The One Minute Case for Stock Shorting

 Posted by on 24 September 2008 at 3:27 pm  Economics
Sep 242008

Galileo Blogs gives a nice “One Minute Case For Stock Shorting“. He makes the case that, “Short selling is moral and should be permitted.”

More Americans (citizens and policy makers alike) need to read this.

U.S. Economic Freedom Index

 Posted by on 23 September 2008 at 10:30 am  Economics, Politics
Sep 232008

The Pacific Research Institute recently published the U.S. Economic Freedom Index: 2008 Report. It’s an analysis and ranking of the 50 United States by economic freedom. You can download the full PDF for free. (The annotated US map is also cool.)

Objectivist historian Eric Daniels contributed to the book. He wrote the first chapter, and contributed to the third.

Happily, Colorado is ranked #3! I pity all you poor bastards in New York, #50.

Yaron Brook on the Economic Crisis

 Posted by on 22 September 2008 at 12:08 am  ARI, Economics, Finance
Sep 222008

The September 19, 2008 issue of Time magazine recently quoted Yaron Brook, executive director of the Ayn Rand Institute, in its recent article on the economic crisis:

What Would Ayn Rand Have Done?

…But as the largest bailout in government history unfolded in almost dizzying waves over recent days, a very different view prevailed at the Ayn Rand Center for Individual Rights, an outpost of free-market, anti-government thinking located just a few blocks from the newly aggressive and highly interventionist Department of Treasury in downtown Washington.

“It’s a complete disaster,” said Yaron Brook, the executive director of the center. “Its a form of national socialism of the financial markets…This is socialism 101.”

…Brook doesn’t blame speculators, traders or financiers for the market’s near-collapse, but instead blames government for having overregulated the markets in the first place. The business leaders bailed out by government this week “are victims,” he said, “and the government set it up.” Washington underreacted to previous crisis, let Fannie Mae and Freddie Mac spin wildly out of control as quasigovernment agencies while taxpayers piled up unsecured debt in their names. The crisis, he added, was “really fed throughout by government policies.”

He also notes that the current Republican administration is doing more harm in intervening in the marketplace than a Democratic administration likely could have.

Who Has The Wealth?

 Posted by on 6 August 2008 at 12:01 am  Economics, History
Aug 062008

Megan McArdle has written an interesting analysis of the following map showing GDP per capita in various countries:

She writes:

When you see the map, it becomes radically apparent just how firmly Britain was the root of the Industrial revolution. With the lone exception of Japan, the darkest places on the map are either next to Britain, or former British colonies. And aside from Saudi Arabia and Chile, all the growth seems to spread outward from those Anglosphere points of infection. Nowhere, not even Saudi Arabia, has the income density of Western Europe and North America.

Of course, the interesting question is why is there this distribution?

Dr. William Bernstein (a neurologist turned financial analyst/historian) does a pretty good job of answering this question in his book, The Birth of Plenty : How the Prosperity of the Modern World was Created. In particular, he analyzes history and economics over the past 400 years and makes a good case that there were four key factors that allowed men in some countries to prosper, whereas men in other countries couldn’t. The four key factors he identifies are: “property rights, the scientific method, capital markets and communications”. He argues that countries prospered to the extent that these factors were present. And in particular, when Great Britain embraced all four of these, it then led to the explosion of wealth known as the Industrial Revolution.

Although Bernstein’s analysis is fairly good, it does not quite go far enough. His four factors can be further essentialized to two: reason and rights.

His first factor, “property rights”, is self-explanatory. Property rights is the direct application of the concept of rights to humans living in a material world. It is a recognition that if men are to live, they must live under a government which respects and enforces certain principles with respect to how men should deal with physical objects, and with other men. In particular, it establishes objective principles of property ownership, and all of the corollaries (e.g., the right to use, sell, trade, dispose of, and exclude others from one’s property.)

His second factor, “the scientific method”, is the application of reason to the practical world — namely, using man’s mind to understand the nature of reality and the causal factors that allow men to shape the world for their purposes.

