Four Economic Mistakes

November 7, 2008 | 11 Comments

While America is filled with joy and consternation over the election and the results I’ve been thinking about what should be done about the economy. The more obvious thing is to list the “For God’s Sake, Don’t Do This List.” It’s a rather short. Founded in hard experience by America’s economy, visible to any student of economics, these few principles need be engaged in your thoughts to estimate the future.

In the meantime let’s be careful to recognize that the media and politician’s efforts to stimulate the economy with “stimulus packages” for consumers, “industry rescues” for financiers and automakers, and the other ideas are much more like snake oil salesmen’s tonic than real antibiotics that attack a disease. Or, better get the stitches or cauterize the wound than endlessly pour more blood in.

You may well realize that if the blood loss can be stopped the body may well recover from the shock and begin healing with little treatment at all. Markets, be they financial or houses are creatures of human organization after all.

To avoid a depression forming out of a recession there are just four big mistakes to avoid.

The first mistake to avoid would be not engaging in protectionism, or setting up trade barriers, taxes and other devices that serve to limit trade, keep jobs at home, or other lofty goals. It didn’t work 75 years ago when there were no instant worldwide communications networks, airfreight systems, integrated capital and commodity markets, and vast numbers of businesses and their jobs based in a worldwide economy. Seventy-five years ago the world engaged in protectionism and the results were catastrophic throwing millions of Americans out of work for years only to finally get work when war broke out.

Today such a mistake would reach tens of millions, if not reach well past the hundred million American citizen mark. So when you hear politicians or media heads talking about renegotiating or other economic treaty meddling, be very concerned. If you own, are invested in, work for such a business or use products and services that come even in part over national boundaries the risks are very dangerous as the economic contractions would be earthquakes of never imagined consequences. Talk like revisiting the North American Free Trade Agreement has more to do with the stock market this week than any other single issue. Way down deep, where few people are willing to visit, this fear is real already and needs addressed with confidence building and soon.

The second mistake to avoid is more regulation. Its interesting to note that since 1945 the U.S. and the free world economies recovered from the disaster of the Second World War and built in short order what we know as the “developed world” leaving everyone else way behind. Much of the worst over regulation from the Great Depression was left behind by the 1950’s, setting many people and lots of capital free. Over regulation is a temptation to set things right, control the bad behaviors, compel certain behaviors, and do other good things. All well and good in a theoretical way, but taken too far, regulation chills people and their hopes and dreams. The bad actors are going to be bad in any case, so regulation needs to be about minimum standards, not something to solve all ills or compel certain courses of conduct.

What brought on the end of the housing boom is complex, but a major effort by government regulation sought to compel lenders to loan 100% and other devices to increase home ownership. A lofty goal, but for many borrowers it was more of a switch from paying a landlord to paying a mortgage. But when something went wrong there wasn’t someone to call. With no equity money saved and invested in the home there is nothing to lose. Would you have made the loan in such a set of conditions? These loans were securitized with all of the good ones making them the bad apple that spoiled the whole bunch. With housing being such a huge credit market making up the majority of personal wealth in the U.S. its no wonder that the crises is as serious as it is. We know that some regulation revamping is needed in the kind of loans that are guaranteed by taxpayers and bundled as securities. Getting the regulations turned back was tried by the Republicans, and blocked by the Democrats in Congress a couple years ago. We surely have learned now that more regulation compelling a behavior is a bad thing here, as turning the regulatory clock back to before the new loan product offerings is a simple and effective solution.

The securitization of credit isn’t a matter of being a bad idea so much as making the regulations couldn’t keep up. This is a case where new regulations limiting the bad behaviors could be applied. But will the mood of the Congress be updating regulatory matters or instead, seek to compel another form of conduct? That’s the risk, instead of regulations that expose and require truthful disclosure of risk in bundled securities, debt swaps and derivatives, we may get something that kills one market and/or seeks to create a new one in its place. That means an economic contraction followed by a mandated form of market that suits regulation rather than the needs of an economy.

