Current economic/market events - a view from the playing field

[trysail]

...Speaking of the S&L boondoggle, we're stillpicking up the tab on that one...

Clearly, nothing has changed.

People have forgotten (or choose not to remember) that S&Ls were an invention of government and politicians (you could look it up!). They were absolutely and irrevocably doomed the minute Regulation Q (Reg Q permitted the setting of interest rates by the government) was revoked.

When inflation was running at 15-odd percent and the prime rate hit 20% in 1979-80, folks were not greatly interested in receiving the Regulation Q-mandated 3% on their passbook savings accounts.

They pulled their deposits out of the S&Ls as if there was a run on the bank.

_________________________________


(Fair Use Excerpt)
Subprime Devastation Retraces Path of S&L Crisis in U.S. States
By Jonathan Keehner and Bob Ivry

The $700 billion bailout of Wall Street's subprime-tainted securities harkens back to the real- estate bets that sparked the savings and loan crisis in the 1980s. The geography's the same, too.

Then, as now, the government created a taxpayer-funded enterprise to absorb the fallout from bad real-estate investments. A Bloomberg map of the hardest-hit areas shows that, with the exception of Nevada, regions with the highest foreclosure rates also had the most savings-and-loan failures, according to the Federal Deposit Insurance Corp.

The overlap shows that the aggressive lending and speculation that ignited the savings-and-loan meltdown persisted, at least in those areas, according to Paul E. Johnson, who was mayor of Phoenix from 1990 to 1994.

``From where I sit, the areas that were hit by the S&L crisis and those struggling with subprime look pretty much the same,'' said Johnson, now president of Southwest Next Capital Management, a real estate investment fund based in Arizona...

Texas, where failed thrifts in the Dallas and Houston areas had assets of more than $45 billion in the 1980s and 1990s, has largely sidestepped the subprime crisis...

Granted, home prices in Texas didn't rise as high as those in California, Arizona and Florida, according to the S&P/Case- Shiller Home Price Index.

Los Angeles, Phoenix and Miami home prices doubled from 2002 to 2006 and have slipped by about one-third since, according to the S&P Case-Shiller Home Price Index. Home prices in Dallas rose 12 percent from 2003 to 2007 and have dropped 3.2 percent since then, according to the Case-Shiller index.

``Deterioration of property values in other states is the result of the run-up,'' Foster said. ``We didn't have the run- up.''

California, by contrast, was hit hard by both financial meltdowns. Failed thrifts based in the regions of Santa Barbara, Ventura, Los Angeles, Orange County, San Diego and Stockton had combined assets of more than $95 billion in the 1980s and 1990s.

Now, the state is home to all five of the top metropolitan areas for foreclosures, according to RealtyTrac Inc., a real estate database in Irvine, California.

California, Arizona and Florida rank second, third and fourth by percentage of households in the foreclosure process, behind Nevada, RealtyTrac said.

Borrowers with subprime mortgages fell behind on their monthly payments at a rate more than four times that of prime borrowers, according to the Washington-based Mortgage Bankers Association. Subprime home loans went to people with bad or incomplete credit histories...

 

[Selena_Kitt]

None of this is true, in my view. Suspending mark to market would just make us more suspicious of these banks' balance sheets and more paranoid about who's likely to go bust, who's likely to default on a loan, and who's hiding the biggest problems. None of things and going to make people more willing to lend, nor is having fantasy capital to lend against better than having not enough capital to lend against. Plus, hiding the dirty laundry by not forcing firms to disclose it just opens up the field to the short-sellers and rumour mongers. Why would anyone want legislation that conceals truth from investors and lenders? The only people who really want this are the ones who know they're likely to go bankrupt and the only people who support it are fantasists - specifically, fantasists who aren't in the lending business.

Easing capital requirements would essentially guarantee that a greater number of debtors will be inconvenienced, if not destroyed, by bank failures: why would you want to increase the number of borrowers from a failing bank?

Best,
H

Oh. That makes sense.

