The Financial Advice of Experts, Then and Now

By Alan Caruba

“I see nothing in the present situation that is either menacing or warrants pessimism…I have every confidence that there will be a revival of activity in the spring, and that during the coming year, the country will make steady progress.” That’s what William Mellon, the U.S. Secretary of the Treasury, had to say on December 31, 1929. The Great Depression would last until 1941 when the U.S. entered World War Two.

“Could we have a crash a la 1929? The flat answer is no.” So said Dr. Pierre A. Rinfret, a noted economist, writing in Time magazine on October 5, 1987 and, on October 19, 1987—instantly dubbed “Black Monday”—the Dow Jones average plunged 508 points.

Despite the pronouncements of Presidents and pundits, it was the December 30, 1929 edition of Variety, a newspaper for the entertainment industry, that got it right. The day after the crash its headline read, “Wall Street Lays an Egg.”

All through history, the opinions of “experts” have been subject to revision and derision. The Internet has simply multiplied our access to a multitude of opinions. It behooves us all to pick our experts very carefully. A good track record is always a good sign, along with a healthy measure of common sense.

As the economies of the U.S. and several European nations totter on default it is essential to draw on lessons from the past. The most obvious lesson is that the governments of the U.S. and the Europeans have been spending far more than they can tax or borrow.

All have spent decades since the 1980s wasting billions on “alternative” sources of energy in the name of global warming or climate change. All have stayed busy before and since the end of World War Two consolidating power in the U.S. federal government and more recently in the European Union.

Herbert Hoover on whose watch Wall Street crashed in 1929 generally gets the blame, but five years earlier in an address to the annual meeting of the U.S. Chamber of Commerce, Hoover said, “The test of our whole economic and social system is its capacity to cure its own abuses,” warning that, “If we are to be wholly dependent upon government to cure these abuses, we shall by this very method have created an enlarged and deadening abuse through the extension of bureaucracy and the clumsy and incapable handling of delicate economic forces.”

“The clumsy and incapable handling of delicate economic forces.” Spoken nearly 90 years ago!

What a perfect phrase to describe what the nation has been passing through as Congress during the last days of the Bush administration and the past two and a half years of the Obama administration has demonstrated.

The financial crisis of late 2008 was the result of government “entities”, Fannie Mae, created in 1938, and Freddie Mac, created in 1970, both intended to stimulate the housing market by securing the loans made by banks for the purpose of giving everyone, including those who could least afford it, the opportunity to own a house. By the time the crisis hit, they jointly owned more than 50% of all U.S. mortgages.

The failure of communism in the former Soviet Union (1922-1991) should be proof enough that government ownership of property and the means of production is one of the all-time bad ideas of the last century. A modified version exists in China with other versions existing from North Korea to Cuba. All depend on oppression and coercion.

The irony, of course, is that the Great Depression was extended by Hoover’s successor, Franklin D. Roosevelt, who believed that expanding the role of government was the best way to bring the Depression to an end. Instead, the Depression, experienced as well by European nations in the wake of World War One, gave rise to totalitarian governments and World War Two.

There is a reason that President Obama’s approval ratings, along with those of Congress, are at record lows. Most astonishing is the fact that, when Obama took office, the Democrats controlled both houses of the legislature, the Senate and the House. Even more astonishing, Obama pursued the same failed programs of FDR, most famously sponsoring a multi-billion dollar “stimulus” bill, along with taking over General Motors and Chrysler, ginning up a Cash-4-Clunkers program, and discovering belatedly that there were few “shovel ready” infrastructure projects.

By 2010, the voters returned political power in the House of Representatives to the Republican Party, largely on the basis on newly minted “Tea Party” candidates. Obama’s Congress had rejected his proposed budget and the nation has been operating with “continuing resolutions” to fund its activities and a massive battle over raising the debt ceiling for the same purpose. A farcical congressional “super committee” has been told to cut a trillion and a half dollars out of government spending.