The third factor, “capital markets”, is an extension of property rights into the realm of finance. When men have confidence that their property rights will be respected in the long term under an objective rule of law, they are able to devise increasingly complex contracts to suit their financial needs, with terms involving time intervals that could span months, if not years. Men could create financial instruments that permit them to engage in lending, insurance, futures and options. Similarly, the birth of the limited liability corporation and the associated rise of stock markets greatly facilitated the ability of investors to shift their capital to ventures that could yield the greatest return, allowing both investors and producers to create and execute long-range plans over a period of years, if not decades.

The fourth factor, “communications”, is the practical outgrowth of both reason and property rights. Even the apparently simple task of guaranteeing the safety of roads for travel and commerce required a government able to protect individual rights from thieves and highwaymen. More sophisticated forms of communications and transport, such as the telegraph and railroads, became possible only as men’s reasoning minds created the necessary technology in a context where they could be turned into viable businesses under the protection of a government that respected property rights.

All of these factors were mutually reinforcing, in that the respect for rights and reason created prosperity which allowed for more innovations in science, technology, capital markets and communications, which led to more prosperity, etc. But the roots of this prosperity were ultimately philosophical. Without a proper understanding of rights, grounded in a philosophy of reason, none of the prosperity of the Anglosphere would have been possible.

Therefore, it is no coincidence that the GDP map tracks closely with countries that still respect reason and rights, which tracks closely with the Anglosphere. The prosperity of modern-day Japan follows from the sweeping cultural and political changes imposed on that country during the American occupation following World War II, and some regard it as a part of the “Anglosphere” in that sense.

(Note: William Bernstein is pretty good when it comes to historical discussion, but he is definitely not an advocate of full laissez-faire capitalism. For a more consistent defense of free market capitalism on both philosophical and historical grounds, I’d recommend the book by Andrew Bernstein, The Capitalist Manifesto: The Historic, Economic and Philosophic Case for Laissez-Faire. To the best of my knowledge, there is no relation between William Bernstein and Andrew Bernstein.)

Pathetic Pickens Plan

 Posted by on 28 July 2008 at 12:02 am  Economics, Politics
Jul 282008

T. Boone Pickens is all over the airwaves and internet with his “Pickens Plan” to develop wind power (can anyone say “public relations campaign?). You’d think that a billionaire couldn’t get that way without knowing some basic things about economics, but you’d never know it by reading the Pickens Plan. Maybe Pickens is more mixed-economy pull-peddler than straight-up capitalist and that’s how he made his bucks. Can’t say I know too much about him, he’s never impinged on my consciousness before the Pickens Plan hit the airwaves. Hope I forget about him soon.

In essence, the main reason we’re supposed to give the Pickens Plan the time of day is because: buying foreign oil is a massive “transfer of wealth” that will impoverish and endanger us. Featured prominently in his TV and web messaging is his complaint that the U.S. is going to spend $700 billion on foriegn oil this year.

To address point-by-point the third-rate argumentation and simplistic reasoning of the Pickens Plan would be shooting fish in a barrel and I’m not going to bother. His method is to pander to the xenophobia, economic ignorance, and intellectual laziness in the worst of his audience. I do, however, want to take a moment to blow off some steam about the economic argument he makes, which I find most offensive coming from a freaking billionaire.

Here’s the pitch on the Pickens Plan website:

It’s an addiction that threatens our economy, our environment and our national security. It touches every part of our daily lives and ties our hands as a nation and a people.

The addiction has worsened for decades and now it’s reached a point of crisis.

In 1970, we imported 24% of our oil. Today it’s nearly 70% and growing.

As imports grow and world prices rise, the amount of money we send to foreign nations every year is soaring. At current oil prices, we will send $700 billion dollars out of the country this year alone — that’s four times the annual cost of the Iraq war.

Projected over the next 10 years the cost will be $10 trillion — it will be the greatest transfer of wealth in the history of mankind.

Alex Epstein at ARI has a great column on “oil addiction” and what our real national security issues are, so I’ll let him handle that one. I want to give T. Boone a little lesson in Econ 101 to address this “transfer of wealth” nonsense he’s got his panties in a bunch over.

