Flyover Country

Check this out, FOCers:

http://oneminute.rationalmind.net/capitalism/comment-page-1/

Take a look at some of the other links as well.   Some good reads there.

My wife and I were having a conversation last night in which she said something very profound.  Now, it’s not to say that it’s unusual for her to say something profound.  I think she is mostly a very intelligent person, except when it comes to politics.  You see, she claims to be a “conservative democrat” and I claim that there is no such thing anymore.  (Although Indiana Senator Evan Bayh may have given me a glimmer of hope that there may be some exceptions to that rule.)

So it was of great shock to me when I was watching the news last night and once again there was talk of the “shovel ready projects” that would be providing the “stimulus” that was needed to end the current economic woes, specifically the bridge in Missouri that everyone has touted recently.  My wife, who I thought was asleep, mumbled that aforementioned profound statement, “What happens when it’s finished?”

What a great question!  Such is the problem with government spending.  When the private sector spends money, it produces wealth.  When the government spends money, that money is soon gone into the great black hole of bureaucracy.  Now, don’t get me wrong.  I know we need bridges and roads and other infrastructure, and I’m not saying we shouldn’t spend money to do just that, what I am saying is that equating government spending with providing economic “stimulus” is similar to saying you can bring to life Victor Frankenstein’s monster with a 9-volt battery.

Creating wealth is a mystery to most people.  It seems based on what I’ve read the last few months, that the majority of people think wealth is limited, a constant amount of money and assets, and for one person to gain money and assets requires another (or several) people to lose an equal amount.  (This is referred to as a “zero sum mentality“)

Let’s go back to some basic economics:

First, let’s say we want a new home and we have $100,000 to have it built.  To make it simple, let’s say we go to a home builder who has the land and everything we need and he designs a house on that land for the $100,000 that we have.  The home builder purchases the materials he needs and sets out to build the house.  Let’s say the land and the material costs the builder $75,000.  After the builder is finished, we have a home that is worth $100,000, but only $75,000 of tangible items are represented in home.  The other $100,000 has been created by the home builder.  Therefore he has traded us $100,000 in cash for $75,000 of his material and $25,000 of his knowledge and skills.  Our wealth has stayed the same ($100,000 traded for $100,000 worth of real estate), his wealth has increased ($75,000 in tangible material traded for $100,000 in cash).  This happens not only with real estate but with TVs, computers, DVD players, lamps, cars, websites, soda pop, sofas, and anything else you can think of that is produced and sold.  That is how wealth is created.

The problem with the government trying to stimulate the economy is that the “wealth” that would be created in the private sector is wasted on bureaucracy and inefficiency.  Whereas the private company or individual makes choices based on sound financial principles, the government rarely does so.  It is more inclined to make decisions based on politics, ignorance, and cronyism.

Will these people say anything to get their $1,000,000,000 spending bill passed?

500,000,000 people in America lose their jobs each month.  I guess most people must lose their jobs twice a month?

From our friends at Breitbart.com via the AP:

In a sobering appraisal of the nation’s banking system, President Barack Obama signaled Monday that he will need more money to bail out the battered financial industry. Even so, he said, “some banks won’t make it.”Neither Obama nor other administration officials said how much a renewed rescue plan might cost. It is possible that additional help could come from the Federal Reserve, not from Congress.

Still, Obama’s acknowledgment reinforced what many economists and bank industry officials have speculated for weeks.

“We can expect that we’re going to have to do more to shore up the financial system,” Obama said.

Treasury Secretary Timothy Geithner plans to announce a new framework for rescuing the financial sector in a speech next week. The plans will focus on how to use the remaining $350 billion in a $700 billion Troubled Asset Relief program that Congress approved in the fall. It will include new programs aimed at helping homeowners stave off foreclosure, and efforts to stabilize the banking sector.

We can’t keep doing this.  This is just insane.

Sometimes businesses, including banks, have to fail.  It’s how the market weeds out those who aren’t doing things properly.  If the government bails everyone out there’s no incentive to fix what’s broken.

Why can’t more people see this?

Also, as I’ve said before

If you aren’t free to fail, then you aren’t free to succeed!

From liberal friends over at Reuters:

BRUSSELS (Reuters) – Former President Jimmy Carter said on Friday the “atrocious economic policies” of the Bush administration had caused the worst global financial crisis since the Great Depression of the 1930s.

Carter told reporters on a stopover in Brussels that “profligate spending,” massive borrowing and dramatic tax cuts since President George W. Bush took office in 2001 were behind the market turmoil and economic crisis.

“I think it’s because of the atrocious economic policies of the Bush administration,” said the 84-year-old Democrat, who served in the White House from 1977-1981 during a period of high inflation and energy crisis.

The irony of this is too much.  President Carter is arguably the worst US president in the 20th century.  And whatever happened to the courtesy that expresidents used to give current presidents by not speaking out?

From breitbart.com:

WASHINGTON (AP) – With the economy on the brink and elections looming, Congress approved an unprecedented $700 billion government bailout of the battered financial industry on Friday and sent it to President Bush for his certain signature.The final vote, 263-171 in the House, a comfortable margin that was 58 more votes than it garnered on Monday. The vote capped two weeks of tumult in Congress and on Wall Street, punctuated by daily warnings that the country confronted the gravest economic crisis since the Great Depression if lawmakers failed to act.