The economic advisers that Obama brought into the White House have all departed with the exception of the Secretary of the Treasury, Timothy Geithner. The various government departments continue to spend millions authorized by the Congress every week or engage in dubious “loan guarantees” which give every indication of being a series of Solyndra scandals.

Despite the increasingly absurd assertions of the President, it’s not just corporations, large and small, making decisions about the current and near-term future of the economy. It is the vast body of Americans who are deciding what to purchase, whether to expand their business by hiring or not, whether to invest in stocks or gold, and thousands of individual decisions by which the real economy is shaped.

It is their decisions that determine how long the recession lasts, not the official pronouncements about when the last one “ended” or a new one begins. Economists of a conservative point of view know what must be done and should be listened to, but they are not advising this President, nor guiding the government’s decisions.

In the midst of this latest of many financial crisises at home and abroad, the campaign for the next presidential election has begun. Much depends on who John Q. Public elects to the office. Much depends on the long, hard slog to reduce the size and grasp of the federal government.

Will the wisdom of “the crowd” prevail over the present “experts” affecting the economy?

Stay tuned.

© Alan Caruba, 2011

A High Stakes Clash of Economists

By Alan Caruba

“We need an impulse, a jolt, an acceleration…Let us experiment with boldness on such lines, even though some of the schemes may turn out to be failures, which is very likely.”

Who said that? Was it President Obama? Franklin Delano Roosevelt? Neither. It was John Maynard Keynes, a British economist. The year was 1924 and England, still struggling to recover from the cost of World War One, was trying to figure out what steps to take. The British economy was suffering from high interest rates, falling prices, and high unemployment.

Keynes’ view was that the government had to spend lots of money on public housing, better roads, and improvements to the electricity grid to get money into general circulation, stimulate the economy, and restore business confidence. The unemployed had to be given work even if it was the government not private enterprise that would provide the capital.

Keynes was already world famous because of his role as a British Treasury negotiator at the Paris Peace Conference, a precursor to the Treaty of Versailles. He had written a book, “The Economic Consequences of the Peace”, that revealed the disastrous path the treaty has set Europe upon, the beggaring of Germany and Austria that led to the rise of Hitler and World War Two.

His economic theories would eventually take his name and, ultimately, his magnum opus, “A General Theory”, would enshrine him in the pantheon of the most famed economists. Succeeding generations of economists and even politicians would call themselves Keynesians.

A quite thoroughly unknown economist, Friedrich Hayak, an Austrian who was sixteen years younger, took a far different view. While Keynes thought economics must be applied to improve the lives of people through government programs, Hayak thought that the less government interfered with the free market, the better. Indeed, the smaller the role of government, the better.

All this is told brilliantly in a new book, “Keynes Hayek: The Clash That Defined Modern Economics” ($28.95, W.W. Norton & Company) by Nicholas Wapshott, a biographer of film actors and directors, as well as political figures, Ronald Reagan and Margaret Thatcher.

While one might assume that economics had to be the driest of topics and two economists most people have never heard of, the least of interest, Wapshott pulls it off, explaining some fairly daunting theories, mixing in lots of history to the present day, and bringing Keynes and Hayek to life in a way that is very entertaining.

What emerges is the recognition that politicians, whether it was Roosevelt in the depth of the Depression years, George W. Bush with a huge financial crisis in 2007, or Barack Obama struggling with high unemployment in 2009, all tend to look for the shortest route out of their problem because they want to be reelected or vindicated for the steps they took. They all think government is the answer.

Hayek reflects the conservative view that government should get out of the way and let a recession yield to natural economic forces. History demonstrates that, without government involvement, they eventually go away in relatively short order.

Government, Hayek argued, is more likely to make a mess of the economy than fix it. He has been proven correct over and over again, but that doesn’t matter because it is politics, not economics, that drives politicians. Politicians do not want to appear to be doing nothing.

