Be Very Afraid

On Thursday, the stock market closed near a nine-month high and there is a growing feeling that the worst is behind us. Some of the same people who failed to predict the crisis in the first place now tell us it is safe to get back in the water.

“No one saw this financial crisis coming,” so say the mainstream press and politicians. Not true! Best-selling authors such as Robert Prechter, Martin Weiss, Jim Grant, and Bill Bonner all predicted, with startling accuracy, our current dire straits.

This fiction—that no one could have foreseen or did foresee our economic circumstances—has to be perpetuated by those who failed in their predictions. If it isn’t, many will ask the obvious question: Why are we still listening to the same individuals who have demonstrated that they are clueless?  And, they are clueless. They are clueless because they are looking through the wrong lens. Einstein put it succinctly: “Whether you can observe a thing depends upon the theory you use.”

Imagine a baseball team on which the starting players were incapable of doing anything but strikeout every time they’re at bat. Next, imagine the manager defending the players by saying, “No one can do any better,” as he conveniently ignores the players on his bench who can hit over .300.

Of course this is a silly scenario. Fans and sports writers would see the absurdity of such a manager’s actions. In any case, the baseball team has an incentive to put a winning club on the field.

Unfortunately, what is impossible to imagine in baseball is all too true in economics. Most fans (the public at large) are illiterate about economics. The media, as in totalitarian countries, are by and by content to repeat the “party line.” And, the management (the politicians) have an incentive to keep the system as it is.

Why would politicians keep in place a system that is destroying the economic vitality of this country? There are many reasons. A central one is that in the system as we have it, the Fed is able to create money out of thin air; the politicians need to keep that going because it is the only way to continue financing ruinous deficits. Whether or not the system is supposed to support that vitality and well-being of the American people doesn’t even seem to be a question. The message delivered by the politicians and chanted by their sycophants in the media is: “Bernanke, Geithner, and Summers are an economic dream team; we are lucky to have them.”

A dream team? In February 2006, Bernanke said, “Our expectation is that the decline in activity or the slowing in activity will be moderate; that house prices will probably continue to rise but not at the pace that they had been rising. So we expect the housing market to cool but not to change very sharply.” Lest you think I have selected one mistaken prediction out of many accurate ones, please spend five minutes listening to this YouTube compilation of Bernanke insisting over and over again that housing prices could not fall.

And speaking of housing, Nobel laureate Paul Krugman is often in the public limelight. Many in the general public shape their economic views around Krugman’s  New York Times blog and op-eds. Krugman, looking through his Keynesian lens, has repeatedly argued that the government, rather than spending too much, is not spending enough. In 2002, Krugman actually called for the Fed to create a housing bubble. He wrote in the New York Times:

To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.

And lest you think this was just temporary insanity on the part of Krugman, Mark Thornton at Mises.org has complied Krugman’s repeated calls, beginning in 2001, for lower interest rates and for a speculative bubble. How sad that many Americans formulate their views based on the ongoing nonsense from Krugman.

Or, consider the repeated nonsense from CNBC commentators such as Jim Cramer. Here is one compilation of Cramer’s nonsensical forecasts.

It is hard to imagine how this shameless man keeps his platform. Yet, he has a bigger audience than most financial pundits.

Now, consider those analysts and forecasters whose predictions have been most accurate. Today they are saying that we are in the midst of a strong counter trend rally in a possibly catastrophic bear market. Enter these waters at your own financial risk!

Yves Lamoureux recently summed up the current rally saying with a Roadrunner/Wile E. Coyote metaphor:

In his pursuit of the Roadrunner, the obsessed coyote is at the wheel of a dragster. After a few passes on the desert roads, they venture up a mountain.  Drag racing to the top, the smart bird stops and lets the roaring Wile E continue on a rocket launch off the top of the mountain and into free space.

Lamoureux concludes, “Laws of gravity still applies, don’t be a Wile E. Coyote.” I write “be afraid”, rather than “be cautious” because caution will not be enough to keep you out of trouble, when the tide turns again.

The Defining Divide of Our Age

Back in the 1980s, I taught summer school at Harvard University for several years. Shortly after I first arrived, the coordinator of the summer program in economics took me out to lunch. He cautioned me, if I hoped to be invited back the following summer, I should not talk to any of the full-time regular Harvard faculty. His message was clear, I was in a lower caste, doing work that the regular faculty had no interest in doing. The servants were not to bother their masters.

