Don’t worsen the debt binge with more easy-money booze

Writing on Aug. 17, the 30th anniversary of Elvis Presley's death, I'd have to say the US equities bull market has left the building. (And see Aug. 20 update about Fed action, below.) When people like Jim Cramer on CNBC (who are paid to be stock market cheerleaders) melt down on national TV, it's a red flag that everything isn't hunky-dory at the corner of Wall and Broad Streets. The recent weakness in the Dow Jones index is another example of what happens when government intervenes in financial and real estate markets, and doesn't let the free-market work out stupidity and excesses quickly and efficiently. I had lunch with a friend this week, and he wondered what Fed Chair Ben Bernanke and the Fed could do to make things better. I replied that there's really nothing they can do, and I explained our country's situation with this analogy:

Let's say you're partying in downtown Denver, it's 1:30AM and one of your buddies is pretty drunk. He doesn't need any more drinks – much less being behind the wheel of a car. He should get off the sauce, maybe drink water or Coke, and call it a night to let the hangover and recovery process begin. But instead, he downs three more shots of tequila. Then he takes off and drives his car recklessly (with several other passengers in tow) and crashes it into a tree.

The American economy and consumers are playing the role of your buddy, with Alan Greenspan and Ben Bernanke acting as bartenders who gave him the hooch. I've heard people say “Why doesn't the Fed and Bernanke do something about this?” The reason is that they really can't avert this financial hangover because they were the ones that caused it.

Increasing the money supply and reducing interest rates (again) is more of the same medicine that got our country in this fix. It'll temporarily relieve the financial pain, but won't get us out of it. The only remedy will be time and the repayment (or default) of enough debt in the system, and more honest-to-Pete savings and investment - which doesn't include stock or mutual fund holdings in 401k plans.

I guarantee you'll hear the financial talking heads on CNBC, Bloomberg, and mainstream media say something like “this is a great buying opportunity, and chance to get back in the market. Remember, you invest in stocks for the 'long term.'” Baloney. That's nothing more than Wall Street propaganda, and has no basis in economic or financial fact. When the Dow takes daily triple-digit hits in this short of a time frame, and a 1,000-point haircut in weeks, that's not a bullish sign to me. It reminds me of the saying: “The bull (up market) climbs up the stairs, and the bear (down market) jumps out of the window.”

Even though financial assets (like stocks and mutual funds) and real estate have appreciated quite a bit in value the past few years, it's been a false prosperity based on cheap credit and an ever-increasing money supply. Real estate values went up because scared stock investors thought it was a better deal than Wall Street, interest rates were lowered to the floor, and mortgage companies had incredibly loose lending standards. For the last several years (up until recently), if you could fog up a mirror and had a job, you could buy a house with little to no money down.

The sub-prime mortgage mess and liquidity crunch are another example in history of the start of a bust after another financial boom. Government needs to get out of the way, and let the financial hangover and subsequent recovery begin. Yes, it'll be painful in the short-term for folks who only know how to profit from up-trending stock and real estate markets. But for professional investors who are financially and economically literate, this is the start of an opportunity of a lifetime to build (or increase) your fortune.

I've said it before, and I'll say it again: If you're not financially literate already, learn to sell, learn to market, and learn to read a financial statement. Don't rely on politicians who helped get our country into this financial mess to get us out of it. Even with these economic and financial challenges, America is still a great country and the land of opportunity. The American recovery won't be led by big-government pols who want more people dependent on the state. It'll be wise, bold, and visionary leaders who can inspire folks to get the most from their God-given talents.

Start with getting the most out of your talents, then work to bring out the best in others. That's the true American way, and it's what will lead us back from the arrogance and insanity of our time.

----------------------- Update, August 20 -------------------------

Well, Ben Bernanke and the Fed poured more booze in the punchbowl Friday when the Fed lowered the discount rate by ½%. But I agree wholeheartedly with Bill Fleckenstein, who says: “The bailout (should) stop here.”

The Federal Reserve can’t really do much except delay the inevitable recession that’s coming soon to the US; no matter how badly politicians or individuals want the Fed to make it all better. America’s central bank doesn’t have magical, Svengali-like abilities to “manage” the economy – and neither does any other elected official. The Fed can only do two things: 1) Control the expansion (or contraction) of money supply and 2) Control the interest rates. That’s it.

Again, don’t rely on the Fed, President or Congress to step in and make things better. All they can (and should) do is let this financial craziness run its course, and let all the bad debt work its way out of the system. It’ll take time (several years to a decade), and it’s not the ‘Goldlilocks’ economic landing that talking heads have promised. But it’s the only way to have a true economic recovery.