 

[trysail]

I'm going to be a bit picky Try. These toxic mortgages cannot perhaps be valued now but it is fair to say they have a value which may be determined in the future, albeit with difficulty.

For my sins I know a fair bit about insurance company accounts particularly the ones dealing with long tail liabilities. Casualty insurers particularly Professional indemnity and third party insurers produce accounts every year which historical analyses will normally show to be spectacularly wrong - because the asset/liability valuations over time are proved to be wrong.

Taken over ten years or more the results are much more reliable but we have to acknowledge that in many large businesses the valuation of assets/liabilities on an annual basis is a very inexact science. But that doesn't mean that volatility necessarily must always be discounted to zero. It's difficult.

ish,
Ain't nuffin' wrong with bein' picky.

I am one of those folk who prefer conservative accounting and managers who, when given a choice, adopt the most conservative treatment. I recognize that the accounting rules mandate valuation, but I am not alone in witnessing managers with very perverse incentives take advantage of the rules to produce "mark-to-myth" valuations absent market prices.

In your second paragraph above, it's not clear to me whether you were referring to insurance company reserving and loss development tables or securities valuations or retroactive policies or reinsurance so my response may not be "on point." The P&C business just might be the world's most fertile ground for persons with a tendency to larceny and fraud. God knows, we've seen enough examples of intentional under-reserving and misstatement of reserves over the years ( I am more forgiving of managers who were blindsided by the asbestos tort scam and similar rackets invented by the tort felons ). Can you say Saul Steinberg? If ever there were a field where the character and integrity of management is of paramount importance— it's the P&C business. Would it surprise you to know that there's only one P&C-related company I'm willing to invest in (and I'll bet you can guess which one!)

I wholeheartedly agree with your description of insurance reserves/liabilities as "a very inexact science." It isn't, never was and never will be an exact science— just as "intrinsic value" is preordained to be fuzzy— and is accepted as such. However, as both an investor and analyst, I am always predisposed toward those who consistently choose the most conservative accounting and valuation interpretations, assumptions and treatments. It's consistent with the notion of: "Underpromise and outperform." I can't help but throw out a memorable comment once made of the insurance field: "It's the only business where, when you sell the product, you don't know what the cost of goods sold is."

I don't disagree with the idea that some of these toxic mortgages are worth more than "zero," in fact, given the current hysteria and panic afoot I suspect that the pendulum of common knowledge (a/k/a Ben Graham's "voting machine") may well have swung too far in one direction— and I have some dough at risk that reflects that sense. Nonetheless, at this stage, the world's "from Missouri" and "see'n's believin' ."

Cheers!

 

[Handprints]

Meanwhile, if things don't stabilize here soon, isn't there a good chance that the US will lose it's pride of place as the world's financial center? Everyone's looking to Washington for leadership and they're not seeing anything.

I think the answer to the first question is probably not: there's an old market saying that liquidity tends to attract liquidity. Places like London, New York, and Tokyo are going to remain global heavyweights for a while yet. You can argue - and indeed such figures as the current and last heads of the NYSE and Nasdaq have argued - that the US is losing/has lost its lead for a number of financial services with little negative effect that I can see other than opportunity costs.

Paulson and Bernanke may get a little more respect abroad than they do at home, perhaps because we're more inclined than many Americans to see their jobs as being made much, much harder by the fact that your president isn't credible on economic matters. It doesn't add weight to their plans, if you like, when Bush supports them.

Best,
H

 

[Handprints]

I'm going to be a bit picky Try. These toxic mortgages cannot perhaps be valued now but it is fair to say they have a value which may be determined in the future, albeit with difficulty.

For my sins I know a fair bit about insurance company accounts particularly the ones dealing with long tail liabilities.

Valuing these derivatives is maybe best thought of as a different category of problem than determining the number to assign to long tail liabilities. In the latter case, you can determine a range of probabilities for the value that narrows over time (a long time, I agree) until the final value emerges retrospectively.