I was amused rather than offended. In truth, he didn’t have to worry; I was more concerned with doing my job well. Although I had an office in the same building where the Harvard economists were housed, very few of them made appearances in the three summers I was there.

This week, noted Harvard professor Henry Louis Gates was arrested after forcing in the door on his own home; he had returned home without a key. A neighbor called the police and, although accounts differ, the end result was that Gates was arrested. President Obama last night said that the police “acted stupidly” during the arrest of Gates. Pundits throughout the country were quick to join in the chorus that the arrest is evidence that racism is still alive and well in this country.

News reports quoted Gates as saying, “This isn’t about me; this is about the vulnerability of black men in America.” He added that the arresting officer as “clearly was a rogue policeman.”

No doubt that racism still exists in the country; and no doubt that some police behave stupidly, even criminally, every day. But the circumstances in this incident do not make the case for either of these assertions. The arrest of Professor Gates had more to do with caste than race.

This morning I caught an internet snippet of MSNBC host Chris Matthews interviewing two guests. His guests were incredulous to the point of derision that the neighbor who called the police didn’t recognize this famous scholar.  Truth be told, I wouldn’t recognize Gates either; and I surely don’t consider that a failing of my civic duties.  Matthews and his guests failed to point out that the woman who called the police was a fellow Harvard employee. They also didn’t find it curious that, although they are neighbors, Gates had never introduced himself to her.  Of course, it is equally true that she never introduced herself to him; I focus on the behavior of Gates because he is the one making the most noise about this incident. Perhaps she never introduced herself to him because she understands the Harvard caste system. She, after all, is a mere fundraiser. Why would Gates stoop to talk to her, an individual in a lower caste.

When the police arrived, Gates initially refused to produce identification.  Eventually he did establish his identity, but then apparently engaged in verbal abuse. The police report can be read here. Now, I know better than to believe everything in a police report; but there are witnesses, including Harvard employees and Gates’ neighbors. No doubt we will learn more in coming days. In addition, according to news reports, the arresting officer “is a police academy expert on understanding racial profiling and has taught a class on the subject for five years at the Lowell Police Academy.”

My read on the situation is that Gates clearly was on edge; he may have over reacted because he was being challenged by someone he perceived as beneath him. “How dare he talk to me like that,” Gates may have thought. Gates was angry at the affront. Many people would have simply showed their ID and thanked the officer for doing his job. On the other hand, perhaps the policeman became angry at the abuse he was taking from a person acting out as a snobby muckity-muck. Caste, rather than race, was likely the great divide here; and there may be blame to go around on both sides.

America has gulfs that divide. The defining gulf of our age is more between those who think they know better than others and should be planning the lives of others and those who just want to be free to fulfill their own dreams.

The 19th century Scottish author, Samuel Smiles, observed about the Industrial Revolution: “One of the most remarkable things about engineering in England, is that its principal achievements have been accomplished not by natural philosophers nor by mathematicians but by men of humble station, for the most part self-educated.” As Michael Strong points out in his book Be the Solution, the same is true for recent technological innovations  which were “largely created by high school and college dropouts” such as Steve Jobs, Bill Gates, and Michael Dell.

The truth is that if Harvard University shut down tomorrow, our daily lives would be unaffected. If Professor Gates was to hang up the towel and never write another word, most people on this earth would be unaware of that fact. The fact is that Professor Gates, the other Harvard faculty, you, and I have every reason to be humble; we have nothing to be arrogant about. They, like you and me, depend upon the great geniuses of the past and the great geniuses of the present who have truly improved our lives.

The Last Day of Peter Shintani

Mt. Washington in the White Mountains of New Hampshire is infamous as the home of the worst weather on earth; many have perished hiking in its subarctic climate.  On average, the wind exceeds hurricane force on more than a hundred days each year, and storms can develop quite suddenly and dramatically. That being said, the mountain can be hiked safely with some training and preparation.

The first time I climbed Mt. Washington, I took a misstep on a wet ledge and began an out-of-control slide. Fortunately, the angle of the ledge tilted toward the sidewall into which I slammed. Rather than dropping off the edge, I regained my footing; incredibly, I was uninjured.

This June we hiked up a trail on the other side of Mt. Washington. About two hours into our climb, the trail crossed another wet ledge. A couple hiking ahead of us was tentative; they invited us to go first. I decided to crawl across on my hands and knees while grasping the sidewall. Seeing me crawl was enough for the other couple; they wisely decided to turn back. I say wisely because both my wife and I had already noticed that they did not seem fit enough to complete the climb.

