Behind The Two Doors

No one won today in Congress. Today’s historic vote defeating the bailout bill is just an opening battle in an ongoing war that may last for decades.

Today’s defeat of the bailout may be a pyrrhic victory. The bipartisan, reactionary forces led by Secretary Paulson, Fed Chairman Bernanke, President Bush, House Speaker Pelosi, and Congressman Frank will be back again very shortly. And let’s make no mistake; although those who support the bailout may call themselves Republicans or Democrats, they are reactionaries—reactionaries in the sense that they long for a world where entrenched wealth gets to keep it forever. After they destroy America, those who now are poor or middle class need but stand by and hope for a few handouts.

They want a world of old Europe that our Founding Fathers fled and overthrew. Thanks to our Founding Fathers, there is no nobility in America, or permanent titles of privilege, or permanent grants of wealth. In America, many families have made great fortunes; and then their children and grandchildren have squandered their fortune. Contrary to popular belief, if you look back 100 years, there are great turnovers among those who constitute the wealthiest in America.

Those who are currently on Wall Street and the reactionary politicians who enable them want to take no chances on what the market will reveal next. They desperately want to steal America’s money; they are willing to destroy America; and in the process, they will throw every man, woman, and child overboard in their cowardly attempts to get on the first lifeboats.

Consider for a minute Congressman Barney Frank, who postures as a friend of the little man, and is tirelessly working for this bailout. Guess who is the largest recipient in Congress of campaign money from mortgage bankers? Guess who received over $600,000 of campaign money this year from political action committees—including those representing Wall Street interests. That’s correct—it is Barney Frank.

We are told a free market is to blame for our current mess. Nonsense! It is reactionary politicians like Barney Frank and President Bush. In a free market, many more financial institutions would be bankrupt already; great fortunes among their major shareholders would have been lost and their CEOs disgraced. In a free market, there are no politicians to steal other people’s money so that those who have wealth can keep it. The free market punishes fools and the greedy without remorse.

Yes, this is a bailout and not an investment in America, as some are nonsensically claiming. If this was a good investment, Henry Paulson would be liquidating his own vast wealth in order to get in on the ground floor. Until he does this, don’t let anybody tell you that this is an investment in America.

As I sat at my computer this afternoon and saw the terrible plunge on Wall Street unfolding, I couldn’t help myself. I got up, turned on the TV, and tuned to CNBC. Commentator after commentator was asking breathlessly some form of these questions: “Why is the public against the bailout? Don’t they know that this is for their own good and how much they will suffer if Congress doesn’t pass this?” As I listened, I heard in their voices the belief that the bill will be passed eventually; I heard how they were looking forward to the suffering of the “peasants” who dared to oppose them. Talk about wolves in sheep’s clothing.

They may be right, some form of the bill may pass; but they have overplayed their hand. A populist uprising has begun. A populist uprising is never principle driven; but instead, it is fueled by anger, fear, and class hatred. Down the road, especially as economic conditions worsen, this will not be a good thing. Think of the French Revolution and you will know how badly a revolution driven by populist sentiment can end.

So where do we stand right now. If by some miracle, no bailout is passed, Chairman Bernanke and Secretary Paulson are fired, and in November, the public repudiates every politician who voted for the bailout, then a deflationary depression will begin. That’s the best case scenario. Those financial institutions that have failed will be revealed and liquidated. Many fortunes both large and small will be lost, and the social carnage will be enormous. Yet, out of that, in no more than a year’s time, the rebuilding will begin; and a healthy and sustainable economy will emerge.

If, on the other hand, the reactionary forces prevail, more money will be thrown after bad; foreigners will withdraw from our capital markets; and eventually, a hyperinflation will begin. In that terrible scenario, it is likely that the United States will split apart; and many cities will descend into anarchy. You can see why I prefer the deflationary depression.

The choice behind the two doors—deflationary depression or hyperinflation—is a terrible and tragic one. Don’t trust reactionary forces to make the choice that is best for you.

Health Alert: Chinese Dairy Products in Our Food

Due to a little known loophole in the food safety laws in the United States, it is likely that most Americans are unknowingly consuming Chinese dairy products and other contaminated Chinese ingredients.

Did you know that China is the largest exporter of whey into the United States? Did you know that if your favorite cookie contains Chinese whey, the U.S. manufacturer does not have a legal responsibility to inform you? Did you know that the assurances made by the Food and Drug Administration (FDA) about Chinese dairy products not being in our food are almost certainly false?

None of this should be surprising. The current financial meltdown has demonstrated that Congress and government regulators will put the interests of the industries that they regulate above the interests of the public. The FDA is no different.