Keynes was for a hands-on government, intervening to save the economy and, he too has been proven correct as in the most recent steps both the U.S. and British governments took to literally push gobs of money out the door and into banks to keep the whole system from collapse. The problem, however, is that it was taxpayer’s money and the borrowing to replace it will saddle future generations with an enormous debt unless some austerity is imposed on government.

Always in Keynes’ enormous shadow, Hayek, late in life, was vindicated with a Nobel Prize, but even more when the Soviet Union collapsed after seventy-five years of imposing a central government that owned everything; property, the means of production, and still could not compete with free market economies.

Keynes, however, has seen his view fulfilled because most Western nations subscribe to some form of socialism with the kinds of programs that he advocated to protect everyone. Social Security and Medicare are the ultimate Keynesian legacy.

Keynes was your classic “top down” manipulator of an economy. Hayek was a “bottom up” believer in the natural energy of the entrepreneur, small business and corporate enterprise.

Neither, however, could calculate greed or fear into their theories though they surely were aware of both as factors driving or retarding an economy.

Neither could predict what any particular politician might do in their own best interest. In America, both Democrats and Republicans have proved to be big spenders since the end of World War Two.

One man who was not an economist understood how to bring down an economy. Keynes warned, “Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency.”

Americans who have watched President Obama triple our national debt to more than $14 trillion should take note before the dollar, still the benchmark currency for the world, is debauched. Too much Keynesian government spending and borrowing will do that.

That was the warning from Standard & Poor’s when it downgraded the nation’s credit rating. Hayek would have approved.

© Alan Caruba, 2011

Unleashing Americans

By Alan Caruba

“I predict future happiness for Americans if they can prevent the government from wasting the labors of the people under the pretense of taking care of them.” -- Thomas Jefferson

My father was a certified public accountant, as is my older brother. I not only lacked any arithmetical skills, I spent much of my early years ignoring the ups and downs of the economy, thinking that these matters were beyond my comprehension. What I failed to understand was that the economy was as much a creature of meddling politicians as economic theories.

I was born in the midst of the Great Depression and have now lived long enough to be caught in a new one. I know that economists and others say we are in a Recession, but it feels like a Depression to me and to the millions of other Americans who are out of work and being laid off weekly. It feels like one to those who suffered foreclosure on their homes. It feels like one every time we go to the supermarket and gasp in disbelief at the cost of groceries.

The unimaginable debt that Americans have incurred by borrowing far too much as a nation and as individuals with credit cards, and the ease with which one could borrow against home equity, has now forced us to deal with the reality of a financial crisis that began in late 2008 when the housing bubble burst.

Historically, it started far earlier when Fannie Mae and Freddie Mac, elements of the 1930s New Deal, were created to bring “social justice” to the housing market. By the time of the 2008 implosion, they owned more than half of all mortgages issued in the nation.

While the politicians seek to position themselves to blame the other party, the saving grace is that in 2010 voters returned power in the House to Republicans; doing so by electing a large number of “Tea Party” candidates pledged to reduce the debt and reverse what have been the disastrous policies of the Obama administration.

Despite the breathless reporting of the 24/7 news channels, the parade of politicians on both sides explaining their positions, the real news is that Americans are finally engaged in a real debate over the debt and the nation’s future. In 2012 they will vote to change course and, just as European nations that also borrowed too much, they will have to accept austerity measures.

A lot of government programs and, indeed, whole agencies and departments should be ended.

It’s not the death of socialism in America, but it is the recognition that a government that seizes and redistributes the wealth of working Americans must be reversed, revised, and reduced in size and scope.

Too much taxation, too much regulation, too much borrowing, and too much wasteful spending is what the national debate is all about and it is a long overdue debate.

In the land of the brave and the home of the free, Americans want to be free to decide what kind of light bulbs they can purchase, what kind of cars they can drive, and end all the other restrictions that make doing business in America an expensive, unrealistic nightmare.

