A Nameless Blog

Warning: the following post is extremely long.  I hope you brought your attention span.

I’m sure you all remember that fateful day when Jim Cramer appeared on The Daily Show to get reamed by Jon Stewart.  A day later, I emailed my buddy Dave to see what he thought of it.  My thinking: he’s my only friend with a degree in economics, so I should probably trust his opinion better than those who host talk shows on basic cable.  What followed was a largely one-sided discussion about economics that helped ease my doubts and answer my questions.

Why am I posting this now and not, say, four weeks ago?  You see, this blog has a policy of reacting to news after most people have forgotten about it.  I think we should be able to step back from events in order to put them in proper perspective.  A little distance is necessary for sober analysis; let the rest of the media clutter our thoughts with half-cocked hokum.

(You see that paragraph up there?  In just a few sentences, I deflected my obvious laziness, inflated my wisdom, AND proclaimed myself a member of the media.  That’s some fuckin’ writing — somebody call the Peabody people.)

Of course, this four-paragraph introduction is only here to distract you from what will soon become obvious: that Dave is the only one with fully formed opinions.  So enjoy the following, which is our email conversation from that fateful day.  I’ve edited it a bit to make it more blog-friendly, but these emails are completely and totally real.

Hey Dave-o,

By chance, did you see Jim Cramer get his ass reamed on the Daily Show?  I’m wondering what your perspective is on the issue — are Jon Stewart’s points right?  As a layman listening to another layman, it sounds pretty good, but I can’t be sure.  What’s your take?  If you haven’t seen it, go to thedailyshow.com and watch the whole thing.

-Darrell

Darrell!  Hey busta – long time no talksola!  I’m flattered you’d think of your good ol’ buddy Mr. Dave!

I just got home from work, and I watched the whole thang:

Jon Stewart has this special ability to make a bunch of unrelated points seem related.  When he wants to make it look like he’s winning an argument, he counters good responses from his guests with entirely different points…

I’m trying to figure out the shortest way to summarize my opinions on that episode, and I think it’s this:  The popular understanding of our recent financial problems is largely wrong, and Jon Stewart epitomizes popular understanding.  Know what I mean?

Worse, Jon Stewart likes to blame the supply side for demand side problems.  You can’t fault CNBC or Jim Cramer for selling useless (and very expensive and risky!) crap to stupid (self-selected higher income) people.  If we are going to start blaming corporations for “mostly-false” advertising (or programming), there are far better targets with far poorer victims, ya know?

He apparently thinks CNBC should take its more subtle commentaries (which do indeed exist on the channel) and make it the headlines:  “This just in!  We’re not entirely sure if the DOW will rise today, but a survey of 712 finance professionals concludes an implied probability of 57% that it will indeed go up.  More breaking news: A recent survey of 10 labor economists suggest the S&P might in fact go down over the next 3 months due to mean wages rising at an abnormal rate.  Though a large interview we conducted with 4,000 behavioral psychologists suggests these labor economists might be biased in their weighting of labor statistics in the matter…  Anyways, maybe you should buy some stocks today!  But maybe not!!  Stay tuned for more inconclusive data in commodities!!”

Sorry, email rant.  Can’t help it.

Anyways, I’m curious to know which specific points Jon Stewart had that you caught your attention.  I was actually going to ask before I started writing this email, but I figured I could tackle it more generally…  And now here I am, at the end of the email, realizing I should have gone an entirely different direction.

Oh well.  Shoutbackatcherboiee, biatch!

- D-hole

I agree with your general points: buyer beware, CNBC is selling/advertising financial advice to people who shouldn’t be listening to them (and NOBODY should listen to any one source exclusively anyway), so I didn’t really care for the fact that he lumped together CNBC, Cramer, and all those irresponsible loan-giver-outers (see? I know my shit!).

And what of the inevitable counter-argument that this know-it-all journalism harms the market by confusing everyone’s judgment?  Is there something to that?  Were there actually scores of people buying Bear Sterns a week before it collapsed simply because Jim Cramer yelled that he loved the stock?

