Wednesday, March 30, 2011

A case in point

Ever since Reagan, it has be widely known among the thinking elite that lower taxes creates more revenue. This paradox is easily explained; an economy with lower taxes has more money to freely spend and invest, which expands the productive base by enfranchising more tax-payers and higher income individuals. In other words, 10% of 250 is greater than 20% of 100. This is why the United States Government gets more revenue than the European Governments, even with accounting for population.

But despite the mass of empirical and mathematical evidence that this is true, left-tards still insist that the state and federal governments need to raise taxes to balance the budget. Read and laugh.
Much of the conservative commentariat have written that the government should lower taxes, but with the deficits that we are running, and the stagnation that our economy is facing, I don't see this as a viable solution.

At times it is tiresome, if exceedingly easy, to continue smashing up intellectual terd like this time and time again. Moreover, the above statement not only betrays the logic presented above, but makes the egregious implication that lowering taxes should not be the response to an economic stagnation. She elaborates further.
While many insist that we have to lower taxes, the hard reality of it all is that we cannot afford to, our economy cannot afford to. People have stopped spending, so the government has to take their savings and spend it for them to stimulate the economy.... What most conservatives don't take into account is that the money taken by taxes doesn't vanish without being put into some goal. You may have guessed it, I am a government employee, and my money is just as good at stimulating the economy as the money of the cashier at McDonalds or that of any other private sector job.

Her vicious rant turned from being a laughable but somewhat coherent argument into downright self-parody. One wonders what mental disease made her write that. She makes 4 errors in 4 sentences. Lets examine them one by one.

1. While many insist that we have to lower taxes, the hard reality of it all is that we cannot afford to,

Raising taxes will only work in the short-term, as the productive sector will suffer and the reckless policies will still be extant to drain the system. Lowering taxes and reducing spending for everyone is the only viable option at this point. It may hurt for some people, but what pain it will induce is vastly preferable to the inevitable consequences of the current projectile.

2. our economy cannot afford to.

Of course it can.

3. What most conservatives don't take into account is that the money taken by taxes doesn't vanish without being put into some goal.

Quite possibly true to some extent. Although nobody would be foolish enough to deny it if directly asked, many make this assumption while making an argument. However, the relevant point is not that government money isn't used, but rather that it isn't used productively or based out of necessity.
When presented with no internal motivation or external impetus to do well, it is highly improbable that I will put in anything beyond minimal effort and that I will reach neither my productive nor creative potential. Left-libs can learn alot from their own experiences.

4. You may have guessed it, I am a government employee, and my money is just as good at stimulating the economy as the money of the cashier at McDonalds or that of any other private sector job.

She commits an error here by confusing a single aspect of a transaction for the whole circular flow. Her spending - and saving - may very well be just as economically stimulating as anybody else's, but the salient point is that where and how the money was acquired differs in that her's was a result of paper-pushing whereas the other's was a result of providing a service that was genuinely desired. The economic cost of her job is one not only of malinvestment, but one of opportunity; because she pushes papers, she cannot do any of the other billions of jobs that would be vastly more societally riching than the one she is doing now.

You know, out of all my critics in the various intellectual fields I fence in, religion, economics, feminism, decline and fall, it has to be the ones that fall into the left side of the politics debate that are the most stupid, and perhaps most unrewarding in demolishing.

Thursday, March 24, 2011

On The Big Short

While playing ball in Springfield Missouri, I read The Big Short by Michael Lewis. I devoured the pages - screen, actually, as I read it on my Father's Kindle. The book was extremely interesting and informative. It detailed the experiences of some of the investors that saw right through Bank fraud in the Subprime mortgage market. Characters such as Steve Eisman, Michael Burry, Charlie Ledley, and Greg Lippman.

Now then, due to my knowledge of Austrian economics, I was fairly well informed of why America is facing this current recession. I knew that it was the result of malinvestment triggered by credit expansion by the central bank; too many people took out loans that they couldn't afford, so in the moment of mass default, the banks failed, and the artifically low interest rates prompted too much spending without the needed amount of savings to ultimately back up the future investment.

However, I merely assumed that the Federal Reserve lowered the interest rates and the banks were eager to give out bad loans because of a failed economic paradigm. I thought they did so because they believed that giving people more money to spend was a good thing that would not have detriment consequences in the future, even if it was a Mexican lawn mower buying a half million dollar house.