This weekend the Chinese dairy scandal expanded. Pizza Hut in Taiwan has found melamine contaminated cheese powder, contaminated cookies were found in Japan, contaminated candy in England, and contaminated Heinz baby cereal in Hong Kong. In the United States, the FDA warned against the consumption of Mr. Brown coffee and milk tea products that were made in China because of possible melamine contamination. This is just the tip of the iceberg: The problem of Chinese dairy products in our food supply is certainly more widespread then we have been led to believe—and it is NOT limited to foods labeled of Chinese origin.

The poisoning of over 50,000 babies in China may be a tragic human interest story; yet, to many Americans it seems to be not relevant to their daily concerns. After all, similar adulteration of U.S. dairy products seems almost impossible, and very few consumers in the United States knowingly consume Chinese dairy products.

However, sadly, this complacency is unwarranted. As I mentioned, due to a little known loophole in the food safety laws in the United States, it is likely that many Americans are consuming Chinese dairy products. The assurances by the FDA that Chinese ingredients are not in infant formula in the United States fail to address much larger questions about Chinese dairy ingredients in the general food supply.

When most consumers fill their supermarket shopping carts with processed foods manufactured in the United States, they have no idea that these foods can legally contain unlabeled imported ingredients. Again, this is another case of regulators failing to do their job; it is another case of regulators enabling the firms they regulate to put one over the on the public with legal impunity.

In general, food products from foreign countries have to be labeled with their country of origin. Thus, olive oil from Italy is marked as a product of Italy. There is a big exception to the labeling requirement for imported products that undergo a “substantial transformation.” For example, a grape jelly manufacturer in the United States may be made from Chilean grapes, yet the manufacturer does not have to label their product as having a Chilean origin. Similarly, if a U.S. company uses imported dairy in their processed products, since the imported dairy product undergoes a “substantial transformation,” the U.S. producer need not label their products as having imported dairy ingredients.

There are no fresh Chinese dairy products that are generally available in the United States; and in any case, even if there were, the country of origin would be labeled. However, literally thousands of processed foods such as chocolate, crackers, cookies, pastries, “nutritional” drinks, and body-building powders have among their ingredients milk powder, cheese powder, and whey. China is the largest supplier of whey that is imported into the United States. Since a processed food undergoes a “substantial transformation,” if the final product is manufactured in the United States, there is no way for a consumer to know if they are consuming potentially poisonous Chinese dairy products.

Since this is just the latest Chinese food scandal—previous ones have involved soy protein, gluten, glycerin, fish, candy, ginger and garlic—you should be alarmed. The food labeling laws allow for Chinese ingredients to be used in processed foods without being labeled as being of Chinese origin.

So what can you do?

1. Eat less processed foods and more whole foods. Again, imported whole foods must be labeled.
2. For those processed foods that you must eat, call the manufacturer and ask them to name the country of origin for all of their ingredients. If their answer is equivocal, make it clear that you will stop buying their product.

Let me make it clear, I am a strong advocate of free-trade. China is an important trading partner, and trade benefits both nations. However, selling tainted food is a criminal action that is being aided and abetted by our food labeling laws.

The legacy of socialism in China has created an atmosphere where Chinese businessmen and their allies in government pursue mindless acts of cruelty and justify their actions with warped reasoning. While ordinary Chinese citizens eat poisoned food, the Chinese State Council Central Government Offices Special Food Supply Center assures that high government officials eat only organic foods such as “hormone-free beef from the grasslands of Inner Mongolia, organic tea from the foothills of Tibet and rice watered by melted mountain snow.”

The quickest way for this legacy to be undone is for China’s manufacturers to experience the strong power of market discipline. One Chinese brand affected by the current scandal is Bright Foods. Ge Junjie, a vice president of Bright Foods (Group) Co. Ltd., said: “It’s a tragedy for the Chinese food industry and a big lesson for us as it ruined the time-honored brand.” Yes, Mr. Junjie, that is what should happen when you behave in a criminal manner.

You can help spread the discipline of the free-market by knowing what you eat and by not relying on the U.S. government for assurances of food safety. My 2007 experiments with calling food manufactures do not exactly inspire confidence. For instance, Post brand “Cranberry Almond Crunch” cereal contains glycerin. Diethylene glycol which is a poison found in an anti-freeze has been substituted for glycerin in Chinese manufactured toothpaste. Last year, when we called Post, they could not tell us the country of origin for the glycerin they use.

Know what you eat! As you do, you will discipline not only Chinese producers but U.S. food manufacturers as well.

Can George Bush and Congress Fix the Economy?

Note: All of President Bush’s quotations are from his address to the Nation on 9/24/08

President Bush: “Over the past few weeks, many Americans have felt anxiety about their finances and their future. I understand their worry and their frustration.”

Barry: President Bush, while it is true that you don’t have to walk in someone’s shoes to feel their intensity of emotion, no one believes that you understand. Last night you were simply repeating words that you read on a teleprompter.