This is awful, a sad day for the United States.  We have effectively completely nationalized an entire industry.

Now that the bail out has failed, what now?

Well, there’s a simple rule that works every time it is tried when the government gets involved in anything.  First, if you want less of something, tax it.  If you want more of something, reduce taxes or subsidize it.  So, if we want more investment instead of people pulling out of the market, why not cut capital gains taxes?

Here’s another idea:  Why not suspend mark to market?  If you are not familiar with this, check out this article at Wikipedia.  To put it very simply, these rules value assets in a company at current market value, usually a low, conservative estimation of market value.  This effects the value of a company’s assets and can cause capital shortages.  Suspending these rules would help ease some of the pressure on these companies.

Here’s a better idea:  GOVERNMENT LEAVE THE FREE MARKET ALONE!!

If we are not free to fail, we are not free to succeed.  I’m a small business owner.  The desire to succeed is a huge motivator.  If I had a “safety net” under me and it didn’t matter if I worked hard today or not, I may not have as much of a desire to work hard and earn my living.  By working hard I’m producing goods and services that increase the country’s GDP (although by a small amount but if you add up all the small businesses in the country, it’s a good portion of our country’s economy).

From the “Wow We Do Have Leaders In Congress” department:

Stocks plummeted on Wall Street even before the 228-205 vote to reject the bill was announced on the House floor.

The House on Monday defeated a $700 billion emergency rescue for the nation’s financial system, ignoring urgent warnings from President Bush and congressional leaders of both parties that the economy could nosedive into recession without it.

Bush and a host of leading congressional figures had implored the lawmakers to pass the legislation despite howls of protest from their constituents back home. Despite pressure from supporters, not enough members were willing to take the political risk just five weeks before an election.

We the people made this happen, and we should pat ourselves on the back!  This actually gives me hope that socialism can still be rejected in today’s America.

It almost brings a tear to my eye..

I like Bill O’Reilly.  I enjoy “The O’Reilly Factor” watch it most nights.  Last night in his “Talking Points Memo” he got it wrong.  (While we are on the subject of the “Talking Points Memo”, does it bug anyone else that he uses “Talking Points” as a noun in a sentence, i.e. “Talking Points believes that blah, blah, blah”.  Yes, I know it’s a “literary device” as Bill has mentioned, but it’s really annoying!  But I digress..)

So last night’s memo was about “Policing the Fat Cats”.  If you want to see the video, you can go here.  It’s the one from 9/22/08.  I’ll be using the text transcript from the website here and make my comments from it.

The feds had to bail out the collapsing financial industry or there would have been a depression in the United States. There’s no question about it.

Ludicrous.  As much as I love Bill’s interviewing style and his choice of guests and topics for the show, he does not understand basic economics.  As I mentioned in the oil company post several weeks ago, most people don’t understand basic economics.  I’ll explain as we venture further on in the memo.

The senator is correct. The president, the head of the SEC, Sen. Chris Dodd, a Democrat, Congressman Barney Frank, a Democrat, all should have publicly warned the folks that companies like Merrill Lynch and Lehman Brothers, Fannie Mae and Freddie Mac were trafficking in bad loans. But we can find no public warnings by those men, none, even though they all knew risky loans were rampant.

“The senator is correct.” is referring to a video clip that was shown of McCain saying everyone has failed.  What Bill doesn’t realize is that these folks created this mess.  What are they going to do, turn around and admit they made a mistake?  They are policians for crying out loud.  The problem didn’t come from the fact that no one warned the American people about bad loans, it comes from this notion that began during Clinton’s administration that everyone deserves to own a home and that the government should provide ways for those who can’t afford to own a home to buy a home.  Thus starts a cycle that happens in a free market that has a wrench thrown in the system by an outside force, i.e. the feds.

So here’s what happened:  To own a home in the past, you had to have 20% down and be able to prove you can pay the money back.  The government intervened in order for more people to have access to funds to purchase a home.  Here’s the problem.  The market already dictated who could own a home based on solid financial principles.  It is in the bank, mortgage company, or other financial institution to give a loan to someone.  If it is too risky of an investment, the bank will not make the loan.  However, when the government gets involved it changes those rules and the risky investments become “safer” because institutions like Freddie and Fanny are there to pick up the slack.

Add to that the fact that more people buying houses increases demand for housing.  For those of you who understand basic economics, you already know what is coming.  Increased demand means, say it with me now, increased prices!  So housing prices go up!  When housing goes up, people use the new found equity in their houses to fund things like vacations, cars, paying off other debts, etc.

Well, as what normally happens in a free market when something is inflated artificially, the bottom eventually fell out.  You see, those people who wouldn’t have gotten mortgages before because they couldn’t afford them, guess what?   They couldn’t afford them!!!  Major surprise there, eh?  And guess what happens to the companies that made the bad loans?  They lose money.  What happens when a company loses too much money?  They fail.

