg News. The worst contraction to date was fiscal 1998âs 1.5 percent drop. Record Drops Shipments to the U.S. and Europe dropped by records. Exports to the U.S. tumbled 52.9 percent from year earlier, and shipments to Europe fell 47.4 percent, the ministry said. The collapse of Lehman Brothers Holdings Inc. triggered a credit crisis that erased $18 trillion from global equity markets, hobbled U.S. consumers and paralyzed world trade. The meltdown also spurred a 23 percent surge in the yen against the dollar since September, eroding earnings for Japanese exporters already struggling with weak demand. âIf the yen stays at this strong level, itâs likely the economic recessionâ will continue, Honda Motor Co. President Takeo Fukui said last week. Every one yen gain against the dollar cuts the automakerâs operating profit by about 18 billion yen ($190 million), according to the company. Still, currency gains have eased recently as the outlook for Japanâs economy deteriorates. The yen has retreated 5.4 percent against the dollar in February, its worst one-month performance in almost five years. Reports showing an unprecedented 9.6 percent decline in factoryproduction and the biggest jump in the unemployment rate in 41 years have convinced some investors Japan is no longer a safe haven. âDeep Troubleâ âPeople are coming to realize that Japan is in deep trouble,â said Hiroshi Shiraishi, an economist at BNP Paribas Securities Japan Ltd. in Tokyo. âConsidering whatâs happening on the export side, and the implications that has for the domestic economy, the yen is clearly not a buy.â Toyota, which is forecasting its first operating loss in seven decades, will halve production in the current quarter versus the same period last year as demand for cars in the U.S. plunges. U.S. auto sales fell 37 percent in January. The Bank of Japan last week said it will buy corporate bonds for the first time, widening its asset-purchase program to prevent a shortage of credit from deepening the recession. Governor Masaaki Shirakawa and his colleagues lowered the bankâs overnight lending rate to 0.1 percent in December. The government has been unable to pass a stimulus package that could help encourage domestic spending in the absence of export demand. Prime Minister Taro Aso is struggling to get approval from the opposition-led upper house to spend 10 trillion yen ($111 billion) to aid companies and households, whose sentiment is near a record low.
I'm starting to think that this stimulus package is more about the rest of the world than us. As if the engine that is the US consumer has stalled, and needs a really powerful jumpstart to re-start. We can probably re-build our economy after a while. What about the rest of the world who hasn't been elevated to our level of wealth (yet)? Do they backpedal and in doing so, create geopolitical instability? Random events happening out of plan - bad for business and really throws a monkey wrench in the global elite's slow and steady plan. Perhaps that's what this is all really about. But for that matter, who knows?
Japan is suffering greatly. They have public parks full of the elderly and young, unemployed people, living in tents, and cooking in community settings. This would have been thought impossible in Japan just 5 years ago.