With derivatives of mortgage pooled assets, you can only do the first bit. Time doesn't narrow the range. Less concisely, the value of an instrument whose value is derived from a future stream of mortgage payments cannot be valued in the same way as one whose value is derived from a bond, simply because the mortgage holder can redeem at any time with no penalty. No valuation model has been devised that can cope with that little twist on the repayment stream. Their value can only be known retrospectively.

As Trysail notes, if you can't value it, it should go on the balance sheet as valueless. That's the fundamental perspective and I respect it. I work in fields where fundamental analysis isn't possible so I'm maybe more predisposed to accept probabilistic valuations than he is. I don't accept that these things can be valued and I've never even seen academic approach which suggest it might be possible to value them.

Hope that's of use,
H

 

[Handprints]

So, Prints, you're skeptical of the Paulson doctrine?

I can't open that link, I'm afraid. I'm perhaps a little more skeptical about the US approach to restoring liquidity than I am about the European one. However, it appears that a number of Treasury types have spent the past 24 hours floating around the idea that some of that USD700bn might be used to buy strategic stakes in US banks, adopting parts of the European approach.

That's helpful, in my view, but I have to wonder if the US government - particularly under a McCain administration - would really stand up for the banks it invests in if they come under attack. I think - and I'm not suggesting it's a well-informed view - that the republicans are just too averse to state intervention to do more than give the investee banks lip service.

Of course, if I'm making any sense of McCain's new plan (didn't he just wreck one plan, then vote for it a week later?) he wants to try an even less direct approach to the problem than Paulson does. Bluntly, the farther away you ae from directly recapitalising the banks, the more doubt I have about your plan's success.

Hope that's of interest,
H

 

[Handprints]

Thus, my question remains a rhetorical one, in a sense, how can you dismiss the moral and ethical aspects of an economic system as you strive to offer solutions and/or explanations to events as they occur?

The entire history of the world has been a partially successful attempt to find and define human individual freedom and then to enjoy the benefits; yet the impetus seems always, at least on this forum, to gleefully offer to give it up for the safety and security of a 'guaranteed' lifestyle.

It does make one wonder.

Amicus...

Ami, your right to a Randian perspective is one I'm happy to grant. But, like a great many other capitalists, I'm unwilling to see capitalism as a moral system, simply because I can't understand why a moral system should reward pure dumb luck as often and enthusiastically as it does any other "virtuous" behaviour.

On your second point, the best analogy I can offer is this: sure, you've got an unalloyed right to refuse a fireman access to your property. If your house is burning, doesn't the exercise of that right make you an idiot?

Best,
H

 

[ishtat]

Valuing these derivatives is maybe best thought of as a different category of problem than determining the number to assign to long tail liabilities. In the latter case, you can determine a range of probabilities for the value that narrows over time (a long time, I agree) until the final value emerges retrospectively.

Hope that's of use,
H

I cannot comment with any knowledge on Derivatives but the fact that ordinary long tail liabilities will fall within a range is true. Unfortunately as often as not the actuarial assessment of the maxima of the whole range in the early years of books of long tail contracts has proved all too frequently to be wrong, hopelessly wrong, thus illustrating that in hindsight the published accounts for these entities are often pretty meaningless.

Considering the even greater difficulty of valuing Derivatives as assets I would respectfully like to decline the business of auditors to the Banks that deal in them. I'd be scared to death. I would also like to be excused the role of Professional Indemnity insurer to the auditors.

Thanks.

 

[rgraham666]

Ami, your right to a Randian perspective is one I'm happy to grant. But, like a great many other capitalists, I'm unwilling to see capitalism as a moral system, simply because I can't understand why a moral system should reward pure dumb luck as often and enthusiastically as it does any other "virtuous" behaviour.

On your second point, the best analogy I can offer is this: sure, you've got an unalloyed right to refuse a fireman access to your property. If your house is burning, doesn't the exercise of that right make you an idiot?

Best,
H

God! I'm not alone!

 

[trysail]

FYI
_____________________
(Fair Use Excerpt)
Don't Write Mark-to-Market's Obituary Just Yet
Commentary by Jonathan Weil

Oct. 9 (Bloomberg) -- Banks can ignore the market's message all they want. They can't make investors believe them.

