Tuesday, July 23, 2013

Gold is Up, or Down - Who Cares?

I have been wanting to say something about the gold market. Many people I am sure are confused and concerned about the drop in the dollar price of gold that has occurred over the last year or so. To understand what is happening you need the right perspective. The gold market (and to some extent the silver market) is different from any other market, commodity or other wise. The demand for gold comes from many different desires and interests, as I tried to enumerate in this blog a couple years ago. Each different type of demand for the metal will have different reactions to price changes and the level of prices in comparison to the rest of the economy.

I said earlier that the raise of the dollar cost of gold went up as high as it did at least partially as a result of the interest of the hedge funds. Necessarily, their interest was short-term. That is their business: short-term speculation. The amount of money the hedge funds put into gold was large enough to have a significant impact on the price. I wonder if the hedge fund managers realized how much impact they would have. In fact, the international gold market is fairly thin. In any event, there had to come a time when the hedge funds would leave the gold market. We can readily see when that happened, can’t we.

The dramatic drop in the price of gold has been taken by many as an indication that people aren’t as concerned about the future as they were, that maybe the situation is better now than before, that gold is no longer seen as much of a hedge. I think all of those ideas are silly.

You also hear some people who are ostensibly interested in gold to preserve the value of their assets express unhappiness with the drop in the dollar price of gold.

If you are concerned about the price in the short-term (and I mean more than just wanting to get as much gold as you can when you are ready to buy), then you really aren’t looking for asset preservation, you are a speculator (a perfectly fine thing to be).

If you are sincerely interested in asset preservation, which is a long-term attitude, then don’t worry about the current price or what it will be and get on with your daily activities. Do not be confuse the impact of monetary expansion with raising prices or with how many dollars it takes to buy a troy oz. of gold. The threat to your assets is broader and more insidious than that and is not reflected in the short-term variation of the dollar-gold exchange rate.

Monday, July 22, 2013

Considering Investment Advice Today

Someone who I have gotten to know and respect on-line recently recommended a book of investment advice. Certainly, there are people who understand investments better than others and can clearly explain that understanding. I have no reason to doubt the usefulness of the book if my friend thought it was good.

I did have a problem, however. The advise offered in the book came from decades ago. What about today? Certainly the principles of economics haven’t changed, ever. But the economic and legal context for investment could have.

What isn’t in these books, not the one suggested by my friend (which I haven’t read but he did not mention the subject) nor any of the others I have looked at, is a discussion of their assumptions. I am not referring to their metaphysics or epistemology. I am assuming a basic I mode for these people, otherwise there would be no hope that the investment advise would or could work. Further, I am not referring to the economics fundamentals of how markets work or the ethics of investment. No, I am referring to what you might call the range of decision making within the economy.

One way to open up what I am trying to consider is to ask these questions: Where would the advise in the book work? We know it wouldn’t work in Cuba. How about Venazula? Egypt? Mexico? Sudan? Turkey? Saudi Arabia? Obama America?

I am not just looking at the legal system in these examples, or even the safety of the investment (against nationalization or another kind of thief). I am wondering about the legal ability of the business manager, the people who will ultimately determine if a business succeeds or fails, to understand the conditions and make the decisions and execute those decisions.

For example, in Europe and the U.S., there has been a drive since the last financial crisis to add additional layers of regulation and regulators to the financial services industry. Many of the areas that major banks were relying upon for profits and growth are being eliminated or curtailed. This process is ongoing. The major law expanding banking regulation in the U.S., Dodds-Frank, has something over 350 new areas of regulation. As of last week according to a recent news article, the government and the various agencies have missed 63% of the deadlines stipulated in the act. Many of those new regulations have yet to be finalized. Further, there are another 36% of the act which the government has yet to address. Five years after the crisis and three after the passage of Dodds-Frank, the industry is still uncertain as to what is going to happen. Whatever the results, the banks are all going to have to function in the same, regulatory approved method, about which no one has any real world experience. Expect stuff to go wrong in many different ways. Expect the banking system to function less efficiently, and investment decisions to be less reliable.

Then there is the larger size of the Federal Government in the economy. Its annual deficit and demand for funds has been soaking up the capital of the country. This astonishing level of spending is expected to continue, regardless of the activity or lack there of in the real economy.