One more thing: Jon Stewart said that there are two markets — the “safe” 401(k) market and the dynamic stock-exchange market — and that the dynamic market is taking advantage of the safe investors’ cash (“capitalizing on your adventure” is how he put it).  Is there anything to that, or is it paranoid bullshit?

I’ll stop for now.  Respond at your will.

-Darrell

You’re definitely no layman…  I was about to point that out in my last email, but you already knew it.  Though I love kissing ass.  (Literally, that’s actually my career these days – I literally make out with people’s buttholes!)

There’s a much bigger issue here.  Most people these days try to simplify it by saying exactly what you implied they say:  Banks were acting “irresponsibly,” and their inability to regulate themselves, or be regulated, somehow caused or at least contributed to recent financial problems.

Banks did not choose to give loans to people they “knew” couldn’t pay them back.  They were only irresponsible in that they couldn’t time the market perfectly.  For 15 years, loan-giver-outers (it’s a fine term) made nardloads of money on loans, and investors in these banks made nardloads in returns, and the economy grew at a nardloadingly fast pace from 1990 to 2007, with some tiny, tiny blips in 2001-2003.  15 years of more people than ever becoming more wealthy than ever at a pace we’ve never seen before in human history apparently comes at the cost of a not-as-bad-as-the-TV-tells-us (so far) recession.

People like to invest in assets (homes in this case) that increase in price, and things that increase in price attract more investors, and more investors investing in a market with supply that can’t keep pace with demand raises prices even further.  Speculative bubble.

Just because this time around the speculative bubble was based on banks lending money for real estate does not mean it’s any worse than venture capital firms buying stock en masse in tech companies in the late ’90s.  Or oil in the ’70s.  Or even “regular” stocks over periods of time…  Growth often means things go up too fast, and then come down too fast.

The point?

People involved in bubbles can’t be called irresponsible.  Only under the condition that a free market investing its money in the most valuable endeavors is irresponsible can you call bubbleers irresponsible… 

And to further stress this point, Jim Cramer said the same thing on The Daily Show:

Stewart: “In what world is a 35 to 1 leveraged position sane?”
Cramer: “The world that made you 30% [richer] year over year from 1999 to 2007.”

…Good, good stuff… 

And you can make an even better point using competition as your impetus:  Banks that didn’t give out 35 to 1 leveraged loans were (or would have been) punished by shareholders.

So that covers the most important point I think…  But maybe you already agreed with all of that.  It was fun to write, at least.

As for the other points:

1.  Confusing people’s judgment / Cramer’s command to buy Bear Stearns -

Is there any other reality we could be living in?  Or rather, I totally disagree that it’s possible to “confuse people’s judgment”.

I’m a strong believer that there really is no way to fight an ocean of demand.  Millions of people perceive Cramer’s show in millions of different ways, and in no parallel universe would CNBC’s choosing to do the “right” thing (which is what, exactly? Headlines from my first email?) change the fact that people are going to be watching, reading, blogging about and masturbating to ways to make money quickly and easily.  If CNBC didn’t exist, the transition would be seamless.  An equivalent number of people would be getting an equivalent amount of false data somewhere else.

2.  Safe investments are screwed by dangerous investing -

First of all, that’s what makes any good economy so dynamic.  There’s a continuous spectrum of investments’ risks, not simply “safe” and “ass-raping.”  The thing about safety is this:  People in 401ks make less money while the stock market is going up, and lose less money when it’s going down.  The only conceivable way in which a speculative bubble can, itself, really harm other markets is if you take a cross-section of time.  In other words, if you put ALL of your money into a 401k in 2007 that was only incidentally related to the real estate bubble, you would have lost an “unfair amount” of money over the past two years.  But shit – I say be patient (which is what 401ks are all about) and it’ll all come back someday.  Just not this year.