'Go to the ant, thou sluggard'

(Title: Proverbs 6:6) How do ants build vast underground cities without a chief engineer? How do bees build a hive and make honey without a leader? How do swarms of migrating birds or schools of fish seem to move as one organism? An article in the current National Geographic, “Swarm Behavior”, offers insights into the question of how the simple actions of individuals add up to the complex behavior of a group -- but this 2007 author reveals an economic blind spot about what Adam Smith understood as early as 1776.

According to this article, what appears to be intelligent, coordinated behavior is actually the culmination of individuals’ actions. A school of silvery jacks appears to be one organization. No one, however, is in charge; each fish fulfilling his responsibility to stay together, go the same direction and not run into another fish. Individual locusts by instinct align their direction with others creating an army of insects systematically mowing down acre after acre of crops.

Foraging ants “know” when to leave the nest in the morning when they have encountered a sufficient number of patrolling ants returning from the night guard. If the patrollers are detained by some threat to the nest, they don’t return and foragers don’t go out. Neither patrollers nor foragers know the “big picture” yet their individual actions create an orderly and beneficial system.

In humans, swarm behavior is something like wisdom of the crowd. Take for example, horse-racing odds are calculated from the all bets before a race. They are usually correct. Stock-market prices reflect the individual decisions of a lot of people and are usually a good indicator of value.

The article goes on to provide examples of applications of swarm behavior such as Google, which relies on the accumulation of web site hits to rank pages, and Wikipedia, which contains the cumulative knowledge of thousands of writers.

The article, however, misses the greatest example of beneficial swarm behavior or crowd wisdom in humans – the free market. In the free market, the culmination of individual choices determines the price and quantity of goods and services. Nobody is in charge, yet the market works to create jobs, goods, and unprecedented wealth for the greatest number of people.

Where the market is freest, the most people enjoy the greatest wealth. Where it is most constrained, people are poorest. Desired goods grow scarce while undesirable goods pile up and gather dust. Suppressing economic freedom is like throwing a net on a school of fish; individuals can no longer act and the group is tangled in confusion. Hillary, Barack, Sen. Edwards, Mr. Gore, Speaker Pelosi... call your office.

Property rights trashed by Boulder's NIMBY plan

By Krista Kafer (krista555@msn.com) I don’t like McMansions – those pretentious, overbuilt houses parked on a crust of a yard within spitting distance of the next near-identical house. I’m not into bland or beige or three-car Garage Mahals. I’m wary of McMansion neighborhoods where I feel like I’m on the set of the Stepford Wives, only super-sized. I imagine a homeowners' association, in the dark lair of a fully finished basement, churning out smiling replica families complete with shiny-coated Weimaraners and wintergreen SUVs. Yikes! Get me out of here! Take me back to the days of my childhood when this blighted land was untilled prairie where red foxes hunted, prairie dogs barked and hawks circled on the warm summer air.

Did I mention I really don’t like McMansions? That said, however, I support an individual’s right to own one. As much as I resent the intrusion and deplore the bad taste, I support the developer’s right to build the houses. And, as much as I miss the golden fields of my youth, I support the landowner's right to sell his property to the developer. Put simply, I support property rights.

The right to property is an alienable one—that is a God-given right that government has an obligation to protect. A property owner has a right to own, lawfully use, and dispose of his property.

Obviously there are some limits. A person cannot use his property for illegal purposes like say, growing marijuana, assembling bombs, or replacing errant homeowners with responsible, well-coiffed robots. Zoning laws prohibit certain otherwise legal activities. One cannot build a porn shop next to a daycare or an oil refinery next to a neighborhood. Countless other federal, state, and local laws, ordinances and regulations dictate how land can be used. Some make even a lot of sense -- but others burden landowners unnecessarily and often without constitutionally-mandated compensation.

The latter describes a restriction under consideration by Boulder County (see “Boulder County weighs McMansion limits” in the Denver Post). Boulder County would like to limit the size of houses. Owners could get out of the limits by purchasing the development rights to preserve open space and agricultural land in the county. The loophole favors those wealthy enough to buy back from government the "privilege" of controlling their own land. This arbitrary restriction, if implemented, will surely impact current landowners wishing to sell, developers, and future homeowners by reducing the value of the land.

The restriction is nothing more than a NIMBY (Not in My Back Yard) power play by those who have control of their own property and want to control the property of others. Here in Littleton, NIMBY folks are trying to block Wal-Mart (see here for my take on that).