In a way, the infatuation with a completely unknown, untested, and inexperienced president has been a wake-up call. Barack Obama was packaged to be a celebrity, a “messiah”, when all he really was, was an ill-prepared, standard issue Marxist. He surrounded himself with economic advisors and unvetted “czars” who shared his belief that one last, big push could “transform” a nation that was more in need of a sensible budget than grandiose and failed socialist solutions.

The result was the appalling Obamacare law that attempted to seize twenty percent of the nation’s economy. The House has voted to repeal it. Twenty-six States have gone to court to have it nullified. A Republican president and Senate in 2012 will end it.

Obama and the “green economy” advocates around him have dumped billions into wind and solar energy companies that could not exist without government subsidies coupled with government mandates for their use. Combined, wind and solar provide less than three percent of the nation’s electricity and will never meet its needs.

The nation’s auto industry, once the envy of the world, is almost entirely controlled by the government that, even in the midst of the debt ceiling debate, was being told it must produce lighter, more dangerous automobiles to meet unrealistic demands that they provide more mileage per gallon. You cannot get more energy from a gallon of gasoline than you can from any other source of energy that is ruled by the laws of physics.

Openly scornful of fossil fuels, the Obama administration has rendered the nation more dependent on foreign oil and waged war on coal and now natural gas.

The Obama moratorium on drilling in the Gulf of Mexico has wreaked havoc on the oil industry, pursuing the same policies of earlier administrations that have thwarted exploration and extraction of the billions of barrels of U.S. oil that go untapped and unused. Oil rigs have been departing the Gulf to other nations, along with thousands of jobs and millions in the revenue they contributed to the economy. The vast resources of the Alaskan National Wildlife Refuge remain off-limits even though only the tiniest part of the refuge would be affected.

We suffered a socialist “stimulus” that stimulated nothing but an increased multi-trillion dollar debt.

I think America has turned an invisible corner and that as soon as we rid the nation of President Obama and his tax-and-spend Democrat supporters in Congress, the nation will begin to correct its borrow-and-borrow-some-more profligate ways. A smaller, less intrusive government may emerge in the years, the decades ahead.

The entrepreneurial energies of Americans will be unleashed if that occurs. The present Recession/Depression will join all the previous ones we have been through. We have all been chastened and we will conclude it wasn’t just Barack Obama’s policies, but decades of socialist policies dating back to the earliest days of the last century.

If that occurs, our children and grandchildren will have the excessive burden of debt lifted from them and American’s energy, innovation, and optimism will prevail.

© Alan Caruba, 2011

Tell Me It's Not a Depression

The Good Old Days

By Alan Caruba

It started with a haircut in the morning. I sat in a barber chair I had sat in initially around the age of five. In those days, the 1940s, four Italian gentlemen cut hair and it cost 25 cents for a kid and $1.25 for an adult. Same shop, but my haircut cost $16.00 not counting the tip. Except for the owner, some lovely gals cut hair there these days.

When my parents moved to an upscale suburb of Newark, New Jersey in 1942, they paid $11,000 for a three-bedroom home with a stand-alone garage. I sold it for many multiples of that and it was essentially the same house with a few improvements. I sold because, in 2000, the town had reevaluated the property and literally doubled the taxes. Ten years later, a second reevaluation was deemed worthy of an article in The Wall Street Journal.

My parents put two sons through college on the earnings of my Father, a CPA with vivid memories of the Great Depression. He was a liberal, a Democrat, and advocate of the United Nations. Starting in the 1950s Mother taught gourmet cooking in the adult schools that sprang up after the war, earning enough to purchase the family cars and otherwise contribute to the budget. They remained married for over sixty years. He never learned to drive.

After the haircut, I topped out the gas, a little under a half-tank, and paid $21 for a mixture of gasoline and ethanol, the latter mandated by the government and heavily subsidized. The cost included state and federal taxes. I can recall when gasoline in the 60s and 70s was around 60 cents a gallon. I can also remember long lines at the pumps in both 1967 and 1973-74 when the Saudis, angered by the U.S. support for Israel, implemented oil embargoes.