President Bush: “My administration is working with Congress to address the root cause behind much of the instability in our markets.”

Barry: You and Congress are doing nothing about the real root causes. In fact, you are not even talking about them. The root causes include the Fed’s reckless credit expansion, fractional reserve banking, reckless Congressional spending, and the “something for nothing” attitude that pervades America.

President Bush: “This rescue effort is not aimed at preserving any individual company or industry. It is aimed at preserving America’s overall economy.”

Barry: This is absurd on the face of it. Money will be given to specific corporations and financial institutions and not given to others. It will throw good money after bad and will help to further destroy the economy.

President Bush: “For more than a decade, a massive amount of money flowed into the United States from investors abroad because our country is an attractive and secure place to do business. This large influx of money to U.S. banks and financial institutions, along with low interest rates, made it easier for Americans to get credit.”

Barry: Yes, let’s blame foreigners and ignore the role of the Fed in recklessly pursuing a policy of extreme credit expansion.

President Bush: “Easy credit, combined with the faulty assumption that home values would continue to rise, led to excesses and bad decisions.”

Barry: Only a charlatan or someone whose good sense had left them during the housing mania, would have believed that home values would continue to rise forever. Yes, there are many charlatans and among them are the very people that you are relying on to solve the crisis.

President Bush: “Investment banks, such as Bear Stearns and Lehman Brothers, found themselves saddled with large amounts of assets they could not sell. They ran out of money needed to meet their immediate obligations, and they faced imminent collapse.”

Barry: They are not victims; they made terrible business decisions over and over again. In the process, they enriched themselves. Now, they and others who did the same should bear the consequences.

President Bush: “I’m a strong believer in free enterprise, so my natural instinct is to oppose government intervention. I believe companies that make bad decisions should be allowed to go out of business.

Barry: Nothing you have done during your eight years as President would demonstrate that there is one iota of truth in that statement.

President Bush: “I also understand the frustration of responsible Americans who pay their mortgages on time, file their tax returns every April 15th, and are reluctant to pay the cost of excesses on Wall Street. But given the situation we are facing, not passing a bill now would cost these Americans much more later.”

Barry: The opposite is the truth. There are terrible times ahead, and the bailout of Wall Street will only increase the severity of our suffering.

President Bush: “Any rescue plan… should make certain that failed executives do not receive a windfall from your tax dollars.”

Barry: This is impossible. These executives have already collectively earned billions, and our tax dollars will cement their ill-gotten gains.

President Bush: “The government is the one institution with the patience and resources to buy these assets at their current low prices and hold them until markets return to normal. And when that happens, money will flow back to the Treasury as these assets are sold, and we expect that much, if not all, of the tax dollars we invest will be paid back.”

Barry: Again, this is absurd. If these assets were good buys, free-market institutions would be snapping them up. Wall Street will unload the biggest dogs in their portfolio to the taxpayer.

President Bush: “Despite corrections in the marketplace and instances of abuse, democratic capitalism is the best system ever devised. It has unleashed the talents and the productivity and entrepreneurial spirit of our citizens. It has made this country the best place in the world to invest and do business. And it gives our economy the flexibility and resilience to absorb shocks, adjust, and bounce back.”

Barry: I have no idea what you mean by “democratic capitalism”? Does that mean that some are free to steal the money of others under the cover of a Congressional vote? In any case, what you and Congress are doing will ensure that America does not bounce back for many years.

First They Came For the Short Sellers

In Germany, they came first for the Communists, And I didn’t speak up because I wasn’t a Communist; And then they came for the trade unionists, And I didn’t speak up because I wasn’t a trade unionist; And then they came for the Jews, And I didn’t speak up because I wasn’t a Jew; And then . . . they came for me . . . And by that time there was no one left to speak up.—Martin Niemöller

Any educated individual should understand the essential role that short sellers play in a market economy. Of course, most don’t; and government and its mouthpieces are only too eager to exploit this deficiency in Americans’ education.

William Buckley used to say that he would rather be governed by the first 100 names in the Boston phone directory than by the entire faculty of Harvard University. Well, I don’t wish to be governed by either. Anyone who would believe this “short sellers are to blame” nonsense is not fit to govern; and yes, sadly, the public seems to be eating up this pabulum.

Anyone fit to lead would not be looking for a scapegoat. They would explain with clarity the real truth of how we got into this mess and the sound policies that would lead us out of it. That our leaders are spouting nonsense and the public is buying, says much about where we currently are as a nation—such a search for false, external villains is more worthy of a developing country where ignorance, fear, and superstition are the norm. Recently, in Pakistan—not exactly a bastion of stability and freedom—short sellers were blamed for their stock market bust.

