Thursday, September 25, 2008

The Smart Money Will Stay Bullish On America

So far, Main Street has shown a surprising amount of resiliency given the problems of Wall Street. Even if the economy eventually succumbs to recession, as now appears more likely, it will bounce back before long. It always has.

There have been plenty of crises in the past -- the stagflation and oil-price spikes of the 1970s, the savings and loan debacle and soaring trade and budget deficits of the 1980s, the popping of the dot-come bubble and the terrorist attacks in the early 2000s -- that led many observers to predict that the United States would soon go the way of Rome.

What the pessimists ignore is that the fundamentals of the U.S. economy remain strong. Indeed, the World Economic Forum has ranked the United States as the world's most competitive economy for the last two years. (The new survey comes out next month.) Its statistics show that per-capita gross domestic product in the U.S. consistently has grown faster than in other developed economies since 1980.

Given America's record of resiliency, it would be foolish to "short" our prospects based on recent turmoil. The smart money will stay "bullish on America," even if that was Merrill Lynch's slogan before its downfall.

~Max Boot in the LA Times

10 Comments:

At 9/25/2008 4:56 PM, Anonymous Anonymous said...

The "smart" money, like Don Luskin who's always pumping stocks on Kudlow and Co.

 
At 9/25/2008 5:11 PM, Anonymous Fred said...

The "smart" money, like Warren Buffett.

 
At 9/25/2008 5:22 PM, Blogger juandos said...

Warren Buffet = smart money?!?!

Unreal!

Can you say, "taxes"?

Just how smart is an idiot savant that babbles on about how we don't pay enough taxes?

 
At 9/25/2008 6:50 PM, Blogger the buggy professor said...

1) Agree wholeheartedly with you, Mark: the underlying strengths of the US economy are numerous and impressive: especially the US avant-garde lead in switching from an industrial economy to an information-based, knowledge-economy.

We are, according to a recent article by Robert Gordon of Northwestern and a British economist, the only economy in the world to have fully exploited the productive potential of the Internet.


.....

2) Besides the big breakthrough in upping our rate of productivity-growth after two decades of more or less stagnant growth after 1975 --- both in labor productivity and multifactor productivity (increased knowledge, whether embodied in new machines or better running of business firms) --- the US economy has outgrown all other industrial economies except, until recently, Ireland . . . a very poor country 25 years ago.

.

This reverses the usual theory of convergence catch-up growth.

On that theory, poorer countries capable of sustained economic growth --- due to the skills of their people and solid legal, political, business, and educational institutions--- will be able to grow faster than the rich lead county or countries on or near the technological frontier.

West Europe and Japan did converge on the US between 1950 and the end of the 1980s, only for that convergence to stop and then reverse itself.

So today, US per capita income is around $47,000, compared in purchasing power parity to Japan, Britain, Germany, France, and Italy (roughly, $33-35,000 each).

.

A country like China, and more recently India, is still engaged in sustained catch-up growth, but for how long?


……..

2) You and I also agree that rapid globalization, plus deregulation (for me, only in the industrial and non-financial sectors), has been a big boost to the breakthroughs in the revolutionary restructuring of our national economy.

And it is a testimony to the hard-work ethos and dedication of the American labor force --- which works longer hours and shows remarkable mobility and flexibility than the rest of the world (all brought all in comparative data) --- that this epochal transformation occurred so rapidly since the mid-1970s. The same sort of resilience, adaptability, hard-work, and willingness to take responsibility for oneself and family facilitated the American lead in the late 19th and early 20th century when we switched from an agrarian, farm-based society to an industrial and financial giant.

Those who knock the American average worker as whiners or “greedy and stupid”--- put so nicely by a regular poster here --- neither know the comparative data, nor the comparative history of industrial capitalism across the world, nor have lived abroad, I suppose, in other countries for a long time as I have.


………

3) Where we differ.
* It was and remains a mistake in my view to have deregulated our financial system, starting in the 1970s --- even if the deregulation, such as deregulating commissions for stock trading in that decade, then eliminating in the 1990s the Glass-Steagall ban that separated commercial and investment banking.
In the process, it’s true, competition in the stock market area increased after the 1970s: in particular, low-cost brokers such as Charles Schwab emerged, with thinner margins (as Barry Eichengreen recently demonstrated in a Vox article, himself favorable to those deregulations). Competition further increased when, in the 1990s, commercial banks could then move into the preserves of investment banks. So too did insurance companies of the likes of AIG. In the upshot, investment banks --- as Eichengreen showed --- could survive only by moving into novel areas of business, such as concocting and distributing complicated derivative securities.