Peter Shintani perished climbing Mt. Washington approximately one week before our hike. The day we climbed, search teams and helicopters were scouring the vast and rugged terrain in an attempt to find him. Peter, a Canadian, had a lifetime of outdoors experience and was 70 when he died. He had planned to summit Mt. Washington one year ago, but had had to abort his climb. When he began his hike one day this June, the morning sky was clear. By the afternoon rain had arrived; a half inch of rain fell. The facts that are known suggest that Peter was probably above treeline when the rains came in. I know from experience how wind and rain hamper visibility on a mountain; it is easy to lose your way in a storm.

A helicopter searches for Peter Shintani

The search teams did not know which trail Peter took up Mt. Washington; after days, the search was abandoned. His body was found in July a couple of hundred yards off the Lion Head Trail—the same trail we hiked in June.

The area below the summit where Peter's body was found

The morning of his fatal hike, Peter observed the sunrise and wrote about it in his journal, which was later found in his car. We can assume that Peter had no idea his death was imminent. In his book The Untethered Soul, Michael Singer asked this question: “Do you realize that what you’re doing at any moment is something that someone was doing when they died?”

Singer encourages us to reflect on how our priorities would change if we understood we would die within a week or a month. As we ponder our priorities, he asks this question: “If that’s really what you would do with your last week, what are you doing with the rest of your time?”

I love to hike in part because of the physical challenge, in part because of the views and the beauty of nature, and in part because of the unpretentious community that forms and dissolves each day on the trails.

The views not far from the summit of Mt. Washington are spectacular

But mostly, I like the honest day’s work doing something that I love to do. It is an honest day’s work; even when I’m exhausted, I must continue to put one foot in front of the other in order to complete my task. When I’m distracted by my thoughts—my ego’s views about this and that or ruminating about the past and future—I subtract needed energy from the physical task at hand. A strenuous hike limits the wanderings of my mind. To be sure, there are things other than hiking that I regularly do, such as teaching, where my ego’s noise fades to the background. But, for a host of other activities, my attention is divided.

To live with our attention divided is not to live at all. Yet, we can choose otherwise. I have no idea how Peter Shintani lived his days. His last day though was unexpected; he probably thought he had many more years of life ahead of him. If we could ask him, he might tell us that his end came too soon.

Time is short for all of us. If we truly understood this, would we spend one precious moment of our life reading another article about Sarah Palin’s future, or Jon and Kate’s troubles, or Barack Obama’s greatness? Would we polish the grievances we carry in our mind as though they were precious gems to be hoarded? Would we watch hours of nightly television, while consuming snacks laden with corn syrup? Would we be waiting around for the government to create opportunities for us to use our inherent genius?

Now, this is not a call to accomplish the spectacular. The world, Helen Keller said, “is moved along, not only by the mighty shoves of its heroes, but also by the aggregate of tiny pushes of each honest worker.” If it is not our calling, we need do nothing that draws the attention of the world to us. Yet, through our simple, honest labor doing something that we love—or doing something mundane with love—we make the world a better place; and our life is happier.

Mary Oliver ends her poem “The Summer Day” with these evocative words:

Tell me, what else should I have done?
Doesn’t everything die at last, and too soon?
Tell me, what is it you plan to do
with your one wild and precious life?

Ignorant and Free

Most of us have been trained well—we find the guilty ones in life, so that we can proclaim our own innocence. Some religions teach that the guilty ones go to hell; so much more important than to be one of the innocent ones whose ticket is punched for heaven. Now, none of this may be occurring on a conscious level; but if we are aware, we can observe how we relish in judging others for small infractions as well as for massive crimes. This week, with the sentencing of Bernie Madoff, we reeled in a big fish—it would hard to imagine someone as unambiguously guilty.

At his sentencing hearing, not one person spoke on Madoff’s behalf; and I won’t either. However, I will point out an unpleasant truth—present day America is full of Bernie Madoffs. By “full of Bernie Madoffs” I don’t mean full of people who have set up $50 billion Ponzi schemes; I mean people who think nothing of spending other people’s money as though it were their own or people who think trustworthy behavior is a ticket for being left behind in life. America is being destroyed by our Bernie Madoffs.

