Sunday, October 12, 2008

Please save us from the WPA.

I found this little nugget of info via "Can Turtles Fly?". Comparing the point losses of the S&P 500 to that of previous market declines is really interesting, and while shouldn't be used as a guide to how long it will take us to get out of this funk, is still really cool.

There is also this write up from the guys at FWallStreet on the state of the credit crisis and what got us to this point in the business cycle. While raising many good points, claiming that "The only economic savior in that environment (a recession) is government spending" is pretty baseless. Government intervention in the market is generally a bad thing, simply doling out the money of the people, with the middlemen in DC taking their cut, won't help out the long term economic outlook.

I remember in one of my economics classes hearing a great story that highlighted the fallacy of the government employing people to stimulate the economy:

There was once a Texas contractor that went to China to take a look at a land dam that was being constructed-a land dam, that was being constructed, using government employed laborers. While standing with the public works mananger, he was shocked to find out that there were 10,000 Chinese workers using shovels to move such a massive ammount of earth. Since he was there to offer advice, he asked the manager in his surly Texan tone, "Why is it that you have 10,000 workers to build this dam? If we were doing this in the US, we would simply get a few large earth movers, use about 100 workers around the clock, and have this thing done in a fraction of the time that it will take you, using this manual labor."

The project manager, feeling quite confident in his response retorted "If we did that, then we would have close to 10,000 people that would not have jobs, and if they don't have jobs, then that is bad for our economy."

The Texan, at this point feeling the urge to be rather blunt simply retorted "If you are wanting to create jobs, then why don't you quadruple your workforce and have them move this earth with spoons!"

The point being, having full employment provided by the government is not the way to get any meaningful long term economic growth. Plus, I certainly have more faith in people to figure out a way that they can make a better stapler or something; about anything is more efficient than moving dirt with a shovel at the whims of some bureaucrat. God help us if we go back to the alphabet soup of work projects in the 1930s.

Another interesting thing to point out (which I don't think has been talked about enough) is that the de-levering and lack of expansion that is occurring right now is not inherently bad. It isn't as if a business sitting on a pile of cash isn't going to do anything with it-after all, the cash will be in a bank account or in public spending via treasury notes, when banks "buy" a ton of deposits, they have to loan it out to produce cash flow. Failure to do so will put the bank out of business quite fast- as we have seen with WaMu.

When the banks seize up, their lending standards and get more stringent with their loans so that they can protect their investment-which again, there is nothing wrong with-it is simply survival. When it comes to survival, loaning money to the most worthy of companies and people seems like a smart thing to do... yet this hasn't been done for a while. It is ironic that the companies that are most suited to be lent to are the ones that didn't use much, if any leverage to get to the point where they were deserving of credit. These are the companies that will be able to expand, and ultimately save us from the crisis that we are in. Any companies that are bad stewards of capital will be absorbed, consolidated and merged into other companies making us better off... Westinghouse anyone?

While the de-leveraging will be painful, it will ultimately be a good thing for the economy.

Last night, one of my slightly left of center friends jokingly took a poke at me and said "Jeff, here's the thing, capitalism isn't fairing to well right now..." which, yeah, he is totally right. We just have to hold out for better days.

No comments: