Monday, October 6, 2008

Econ 101

Another record drop in the stock market today. Pictures in the news of middle-aged men biting their nails. Like they're worried about really important things. It's all so philosophical. As if the fluctuation were meaningful. We breathe in, we breathe out. Our hearts contract and relax. There's a moment of stillness in between that can look like death. But it's not. We monitor such functions more closely when we're sick, but we're sick unto death only once. Paying attention the rest of the time is premature.

As I say, philosophy. Stock brokers perform a virtually useless job. They contribute nothing to the market. They're not even middle men, like retailers, since retailers sell an actual product that has worth and function. Sure, technically stocks are pieces of viable companies. We know that because we're told it's true. United Amalgamated Widgets has all the framises you could ever want. We're told. But the fact is, they sell an idea, advice about an idea. Pork belly futures. They're selling you what pig guts might be worth next winter. How is this not Las Vegas?

Point is, stocks are not meant to be obsessed over. They are not meant to be traded on a daily basis. That's just a way some guys invented to make money for themselves. For the actual investors, well, look at the word -- invest. That implies value and commitment. They are not investors. They're exploiters, momentary carpetbaggers, three-card monty artists, shuffling around shells under which there sometimes is a pea. Warren Buffet has it right, of course. Buy value. Don't buy advice. We're seeing the consequence of that now. People paying inflated prices for crap with other people's money.

Credit is a strange thing. Again, look at the word. It's about something that might happen. It's a faith-word. It's about something that's owed, either from the past, like extra-credid on you homework -- I did the bonus question, give me them extra-credit points -- or about a promise to repay in the future. So this housing collapse, with Fanny and Freddy and my own bank. People were paying more for houses than they could afford or the houses were worth. Now, if you pay more but you can afford it, or if you can't afford it but it's worth the price, that's not so bad. You can resell it for what it's worth. Didn't happen. To quote the Reverend Wright, the chickens. Are coming home. To roost. Cuz somebody wasn't, was not, as good as their word. Not worth the paper it was written on.

But that's the foundation of our economy. Credit. So here's why I'm not against heavy government intervention. Allow me to say I hate taxes. Allow me to add that I have only a very primitive grasp on economics, most of the precepts of which I've referenced just now, about fair value and the importance of contracts. But the fact is that the only institution that is allowed to mint money is the government. And credit is the invention of money.

It used to be that a bank could lend only three times the amount of money it actually had in its vaults. Something like that, if memory serves. Don't know what the limit is now, if there is one. There are no doubt still limits. But all that owed money, borrowed on unsecured credit, is illusory. It doesn't exist. A house of cards sort of thing. The occasional collapse is to be expected, when you're living in a house of cards. That's what we've got going on now. Living beyond our means. Betting on the future of pig guts. Obsessing over our heartbeats, moment to moment, like a hypochondriac.

I'm sure credit is a good thing. I'm pretty sure that savings is an even better thing. My son, for example, has quite a bit saved from his combat pay. It's invested in stocks, which he does not watch over on a daily or weekly basis. Because investments are about the long term. He says that if he needed money, rather than cash out some stocks, he'd borrow money using them as collateral. I don't quite understand it, except that it's sort of like borrowing money on your house, rather than selling your house to get the cash. A golden goose thing, I guess. So yes, credit is a good thing, sometimes. But like extra-credit, it's earned.

As for regulation, new technology is always going to create problems for old institutions. The way computers could rebundle mortgages and mix up ownership so that nobody could keep track of the real value or its lack of what was being sold -- we're seeing the market correction of that now. There will and must be regulations over this, because it's about inventing money, and the government can sort of licence that ability off, but it can't do so willy-nilly.

Conservatives just love to talk about the free market. I love it to, if not the talk. But the free market is not the stock market. The free market sells real things, even whole companies, to actual people. Stock brokers have virtually nothing to do with the free market, any more than blackjack dealers do. Not all financial transactions represent a healthy functioning of the free market, just as not all drugs are medicine. There are doctors, and there are FDA laws about snake oil. And there are regulations about who may invent money, and how Wall Street may play with everybody's retirement funds.

As I said, my understanding is primitive. But I mean no slight against myself in this. Primitive here means first, as in first principles. The economy is being devalued, revalued, in a pretty classic market correction. The folks who sold their houses for more than they were worth got the benefit. The suckers who payed too much are foreclosed upon. The tax payer is stuck with the bill. Hopefully this isn't a march into socialism. Could be. The regulations I've been talking about aren't the bailout. I don't know about the bailout. I know that some worried dude in a suit biting his nails cannot be allowed to invent money.

Simple. Primitive. Obvious.


1 comment:

GUYK said...

"Hopefully this isn't a march into socialism."

No, it is not a march into socialism..that has already happened and the economic crises is the results of the turn to socialism.

This started when congress decided that everyone had the right to own a home..and it didn't make any difference if they didn't have enough down payment or couldn't really afford it. Throwing money at the problem will not solve it unless the root of the problem is taken care of, ie, the Community Reinvestment Act and subsequent changes thereof.

Yeah, we are now a socialist country and you can expect your freedom of speech to be curtailed fact the left wing is already trying to stifle dissent. Next will be a grab for the second amendment and shorty thereafter a revolution.

You will probably be living in the Bankrupt as well as morally corrupt country of Mexifornia