Wednesday, February 18, 2009

Antiquated Dreams of the Postmodern Capitalist

Today I was watching Larry Kudlow on CNBC. He was in the middle of a fight with four guests over validity of free markets. It struck me that I never would have imagined that I would live in a time where people in the United States would have to be convinced that Capitalism and free markets were the direction we should pursue. To me, it was like watching people argue over the color of the sky. Kudlow up there trying to convince them it is blue, and they trying to convince him that really it something different and it used to be blue. Where are we going with this?

When I talk to people all over the country – Arizona, California, Texas, Pennsylvania, and Ohio - they all state that they are against this bailout. I very rarely run across a person that is vehemently for this action. People want those who have gotten themselves into this pickle to be responsible for their own actions. In fact, a favorite quote I hear is that they have worked 10 or 15 years now and yet their investment accounts are down 40% or 50%. They want to know why their investments aren't being helped out.

When I hear half the politicians say they are against the bailout, but vote for it anyway I am hit with a sickening feeling. Additionally, when every politician who voted for or even against this action realistically didn't even know what they signed into law, where do you think this will lead us?

What is an amazing anomaly in this whole process is the media. What is interesting is that the media seems to be for it in a ratio of 5 or 6 to 1. They are spouting ideas such as how free markets don't work, there is need to regulate our ways out of this. What my reason shouts inside me is that regulation got us into this mess. How is regulation going to get us out of it?

I was at a luncheon the other day with a gentleman from the fed, he was saying that he really didn't believe in what we were doing was right. He made the point that this problem was brought on by a combination of artificially-low interest rates, lax lending and one more very interesting aspect that you don't hear discussed. This last element is rooted in governmental regulation of free markets. Many municipalities enacted regulations during the big housing boom that were designed to slow growth. These regulations included such acts as limiting the amount of building permits. Whereas, in a free market, demand would have driven new houses being built and maintaining a proper level of supply. These municipalities regulated the amount of supply available and thus artificially inflated the cost to the customer. Now we are going to attempt, as a federal entity, to put a floor under these artificially high home prices. Instead of correcting this initial problem and allowing the free market to correct the issues, we are doing nothing but exacerbating the problem. During the height of the boom, only 2% of Los Angles could afford the median priced home, now as the market has dropped prices that rate is up to closer to 40%...what our brilliant leaders want to do now, is to add regulations in an effort to increase home values again…do they want to get back to a place where nobody can afford an average priced home? This is insanity.

The following data is from OFEHO – Essentially, the federal housing index. If you notice that even with the big drop in values, the index is still almost double what it was in 2000. Now ask yourself, what has your 401(k) done since then?

…this is Chewbacca…


1 comment:

  1. It seems my chart did not post - I am still figuring things out...have patience.