Cyreenik Says
If you can't save the children, save the houses.
So it seems in this month-before-elections environment.
This 9 Oct 10 WSJ editorial, The Politics of Foreclosure, talks about how various states' judicial establishments and the whole nation's political establishment are going over-the-top about some sloppy paperwork in the foreclosure process on homes in twenty three states.
This is a textbook panic and blunder situation. This is a case where stress and emotion are producing an expensive solution -- expensive in the sense that it is going to cost lost of money and not solve the problem that started the issue. It will, in fact, make the problem worse, ...but in the hearts of many people it will feel like a good solution in spite of that.
Foreclosure is a process that corrects a mistake -- a person took out a loan to buy a house, and now that person finds they can't pay the loan. It's as simple as that.
But because there is a dwelling involved -- something very dear to many peoples' hearts -- Americans in various states have developed a lot of ritual to make sure that's what really has happened.
That ritual adds to the expense and uncertainty of making such a loan. This means that the cost of making the loan goes up, and the players willing to make such loans will become more of the tough-skinned variety, not the nice-guy variety -- the nice guys will find some other kind of business to be in because they don't want to put up with all the extra grief the ritual is causing. As an example of this added uncertainty, according to this 9 Oct 10 WSJ Heard on the Street article, U.S. Banks Get Boxed In on Foreclosures by David Reilly, this flap is going to add uncertainty to bank profits.
So... is all this sound and fury going help the housing market?
Nope.
What we have here, folks, is a textbook blunder, which will lead to a textbook social scar.
<in a circus sideshow barker voice> Watch it happen now, folks, and you don't even have to pay a dime to see this show.
... unless you're planning on buying a house or selling a mortgage in the next couple of decades.
In the 1970's, the stagflation era, the US economy suffered from both high inflation and slow growth, and this surprised people of the time. Part of the reason inflation proved tough to beat down was the Phillips Curve -- a believe held by politicians and economic opinion leaders of the time that inflation and unemployment were inversely coupled: Low inflation would produce high unemployment. In the 80's it was shown that the Phillips Curve was valid only on short time scales. But during the Ford and Carter eras it was gospel, and that made it a blind spot in 1970's thinking.
Fast forward to 2010 when current government and economic opinion leader thinking is neo-Keynesian and that economic stimulus (also known as cheap money) is going to get the economy growing and get us through the Great Recession faster. But, like the Phillips Curve policies of the 70's, the stimulus doesn't seem to be working as predicted. It is surprising people with its lack of effectiveness.
Could we be in the midst of another economic blind spot?
I predict that we are. What is not being considered are two things: The uncertainty of the current investing climate, and the high expense of creating jobs. These are things that the government needs to be sensitive to. Making it easier, less expensive and less uncertain for small business to invest and grow will pay much bigger growth dividends than investing in more government and taxpayer debt. This 5 Oct 10 Huffington Post article, Anti-Small Business Laws Hobble Entrepreneurship and Jobs Creation by Gary Shapiro, President & CEO of the Consumer Electronics Association, explains this issue as he sees it. And an 8 Oct 10 WSJ Heard on the Street article, The Fed's 30-Year Warp by David Reilly, talks about the market-warping effects of superlow interest policies. These include warping effects on housing prices, mortgage prices, mobility and employment.
This blind spot is a big one.
This WSJ 2 Oct 10 editorial, San Franciscans Try to Take Back Their Streets by Heather MacDonald, talks about the full-flowered homeless culture that is established on the streets of San Francisco. The first interesting part for me was the delusions of those partaking in the culture. An early example from this article is this response of one of the homeless to an interview question, "I'm not begging, I'm just asking for money." The article goes on to describe that this culture is actively supported by locals who are politically potent -- these locals see spending on supporting the homeless in their lifestyle as being money well spent.
The final interesting point, and this is where Cleveland comes in, is where the money to support this San Franciscan lifestyle was coming from. Saying this another way is asking, "What is San Francisco's 'steel industry'?" The answer is not too hard to find: tourism.
So San Francisco is a boom city built on a decades-long tourist boom, just as Cleveland was a boom city built on a decades-long steel boom.
The scary part is that in both cases we have seen some seriously strange spending and thinking habits develop and flourish during the boom times. That flourishing was nourished by boom time money. In Cleveland's case when the boom ended in the 1970's, the city's thinking did not reinvent and recover, and half the residents moved out. New York City, on the other hand, has reinvented and recovered a couple of times since the 1970's, so a city can go either way.
Do San Franciscans see a problem? Is there a problem? There isn't if the tourism boom there never stops and San Franciscans don't mind supporting their expensively peculiar thinking. The San Franciscans are de facto saying, "We live in prosperous times and supporting a delusional homeless culture is how we choose to spend part of our prosperity."
This is fine as long as the good times last... I guess... But when the tourism boom stops, will San Francisco follow the fate of Cleveland or New York?