So, Bill, the issue is not that “nobody warned us”, the issue is that the government shouldn’t be involved at all.  Now we the taxpayers are probably going to bail out these companies and thus no lessons will be learned here.  If we let them fail, this will never happen again.  Bailing them out is more likely to cause a depression down the road than not bailing them out would.

Mr. O’Reilly then goes on a rampage about the oil industry again.  Instead of rehashing it here, just read this post.

Again, there is supposed to be a social contract in a capitalistic country. We need to trust the game is not rigged. The federal government must warn us if companies are putting investments at risk or exploiting the folks. That is what we elect these people to do.

We all have a right this evening, ladies and gentlemen, to be very angry about this.

Bill, when the government gets involved, someone is going to get screwed.  See, the government is not some cold organization that has no interest other than doing the will of the people (as it should be).  The government is made up of individuals who look out for their own self interests before the country’s.  I wish that weren’t true, but it is.  Just look to any level of government and you will see the same thing.  Heck, there was a local story here a couple of weeks ago about a city government official who had the sidewalk in front of his house redone but ignored the rest of the block that was falling apart.  Those things happen all the time.  The government is rarely the solution to the problem.  Frequently it is the problem.

This is nuts.

No, really..  absolutely nuts.

You would think that the vast majority of U.S. Congressmen have no clue about simple, basic economics.  I do have to give kudos to a handful of republican congressmen who stayed in the House after the democrat “leadership” closed up shop and turned the lights out on them.  (Which, ironically, is what eventually may happen to us if Congress doesn’t wise up!)  I’m especially proud of my congressman, Mike Pence (R-Ind), who was one of those who stayed to “debate”.  I’m very lucky to have a true conservative represent me in Washington.  There are very few of those left there.

So, according to politico.com, some of those representatives are going to continue their actions this week:

Continuing with their guerilla tactics from last week, House Republicans will be back on the floor Monday to talk gas prices, even though Congress is in recess, and they may stay there all week.

More than a dozen Republicans have already committed to make appearances, according to House GOP leadership aide, including National Republican Congressional Committee Chairman Tom Cole (Okla.).

Rep. Tom Price (R-Ga.) and Mike Pence (R-Ind.), who lead Friday’s five-hour talkathon after the House shut down for the August recess, are also expected to be there, according to this aide.

“In an urgent memo sent to GOP Members and staff Saturday (“A Call to Action on American Energy”), Republican Leader John Boehner (R-) and Whip Roy Blunt (R-Mo.) hailed Friday’s action, and encouraged House Republicans to return to the Capitol beginning Monday morning to help keep the historic effort going,” said a press release just released by Minority Leader Boehner’s office.

I’m not sure if this is going to help or not, but at least it’s getting the message out there that something has to be done.  The problem is simple.  The solution is simple.  But sometimes it seems that the simplest of things is the most difficult for our nation’s lawmakers.

See.. there’s this simple thing called “Economics”.  Economics is not hard to understand.  Take any industry.  I mean any industry and one simple rule applies.  There are no exceptions and I challenge anyone reading this to come up with an exception that would be true without government interference.

Let’s take the ever famous “widget”, for example.  Let’s say that the ACME company sells this cool gadget they call The Widget.  The Widget is an extraordinary device that they sell for an extraordinary price, let’s say $10,000 each.  But people want this extraordinary device and they pay for it.  Thousands do.  ACME starts rolling in the dough.  Eventually, someone, let’s say the XOXO company, decides they want a slice of that Widget pie.  So after doing some research they decide they can save some money by using a new production technique and they can make the Widget cheaper and sell it for $9,000.  ACME doesn’t like this so they upgrade their facilities in order to compete with XOXO and cut their profit margin to sell their Widget for $8,500.

In the meantime, American Widget Company (AWC) has developed a completely new Widget that has advanced features that they sell for $8,000.  Not only is it less expensive, it’s better!  So AWC starts gaining market share left and right.  ACME and XOXO have no choice but to either slash prices or upgrade their Widgets or they will be out of business.

Yes, this is simplistic, but this is how the free market works.  Prices come down and products get better because of market influences and the government doesn’t have to do a thing, and it works in every industry!! There are no exceptions.   There may be some industries where it takes years for competition to evolve, but eventually it does.  Look at the telephone industry.  AT&T had a stranglehold on it until the government broke them up.  It was assumed that telephones would always be a “monopoly” type of industry, but today you have MANY options, some that don’t use a traditional land line at all like VoIP, cellular, and others.

This same free market magic would work with oil also.  The problem right now is that there are only a handful of places to get oil out of the ground and a handful of companies that drill for oil or refine it into products we can use.  The barriers to enter the market are too great, mostly due to government interference over environmental or other reasons.

If the oil industry were left to a more open and free market, entrepreneurs would find less expensive and more productive ways to get oil out of the ground, refine it into products we can use (like GAS!), and drive the price of energy down.

I recommend anyone who doesn’t understand these principles to read a book by Thomas Sowell called “Basic Economics”:

It’s not a bad read considering the subject.  It should be required reading for all members of Congress at a minimum.  Maybe if they understood simple economics, we wouldn’t be paying $4.00 a gallon for gas.

That’s just nuts!