Blaming short sellers is sort of like going to get a root canal and blaming your endodontist for the pain that you are going through. The short seller, just like the endodontist, is simply uncovering—not causing—the preexisting rot.

About the draft Treasury bailout bill that is currently before Congress, Joshua Rosner, a managing director at Graham Fisher (a company that does independent research for institutional investors) was quoted in The New York Times as saying that the bill:

prevents judicial review that could allow the protection of decisions that create false marks, hide prior marks, or could be used to prevent civil or criminal prosecution in situations where a management knowingly provided false marks that aided the growth of this crisis of confidence.

A “false mark” is “using mark-to-market accounting to hide the true value of security, rather than disclose it honestly.” No wonder the government and our failing financial institutions are so intent on blaming short sellers.

Let’s get down to basics. Someone who buys long and someone who sells short have the same goal—to make money. And they can only make money if they are correct about the future prospects of the company they are buying or selling.

The idea that a short seller can make money by spreading false information is absurd. If all the readers of this post formed a secret cabal to spread misinformation about Google so that we could make money by selling short Google, good luck to us. We would lose our money as fast as we could invest it.

The reasons for this are clear. Market forces are far more powerful than a few hundred traders spreading misinformation. And why would a short seller try and make money the hard way? Why not do it the far easier way? Why not uncover information about stocks that are truly overvalued because, for example, the true prospects are being overlooked or the company is committing fraud.

Now, here is a key point: In uncovering this information and then selling the stock short, a short seller would be providing a valuable service to the market. First, information is a precious commodity. Those who lack the information that a short seller has may blindly continued to invest in a hazardous way. Secondly, when the inevitable happens and the overvalued stock begins to fall, a short seller actually breaks the fall in price. How? The only way for a short seller to book their gain is to cover their short position by buying the very stock they shorted.

James Chanos writing in The Wall Street Journal explains why short sellers are vilified and the essential role that they play:

In the U.S., we’ve seen how corporate executives have tried to place the blame for their failures on short sellers instead of on themselves. In the end, short sellers—not management—defended honesty in the pricing of shares by demanding accountability. Short sellers openly warned about the problems at Enron, Tyco, Fannie Mae and Freddie Mac before their meltdowns. And when it comes to investigating corporate fraud, it’s the short sellers who are the detectives, while all too often our regulators practice archaeology.

It is not hard to see where this attack on shorts sellers will lead. As the economy worsens, restrictions on the Internet are surely down the road. After all, politicians will tell us about how much bad information is on the Internet. They will say, think how much more confident we would be about the economy, if we were not bombarded everyday by negative analysis on the Internet. Any restrictions, they will tell us, are temporary; any inconvenience, they will assure us, is a small price to pay to get the economy going again.

The mainstream media, having lost market share to the Internet, will surely agree; as will the academics whose livelihood depends upon the largess of government. Government will surely use an economic crisis to strengthen its position by restricting the flow of information.

Of course, it will not end there. Immigrants will be blamed, even more than they are today, for taking away jobs. There will be pressure for at least token deportations.

And then will come the search for foreign enemies.

What the government can count on is this principle of human nature—while we may disagree about who to blame, frightened human beings are all too willing to agree to find an external cause for their misery. The most ruthless members of government will exploit this weakness in human nature.

When we enter this terrible part of the economic cycle that is yet to come, the search for scapegoats will begin in earnest. And in human history, this search for scapegoats has already produced hundreds of millions of victims.

A fixed pie or a shrinking economy is manna from heaven for demagogic politicians. They can offer solutions that blame external enemies, foreign and domestic, for our collective misery. They can tell some groups that they have too little because other groups have too much. Such politicians will feed off the anger, fear, and despair that a shrinking economic pie produces.

We are in the very early innings of this tired human game. Everywhere on Earth that this game has ever been played, it has ended in tragedy and immense human suffering. The outcome won’t be any different here. There is still time to choose a better way.

It’s The End of the World As We Know It

There can be no prosperity without freedom. For now, and perhaps for decades to come, America’s best days are behind us.

For Americans who are economically literate, the events of this week are as significant as those of 9/11. The proverbial tanks have rolled in America this week in a bloodless coup. This is the end of America as we have known it. This country was built on the supremacy of rule of law, on the sanctity of contracts and property rights, on individual liberty, and on trust that most people will keep their word. For now, that America has ended.

I have told my students for years that when fears of economic troubles increase, politicians will be ready to exploit those fears. The public and the media seem collectively ready to justify the end of America that we have known; they are hypnotizing themselves with the mantra “it would have been so much worse if the Bernanke and Paulson had done nothing.”

A public that has lost touch with the principles that promote liberty and prosperity will always trade away freedom for the illusion of security. And they will wind up with neither freedom nor economic security. That day of reckoning has arrived.