A clear result: far greater leverage, the restrictions on which were relaxed (Eichengreen missed this point) by the SEC in 2004, for the 5 big investment banks and for AIG and others. Instead of a max limit of liabilities to assets of 12:1, they leapt to new heights of 25 or 30:1. And of course, three of these investment banks no longer exist, and AIG is now government-guaranteed half-toast.

*No point in elaborating on these concocted, half flim-flam new instruments that commercial banks (their investment affiliates), investment banks, insurance companies, hedge funds, brokerage firms, and independent mortgage brokers all engaged in. By 2004, huge leveraging had materialized in all our financial institutions. Equally worrying, the huge leverage rested not on effective credit-analysis of the borrowers or proper risk-management, but on assets like housing that, it was assumed, would continue to rise way into the future.

Anyway, why worry if the risk was now passed on in a Ponzi-like scheme to some other financial group in the form of sliced, diced, and repackaged assets/debts, until only, supposedly, some chump group at the end of the line was stuck with most.

* The tremendous risk-enveloped leveraging that marked all our financial institutions by 2005 and 2006 was accentuated further by allowing not just old institutions like investment banks to rack up double and triple their previous leverage-maximums, but not requiring insurance companies and hedge funds and independent brokers (who were they?) and investment banks to operate entirely beyond the limits of any regulatory agency.

Not that the SEC after 2005 --- when Cox took over from, Donaldson (his predecessor) who was driven out from his post by Republican Congressmen for actually wanting to enforced SEC regulatory rules --- would do anything to stop this orgy of sky-rocketing leverage and risk-taking. And certainly not the Greenspan-run Federal Reserve . . . Greenspan, a diehard devotee of that great economist, novelist, and philosopher, Ayn Rand, convinced that market institutions were perfectly able to regulate themselves.

* The financial system started imploding further because of a very relaxed interest rate policy carried out by the Greenspan Federal Reserve . . . with these interest rates kept that way two or three years after the 2001 recession ended. Then, too, as US national debt soared in this decade --- after the Clinton era not only ended our federal deficit spending but had three years of clear federal surpluses --- US Treasury securities and other financial assets (Fed and private) required more and more foreign investment, what with the consumption binge in the housing-market and other debt-driven purchases of cars, televisions, and anything else that a retail firm or credit-card company would fund.

And so we had more and more net dis-saving in the American economy during this decade --- just as we did in the Reagan era, with household savings fading or going through the cellar, and government (as in that era) landing itself with ever greater structural deficits. Somehow, ladies and gentlemen, tax cuts that favor the very affluent and wealthy just don’t seem to do for federal deficit-spending what they claim to do. And no, it isn’t increased defense spending that explains the problem. In the Reagan era, the defense-build up stopped in percentage of GDP-terms in 1986. In the Bush-W era, it accounts for only $800 billion of the new $3 trillion dollar increase in national debt.

* Add in something else, the enormous footloose capital flowing around the world as corrupt gangster regimes in oil-rich countries and a new neo-mercantilist giant country (China) either had no inclination to use their export-driven wealth for good internal development --- such as in China and Russia spending for infra-structure, housing, environmental policies, education, health, and the like --- or couldn’t as in the case of the tiny Persian Gulf countries absorb such wealth.

And of course, unprecedented US current account deficits --- a staggering amount in this decade (reaching 6.0 – 7.0% of GDP yearly!!!) --- meant that these neo-mercantilist and gangster-regimes would plow the $US largely back into US financial markets. In the Chinese case, there was the added incentive to plow all the dollars back in order to keep the Yen-dollar exchange ratio from leading to, first, any pressure to revalue the Chinese Yen upward, and later --- with some relaxation --- to prevent the appreciating Yen to rise toward anything like an equilibrium model. (When a country growing 7-10% a year forces, in effect, its population to save 50% of its income, we are in almost as strange a world as when the heads of the 24 top hedge-funds in the US earned more together than the collective income of the top 500 Fortune-500 companies!)

....

4) Further differences.

No need to detail these. I’ve mentioned them before in my lengthy posts here, for which latitude, Mark, I’m grateful (and have tried to reciprocate by asking my own buggyprofessor.org visitors, 6000 a day or so when I last looked a couple of years ago, by touting them to visit your site)

The long and the short of these other differences --- which emerged in public opinion even before the current financial crisis --- is that 80% of Americans believe we are in a “very bad” or “fairly bad” economy. And frankly, I wouldn’t be surprised if new surveys show that the percentage is over 90%. Along with the sentiments that the country has been on the wrong track in the Bush-W era --- the president, well-known for his contemptuous attitude toward regulation of the business and financial world when he came to office --- we are now in the recurring drama of a mass populist rebellion against the financial, big-business, and political elites . . . all seen as catering to one another.