Contrary to many news reports, the Securities and Exchange Commission and the Financial Accounting Standards Board did not loosen the rules for fair-value accounting when they released new guidance on the subject on Sept. 30. Assets that had to be ``marked to market'' before still must be valued that way today. And the methods for doing so haven't changed...

Were the SEC to suspend the fair-value accounting rules, as many banks and lawmakers have pleaded, investors would distrust corporate financial statements even more than they do already. It also would exacerbate banks' capital problems. When investors don't believe companies' numbers, they flee, making capital- raising more difficult.

The reaction to last week's joint SEC-FASB guidance was much like the one in March when the SEC staff sent a similar letter to financial executives explaining the ins-and-outs of the board's fair-value standards.

Just like last time, banks cheered when told that companies need not mark their holdings based on forced liquidation sales, although that was in the rules already. Theories emerged that the SEC was giving a wink to managers looking to avoid writedowns.

Press accounts claimed the Sept. 30 guidance gave companies more leeway, as if they didn't have lots already. The Mortgage Bankers Association said the clarification ``should allow firms to write affected assets back up to their intrinsic values.'' Loosely translated, intrinsic value is what a banker hopes his company's assets will be worth someday, not what they are now. [ Trysail note: the author is exercising more than a little literary license— this is not even close to the widely understood notion of "intrinsic value." ]

Actually, the SEC and FASB merely explained what the rules are. They reminded managers that measuring fair values may involve lots of judgment for balance-sheet items that don't trade in active markets. Where broker quotes aren't credible, companies can look to their own data and projections about things like future cash flows to form estimates. And there's no hard-and-fast rule for deciding if a loss on a given security is only ``temporary,'' in which case a writedown might be avoided.

Indeed, every line in last week's tutorial came straight from generally accepted accounting principles. That includes the oft-demonized FASB Statement No. 157, under which companies must disclose details about the reliability of their fair-value measurements.

``This isn't some wink-and-nod document that says somehow you don't have to follow GAAP, or you suspend recording losses,'' James Kroeker, the SEC's deputy chief accountant, told me. The FASB's chairman, Bob Herz, said the Sept. 30 statement didn't change GAAP. Rather, it provided ``helpful guidance in applying GAAP in the current situation.''

That may surprise some executives who had lobbied for a break and thought they'd gotten one. If they're still holding out hope, they should review a separate explainer the FASB released last week. In that document, the board reminded companies that liquidity risk, among other things, must be built into their valuation models.

So estimating the value for something like a toxic mortgage-backed security won't be as simple as imagining future cash flows and calculating their present value using some miniscule discount rate. Introducing liquidity risk into the equation when markets are frozen could be a killer, even with rosy cash projections.

That's a far cry from the mortgage bankers' spin that the new guidance provides an easy way to write up asset values. The audit firms are sure to have tough fights with clients soon.

Critics of fair-value accounting say it drives needless investor panic. Writedowns beget stock-market losses that trigger more writedowns, and so on, they complain. That is the reality of what's going on, though.

[Trysail emphasis added] Mark-to-market accounting didn't force global banks to lever up during the credit bubble. It didn't make executives outsource their brains to AAA-happy credit-rating companies. Nor did accounting rules compel AIG to sell hundreds of billions of dollars of credit-default swaps and agree to post untold billions of cash collateral if the swaps' value soared.

Politicians may kill fair-value accounting yet. You could reduce their argument to a bumper-sticker slogan: ``I wouldn't have cancer, if my doctor hadn't told me.''

The rules are here to stay, for now...

 

[JAMESBJOHNSON]

No, ROB, you really are alone.

TRYSAIL

No engineer will ever get away with the nonsense accountants pull every day.

If a developer comes to me wanting 10 pounds of shit in a 9 pound bag, I tell him 'No way!' Because I understand the physics beneath the interaction of shit & bag. In 1980 I saw a building collapse into a huge pile when the 10 pounds of shit overwhelmed the 9 pounds of supports.