Let’s make a few things very clear. The failure of the housing market, AIG, Fannie Mae, Lehman etc. is not what is damaging the economy; the damage to the economy occurred during the boom. The artificially cheap credit policy pursued by the Fed under Greenspan and Bernanke did the invisible (during the boom) damage. The failures we are experiencing today are the consequences of the distortions created in the boom.

Too many houses were built, mortgages were issued to those unqualified to receive them, housing prices were driven to unattainable levels, and Wall Street and the banks bought and sold these mortgages. Wall Street and the banks acted as if housing prices would go up forever and bailout them out of their mistakes. Cheap credit allowed Ford, GM, and Chrysler to sell enough cars to be complacent—complacent enough to not truly innovate and be competitive.

I could go on, but you get the picture. What we are now experiencing is the liquidation of damages that have already occurred—we are in the credit contraction part of the cycle. Again—the problem is not housing foreclosures, Lehman Brothers, etc. These are symptoms of what the Fed, fractional reserve banking, and out of control Congressional spending had already wrought.

The analogy of an alcohol or drug addict is helpful. The damage to the addict occurs when he is taking cocaine, heroin, or alcohol. When he is off his high he is recovering form the previous damage. No matter how much he screams for more drugs or alcohol, no reputable treatment center would supply him with more.

Those who have benefited by the past excesses are now screaming for more drugs in the form of cheap credit and bailouts. The amount of bailouts that our essentially bankrupt government is promising is staggering—it will easily run over a trillion of dollars. The productive sectors of the economy will be forced to foot the bill—we’ll be forced to throw good money after bad.

Again, let’s be clear. These bailouts will not save us from the terrible times ahead. The damage to the economy has already been done, and we are now transferring the good money of productive taxpayers into the hands of those who wrecked the economy. As Lila Rajiva, coauthor of the excellent Mobs, Messiahs and Markets, colorfully wrote, the attempt to portray the interests of Wall Street and Main Street as exactly the same is false:

We, of course, need to do nothing. There is no we here. This is a Wall Street crisis. And the usual suspects on Wall Street need to line up, bend over and get caned for their misdeeds. Barring that, they need to take the market’s medicine like men.

Instead, they were out in full therapeutic mode, pouting and whining for a change of their soggy diapers by dear Nanny Washington.

Andrew Jeffrey writing in Minyanville colorfully explains why the failures on Wall Street need to be liquidated and not subsidized:

When government invades free markets to the extent it has – specifically in the last 24 hours — the system ensuring capital gets where it needs to be breaks down. Money is instead doled out to the firms well connected enough in Washington to lobby for handouts.

Beltway bureaucrats have been trying to rewrite this country’s economic rules and protect Wall Street from its own mistakes for over a year. Still, the free market prevailed, punishing the firms that made the most egregious bets during the housing boom: Countrywide, Bear Stearns, IndyMac, Merrill Lynch (MER), AIG (AIG), Lehman Brothers, National City (NCC), Washington Mutual (WM) and Wachovia (WB).

According to our once-free market, these firms needed to be wiped out, gobbled up and liquidated, so real economic growth could take hold from a stronger foundation.

The bailouts of the incompetent and corrupt may work for a while—read “a while” as in weeks or months—but then the inevitable will begin again.

When the stock market decline resumes, the ban on short selling will cause prices to fall even more than they would have otherwise. (More on short selling in another post.) Welcome to a no growth, capital starved economy of shrinking opportunity.

Jeffrey Tucker in his excellent essay The Rich He Hath Sent Away explains why the current reprieve will be short lived:

Market conditions change. A dramatic change can blow away a company with billions in assets in a matter of days. With communication technology moving information at lightning speed every second of every day all over the world, there is nothing anyone can do to stop this from happening. The secretary of the Treasury, the heads of the Fortune 500, and the governors of the Federal Reserve can meet in rooms and hammer out deals all they want. But they are powerless to stop a market that has turned.

Mostly what the powerful attempt to do is provide more of what started this mess to begin with: floods of paper money. What is the effect of that? It can postpone the day of reckoning sometimes. But at what cost? Every dollar that the Federal Reserve prints waters down the value of the existing dollar, which means one thing: inflation. Actually, it means one more thing: distorted market signals.

Even then, the market winds blow ever stronger. The injections of credit in the past didn’t stop the present crisis; it only worsened them by creating the illusion that life could go on as usual.

From today, for how long will life go on as usual? Clearly the time between each crisis and each “solution” is shrinking, and this rally, if it continues, will soon be rudely interrupted. One day the government will run out of funds that they can confiscate from the healthy sectors of the economy, or the new drugs administered will not work at all—the economy will simply seize up just as a young drug addict sometimes dies prematurely from a heart attack.