In fact, any “safe market” investor does not pile all of his life savings into the market after 15 years of unparalleled growth.  By definition, that’s risky…  And even if he did pile it all in, it implies he is younger (or old and unfuckingbelievably unlucky) and should be waiting for long term growth anyway.

So no, the only people harmed by the “capitalizing on your adventure” process are old people who all of a sudden decided to pour their life savings into stocks sometime in the year 2007.  Everybody else made a ton of money over the last few years, and is now losing a portion of it.

Considering the outcry against “risky and irresponsible” capitalists these days, either Old-and-Unlucky is a huge demographic, or there’s a ton of political bias (agenda, perhaps?) behind it.  I’m guessing the latter.

Wow, that’s a long email.

So whatcha think, D-Johns?

Now there’s the response I was hoping for!  First off, I’m delighted and relieved to learn that our economic woes are a consequence of people behaving in a free market, and that you seem to have similar trust that capitalism can work itself out.  I’ve also long suspected that this recession really isn’t so bad (sure, there’s practically no more Circuit City or Washington Mutual, and Clear Channel laid off my favorite radio host, but I’m not waiting in a fucking bread line), so I’m glad to see you write that.

And yes, I did agree with your points already, but I haven’t seen many people make them recently.  Having zero economic training beyond casual reading (really — I didn’t even take an econ class in high school), all I could do in the face of all this is to shrug my shoulders and say that it looks like capitalism is just being capitalism and that it’ll work itself out.  Much like baseball fans’ argument about Manny Ramirez’s antics — okay, he’s acting weird and for some reason this week he’s upset at some random clubhouse employee, but it’s just Manny being Manny; he’ll forget about it eventually and hit 50 home runs on the year.  The market, like Manny, has its unpredictability, but overall it’s pretty reliable.

So that leads me to my next question: if this hiccup is just that — a hiccup that came naturally at the cost of a period of ridiculous boom — should we be doing anything about it?  Does the economy actually need stimulation, or is it perfectly okay that small- to mid-sized banks that I don’t invest in are shuttering?

And how does Obama play into all this?  You’ve written that you suspect Obama to be a secret economist, but the first major thing he did as President was to push an eleventy billion-dollar spending bill through Congress.  I like his rhetoric about creating jobs without make-work and that it sure seems like we should do something, but is this stimulus package good economics?

-Darrell

I knew you’d kept the faith.  I was starting to think that, perhaps, there was a lot more hippie peer pressure in your life these days…  Actually, I’m guessing that’s true – but you’ve still got the goods…  Deep inside…  :)

The question “does the economy actually need stimulation” is the hardest fuckin’ question of all, ain’t it?  And it depends 10000% on what your goals are.  I mean, are we shooting for an economy with no moral hazard and malinvestment?  Or are we just trying to maximize aggregate demand (which is what Obama’s trillions  in “stimulus” is “laying the groundwork for.”  Quotation marks should be emphasized.)

The idea of stimulus is that the government fills in the gaps left by a slowdown in investment and consumer spending.  The benefit would be that you avoid the collapse of economies of scale and prevent the repercussions of scaring investors from high volatility (AKA letting things [businesses] fail), but the cost is high deficit and high “malinvestment”.  Malinvestment is another topic altogether, though…  Along the Ron Paul philosophy lines, in case you’re curious.  Lots of people can “prove” that it doesn’t occur…

Anyway…

During any large(r) recession – and especially right now – the U.S. can borrow money unbelievably cheaply (because everyone in the world is freaking out and flocking to the good ol’ safe investment of the U.S. government).  So the plan is this:  Nobody else in the world knows what to do with their savings, so either U.S. consumers will spend them or the U.S. government will.  Interesting little position we take in the world, ya know?

So if we’re going to try to prop up aggregate demand (which most people agree we have to, or else we get underutilized [WASTED!] resources [people's ability to work]) the only question is how should we spend all this cheap money?