The local activists have me beat on intensity. They certainly hate Wal-Mart more than I dislike McMansions, and their scorn for the big box store is untempered by the irony of my Stepford fantasy. But the main difference between the NIMBY folks (whether in Littleton or Boulder) and someone myself is respect for property rights.

I may not like what people do with their property but I respect their right to legally dispose of it as they please. It's principle, and it's also self-interest, because the same property rights that protect big box store and the McMansion owner, protect the owners of that little boutique down the street and me the cottage-dweller.

Will Congress repeat Smoot-Hawley debacle?

By Brian Ochsner (baochsner@aol.com) At this time of year, Memorial Day and now D-Day, we reflect upon the sacrifices that soldiers have made for our country. It's also good to look back at our economic history, review our successes and make sure we don't repeat our mistakes. The Democrat-controlled Congress now appears bent on repeating the disastrous economic blunders of the late 1920's and early 1930's. Namely, believing that higher import tariffs and income tax rates will make our economy more robust and 'protect' American jobs and incomes from foreign competition. That's like strangling the goose who lays the golden eggs. I'll tell you which two senators are today's Smoot and Hawley, and why this kind of misguided thinking is dangerous for America's economy.

In 1930 – when the US started its descent into the Great Depression - there was a hue and cry for Congress to 'do something' to help struggling farmers and workers. Sound familiar? President Hoover urged that tariff rates be reduced to promote trade, but Senator Reed Smoot and Rep. Willis Hawley (ironically, both Republicans) introduced a bill – the Smoot-Hawley Act - that increased tariffs to record levels on over 20,000 imported goods.

The debate on tariffs started in 1929. After the stock market crash in October, enough support was garnered to pass the bill. President Hoover then reluctantly signed it on June 17, 1930. It resulted in American exports plunging by over 65%, and pushed the US economy over the proverbial cliff. You may be asking – why am I bringing this up now, and why is it relevant today?

There's been recent talk from Senators Chuck “Smoot” Schumer (D-NY) and Lindsay “Hawley” Graham (R-SC) that 'something needs to be done' to correct the large trade deficit the US has with China. Senator Graham has complained about China's 'currency manipulation' and how it's hurt South Carolina textile manufacturers.

They believe that raising tariffs on Chinese goods to 27% will 'get China's attention,' force them to revalue the Yuan to more American-friendly rates, and level the playing field for US manufacturers.

Unfortunately, this is misguided economic stupidity. Even if the US Dollar and Chinese Yuan were at a 1 to 1 ratio, the US couldn't compete with Chinese slave labor, where workers are paid a fraction of what Americans earn for the same work. Not to mention their manufacturing facilities and infrastructure are more modern than ours. We've encouraged this activity by buying billions of dollars of cheaper Chinese goods over the past few years.

China is also our second largest holder of US Treasury debt behind Japan. Our congressmen are in no position to bully or demand anything from the Chinese about the Yuan-US Dollar exchange rate (or anything else). The Chinese are very financially savvy, and they'll lower the value of the yuan to the US Dollar on their terms – not ours.

If Congress did pass this economic insanity, it would be like you going into the office of your mortgage banker (who holds your largest debt) and slapping him in the face. Chinese lending has helped prolong the positive economic growth in the US over the past few years. Asian money along with cheap US interest rates extended the American prosperity party through booming real estate values. Many owners of real estate used their property as their personal ATM, kept spending this newfound cash to keep the good times rolling.

Given our huge balance of trade deficit, we need as much exporting to other nations as possible. Enacting these import tariffs and starting a full-blown trade war is the last thing our economy needs. My hunch is that President Bush will veto these tariffs, if they make it to his desk. However, given his judgment on other issues, that's not exactly a 'slam-dunk,' as George Tenet would say.

If these tariffs are signed into law by the President (or Congress overrides Bush's veto), I'm not saying we're heading into another Great Depression. But 'Smoot-Hawley 2007' wouldn't be a shot in the arm for the American economy. If (or when) this bill comes up for a vote, tell your Senator and Congressmen to vote no.

Doing nothing is much better than doing something stupid like this.

Beware the ethanol hype

By Brian Ochsner (baochsner@aol.com) What's the solution to rising oil & gas prices? Time and the free market will tell, but Rebecca Hagelin of World Net Daily explains why America should steer away from ethanol. US News & World Report gave a similar caution signal in its Feb. 12 cover story. Beware the hype.