There is the continuous effort by the Federal Reserve Board to manipulate the economy into growth by completely destroying any meaning to the pricing of capital. Interest rates mean almost nothing now for the business decision maker. He has no tool to determine if his capital project is going to be profitable or if the capital he needs is actually there.

A business decision maker might also be concerned with the changes in the level of new money being introduced into the market. He might be concerned about the lack of stability in what the Fed and the rest of the government is doing or can be expected to do. He has no idea or source to understand what is going to happen. But to him, the difference between 2.5% and 3% interest on loans is not as significant. You can readily see that since 2009, there has been no rush to borrow and invest as interest rates were lowered and have remained at historic lows.

I have seen commentators and business people point out that current profits are from cost cutting, not from new investments coming on line. They point out that there is only a limited amount of costs that can be cut and that point is being reached. There is a certain amount of growth through merger and acquisition, which isn’t economic growth, but still cost cutting. There may be some investment due to the need to replace plant and equipment. But there is little growth.

None of this is similar to the economic context in the U.S. since the end of WWII. Except for the inflation years ending in 1982, business has had sufficient confidence in the future to invest and grow. That isn’t the case today or for the last five years.

Could confidence return and get us going again? I don’t think we can know until the situation calms down and the government stops tinkering. It is possible that the government won’t stop. It is possible that the restrictions on action will overcome the American businessman. That will happen at some point. We just don’t know.

But we do know that the situation is sufficiently different today so as to make application of successful personal investment policies from the 80s and 90s uncertain. The context has changed. That is a major deal. If you are serious about your investments, you have to recognize the underlying premises about how the economy functions.

When I read some of the economic analysis offered by people with mainstream approaches, I see that they treat all non-communist economies the same, regardless of the level of government intrusion. In their mind an economy will continue going along somehow. They believe that the government’s impact is necessarily either minor or for the good of the economy. That is the same attitude of the standard works on investment: the economy is not going to change significantly when the government acts. But that is not true. You need to recognize that there is a point in which the government’s actions are making normal economic activity too difficult. That has been happening now. It might be temporary, I am not going to rationalistically say that we have reached the point of no return. Nor am I going to say that the current situation may calm down and people can work within the levels of controls we will have. But, it will happen. Don’t ignore it.

Friday, July 19, 2013

From Bernanke's Lips

While I do have one bone to pick with John Allison, I have found his book, The Financial Crisis and the Free Market Cure, to be a source for many insights into our economy and how it works. One point he made just popped into my head as I was reading another silly article.

The article, “Loose Lips Sink Euro Bond Markets in Crisis: Cutting Research,” cites “research” about the effect of 25,000 news releases by eruo-zone governments on the sovereign bond markets. They did a statistical analysis on the words and content of all of those news releases. Real science, right? They found that positive announcements tended to have a positive affect and that negative, confusing, or conflicting announcements tended to have adverse affects on the market, i.e., interest rates went higher. Like I said, real science! There was no indication in the news article if the study considered the effect of lies or self-serving political announcements.

Mr. Allison’s point was that every time the Federal Reserve Board made an economic prediction, it was wrong, significantly wrong. That’s right, Mr. Allison points our that the Fed has a perfect record of understanding what was going to happen. Always, 100% wrong. They have no idea what is going to be the results of their policies.

Think of Bernanke’s pronouncements from 2005 to 2008. He was asked how things were. He said, “Fine.” When housing prices skyrocketed, Bernanke said everything was “Fine.” When it was noticed that subprime mortgages began to fail, he said that the economy was “Fine.” When Lehman Brothers failed, Bernanke said that everything was “Fine.” When the economy went into crisis, businesses failed, people lost their incomes, and asset values collapsed, Bernanke claimed that he saved the world.

So today, everyone is hanging on every word that Bernanke says and the market is going up and down like a yo-yo. People are ignoring that there is little to zero investment occurring that would expand production, that there is little growth in employment (of any kind, let alone highly productive ones) to put the millions who lost their jobs back to work, that government debt is swamping our ability to cover current expenses, or that expanded regulation is close to choking our economy.

Why are people paying so much attention to Bernanke? Well, he does have a lot of power. Speaks well of us U.S. voters, doesn’t it. It is also true that today the government, including the Fed, is a major force, if not the major force, in the economy. That’s not good either.

What are we going to do to change it?