But a CEO can go to his accountant, wanting to stretch one dollar into a million, and the accountant sez, 'No problem!'

Too much of accepted accounting practices are legal fiction.

 

[xssve]

Ami, your right to a Randian perspective is one I'm happy to grant. But, like a great many other capitalists, I'm unwilling to see capitalism as a moral system, simply because I can't understand why a moral system should reward pure dumb luck as often and enthusiastically as it does any other "virtuous" behaviour.

On your second point, the best analogy I can offer is this: sure, you've got an unalloyed right to refuse a fireman access to your property. If your house is burning, doesn't the exercise of that right make you an idiot?

Best,
H

Well it was concieved as a moral system, by a moral philosopher - the problem is randists like Ami that confuse "free market" with "unregulated market" - because no, it isn't supposed to make everybody nicer and better behaved, it's supposed to provide incentives for driving prices down and quality up through competition, and that incentive is what creates the public benefit, and regulations, much like the bill of rights, are to protect the innocent.

When what regulations there are tend to reward gaming and discourage fair competition, guess what happens? Guess what happens when there are no effective regulations? Can you say Melamine? Insider trading?

The worst part is, you get no rational public debate on regulatory policy when you can't even agree that regulations are necessary - are laws necessary? i.e., what is good or bad about a given regulation, and why it is necessary or isn't - these things are left to PAC's and that generally means whoever spends the most money get's what they want - even good regulations end getting twisted and backdoored in commitee. Typically, this is defended as "free speech" by the right - you all need to go find a dictionary and look up the word free, you keep using that word and I do not think it means what you think it means...

Now guess what happens when you get a bunch like the neocon/Bush Texas cabal that specialize in value subtracted economics and you give them a free hand?

Oh wait, you don't have to guess.

 

[xssve]

I can't open that link, I'm afraid. I'm perhaps a little more skeptical about the US approach to restoring liquidity than I am about the European one. However, it appears that a number of Treasury types have spent the past 24 hours floating around the idea that some of that USD700bn might be used to buy strategic stakes in US banks, adopting parts of the European approach.

That's helpful, in my view, but I have to wonder if the US government - particularly under a McCain administration - would really stand up for the banks it invests in if they come under attack. I think - and I'm not suggesting it's a well-informed view - that the republicans are just too averse to state intervention to do more than give the investee banks lip service.

Of course, if I'm making any sense of McCain's new plan (didn't he just wreck one plan, then vote for it a week later?) he wants to try an even less direct approach to the problem than Paulson does. Bluntly, the farther away you ae from directly recapitalising the banks, the more doubt I have about your plan's success.

Hope that's of interest,
H

Site seems to be down, no matter, a lot of stuff you probably already know, but I like this guy, he seems to be on top of things for the most part, not self deluded at least.

It is interesting to me that Bernanke was already injecting capital into the system in May, and is even going so far as to print more money - a huge departure from monetarist policy, which seem to have reached the point of diminishing returns as a panacea - you can't go below zero - and wasn't it the uncommonly low interest rates that provided the "perverse incentives" to begin with?

The whole think has been teetering for the past Three years or more, it looks to me a lot like the whole country has gone to death spiral financing.

All the pubs have done is create a shaky bond market to service all that debt, we've made no progress in alternative energies, distributed grid, fuel efficient vehicles, biotech, etc., etc., all areas that should be multiplying in terms of investment opportunities, all with huge global makets of waiting demand.

Meanwhile the debt itself is a substantial drain on liquidity, due to it's crowding out effect.

 

[JAMESBJOHNSON]

XSSVE

The problem with the whole fucking mess is no one has the balls to point fingers at the thieves and charlatans. Because no one wants a size 13EE lawyer shoved up their ass.

The Folks dont get all the arcane bullshit that the money guys know, but the Folks do get it when a government official goes on tv and calls the CEO of ABC Corporation a thieving rat-bastard.

