Friday, December 26, 2008
It's difficult to know in advance where a credit-induced bubble is going to occur. Recently we've lived through the "dot.com" bubble and then, most-recently, the real estate bubble, both of which inevitably burst. Each bubble involved both a certain suspension-of-common-sense mania and easy credit from the central bank. The dot.com bubble was based on the belief in a new era of information where the old rules of investing didn't apply, a hot dot.com needn't even have a revenue stream to say nothing of profits. The dot.com bubble burst finally and was rather quickly handled by the market. The companies were often ephemeral and hence just vanished. The foolish were punished and rest got on with their lives.
The recent real estate bubble bursting and liquidation, real estate being much more "real" than a dot.com, is much more complicated. Aggressively acting to increase rates of home ownership has been explicit government policy since the Clinton Administration. Post-911, Greenspan pushed interest rates to 1%, funding a frenzy of real estate activity. The government also guaranteed the risky assets created by bundling "creative" mortgages into securities; greed can get out of hand when the risk of loss is thus eliminated. Both mortgage companies and borrowers believed that no matter how impractical a mortgage arrangement was, ever increasing house prices would save their skin--the house could just be sold to the next, greater fool.
Left alone, the now-burst real estate bubble would liquidate and house prices would return to sane levels. The pain would be intense, like pulling out an arrow, but soon the bleeding would be stopped and recovery could begin. The official government policy is, however, to leave the arrow in place and hope the body can get along with it. The body is rejecting the arrow and may continue in a sickly way for some time.
Rather than biting the bullet, we are likely to see the attempt to create a new bubble of false prosperity, fueled by easy money provided by the infrastructure plan of the incoming Obama Administration. Investors do not make government policy; to make profits they often must pay close attention to it. Already the talking heads on CNBC are speculating on where the next boom will be. Many are looking to companies likely to get a boost from the coming infrastructure building frenzy. This frenzy may create a surge of economic activity that some may mistake for a recovery. Don't be fooled.
The great infrastructure boom can only be sustained as long as money continues to pour in, which can't continue indefinitely. What will follow in its wake? A great bust, as capital will have been misallocated to industries which do not have long term viability. Infrastructure capital is not likely to be easily convertable into other profitable arenas. Further, ventures that could have been sustained will be starved for resources, those having been focused on the infrastructure boom. In the end, we will have an economy with gross malinvestments that will create more economic pain as they are liquidated.
Will the infrastructure projects themselves induce a new round of prosperity? Not likely. Projects chosen by politicians rather than capitalists have a poor track record in this regard. We are likely to see numerous TV news shows about the utterly useless projects left in the wake of Obama's infrastructure plan.
What do we need instead of a new infrastructure bubble? It's just dream but, capitalism would be nice, complete with bank failures, business bankruptcies, sound money, and all of the other things that keep the potentially crazy sane and the greedy cautious. We certainly don't need an "Obamania" induced infrastructure bubble.
Tuesday, December 23, 2008
The United States Council of Mayors just came out with a massive, pork-laden report for use in helping the next administration spend its economic stimulus money. The mayor of Miami was caught off guard by a television interviewer who asked whether a project to build another water slide at a water park was really infrastructure or just pork. The mayor said he didn't read all of the 1130 projects proposed by the country's mayors; when the reporter informed him the water slide was proposed by his own city, Miami, he didn't seem embarrassed at all. He should have been.
At a press conference talking about, but not detailing, the upcoming stimulus package, incoming Vice-President Joe Biden assured the assembled reporters that the stimulus bill will be filled only with rational projects; it would be no "Christmas Tree" of make-work gifts. But if consumer spending on Christmas presents is such an important part of our economy, what would be wrong with a stimulus bill overflowing with spending of every kind, gift-wrapped especially for those the administration loves most? The prevailing idea is Keynesian demand-side economics, as Obama economic guru Larry Summers indicated in his press conference comments: consumer purchasing power must be maintained. Keynes himself said it didn't matter at all how the money made it into consumers' hands. Keynes even advocated paying laborers to dig holes and then fill them back up as a way to stimulate demand.