Have you ever heard of division of labor, Mr. Billionaire Pickens? You know, that neat little arrangement where people produce what they’re best at producing, and then trade their goodies with each other? That economic principle that makes possible our elevated standard of living? That mode of production the opposite of which is a life of squalor on a self-sufficient farm? No? Well, here’s a little tutorial. We buy foreign oil because foreigners produce it more cheaply than we can domestically. And we buy it with the money we earn by producing the things we can most cheaply and efficiently produce. Now, we can get into the weeds over why this is the case, but as long as it’s the case, it’s completely rational to buy foreign oil. The consequences of going through a withdrawal from this “addiction” would be: getting on an express train to a 19th century standard of living. (A train fueled with coal, by the way.) Capice?

Oh, and can I offer you a little help finding that $700 billion you’re acting like we’ve irretrievably lost? Here’s a hint: we actually bought a product with that $700 billion, it’s called oil. I suppose that if it were better for us, we could buy the oil and then turn right around and sell it again — then we’d get our $700 billion back and all would be well, eh? Of course, then there’d be the little detail that we wouldn’t be able to get to work in the morning, or fly our airplanes, or power our factories . . . but we’d have that $700 billion. For what it would be worth, under those circumstances.

Bottom line here, T. Boone — wealth isn’t money, wealth is what you buy with money. Wealth directly supports our lives, but money is just paper. Ever try to eat money, or get your car to run on the paper money is made of? Even if money were gold coins, there is literally nothing in gold that can keep body and soul together. Unless those foreigners themselves turn around and buy some actual products with their money, the wealth transfer will all be from the foreigners to us — we’ll have oil, and they’ll have a bunch of paper. And who knows? Maybe those foreigners will use that $700 billion to buy from the United States some of that wealth they need to survive. Ya think? (Sheesh.)

Pickens is pushing wind power as an alternative. I’ll leave it to someone else to address the technical details of why it’s not feasible. Why? Because I don’t have to address those details. If wind power were a viable alternative, potentially a real value in our real every day lives, you can bet that selfish, profit-seeking entrepreneurs would have been all over it by now, confident that people would buy it. And they’d put the research dollars into it — look at the hundreds of millions drug companies will spend developing a drug, confident of future sales. Maybe one day wind power will be a viable alternative, but at present it just isn’t a money-making enterprise, or T. Boone wouldn’t have any trouble privately raising the money needed to develop it.

So you know what? I don’t think the Pickens Plan is a plan to “save America.” I think it’s a plan to extort $1.2 trillion tax dollars from hard-working American citizens to fund schemes T. Boone can’t persuade people to voluntarily support, by scaring them half to death with horror stories of impoverishment at the hands of evil foreigners.

The Mortgage Mess

 Posted by on 24 July 2008 at 3:51 pm  Economics
Jul 242008

The July 18, 2008 issue of Forbes has a good analysis by Yaron Brook of the home mortgage mess and how the government created the crisis in the first place:

The financial peril of Fannie Mae and Freddie Mac–the government-sponsored, government-regulated mortgage giants regarded as instrumental in solving the nation’s mortgage market problems–has one benefit. It should help expose the lie that today’s financial problems are the result of an insufficiently regulated market.

And Amit Ghate points towards good retrospective in the July 14, 2008 Wall Street Journal detailing years of corruption and ineptitude in those two quasi-governmental agencies.

Articles like these rebut the usual claims that villainous lenders are to blame, as if they would somehow benefit from defaulting clients.

Jul 222008

Isn’t it enough that Congress forcibly takes your income and spends it any way it wants–for the frivolous or ridiculous, extravagant or exorbitant? Now they want to control the way you spend your own money!

Democrat Senators, Charles Schumer (NY) and Herb Kohl (WI), will introduce a bill prohibiting the use of debit cards to withdrawal from one’s 401(k) as well as limit the number of loans a 401(k) participant can take (doing so requires a monthly payment, fees and interest). Because of the crisis in the housing and financial markets, more people are dipping into their 401(k)s. Some financial experts believe this is an unsound financial practice.

Some people make bad financial choices, like getting overburdened with credit card debt, obtaining a loan for an unaffordable house, or investing 100% of their savings in some retirement swamp in the bayou.

But what if you needed money from your 401(k) and you needed it now? What if you judged it to be in your best interest? Your financial choices–good or bad–should be up to you as an adult to decide. And it should be no body’s business but your own.

But Senators Schumer and Kohl won’t give you permission to make those choices. So, you can just go to your room without supper!!