A visit to the supermarket these days is a carnival of sticker-shock. The price of food has been rising thanks in part to the increase of the cost of energy to produce it and the diversion of corn to produce ethanol that reduces the mileage you get from the gas you purchase and likely harms your car’s engine. Corn is a major feedstock so the cost of a steak is rising too.

During WWII, the milk was delivered to my home by a horse-drawn wagon. Before refrigeration became widely available, we kept it in an ice box that required the delivery of large blocks of ice. There was radio, but no television. If you wanted air conditioning, you had to go to the local movie theatre. Price of admission, plus popcorn cost a kid about twenty-five cents. I saw my first television program in the 1950s. Within no time, everyone had a TV.

When I attended elementary, middle and high school there was zero talk about illegal drug use because there was none and I cannot recall any mention, let alone the teaching of heterosexual or homosexual sex of any kind. The school day began with a pledge of allegiance and a prayer. We did not have a politically correct curriculum or have to listen to fantasies about the planet heating up.

We did not recycle because everyone knew it was just the garbage.

It was the rare child who came from a family that had experienced divorce or who was being raised by a single parent. There was no segregation in the north, but my high school was almost completely white. That ratio has been reversed.

The Draft ensured that every able-bodied young man would serve a minimum of two years in the military learning the arts of warfare. We had all been born early enough to have passed through World War Two as very young children. This was followed by a conflict in Korea in the 1950s when we were teens. By the time the Vietnam War came along it was a new generation of conscripts fighting it. After that, the military became entirely staffed by volunteers.

The biggest scandal of the presidency of Dwight Eisenhower involved a vicuna coat his chief of staff had accepted as a gift. It would take Watergate to stain and end Nixon’s presidency, an ugly sexual dalliance to undermine Clinton’s, and a parade of congressional felons that constitutes a non-stop perp-walk these days.

Since I was a lad the government added a Department of Education, a Department of Energy, a Department of Homeland Security, the Environmental Protection Agency, and others I cannot recall. Regulation of everything has exploded. Borrowing and spending has exploded. If anybody had told me back then that the government was broke, I would have thought he was crazy, but the debt ceiling kept being raised until there is, in effect, no ceiling.

In my memory, American society began to shift from traditional values and patterns in the 1960s. The century-long failure of the South to rid itself of the aftermath of the Civil War, the Jim Crow laws, eventually found expression among blacks, but it also caused riots in U.S. cities.

In time, gays in New York would rebel against police harassment and a whole new movement would be sparked, culminating in the demand for same-sex marriage, along with an end to Don’t Ask, Don’t Tell in the military. The lives of women changed with the advent of “the Pill” and demands for more equality.

Sex, drugs and rock’n roll became the order of the day. We have gone from Frank Sinatra to Lady Ga-Ga. Later generations than mine share a more chaotic vision of society and a far more costly one in which to live.

It has taken the emergence of the Tea Party movement to capture and focus the independent voters who have seesawed back and forth between the comfort of Eisenhower's conservatism to the free-spending of Lyndon Johnson, the conservative values of Ronald Reagan to Barack Obama’s effort to force European-style socialism on America.

In my life, we have gone from the Great Depression to an era in which whole nations have discovered that a highly centralized government inherently cannot function without bankrupting its citizens whether they live in the U.S., the United Kingdom, Portugal, Greece or in the former Soviet Union.

As international organizations have flourished, from the United Nations to the European Union, the more unwieldy, corrupt, and grasping they have become.

We live now in the Age of Terrorism. No one in authority seems to want to acknowledge the source, the threat to civilization called Islam. Few Americans knew anything about Islam before 9/11. Now you can’t get on a plane without a full body scan and search.

If your grandpa or grandma say they miss the “good old days”, keep in mind that in many fundamental ways, they really were good.

© Alan Caruba, 2010