Thursday, November 5, 2009

Marko's Take: The Economic Mess....Who's Fault Was It Really?

It's not nice to fool with Mother Nature and the economy follows many of the same rules. Let me explain. In 2000, I went on a vacation to Yellowstone and learned of a great fire that took place in 1988 wiping out nearly 40% of the park. It wasn't arson. It wasn't terrorism. It was the result of approximately 20 years of a faulty theory propogated by misguided environmentalists.

These folks argued that immediately responding to fires would be beneficial to the park. The problem was that they failed to realize that a forest is a regenerating eco-system which NEEDS fires to clear the way for new growth. As a result, by 1988, the accumulation of deadwood that otherwise would have been cleared in smaller amounts had reached incredible proportions. All it took was some lightning in June and three months later the Park was nearly destroyed. Virtually every firefighting resource in the western United States was used to try to put it out.

Sadly, it wasn't until an early September snowfall that the fire was contained.

So, what's my point? Well, politicians like to get elected and re-elected. In order to do that, they learned that recessions were to be avoided at all costs, and that they could artificially juice prosperity by a variety of measures. For example, interfering in the markets was employed to artificially juice the economy. The most obvious of these was interest rates artificially low thus penalizing savers and rewarding over risk taking.

They "bought votes" by encouraging the quasi-public lenders like Fannie Mae and Freddy Mac to promulgate loans that artificially fooled people into over consuming houses. This caused the so called real estate bubble. It wasn't the buying public's fault: the vast majority were merely acting in their own self interest. The bubble created illusory wealth, which then lead to overconsumption via credit cards for example. Sure, some folks were reckless, but the VAST majority were merely making decisions based on faulty information.

Same reason doctors discourage the overuse of antibiotics. Occasional sickness like colds are NECESSARY to restore the immune system just like recessions restore a healthier economy.

As our economic forest fire continues to burn, there is no secret that our political leaders are throwing around a lot of money. The problem is that the continued series of bubbles, first in the Nasdaq, then in real estate, then in derivatives (a topic I'll explain later) is the result of decades of trying to keep anyone from feeling any economic pain by the political collective. There are a few exceptions, but the people who warned about the problems, like Ron Paul, weren't given the time of day.

So what's the point of all this? Politicians, worried about being re-elected and not the long term good, made decisions that were in THEIR OWN self interest not those of the country and they were given a pass because the period of prosperity we ended caused few to question their motives. This is not the fault of Democrats or Republicans alone. And, most importantly, not the fault of Capitalism either.

The truly sad part of all this is that the same incentives for this to keep happening are still in place, and market interference has grown steadily. And, worse yet, the quality of information is getting more obfuscated making it harder to have the proper corrective mechanisms put us back on course.

Marko's Take

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