It's an interesting study waiting to happen in boom, delusion and recovery.
Follow-up: Here is a 3 Nov 10 Yahoo News article, Law curbs McDonald's Happy Meal toys by Lisa Baertlein, giving yet another example of San Fransisco government and its community deciding there are more important things to be concerned about than promoting business growth in the community. This is a law micromanaging the food service business and getting the city government squarely between the business and its customers. This is the kind of city government-to-business attitude which makes aspriring business people look to other places than San Fransisco as places to try growing a new business.
This is an example of why it is no accident that Silicon Valley is not centered on San Fransisco, and why the San Fransisco people are likely to say, "Huh?" when you point that out to them.
Over the last couple weeks I encountered a series of articles that found themselves talking about the scars of previous blunders. These are examples of why Blunders are so important to recognize.
In a 13 Sep 10 WSJ editorial, The U.S. Needs Its Own Industrial Policy by Jeremy Wisen, Mr. Wisen correctly analyses the problem by stating that we need more economic growth and we will get it from entrepreneurial startups. Sadly, he then applies The Curse of Being Important, and, rather than suggesting that government ease the regulatory burdens on investing in startups, he suggests the government develop an industrial policy and pick and choose its favorites.
The disadvantage of letting the government pick favorites is that what works well in a cutting-edge contemporary developed society is full of surprises. The efficient way to find out what works well is the way evolution chooses the right life forms to live on earth: you conduct a thousand experiments, almost all small scale, and expect one or two to thrive. If you make choices without the thousands of experiments -- as in, you rely on planning -- a lot of good choices are going to be missed.
Sadly, this is a scar because if you rely on planning, and embrace The Curse, you never see the good choices you have missed. In economic parlance these are opportunity costs, and they are hard for our instinctive thinking to appreciate.
In a 22 Sep 10 WSJ editorial, GM, Chapters 1 to 10 by Holman, W. Jenkins, Jr., Mr. Jenkins explains how a previous blunder scar, the CAFE standards, first invoked by Congress in 1975, were at the heart of GM's demise. In Jenkins' words, "Had Mr. Obama represented anything new under the sun, he would have said what economists and engineers have said for a generation—that the fuel economy mandate known as CAFE is a failure, producing only perverse results." and describes the blunder chain resulting from it as, "Properly seen, the GM bailout is but a Rube Goldbergian necessity conditioned by previous Rube Goldbergism inflicted on the car makers for 35 years."
Following the Oil Crisis of 1973, the auto industry fell even more deeply under The Curse of Being Important and Congress felt obliged to share along with consumers the responsibility of telling auto makers how to make cars. The SUV as we know it today is a direct fallout of CAFE -- for emissions standards the SUV is considered a truck, which means customers can buy a few hundred extra dollars of interior furnishings in place of more expensive pollution control.
Congress gave Americans their choices, and Americans chose. Now some are head scratching over the choices made. Sadly, this is what happens with blunder scars.
In a 27 Sep 10 WSJ editorial, The Regulation Tax Keeps Growing by Nicole V. Crain and W. Mark Crain, the Crains talk about the costs of regulations on businesses. This is how it opens, "The annual cost of federal regulations in the United States increased to more than $1.75 trillion in 2008, a 3% real increase over five years, to about 14% of U.S. national income. This cost is in addition to the federal tax burden of 21%, for a combined cost of 35% of national income. One out of every three dollars earned in the U.S. goes to pay for or comply with federal laws and regulations, and new policies enacted in 2010 for health care and financial services will increase this burden."
The article goes on to point out that this an estimate because the burden is not easy to quantify, and it's not spread evenly. "In a report released last week for the Office of Advocacy of the U.S. Small Business Administration, we find that small businesses bear a disproportionately large share of regulatory costs. The portion of these costs that falls initially on businesses overall was $8,086 per employee in 2008."
Umm... 8K per employee... and that's before you start paying them a decent wage. This is a huge scar. It's the product of multiple scars added to the American working and business climate over many decades.
This 9 Oct 10 WSJ editorial, Technology = Salvation by Holman W. Jenkins Jr., is an interview with Peter Thiel, cofounder of PayPal, early investor in Facebook, and hedge fund founder, in which Thiel points out that these days technological progress is broken -- we just don't have much, unlike what we've had in the past such as in the 1930's. He talks about many issues that are impeding progress such as the education system, and he specifically fingers the FDA and Sarbanes-Oxley as examples of technology and entrepreneurial impeders.
This is why scars are important to notice. They are big. They are expensive. They change how we live. If we must bear them, we should certainly be aware of them and believe that they really are making our lives better, and our children's lives better.
Roger White is a guest blogger in the 30 Sep 10 Skeptical Market Observer blog, Roger and Me by Luc Vallée and Roger White. We are discussing our feelings about the upcoming, and not yet seen, movie Inside Job. (alternate link)
Not having seen it has not discouraged either Luc or Roger from having opinions about it. <grin>
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