It took from the over regulation attack on the economy during the Great Depression until the beginning of the Clinton administration to finally get the economy moving in cruise mode. Then the ensuing 16 years have seen more of the compelling of behaviors than regulations that simply protect us from and limit the bad behaving players. The pendulum certainly swung quickly back to another economic calamity, but this time the error isn’t a lack of regulation, but too much of the wrong sort.

It’s a lot to expect, and truthfully, I don’t expect that Congress will establish law that gets regulation back on a useful course for security, safety and growth. Instead we may get another swing of the pendulum too far the other way. Remember, it took more than 50 years to fix most of the over regulation of the Great Depression that in today’s dollars may have cost tens of trillions of dollars in lost economic activity. Over regulation is slower, less visible, but cuts very deep for a very, very long time.

The third mistake to avoid is attacking capital. By this I mean striking fear such as engaging in protectionism, over regulating, taxing, and even scolding those who worked hard enough and were lucky enough to get some. That’s a big chunk of Americans and justifiably they will act to save, protect and defend that capital. It’s in homes, pension funds, 401Ks, small businesses, IRAs and a wealth of other things. The “Rich” is most of us. Assertions that what we’ve won with hard work, risk taking and deep stress is a source of pride, the family who can burn their mortgage is just as much a success as the millionaire, different only by degree. The artifice of taxing “only those” is a well-known lie understood by all who have any maturity and experience.

The whole of any successful economy is founded in the willingness to risk, work and endure. The profits, payrolls, sales, and property to tax is utterly dependent on those people’s results. Spooked, profits will “disappear,” along with jobs, capital will get moved to a safer place so making what is the end of a business cycle triggered by regulatory policy errors in housing and home financing, a long term problem. Actually, much to the horror of the unionized community, capital can in its disorganized way “go on strike,” too. When I hear the term “Cash Is King” I shudder, as it means fear, uncertainty and doubt or “FUD” has won.

FUD is a creature thought up to describe the attacks by Microsoft to belittle and dissuade people from competitive operating systems. And it worked to some degree in a competitive business environment. Over the years the strategy has worn thin, and Microsoft has had to get better products out. They have yet to learn that they have way over priced the commodity personal operating system. Which is a good thing as the alternatives thrive while Microsoft just bleeds it customers. But government is much more than a near monopoly like Microsoft.

Attacking capital is an insult to work, risk and surviving stress. People can choose to go on strike not just in investing, but in simple spending, too. Its in progress now, housing is nearly frozen unless it’s a foreclosure buyer after a distressed priced property. Demand destruction in energy and fuel use is well underway. Reduced consumer spending in retail stores is getting going now, and surely pointing to a sorry commercial Christmas season. Soon health care will come under pressure and nothing will be left untouched save government itself. Government will still seek to go on without an economic contraction adding more stress to those most short of cash flow.

America is both blessed and cursed by multilevels of government with power dispersed close to people and in the black hole of Washington D.C. With governments increasing their focus on solving their own operating problems in an economic contraction rather than assisting the economy to stabilize and resume course, taxation, fees and other means to gather cash is further attacking the economic cash flow.

FUD, taxes either staying the same or increasing, fees, licenses and other costs simply kill capital activity. When capital activity is reduced the consequences are profound, eventually government will have to literally “make” money by the artifice of creating more cash for itself, a kind of self reinforcing, looping phenomena that appears to the average person as inflation. As many readers old enough will remember, inflation makes people poorer with repeatedly lowering the value of money and a little more remembering will recall that the fix for inflation is yet another dreadful recession experience. Attacking capital is a sure way to keep a recession and drive an economy into a depression.

The fourth mistake is engaging in creating simple uncertainty. This is surely the most difficult thing to avoid as media, press, opinion makers, we bloggers and a wealth of new venues on the Internet are all going off in whatever way suits the individual producer. Every culture or society or nation will form a kind of pyramid of power from the least intelligent and poorest of luck at the bottom and increasing education, work, risk taking and perseverance as one looks at the upper levels of the pyramid. Everyone to some extent is watching those at the top where money and influence impact the popular wishes of democracy’s functions into the hands of a few in the Presidency and the leaders in Congress.