But, also important to anyone living in the U.S. or in some way dependent upon the condition of the U.S. economy (nearly everyone alive, right?): you best remember Bernanke’s track record. If he says that were heading into a drought, you better be ready for a flood and our ships won’t float either

Wednesday, July 17, 2013

Our Own Third World District

The DC city government just passed a law putting the minimum wage at $12.50 an hour for “big-box” stores. The city already has a high youth unemployment level. It has many underemployed adults. The level of unemployment is going to get worse. The Voice of Reason blog noted that someone in the city government said that the businesses needed them more than they need the businesses. Fantasy Island. WalMart immediately announced that it will not build three new stores. It may close the three already doing business.

I don’t know who else would be included in the “big box” designation, but there are a lot of stores who would be similar. Nor do I know if there is a president for such a special category. Hmmmm, I also don’t know if other retailers realize how anti-business the government in DC is. I jokingly call it a third-world country. That is the level of its thinking. Its only attraction is the Federal Government, which should give you a clue about it. What is sort of funny is that even the Federal Government is seeing a steady slip of jobs out of the city as agencies move. At times, it has been a lovely city. At times it has burned. It probably will again considering how poorly its economy will do.

Tuesday, July 16, 2013

Einstein and DIM

In the context of the DIM Theory and understanding how a culture is influenced, I think that it is interesting to consider the example of Albert Einstein.

My making comments on this subject require some disclaimers. After all, I am not a physicist nor an historian. What I can list as credentials, besides having read original and secondary material on the subject, are the graduate level courses I took on the history and philosophy of science. Albeit, that was several years ago, decades. So, what I have to say cannot be considered anything more than a suggestion,

LP’s analysis of Einstein concludes that the originator of the Theory of Relativity is an M1, i.e., Einstein sees the world of ideas as being fundamental, and the physical world as real, but dependent upon, or at least secondary to ideas. I won’t duplicate LP’s reasoning here. It is clearly presented in the book, The Dim Hypothesis.

If you contrasted Einstein with Descartes, also an M1, you would see that the earlier philosopher leans very much toward his M side, while Einstein leans more toward the I, while both are M1.

A good friend commented to me recently that he was taught in graduate school that Einstein based his physics on the physical world, i.e., Einstein used induction and thus was an I. I think that there is some grounds for that view. But that seems to conflict with LP’s conclusion that Einstein is an M1.

Consider Einstein’s physics without the relativist observer stuff or what he has to say about science. As a description of the physical world, Einstein’s physics has been put to many tests. To my knowledge, every prediction has been proven to be accurate. His science has a significant degree of truth, of correspondence to physical reality.

In his excellent book on induction, The Logical Leap, David Harriman points out that the beginning of good science is for the thinker to be thoroughly familiar with what is known at that point, i.e., he has to know the facts discovered. For a human, of course, that means an integrated, conceptual knowledge, well grounded in its connection with the real world. Einstein, in order to so thoroughly account for the real world had to have a truly objective knowledge of it prior to his discoveries. I think that his wide understanding is well established in that when he got around to publishing his thoughts in 1905, he offered five papers on five different subject which were all ground breaking and influential for good, scientific, objective reasons. Einstein knew his facts and his concepts objectively.

You can’t have a true scientific theory without induction. You can’t dream it up. Einstein used rationality on the physical world to arrive at his theory. No matter how you try to rummage through his comments, interpret his writings, or analyze his mathematics, the incontrovertible fact that his physics has consistently truthfully predicted what we then observe is prime facie evidence that induction was used. Again, compare him to Descartes, who almost completely dreamed up his physics which was completely off the mark.

Still, Einstein is an M1. Why? Because he, Einstein, said he was. LP in analyzing what Einstein said, not what Einstein did to reach his theory. Einstein’s influence on the culture is what he said, what he wrote. Maybe some people noticed that what he said was not consistent with the process by which he discovered his theories. But culturally, that is a minor detail. Einstein’s influence is the result of his statements and writing. The cultural product is the completed, published work. That is true even for the realm of physics, a subject in which you would hope the scientists could tell the difference. But Einstein’s legacy has been his comments about the esthetics of a theory, its elegance, not correspondence with the physical world. That cultural influence is the result of what someone says and not what they do is consistent with what we see resulting from Kant, for example. Kant created a complete philosophical system, a vast integration, with a purpose. In his method, Kant was a Platonist. As an influence, Kant legacy is that systems, integration, and purpose are bad. He is the destroyer, not the integrator.