I had heard that there was unmitigated greed and fraud going on in wall street, but I didn't know how it actually happened, so I was eager dispel this mystery by reading The Big Short. The book proved to be enlightening in that it revealed the insides of Wall Street and the motivation that guided the bankers to pursue those reckless policies. What I found was a grand conspiracy of massive proportions.

What happened in the pre-crises days of Wall street was that the Subprime Mortgage market was expanded into its biggest revenue producer. The big banks such as Morgan Stanley and company were no longer satisfied performing their role in serving the consumers by providing credit to those worthy of it, and thus they allocated capital efficiently. Instead, the became enamored by the idea of repackaging subprime mortgage loans into bonds that could be then sold for a profit. There was one problem, however, in finding a buyer for bonds that largely consisted of junk loans that most certainly were not going to pay off. The way they worked around this problem, though, was to assemble a CDO of filled with sour bonds but could somehow be rigged so as to be rated at Triple A status by the Rating agencies such as Moodies and Standard and Poor. This is precisely what they did; they found loopholes in the Rating agencie's risk models and exploited them so that a bond filled with 6 figure loans given to
strawberry pickers would be rated as "riskless." So then entities like AIG would buy the bonds in mass under the illusion that what they were buying was about as safe as a U.S Treasury bond.

The theme of the book is the experiences of a few smart investors that saw the fraud going on and its ramifications for the American economy. These men were in the distinct minority, all contrarians by heart. In fact, one gets the feel that it is only those that harbor a deep-seated cynicism coupled with contrianism that can clearly see what no one else sees. So while the consumers were under the housing hysteria, and the bankers enamored by the way they could make pure profit by packaging junk loans into reliable bonds, renegades like Eisman, Burry, and Ledley saw a massive ponzi scheme that was mathematically bound to fail. The way they ended up making jack was buying billions of dollars worth of credit default swaps on Subprime Mortgage CDO's - essentially a bet that those loans will go sour.

The book is very much worth reading, and will forever alter your conception of the roots of the ongoing financial crises.

More economic hogwash

Featured in the Wall Street Journal was a daring editorial blurb written by Sir Harold Evans, in which he confidently states that the stimulus package and Tarp were not only beneficial to the economy, but have been demonstrated to be beneficial. And in doing so, Evans reveals a myopic and blind trust in the authorities that got us into the mess so that we needed Tarp and Stimulus in the first place:

The Congressional Budget Office report of November 2010 and careful econometric assessments by two independent economists, Pof. Alan Blinder and Mark Zander, chief economist at Moody's.

You trust Moody's? Are you F----- kidding? If Moody's rated what was obviously crappy triple B bonds into riskless triple A one's, what makes you think that they can reliably examine the effects of a policy on the economy, which is almost infinitely more complex that than a single bond. But of course, not only should one not place any credibility on what Moody's has to say, but should place an active bet against, every time. Just ask Steve Eisman.
Both nonpartisan reports identify the positive effects of the american Recovery Act and TARP: "Without the government response, GDP in 2010 would be about 11.5% lower, payroll employment would be less by some 8.5 million Jobs and we would now be experiencing deflation."

In here we find epistemological arrogance on a grand scale. GDP lower by 11.5%? Despite the elegant equations and appeal to numbers, much of economics does not, and intrinsically cannot, predict what would have happened, let alone the future, with any degree of accuracy.

Although I wouldn't necessarily disagree with the gist of the message. GDP probably would be down had not the government taken action. Considering that Government spending is added to the sum total of GDP, this is not surprising. If the Government borrowed a trillion dollars and wastefully spent it, that would add one trillion dollars to the GDP. The problem, however, is that spending is not inherently beneficial to the economy, and at times can be antithetical to it. As regular readers of this blog will surely point out, stimulus packages serve to redirect money into areas where they otherwise wouldn't be directed, mostly because nobody has need of it. So we overbuilt our real estate, do we need to hire more construction workers and build more houses? The American Recovery Act is both artificial and deceptive in its effects. It is this that makes the issue so convoluted.

Moreover, TARP and ARA-induced economic recovery is not necessarily indicative of long term growth; debts have to repaid, and people will eventually have to take their training wheels off, because they will fall once they break.

Sir Evans' diatribe on the matter is not evidence that the various government interventions were beneficial to the American economy, it merely serves to demonstrate that you should be very careful where you place your blind, unwitty trust.