There, the attitude, the willingness to engage in government for the greatest good ahead of social engineering will decide if creating uncertainty comes before the need to set a certain national security and an economic growth confidence path. While wrangling will go on it’s the context that matters. Is national security the order of business or some idealistic goals substituting in its place? Is economic confidence the order of the day or is social engineering leading the debates? People, in spite of the media, press and pundits catch on pretty quickly. Sound bites are very telling and hardly need parsed by the average person to be clear. Idealism and social goals while under national stress are breeders of uncertainty as the leaders are clearly seen putting private agendas ahead of the nation as a whole. In truth, idealism and social engineering have always failed to get the promised results.

Uncertainty is sand in the gears, infection in the wound, depression in the mind kind of thing. What we see and hear in the coming weeks will tell us much of what we have bought in the latest election. Have these newly elected people learned anything from history or are we all doomed to repeat it?

Can they keep the doors open and let world prosperity be a foundation for national and world economic security?

Will they control their impulses in making laws and regulations, suppress their human wish to wield power over others and correct the mistakes of the past or trigger a new disaster with decades of recovery required?

Can they deal with the responsibility so avoiding the tyrant’s and dictator’s trick of blaming something that cannot speak in defense? Capital has no single voice, blaming “greed” and avarice is a not very clever trick that won’t last long. Winning back the trust from the lie may take much longer than one term in office allows.

Will the national interest be first ahead of ideals and social dreams? Do the leaders and the influence of special interests find a context of public discourse that tells observers that certainty of purpose for national security and economic performance comes ahead of all other wishes?

This is a long blog. Not on topic, but relevant to the day. There won’t be much in new energy and fuels if the national security and economic activity are lost to weak minds and dreamers of utopia. I would surely not like to lose my soapbox on my favorite field to political failures of responsibilities.

There you go. What to watch for. May God bless us; we’re really going to need it.


11 Comments so far

  1. Al Fin on November 7, 2008 7:43 AM

    Excellent advice, Brian.

    I hope you will not take it personally if Obama decides to do exactly the opposite of what you recommend on every point.

    Some persons can never outgrow their programming. Until now, a narcissistic Obama could be reined in by his ambitions for the supreme ruling position. Having finally attained the rank of Dear Leader, adored by voters and media worldwide, his somewhat erratic tendencies may not be as easy to control.

  2. Matt in NC on November 7, 2008 12:44 PM

    I believe that it is a mistake to make blanket statements about protectionism. I would submit that major restrictions in the money supply by tightening credit, increasing taxes and raising bank reserve requirements had more to do with squelching trade than the tarrifs did.

  3. Marcel F. Williams on November 8, 2008 11:24 AM

    I’m a strong believer in free trade— amongst nations that are free and democratic. But I also believe in tariffs on nations that are not free and democratic since it cost this country hundreds of billions of dollars annually to protect ourselves from nations like China, the Middle-eastern theocracies, and a back sliding Russia.

    Free trade with China has been a disaster, IMO. How could we have allowed such a fascist state to purchase US treasury notes?

    Free trade amongst free and democratic states is the only path towards peace and global economic prosperity because it puts pressure on non-democratic states to move towards democracy in order for them to gain full access to the powerful free markets of the free world.

    Marcel F. Williams

  4. Brian Westenhaus on November 10, 2008 5:50 PM

    First, do no harm. I’m not suggesting that there be a blanket dropping of trade policy, rather that no new restrictions come into being and those treaties in the pipeline get approved by Congress with best possible speed.

    Bigger producer and customer pies benefit everyone. Sometimes it hurts folks when competition gets hot, but a slowing economy only puts more price pressure on everyone. So Don’t make the first, most awful, mistake!


  5. Robert Speirs on November 11, 2008 7:20 AM

    “But will the mood of the Congress be updating regulatory matters instead seek to compel another form of conduct? ”

    This sentence is incomprehensible, unfortunately. I feel that this posting contains some good ideas, but often the language is not clear. Is English not the author’s first language?

  6. Brian Westenhaus on November 11, 2008 8:33 AM

    Thank you Mr. Speirs. Sentence fixed, I think. English is the only language, albeit done poorly, its getting info out that isn’t otherwise. OK, I breezed through math and science and struggled with English. Still do!


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