So what's with Biden's assurance that the stimulus bill will be no Christmas Tree? If the stimulus bill should be "gift free", why not advocate cancelling Christmas altogether? Consumers should be advised to, instead of buying gifts, develop their personal infrastructure: go back to school, start a business, put a new room on the house, resurface the driveway, anything but save money, pay down debt, and live more frugally.
Saving money, paying down debt, and living more frugally, however, are exactly what consumers should be doing. Only from an enlarged pool of savings can real, sustainable economic growth come. We should all be following Lew Rockwell's Law: "Always believe the opposite of what state officials tell you, and the corollary, always do the opposite of what they advise you." If the government says spend, it would be wise to save. And if the government says there won't be pork in the infrastructure bill, it would be wise to not believe it.
Mayors' infrastructure request full of pork, critic says
Sunday, December 21, 2008
"My teachers all gave up on me; no matter what they say, I disagree"
~"Fools" by Van Halen
It may seem strange for a teacher to imply agreement with the above quote. As a teacher, I do welcome students' earnest challenges; student challenges are often great opportunities to clarify points, helping everyone in class. But I am also a student, having gone back to get a Master of Liberal Studies degree online at an unnamed midwestern university. Last semester's treat of a class was about the origins and implications of the knowledge society. I'm not sure if the professor ever had a student argue for the abandonment of an entire academic discipline in response to a final exam question, but I did just that. For the class was regrettably a sociology class.
Without rehashing the entire course, I'll hit the highlights. The research paper required me to formulate a measure of the so-called digital divide. For the uninitiated, the digital divide is the gap between the "haves" and the "have nots" in the age of information technology. This "have" versus "have not" concept permeates every aspect of sociology. Thus we get, rich vs. poor, men vs. women, race vs. race, and so on ad nauseum. All any researcher needs to know about the digital divide is that other researchers have wasted a lot of time trying to measure it. Thus my research paper ended:
"The entire concept of a global digital divide is entirely contrived. As noted, there is no sound rationale for comparing internet use statistics in developing countries with those in industrialized countries. No matter how much wealthier developed countries become relative to poor countries due to the benefits of their superior internet connectivity, the poor countries’ standards of living are unaffected in absolute terms. The whole global digital divide concept seems to be an excuse, updated for the information age, for the parasitic planning class from academia, the U.N., the World Bank, and the I.M.F. to continue to harangue the developed world to fund their hare-brained foreign aid schemes which are empirical and theoretical failures. The internet will spread as it is needed and is able to be supported by the wealth of its users; artificially speeding up the process through externally-imposed programs will in the long run fail, leaving the poor would-be beneficiaries even worse off."
I stand by every word. What did I learn from this class? Sociology is a bankrupt discipline:
"This course reinforced my poor opinion of sociology...The entire “have” versus “have not” concept is wholly misapplied. The fact that the concept comes mostly from long-disproved Marxist exploitation theory is what makes it so unworkable. Sound reasoning simply can’t begin with poor antecedents – garbage in, garbage out sums up the problem with sociology. In the world of sociology’s contrived conflicts between classes, races, genders, generations, and on and on, the one conflict that really matters is almost entirely off the sociology radar screen, i.e. the conflict between looters in government and the citizens they loot through burdensome taxation and regulation. This is a conflict truly worth study and elucidation. The fact that sociologists and the universities they work for are often funded with government loot perhaps explains why this conflict receives so little of their attention. Sociologists seem content to continue to stir up contrived conflicts that poison the intellectual environment everywhere they are seriously discussed. This while governments around the world continue to loot, regulate, and even kill their citizens with ever more reckless audacity, destroying liberty and prosperity...the digital divide is only among latest contrived conflicts conceived to justify looting of the productive class by parasitic bureaucrats. Rarely considered, and then only for the purpose of derisive dismissal, is the idea that truly free markets are the greatest engine for social cooperation ever conceived. Allowed to operate, free markets bring the interests of all people into the greatest possible harmony. The typical solutions of the sociologist, almost always paid for with money looted from taxpayers, only exacerbate the problems they purport to solve...The activities of sociologists are a dead weight loss to society. Not only do they not maintain or advance civilization; they are a threat to civilization. Add to this the methodological chaos that afflicts the discipline and the case for its complete abandonment is made."