At that point, the Fed and the Treasury department will have a choice. They will have thrown way so much good money bailing out bad assets that either they will have to allow a full-blown deflationary depression to proceed, or they will have to print so much money as to generate hyperinflation.

The political pressure by demagogues to choose hyperinflation will be enormous; we can only hope for a deflationary depression. Why? Our economy is extraordinary resilient, but only if we allow it to be. Without government intervention, the market will dismantle our failed financial institutions and transfer the remaining assets to those who are better able to manage them. A deflationary depression, if it is allowed to proceed, can end relatively quickly; and prosperity can begin again. Many of us who played no part in creating the problem will suffer greatly, but the alternative is far worse.

Let us hope we don’t choose the more dangerous path of hyperinflation. A hyperinflation, such as Zimbabwe is experiencing today or Germany did in the 20s, will essentially destroy the market economy and it will threaten the survival of the country as we currently know it.

I fear for the future of this country, and I’m not just speaking in economic terms. There are many Americans who will lose everything in the coming years. No doubt future political demagogues will feed on their anger, and far more ruthless and despotic elements than we see today will likely rise to the top.

Android Changes Everything

Do you remember life before Amazon? Do you remember life before Google? Or even, life before personal computers? Every so often a new product creates a sea change so big that life before the product seems like just a vague memory of a previous existence in a foreign land.

And now there is Android. Android is an operating system for mobile phones that is being developed by Google. I would bet on Android to crush the iPhone and other competitors.

Now, this is a rather bold prediction coming from someone who hardly uses his mobile phone, has never seen an iPhone, and knows nothing of Android other than what he has read in news stories. True confession—I have never sent a text message. So, what the heck can I know about the future of mobile phones?

In contrast to my prediction, many technology experts, such as Matt Asay, believe Android is no match for Apple’s expertise. Asay explains, “In part this is because Google may lack the aesthetic touch that Apple has in spades, just as Microsoft does… Android is still no iPhone killer.”

Asay is wrong. Aesthetics are critical when products are close competitors in price and quality, but no amount of design aesthetics would currently sell many Changfengs (a Chinese car) over Hondas in the United States. The why is clear—a Changfeng would not be in the same quality league as a Honda.

I understand that to Apple fans, such as Asay, my comparison is ridiculous. The iPhone to them is the current pinnacle of mobile phone development. However, what Asay may not understand is the enormous flexibility and innovative capacity of open source operating systems. Unlike the iPhone and every other competitor, Android is an open source operating system.

True, there are smart developers at Apple who have apparently made a pretty good product in the iPhone. But a handful of smart developers can’t compete against many smart developers, and pretty good can’t compete against great. Planned development can’t compete against the decentralized forces of spontaneous development. Self-organizing systems are more powerful than a thousand Steve Jobs; and they rarely behave as experts, such as Asay, predict.

Google is not going at this alone. Scott Taves writes that Google has put together a “collaborative group including Google and more than 30 semiconductor and software companies, mobile operators and handset manufacturers.”

But it doesn’t stop there. Most importantly, Google is encouraging independent teams not affiliated with any company to develop applications for Android. To kick off interest among developers, Google is awarding $10 million dollars in prize money to developers with the best applications. Developers, according to Google’s Eric Chu, “will be able to make their content available on an open service hosted by Google that features a feedback and rating system similar to YouTube…We feel that developers should have an open and unobstructed environment to make their content available.”

Even before the first Android phone has even been released, there are applications that will interest even a “not much use for a cell phone other than to call and say I’m stuck in traffic” person like me.

How about these features? You are out shopping and about to buy something on impulse. But you wonder, is it a good price? You scan the barcode of the item into an Android phone; and the phone gives you the best price online, as well as the prices at local merchants nearby you.

Or, consider this. There is an emergency; immediately, you need to physically locate a family member. Android will be able to do that too.

Here is the bottom line—free-markets always beat centrally planned economies; and similarly, Android will beat Apple and any other closed operating system. Due to compounding inherent in the market’s discovery process, five years from now, the Android powered mobile phone will be a gadget that we could hardly recognize today. In ways we can’t anticipate today, the long-promised era of convergence among all of our various electronic gadgets with different operating systems will be at hand. If Google is successful with Android, imagine next a Google computer with the open source operating system Linux. Imagine your phone seamlessly integrating with your computer. Imagine no longer having to gnash your teeth over whatever future proprietary operating system Microsoft will be trying to sell. If I was Microsoft, I would be very scared. But then again, those in Microsoft who urged a movement away from proprietary software have long ago been forced out of the company.