.........

5) It’s a repeated surge of political backlash driven by a sense that the economy is in the hands of manipulators and con-artists who have created a system that is operating unfairly. John McCain, if anything, has even transfigured himself more than Obama into the garb of Populist Pete, the defender of Main Street against the demons on Wall Street and in Washington D.C. Shades of the Whiskey Rebellion of the 1790s, the Jacksonian era of the 1830s, the Populist agrarian rebellion of the late 19th century, the Progressive and Muckraking era of the early 20th century, and the FDR regulatory revolution.


……

Michael Gordon, AKA, the buggy professor

 
At 9/25/2008 6:58 PM, Blogger the buggy professor said...

"Just how smart is an idiot savant that babbles on about how we don't pay enough taxes?"--- Juandos

Well, Juandos, when you're able to show us that you're capable of acquiring over $32 billion in your financial investments, we will regard you as the greatest idiot-savant of all time.

And this idiot-savant --- who warned us about investment in the new-fangled derivative markets of the early part of this decade (just as he avoided the dot.com frenzy of the previous decade) --- has decided to give virtually all that fortune to the Gates Charity. Presumably, he isn't just an idiot, he is on your view of human nature maybe the village-idiot.

......

And oh, this village-idiot is opposed to leaving his children and posterity any large fortune, believes that the US has dangerously let itself become vulnerable to gangster oil-rich regimes like Russia, Iran, and the Wahhabi-fanatical Saudi Arabia --- not to mention the neo-mercantilist Chinese CP --- just as that other idiot-savant, T. Boone Pickers has warned against.

And this village-idiot has decided to purchase $5 billion worth of preferred stock in Goldman, with warrant for another $5 billion.

If you have a better financial tip for us, please let us know.

......

Please note though. Like others, no doubt, I do warm up to your punk-ciggy pose as pictured in your posts.

...

Michael (the buggy guy)

......

 
At 9/25/2008 9:27 PM, Blogger the buggy professor said...

Big boo-boo error in one sentence in my first post here:

It reads. with the mangled howler in italics:

* The tremendous risk-enveloped leveraging that marked all our financial institutions by 2005 and 2006 was accentuated further by allowing not just old institutions like investment banks to rack up double and triple their previous leverage-maximums, but not requiring insurance companies and hedge funds and independent brokers (who were they?) and investment banks to operate entirely beyond the limits of any regulatory agency."

Please substitute: "by letting" for the italics.

....

Michael Gordon

 
At 9/26/2008 9:54 AM, Anonymous RebelRenegade said...

juandos just got pwned by buggy professor

 
At 9/26/2008 1:13 PM, Blogger Marko said...

You mean you actually read those things??

 
At 9/26/2008 6:01 PM, Blogger juandos said...

"Well, Juandos, when you're able to show us that you're capable of acquiring over $32 billion in your financial investments, we will regard you as the greatest idiot-savant of all time"...

Hmmm, how do you know what I have or don't have BP? Is this one of those socialist leaps of logic I've seen you toss out here lately? Just asking...

" has decided to give virtually all that fortune to the Gates Charity."...

So BP you think this is a good thing to waste all that money?

Its Warren 'we don't pay enough taxes' Buffet's money so he can do with it what he wants...

Funny how that silly geezer didn't bother to give it to the IRS...

"And oh, this village-idiot is opposed to leaving his children and posterity any large fortune, believes that the US has dangerously let itself become vulnerable to gangster oil-rich regimes like Russia, Iran, and the Wahhabi-fanatical Saudi Arabia"....

Did you take time to thank your friends in the Seiditous & Sleazy for their collective efforts to make sure that we didn't drill domestically?

Yet those same fine folks did offer up this bit of delusional lunacy...

Thanks for pwning yourself BP...

 
At 10/05/2008 5:36 PM, Anonymous Anonymous said...

I'm still trying to figure out if "smart money" is really "smart." When Buffet strikes deals with GE and Goldman Sachs for special stocks with BIG dividends, doesn't that come at the expense of existing shareholders like retires, pension funds, and common 401K investors ? In his dealings with Constellation Energy, do you think he plans to keep the planned French nuclear designs or will he switch to GE ? He says he doesn't understand credit derivatives and stays away from them, but proceeds with an investment in Goldman Sachs. Are we to believe GS has avoided CDS, MBS, ABS, etc. ? Think about it.

 

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