I do not think my professor agrees.
Even the most avid football lovers usually express mystification about the vibrating maelstrom known as electric football. Most could never make those little plastic men do more than spin in place; anything resembling a life-like play was impossible to achieve. The game was to them, frankly, stupid. My brother and I, on the other hand, created cosmos from the electric chaos; we even kept statistics compiled from a play by play log of each game. Even though I rarely play electric football anymore, I still think I could beat anyone in the world using right out of the bag players, given a couple hours to work out a couple good plays. Nothing more is needed to beat any defense; the key is to threaten every part of the field on every play. Any overload by the defense can be punished. The same is true in real football, but few offenses do that well.
It was with great dismay that I witnessed the hiring by my beloved Auburn Tigers of a guru of the latest trend in college offenses, the spread offense. The "spread" is a quarterback-centered offense that uses a "shotgun" snap. Depending on the strengths of the quarterback, the offense can be run-oriented or pass-oriented. The main running play is a read option to a running back--the quarterback puts the ball in the running back's belly and either leaves it there or pulls it out and runs in the other direction himself. The formation is spread without a tight end so while spread offenses can run the ball effectively, it is not a power, "smash mouth" running game. Tim Tebow of Florida is the prototype quarterback for this offense.
The experience of Auburn in 2008 with a spread offense was a disaster. The Auburn culture is a running culture. Now former coach Tommy Tuberville thought the spread was the future of offense in college. Top recruits out high school wanted to run it; it was an offense in the midst of a bull run, even if runners in it more resemble deer. At Auburn, the spread offense needed to roll up big point totals early and often; capital in the form patience on the plains of Auburn would not be in great supply. Halfway through the season, the new spread guru, Tony Franklin, was fired.
As James Grant says, the trendy is at its most risky when it is at its most popular. While Tommy Tuberville was trying to catch a rising star in the spread offense, another kind of spread offense based on, in college football chronometry, ancient principles was earning first-year Georgia Tech coach Paul Johnson "coach of the year" nominations. The triple option was invented by Bill Yeoman. His "split back veer" made the University of Houston an offensive juggernaut in the 1970s. Paul Johnson honed his spread version of the triple option at Division I-AA Georgia Southern, winning multiple national titles. Johnson then made Navy the powerhouse of the service academies, repeatedly embarrassing rival Army in their annual showdown. Sure, conventional wisdom held, the spread option can work at lower levels of college football, but big-time college defenses are too fast, defensive foot speed being, supposedly, krytonite to the spread option. Georgia Tech, at the end of its first year running the spread option, ran up obscene rushing yard totals against fast defenses from the ACC's Miami Hurricanes and the SEC's Georgia Bulldogs.
It is embarrassing for a defense to have a quarterback throw for 400 yards against it. Such an event does not call a team's toughness into question the way giving up 300 rushing yards can. Passing yards are gained by trash-talking gazelles at the expense of trash-talking cheetahs; few true football lovers get excited about the success or failure of these glib speedsters. Lineman are the foundation of the game of football. Linebackers and running backs are true exemplars of the game--tough, tight-lipped gladiators who dish out and absorb the most of the game's punishment. No aerial circus trumps running the football well.
Paul Johnson's spread option is difficult to defense because it threatens the entire field on every play. Superstar defenders are used to having latitude to be instinctual in making plays. The spread option forces discipline on every defender; load up to stop one type of play or get sloppy about assigned responsibilities and the spread option will exploit it. We usually associate the "big play" with the passing game, the long bomb being its most dramatic form. The spread option gives a "big play" running game. Up the middle or around the end, any play can go all the way. Paul Johnson proved that the spread option is a viable big-time college offense this year. Since it is so explosive and no one else is running it, opposing coaches have a difficult time preparing for it in one week. The spread option is the ultimate contrarian offense, this is, until the single wing makes its comeback.
It seems Tommy Tuberville, like a wayward teenager, lost his job because he chose to run an offense just because everyone else was running it when perhaps a more contrarian play would have better served.