A world without Windows is hard to imagine, but then again, so was a world with personal computers. Smart people make mistakes, because they can’t anticipate the power of markets to change the status quo. In 1977, when IBM and Digital Equipment Corporation (DEC) dominated the computer industry, DEC’s CEO, Ken Olsen, said, “There is no reason for any individual to have a personal computer in his home.”

Of course, there turned out to be thousands of reasons; but those reasons needed to be discovered by the market process. Android will unleash a new process of discovery, and the results are likely to be as revolutionary as the personal computer.

Parts of this piece may read like a gushing press release for Google. I assure you that I am not on Google’s payroll. With unrelenting bad news unfolding in the economy and the iron fist of government increasingly choking off innovation, it is good to know that American entrepreneurs are still busy changing the world and making all of our lives better in the process.

This is the free-market at its best. Without any direction from politicians, Google is about to revolutionize the world—again.

They Ended Up Doing Very Well

My wife doesn’t watch much television, but she has an affinity for English detective shows. Having heard rave reviews (all warranted) about Foyle’s War we began to watch the series which is broadcast on PBS. This past weekend we saw the final episode which takes place as World War 2 is ending. The murderer is running for Parliament—as well as being a murderer, he has also stayed out of the war by faking a heart condition. Near the end of episode, Foyle dryly observes to the captured suspect, “Having evaded the draft, murdered a member of the medical profession, tried to avoid detection to feather your own nest, I’d have said you were a born politician. But, the Law being what it is, hanging is perhaps the very best way you can serve your country.”

Foyle’s character is absolutely unimpeachable—as such, he has no use for arrogant bureaucrats and politicians who cheat, compromise, and put their own career above the public and the law. I make no claim to be as flawless a character as Foyle, but I do share his disgust for most politicians.

The morning after we watched the episode, The New York Times reported that Congressman Charles Rangel “paid no interest for more than a decade on a mortgage extended to him to buy a villa at a beachfront resort in the Dominican Republic.” Rangel, who continually advocates and votes for higher taxes for the rest of us, “earned more than $75,000 in rent on the vacation home since 1988” and paid no taxes on the rental income.

This is not the first time that Rangel has made the news as one of our more visibly corrupt politicians. In July, we learned that he was leasing, from a prominent real estate developer, four New York City rent-stabilized apartments, including one he used as a campaign office. This was in violation of New York State law which limits these plum units, which can rent for thousands under the market price, to one for a primary residence. Rangel has defiantly given up only one of the apartments; he has vowed to keep the other three.

We further learned this summer that Rangel, who is chairman of the powerful House Ways and Means Committee, has been shaking down corporations who have business before his committee for contributions to his “monument to me”—the Charles B. Rangel Center for Public Service at the City College of New York. Before shaking down corporations, Rangel had begun with the taxpayers who coughed up almost $2 million for his building that, among other things, will house this “great” man’s papers.

When a two-term congressman objected to Rangel’s center, he retorted: “I would have a problem if you did it, because I don’t think that you’ve been around long enough . . . to inspire a building like this in a school.” In other words, to Rangel, this is just one more perk of the job that seniority earns. And some agree, such as New York Sun editor Seth Lipsky who wrote: “In Europe, they’d have given him a castle and a realm.”

Presumably, Lipsky means that Rangel deserves a reward for his great deeds. But I wonder if Lipsky can name one great deed. Of course, while enriching himself, Rangel has posed as a champion of the poor and downtrodden.

Milton Friedman used to say of politicians: “They came to do good and they ending up doing well.” Friedman gives politicians too much credit. The implication is that originally they were honest, but then they were corrupted by the system.

If Rangel was truly interested in helping the poor, I can think of many ways he could have helped. Perhaps instead of illegally occupying apartments, he could have been a low-cost housing developer. Instead of building a monument to himself, he could opened a discount supermarket in a poor area. If he preferred a more anonymous life, he could have volunteered in a soup kitchen. And if his talents were such, he could have invented something that would have improved the lives of millions.

Instead, Rangel has chosen to enrich himself at the expense of the taxpayers. We have only ourselves to blame. Charles Hugh Smith observes:

Look around; why are the politicians who pander most and pander best the ones who get re-elected? Why is the most visibly ludicrous and false posturing accepted with nary a complaint, and the mainstream media/CNBC/Fox propaganda sucked up like a sugar-free soda? What are we so afraid of? That we can no longer work, or cut our own path, or deal with challenges that require long-term thinking and sacrifice?

Rangel’s almost 40 years in the House, feeding at the public trough, would make the founding fathers sick. They envisioned a government served by individuals of accomplishment, who would serve the public for a short time at a sacrifice to themselves, before resuming their normal life.