 

[trysail]

But a CEO can go to his accountant, wanting to stretch one dollar into a million, and the accountant sez, 'No problem!'

Too much of accepted accounting practices are legal fiction.

Which is exactly and precisely why a competent financial analyst devotes his attention to cash flow, balance sheets and leverage.

You are guilty of wild exaggeration and egregious oversimplification with respect to accountancy; yes, there are rotten apples— but nowhere near the extent you seem to believe. The vast majority of accountants confront managers for simple reasons of self-preservation— they have absolutely no desire to suffer the fate of Arthur Anderson and the partners thereof. Their situation is no different than that of the airplane pilot with the following message taped on his cockpit controls: "Remember, dummy— this end hits first!"

To wit:

...I would respectfully like to decline the business of auditors to the Banks that deal in them. I'd be scared to death. I would also like to be excused the role of Professional Indemnity insurer to the auditors. ...Thanks.

 

[BlackShanglan]

God! I'm not alone!

It's nice to see, isn't it?

 

[rgraham666]

It's nice to see, isn't it?

Yes. I get tired of saying "Capitalism is just a tool and tools have no ethics" and having people hide the sharp objects.

 

[BlackShanglan]

Yes. I get tired of saying "Capitalism is just a tool and tools have no ethics" and having people hide the sharp objects.

I've tried to shed some of my youthful naivete and not look too shocked when I object to something on moral or ethical grounds and receive only the puzzled response of, "But ... it's in my/your/our financial interest." Honestly puzzled and confused.

 

[JAMESBJOHNSON]

TRYSAIL

Look around you. Buildings arent collapsing unless Ragheads fly large aircraft into them or you have severe earthquakes....or the engineer is incompetent. And engineers have as many dynamic forces to consider as accountants do. Wind, heat, cold, hydraulic pressure, seismic activity, material fatigue, etc. But bridges across the planet dont simultaneously collapse.

And when a bridge collapses, engineers learn from their errors. Accountants didnt learn a goddamned thing from 1929.

Let me say it another way: Politicians cant play with the forces of Nature like they do with the rules that apply to accounting. An engineer is stuck with 2 +2=4; accountants get shit like 2+2 x hope + confidence = joy

 

[trysail]

While it may not be immediately apparent to those untrained in economics, capitalism and free markets are as much a part of the natural order of the universe as supernovae, daisies, galaxies, evolution, elephants and ants.

To the extent that there is a moral justification for free market capitalism it is this: in the long run, it efficiently allocates scarce resources.

That may not be evident at the moment, but it is true.
_______________________________

"The economy of man was Charles Darwin's inspiration for his theory of natural selection. Darwin wrote,

I happened to read... Malthus on Population, and being well prepared to appreciate the struggle for existence which everywhere goes on from long continued observation of... animals and plants, it at once struck me that under these circumstances favorable variations would tend to be preserved and unfavorable ones to be destroyed. The result of this would be the formation of new species.​

Darwin went on to conclude that organisms vary randomly, with natural selection simply favoring the variations which happen to be well suited to an organism's local environment.

The most common use of the idea of evolution is to regard man as the product of evolutionary forces which impel organisms from lower to higher states of existence; with man at the top. This view is not quite right. Darwin and other evolutionists correctly perceived that evolution has no preordained direction, that, in the words of Stephen Jay Gould, 'the degeneracy of a parasite is as perfect as the gait of a gazelle.' Man, then, is not necessarily better than other creatures. But organisms have undeniably evolved from less complex to more complex forms. Man, who is a physical, emotional, intellectual, and economic animal, is perhaps the most complex creature of all.

SQUIRRELS, ANTS, AND ECONOMIC GROWTH
Our instincts tell us that man's development of an economy may be an evolutionary adaptation, a variation which adapts well to his environment. Let us look at this idea in the context of production, consumption, saving, and investment— the fundamental components of economy.

Squirrels hoard. Knowing that they must have food in the winter, they willingly forego present (certain) consumption in exchange for future consumption which is also more or less certain. Within an individual squirrel's lifetime, the animal makes numerous trades between the present and the future.