More individuals in America resemble Bernie Madoff than we care to admit. Some sink to the level of criminality, some don’t; but regardless, their actions erode our freedoms. First, given the size of the fraud and the countless false statements detailing trades that never occurred, it is likely that tens, if not hundreds, of others were involved in Madoff’s fraud. In May, it was revealed that Jeffrey Picower took out over $5 billion of “gains” from his Madoff fund. According to Reuters, Irving Picard, the trustee overseeing the liquidation of Madoff’s assets, “claimed that in several cases Picower’s purported annual rates of return were more than 100 percent, with some annual returns as high as 500 percent or even 950 percent.”  I expect that we will be hearing more about Picower’s relationship with Madoff.

And what of the innocent Madoff investors, the ones earning merely 10-15% a year? Only those ignorant of economics and finance could believe in the financial “perpetual motion machine” run by Madoff; only the ignorant could believe that losses are a thing of the past and a steady stream of gains is here to stay. No doubt some, despite their wealth, were ignorant; but surely, more than a few must have suspected that something was wrong. Some of these “innocents” are now demanding that the government pay them, not only for the money that they originally deposited with Madoff, but for the “gains” that their false statements showed. In other words, while many non-Madoff investors found their stock funds down by 50% or more, these “innocents” believe that they should receive the false gains that Madoff promised. And who would pay for this? Why, the taxpayer, of course. No, these “innocents” are not guilty of fraud; but like Madoff, they behave as though other people’s money is their personal piggy bank.

Yes, I know that there are many Madoff investors who would be happy to have their original investment refunded; they have no designs on false gains. Our hearts go out to these investors for what to them must be terrible suffering.

This week, alongside the Madoff story, the Washington Post reported that “Sen. Daniel K. Inouye’s staff contacted federal regulators last fall to ask about the bailout application of an ailing Hawaii bank that he had helped to establish and where he has invested the bulk of his personal wealth.” Shortly after the phone call, Inouye’s bank received $135 million.

Of course, Inouye’s conduct is part of a much bigger problem. Bill Bonner answered his own question about Madoff: “Isn’t he the biggest financial scammer of all time?”

Well…he’s the title-holder now. But he has a lot of competition close on his heels. Bernie’s crime was taking money from people under false pretenses…and then being unable to give it back to them. How is that different from the financing activities of the US government?

This year alone, the feds will borrow 50 times as much money as Bernie managed to take in during his whole 20-year career. They can only pay it back by borrowing even more money from more lenders. This is not very different from the typical “Ponzi” scheme, except that it’s the government doing it. Eventually, the suckers are going to lose a lot of money.

It is easy to rail against government, but what about the likes of Donald Trump, respected and admired by many?  The Wall Street Journal recently reported on Donald Trump’s deposition taken in late 2007 as part of his lawsuit against author Timothy L. O’Brien. The Journal describes Trump’s definition of being “sold-out”:

Mr. Trump told The Wall Street Journal in November 2007 that he sold all 1,282 units at his Las Vegas condo project that he owns with casino and hand-truck magnate Phil Ruffin. There were $1.3 billion in proceeds coming from that project, he told The Journal and other news outlets, including CNBC.

In the deposition one month later, he said he had deposits for around 900 units. Mr. O’Brien’s lawyer, Andrew Ceresney, asked whether Mr. Trump was caught in a lie?

“That’s not a lie,” Mr. Trump said. He said that he was holding on to the rest of the units as an investment. “I’m a buyer also, essentially.”

Trump was also asked whether “he has ever exaggerated in statements about his properties.” Trump’s response:

“I think everybody does,” he said in the deposition. “Who wouldn’t?”

A follow-up question: Does that mean he inflates the value of his properties in general, nonfinancial public statements? “Not beyond reason,” he said in the testimony.

And just who is the arbiter of what “not beyond reason” means? Of course, Trump himself. I personally would never knowingly do business with the likes of a Trump; and if I was forced to, I would be backed by an army of lawyers and accountants. How quickly would commerce grind to a halt if everyone did business the Trump way?

As for Madoff, he will never be a free man again; but we are not safe. The same culture that produced Madoff, produced his investors, produced Trump, and produced Washington, D.C. Our troubles are just beginning, and we are not innocent. At a minimum, we are collectively ignorant of the values and principles that preserve freedom.

On this Fourth of July weekend, we can be reminded of Jefferson’s words: “If a nation expects to be ignorant and free…it expects what never was and never will be.”