Imagine this—a Cato Institute study found that “it was 1900 before the average number of terms served by House members exceeded two.” Doug Bandow further writes:

Average turnover during the Republic’s first century was 43 percent; more than a third of members simply retired of their own accord, to resume previous professions or develop new ones. Not until 1900 did electoral turnover fall below 30 percent. And total turnover was occasionally staggering: 76 percent in 1842, 63.8 percent in 1852, 63.7 percent in 1816, 62 percent in 1854, and 61.5 percent in 1862.(67) Back then, elections were heavily policy driven—disgusted voters would transform Congress in one election if angry over Federalist opposition to the War of 1812, passage of the Fugitive Slave Act, the compromise over slavery in the Kansas territories, the Republican party’s prosecution the Civil War, or any number of other serious issues. Even in the second half of the 19th century, turnover averaged 50.2 percent.

Term limits are one way to deter career politicians, but I can think of others. Make it impossible for them to earn more than a Congressional salary. If campaign money could not be used for personal advantage and it was impossible to place family members in plum positions that would be a beginning. Then zealously prosecute any advantage (interest free loans, etc.) that any Congressman receives. Many of the current Congress would quickly pack their bags and leave. They can then write their memoirs explaining all the good they came to do.

Nobody Can Save Us From Ourselves

These days, to be an economist is to be the life of the party. Although I don’t go to many parties, there has been a steady stream of workmen in our home this summer. When they find out that I’m an economist, they feel an urge to share their opinions on the future of the economy and how to fix it. More often than not, they seem to have no interest in my views.

Not that I’m offended by their lack of interest in my views. I find it fascinating to listen to theirs, and I learn a lot by doing so. The other day a heating technician was in our home. He is a man in his late 20s, and we have dealt with him many times. He is a fine problem solver, excellent at what he does, and hard working. Let’s call him Jack.

When the topic came to the economy, Jack began to tell me that the problem was that too many jobs are being shipped overseas. He told me about his father who was a well-paid machinist until age 57 when he lost his job. In Jack’s words “it was shipped overseas.” Jack explained that his dad had no other skills and could do nothing else; when he lost his job, his health began to slip. His father’s diabetes began to flare up, and now his father is on a disability pension.

Somehow the topic turned to computers. Jack explained with a broad smile that he had no use for computers, that he wasn’t any good at them, and that he could never learn them. I was puzzled. Our heating units are very high-tech and Jack was a wiz at fixing them. Where did he get the idea that he could never be good at computers?

As I listened to Jack, I could imagine hearing Jack’s father saying those very words over and over at home while Jack was growing up. Jack’s father’s job didn’t come to a sudden end. Instead, machinists’ jobs were in steady decline over decades. Many times, the topic may have come up about what would Jack’s father do when he finally lost his job. And like a mantra, the hypnotic refrain may have been repeated—I’m only a machinist, that is all I can do, and I can never learn computers.

We are all Jack and we are all Jack’s father. We all are blinded and crippled by at least some limiting beliefs and stories that we tell ourselves about what we can and cannot do. Our beliefs are frequently contradictory and absurd, but they make sense to us. Like Jack, we may shop at Wal-Mart but complain about jobs being lost to China. We may secretly relish being a victim and argue strongly for the story of our victimhood. And we may be waiting for the right politician to save us.

Like many of us, Jack has chosen to adopt at least some of his father’s beliefs about what he can and cannot do. And in that, we find the genesis of the strange passion that many generate over who will be the next president of the United States. Not that there is a real choice, but many are hoping that someone external to themselves can save them.

Obama can’t. Nor can McCain. Only we can challenge our beliefs—beliefs that block us from using the invisible supply of energy that is ready to flow through us.

Invisible supply? Joel Goldsmith writes, “Ideas, inspiration, intelligence, wisdom, service, or love bring about the forms of supply, but they themselves are invisible. Only the results are visible.”

These are qualities that need not be added to us; instead these are qualities that we express. Since we need but allow ourselves to express these qualities, the zero-sum mentality that politicians encourage is corrosive to both the well-being of our nation as well as to each of us. After all, how can someone who is encouraged to see himself as a helpless victim change?

Could Jack or Jack’s father learn computers or another field? Of course. Might it be difficult and time-consuming? Yes, of course. But the invisible supply will work through them, and it will use their talents—if they allow themselves to express their talents. And for that to happen, they first need to drop their stories.

Rose Wilder Lane in her riveting book The Discovery of Freedom writes:

For six thousand years at least, a majority has generally believed in pagan gods. A pagan god, whatever it is called, is an Authority which (men believe) controls the energy, the acts and therefore the fate of all individuals.

The pagan view of the universe is that it is static, motionless, limited and controlled by an Authority. The pagan view of man is that individuals are, and by their nature should and must be, controlled by some Authority outside themselves.

Of course, as Lane demonstrates, this view that others can and should control your energy is false. It results in poverty and misery. Nobody can save us from our own false beliefs.