Yet squirrels do not build wealth over time. The offspring of particularly industrious squirrels do not find their lives made richer by their parents' past efforts; squirrels as a species are not better off than they were a hundred years ago. Clearly, hoarding or storage (the exchange of present for future consumption, both under certainty) is not a sufficient condition for building wealth. One might speculate that such riskless saving has a zero rate of expected return. Ibbotson and Sinquefield find precisely that: riskless investments earn a zero real rate of return on average over long time periods. They arrive at that conclusion not by studying squirrels, but by comparing U.S. Treasury bill returns with the inflation rate.

Ants (which incidentally are organically far less complex than squirrels) not only hoard but build structures (anthills) which may last longer than any individual ant. Thus, ants transfer wealth intergenerationally: young ants may find themselves born into a well-constructed anthill. Since an ant may not live to reap the fruit of his own labor, we regard ants as investors, not just hoarders. Like human investors, they trade present certain consumption for future uncertain consumption, and may defer consumption until after death. By investing, ants build wealth.

Yet, unlike that of humans, per capita ant wealth does not grow steadily over time, with each generation of ants better off than its predecessor. We have examined hoarding and risk-taking but we still have not uncovered a sufficient condition for secular economic growth.

The reader who is skeptical that economic growth occurs is at this point entitled to some hard evidence. This evidence is provided by the work of Sir Henry Phelps-Brown, who documents seven centuries of building wages, and Julian Simon, who records two hundred years of falling food prices for food and other resources. In medieval England, individuals sometimes sold themselves into slavery in return for the provision of bread. This is certainly not the case today. Economic growth is a fact, and it appears to be the exclusive province of man.

Economic growth is made possible by the building of capital; in fact, some regard the two as synonymous. Capital takes many forms: human, physical, financial. The outstanding economic trend of recorded history is the increase in the stock of all these kinds of capital over time; both in aggregate and per capita. This growth has been made possible by the taking of risk.

At this point, it is obvious that there is a missing link in the logic. Ants take risk and their economies do not grow steadily over time; humans take risk and their economies do grow.

The link has to do with man's ability to influence outcomes. This ability is the evolutionary adaptation which makes man far more of an economic animal than the squirrel or the ant. Humans can influence outcomes in three ways. First, man can identify good and bad uses for capital, and select the good ones; and secondly, man can change the enviroment in a way favorable to the desired outcome. Third and most importantly, man can change himself. Although man may not be strictly unique in any of these three attributes, he is unique in possessing all three in combination and to the degree in which he has them.

Why, then, do human economies have secular growth while ant economies do not? The reason is that ants most probably multiply in a Malthusian fashion, expanding their population to consume any attained economic growth, while humans sometimes react to growth by limiting their population. Thus, humans have the mechanism for pushing up the per capita store of wealth over time. These abilities— to influence outcomes and to change oneself— explain why the taking of risk is rewarded in human activity. What remains to be seen is whether humans can sustain their non-Malthusian behavior over the very long term, or if over-population or nuclear weapons will eventually limit our growth.

The question, why is risk rewarded, is not trivial. Ibbotson and Sinquefield amply demonstrate that rewards go to risk-takers. They not exactly say why, but suggest that people perceive risk as bad, all other things equal, and that they demand to be paid for taking risk— the exchange of certain for uncertain outcomes— does not in itself produce any wealth, nor is there a natural law stating that risk ought to be rewarded. People, moreover, demand many things which they do not get. (For example, most people would demand to be paid for jumping into a frozen lake. Since there are no payers, the Polar Bear Club has a small membership.) So, we must conclude that there are payers for risk, or else a market for risk would not exist. This conclusion, incidentally, points out the fact that the traditional capital asset pricing model is a demand side model and take no account of the supply of risk.

Who are the payers? They are people who believe that they can identify and select good uses of capital; or affect the environment or themselves in ways favorable to the growth of capital. These payers constitute the supply of risk, the demand for risk capital. The existence of people who can transform risky sacrifices into rewarding outcomes (and that includes all of us at some level) is one of man's unique evolutionary adaptations, the adaptation which explains his apparent singular ability to build wealth through investment..."