Some people say tax cuts, but others think that’s blowing your load too soon and cutting off your ability to raise revenue in the future.

And then there’s Obama’s folks, who think giving money over the course of a few years to people who will spend it at varying speeds is the best way to ensure lasting demand.

Personally, I think that’s just Obama’s political capital being wasted on bullshit non-destructible government infrastructure capital.  Or rather, Obama is just paying off his supporters (or buying a political base).  Porky pork.  Or combinations…

So I’m presently of the opinion (and it does change) that if we’re going to use fiscal policy (instead of “unconventional monetary policy” – I’ll explain later) to recharge consumer demand, we should do it with a large initial burst, followed by (if necessary) smaller ones…  But creating government jobs at the cost of a future inability to stop paying for those jobs (AKA non-destructible gov’t) and higher debt interest seems silly when there are plenty of corporate incentives that could be handed out…  Or individual incentives…    To be less cryptic:  I’m a fan of tax breaks…  Particularly of the First Term George Bush style.  I know – what an unpopular thing to say, right?  Mostly I like tax breaks for the very reason most people don’t – it’s hard to raise them in the future, putting a natural cap on government spending…

-HOWEVER-

That’s only if we have to use fiscal policy, which we don’t.

The original “stimulus” package, AKA bank bailout, was a pretty substantial success.  Contrary to popular opinion.  Outside of actual data (TED spread, if you’re interested) the federal reserve pumping money to large institutions that need it is generally far, far better at stimulating the economy than giving it to the government to give it to people who don’t need it, and will only use it after 1-3 years.

Also, the federal reserve can do a whole load of other shit.  Like taxing bank reserves to increase lending…  And buying up government debt by the truckload.  Essentially they can print money until we get inflation.  As soon as we get inflation, the recession is over.

Interesting factoid:  The only reason we’re not at that point yet is that the lag between making “new” money and its effects is too long, and the federal reserve is literally afraid of overstimulating the economy.  I.e. afraid of too much growth.  Put in a more interesting perspective:  It’s so easy to get out of a recession, the federal reserve does not want to overdo it.  No kidding.

Though long-term inflation is far more damaging than a short term recession…  So it’s not that interesting of a factoid, I suppose…

And another point:  The government can’t actually create jobs.  If it’s paying for them with tax dollars (…very important stipulation…) the government can’t make 1 job without destroying more than 1 job.

But, again, the point to Obama’s stimulus is that we’re not paying for them with present-day tax dollars…  We’re borrowing money from the confused Chinese…

OK, I should have split this into two emails so you could argue (or agree profusely) with the first half while I continue to rant.  ..Ah, well…

…and that’s where the conversation ended.  UNTIL NOW!

Dave gave me a bit too much to swallow all at once (in sharp contrast with our prison days), so I’ll only address a few things.  First, what do you mean the government can’t create jobs?  Half our country works for the government.  Most of the New Deal involved government-created jobs to build campgrounds and clear fire roads.  I hope we’re not arguing semantics, but it seems to me that, for better or worse, the government is quite able to create jobs.

Second, if this is just Obama spending his political capital, why would he do it as unwisely as you suggest he has?  I have a feeling that he’s just following the wave of liberal “let’s do something” thinking, and this is as imaginative as they get when they have a majority.  Because really — what’s more lily-white liberal than a federal policy that throws money at companies who show that they’re “trying hard” and “acting morally”?

And since this conversation isn’t complicated enough, how does Tim Geithner figure into all this?  Why the sudden hatred from the media?  Is he being scapegoated here?  He does appear to be a bit of a dullard, but I thought that’s what we wanted in our Treasury Secretaries.  We all remember what a disaster it was when Dubya appointed Sammy Hagar.  Sure, it was fun for awhile, but the moment he tried to implement the Tequila Standard, he completely lost me.

Holy fuck, this post is over three thousand words long.  Let’s move this to the comments, shall we?  Open season on the economy has begun!

-Darrell

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