This bill is just another of the countless historic violations of the separation of state and economics, and here are some reasons why this bill is bad:

1. It’s a grotesque trampling of your property rights: your money really isn’t yours–not the money in your pocket nor in your savings account.

2. It’s a flagrant and demeaning demonstration of paternalism: the idea that government knows better than you do what’s best for your financial situation.

3. It’s a total disregard for the right to pursue your life with the only resource that makes that possible: the earnings from your work to purchase the necessities and enjoyments of life.

Here’s my letter to those Senators: “Get your greasy pork-fat fingers out of my pockets!”

From Flat World To Free World

 Posted by on 16 June 2008 at 8:49 pm  Economics, Politics
Jun 162008

Yaron Brook has a new column on Forbes: From Flat World To Free World. It begins:

Considering the many jubilant boasts by “flat world” devotees in recent years, you might have been tempted to regard economic globalization as a juggernaut, powered by inexorable forces of technology and history.

Big mistake. There’s no preordained direction for the world economy–only an undetermined future that will take the shape of whatever ideas and policies we choose to uphold. The lack of an intellectual defense of capitalism has left free markets vulnerable. “The power of the state is reasserting itself,” said Daniel Yergin, co-author of The Commanding Heights and a free-market optimist, in The Wall Street Journal recently.

I particularly liked the explanation for the retreat of globalization. So… read the whole thing!

Nationalizing the Oil Industry?

 Posted by on 23 May 2008 at 11:22 am  Business, Economics, Politics
May 232008

Just when you thought American politics couldn’t get any worse, Maxine Waters threatens to nationalize the oil industry, if consumer prices aren’t to her liking:

Of course, Maxine Waters wouldn’t ever support the genuine cure for high energy prices, namely the elimination of government controls on drilling for and refining oil, as well as on other forms of energy like coal and nuclear power. As any semi-conscious student in a microeconomics class knows, such controls constrict supply and drive up prices. But nevermind that mumbo-jumbo. Maxine Waters has a different kind of plan: oil company executives must find some way to magically violate the basic laws of economics — or else!

(Via Kelly McNulty on FRODO)

Early Retirement Is Selfish and Unpatriotic

 Posted by on 9 April 2008 at 6:27 am  Economics, Politics
Apr 092008

The March 26, 2008 Baltimore Sun has printed a disturbing OpEd by Andrew Yarrow, in which he makes the claim that Americans who retire early are “selfish and unpatriotic”. Here are a few excerpts:

Early retirement selfish, unpatriotic

…But there’s just something – make that lots of things – wrong, in general, with retiring at 55, 62 or even 65. I would go so far as to call it profoundly selfish and unpatriotic.

Dropping out of the work force while still in one’s prime means ending one’s contributions to America’s strength, mortgaging our children’s and grandchildren’s future and leeching trillions of taxpayer dollars from the economy.

…Thus, working longer would increase national output and personal wealth. And given our nation’s crying need for teachers, social service workers and public servants, millions of “seasoned citizens” could serve our communities while giving meaning and money to people with decades of life and activity left in them.

…For everyone’s good, Americans should at least be able to work as long as their shorter-lived, poorer grandparents did. By doing so, they would be unselfishly helping preserve and strengthen our nation’s future by alleviating – rather than worsening – our national debt and making hands-on contributions to our children and communities.

There are a few noteworthy unstated premises in his argument.

(1) Your life is not your own; instead service to others is the highest good.

(2) Selfishness is opposed to patriotism; in other words looking out for your own interests is harmful to the USA.

(3) When you stop working, you are “leeching” off of others.

Of course, the current system of Social Security taxes are just a giant Ponzi scheme. The government attempts to promote the fiction that you are paying your own money into the system when you work and you are “getting it back” when you retire. At least Yarrow is correct in stating that retirees are collecting other people’s money.

As the Social Security crisis deepens over the next decade or so, I expect we’ll here more such collectivist arguments, in an attempt to forestall intergenerational resentment amongst American.

But the solution is not to force people to work longer for a mythical “common good”. Instead, it is to phase out and eventually eliminate the collectivist system of Social Security altogether and let people truly fund their own retirement with their own money. Yes, there will be some painful transition costs. But if we do nothing, we’ll pay in the form of vastly more economic pain in 15-20 years, with interest.

Suffusion theme by Sayontan Sinha