Laurence B. Siegel,
Foreword to Stocks, Bonds, Bills, and Inflation: The Past and The Future by Roger G. Ibbotson and Rex A. Sinquefield. Charlottesville, Virginia, 1982 Edition.


All right— I'm tired of typing and there are at least three more pages that address issues such as "Who Gets The Economic Growth" and "The Ant; The Grasshopper, and the Tax Code" but I've got other things to do and, while some of you may find it hard to believe, I do have a life. If I get a chance, I'll transcribe the rest later.

 

[xssve]

Let me say it another way: Politicians cant play with the forces of Nature like they do with the rules that apply to accounting.

Glad you brought that up - if you recall, following on the heels of the crash of '29, agricultural overproduction and soil exhaustion turned a cyclical drought into an environmental catastrophe of National magnitude.

Of course, as The Cato Institute says:

Finally, many environmentalists contend that exploiting natural resources today is often an irreversible process that makes our overall resource stock less diverse and restricts the choices of future generations. It is fashionable in certain intellectual circles to go even further and argue, as does Richard Norgaard, an associate professor of energy and resources at the University of California at Berkeley, that future generations have as much right to today's environmental resources as we do, and that we have no right to decide whether or not they should inherit their share of those rights.

The concept of tangible rights to resources for those not yet even conceived is dubious to say the least. Under its logic, no generation has the right to use or draw-down the natural resource base given that another generation will always follow with their own claim on the resources in question. No resource rights will exist for any generation.

The Challenge of Sustainable Development Jerry Taylor

There ya have it, the "culture of life", fuck the unborn, gimme mine, lol.

Anybody want to start a pool on when and where the next big NWO neo-capitalist (managed corporate/industrial capitalism) shit will be taken?

I do have a good idea what it'll smell like.

 

[JAMESBJOHNSON]

TRYSAIL

Thats the whole point! Government-business preserves harmful traits in the market. Engineering cant get away with it.

 

[xssve]

This is certainly not the case today. Economic growth is a fact, and it appears to be the exclusive province of man.

You have heard to the laws of diminishing returns?

Growth is a phenomena, not a goal - how much better off are we than 100 years ago, or even 60 - assuming you aren't African or Native American of course.

The article makes exactly the same mistake that it corrects at the beginning, w/respect to Darwin, what the Catholics call logical positivism: that there is some higher peak to which we're always striving, some perfect abstraction made possible by the magical capital - guess what? We really only need what every other organism needs: Shelter, water, food, and a little nookie now and then - but we do need that, without it, the magical capital cannot do shit for you.

The rest is icing on the cake, and guess what else? It can always get "worse" instead of better.

Think about our cousins, the Chimps - they had it fucking made.

 

[JAMESBJOHNSON]

XSSVE

Youre missing the boat.

How to create wealth is no mystery. You take your wares to market and exchange them for something more valuable to you.

Lemme crystalize the problem for you.

Many years ago the guys where I worked gave another guy money to buy lunch for us from McDonalds. His task was to drive to McDonalds, place the order, and bring the food back to the office. We bought his lunch to compensate him.

So he left and didnt return until the next day.

At McDonalds he met a bitch, then took her to a restaurant, using our money to pay for their lunch.

What Bush did was say that this sort of stunt sucks, but its legal, then gave the guy the money he spent for lunch with the girl. Its no longer OUR money, its his, an maybe he'll loan it to us or maybe not. I forgot to add that the asshole owned the company we worked for, so we couldnt kick his ass.

 

[Handprints]

To the extent that there is a moral justification for free market capitalism it is this: in the long run, it efficiently allocates scarce resources.

I certainly believe in the weaker version of this: that it will allocate resources more efficiently, for some given value of efficiency that is defined in part by the time horizon deemed most important by the majority of the system's participants, if the concurrent political system lets it.

Best,
H