All of which leads me back to my recent blog post about in implication of the DIM Theory on our work to change the culture. Again, it is not what we do, but what we say and write that will have influence. We cannot expect our example or an implication to be understood or to be influential. We must include within our speeches and articles our I mode in some explicit, clear, and unambiguous form. We don’t want to preach. It isn’t necessary that we put in the philosophical support (it is available). But we do need to include at least part of the vital fact that we are looking at the physical world, thinking about it in a logical, objective manner, and that we are integrating as broadly as we are capable. That is the mode we absolutely need to communicate.

Monday, July 15, 2013

Unavoidable Consequences of Regulation

Among the many interesting points that John Allison made in his excellent book, The Financial Crisis and the Free Market Cure, is that the regulators consistently favored the banks with risky behavior and failed approaches over the successful ones. The deposit “insurance,” the bailout, and the “cures” all reward the failures and punish the successes. This point is even clearer when Mr. Allison discusses the events after the crisis. BB&T was forced to lower, that’s right, lower its capital reserves by the regulators. It was forced by the regulators to change its decision making structure to conform to that in the failed banks and give up a process that had been a significant strength in the bank. The regulators were not interested in success. They were (are) interested in the politically required, currently popular priorities of the non-elected, politically appointed heads of their agency. The regulators were attuned to what the leaders in Congress wanted, not what the market demanded or what was good for the success of the bank or the service of the bank’s customers. This process of political fads is called having a social conscious.

But this is the way it has to be. For a regulator on site to see that a bank is functioning well and is controlling risk he would have to be able to think clearly, independently, and have a good knowledge of banking. None of those characteristics make good regulators. At the very least, the regulator is a bureaucrat who applies regulations. He knows those in detail and by name. His frame of reference is his superior and the head of the agency, not profits or efficiency of the business he regulates. He can’t care about what happens to the business and continue to be a regulator. He doesn’t consider cause and effect except in regard to his agency. He does not know if the regulations will work or not, or care. He doesn’t care about the success of the bank he regulates, only that it not fail worse than the other banks. He doesn’t want to stick out.

All of this is clear from Mr. Allison’s book. It is clear to me from my experiences in the securities business. Talk to your friends in regulated industries. Talk to anyone who has tried to start a new business, or put up a commercial structure.

Friday, July 12, 2013

The Fate of U.S. Banks Is Our Fate

One wonders what politicians and current government-oriented economists think banks are. Ask them to define the concept, banks, and what could come out? Ask them what function they perform in the economy, the private economy, and what would they say? Then, there could be a difference between what they said and what they thought to themselves.

I expect that politicians and the Fed sees them as big piles of money, you know, something like bank robbers view them. Piles of money to loot or to use as influence for their political gain. They don’t view banks as having a particular identity that is necessary for the economy because they believe that they can force the banks into any shape they want and nothing particularly important will happen. Banks are toys, to be played with. Or, banks are whipping boys and every stroke makes the politician look good to the electorate, you know, the mob. The mob hates banks, and has for centuries.

It is my understanding that for a while, primarily in the 19C, some bankers in the U.S. were respected by many people. The name that comes to mind is J.P. Morgan, and his family. Today there is only an echo of that respect left. A PBS program I saw recently ascribed to Morgan a through going desire for power (undefined). That is bad for a banker apparently (but good for Obama).

Before the residential real estate mortgage crisis, banks were very heavily regulated and influenced. Now, the level of government control has gone up dramatically in the Western World. The worst step is Dodds-Frank. Even there I think that few of us, including myself, have but a superficial understanding of how destructive that law will be. It is probably the equivalent of what ObamaCare is for medicine.

But banks are vital for our economy, for an advanced, industrial, integrated economy. Finance, credit, routing of capital, are vital functions in our economy and banks are the number one tool used in those markets. There are a few others, e.g., venture capital funds, hedge funds perhaps, but they are small potatoes compared to the size and range of activities that are banks. To cripple our banks is to cripple our economy.

For the purpose of saving our economy and avoiding disaster, healthy banking is far more important than the size of government spending.

Again, as we have learned from Ayn Rand, and as I have said before on this blog, our first priority for our survival as individuals is freedom, which is the removal of controls and regulations.

Overspending, i.e., the creation of government debt, can kill us, yes. But the only way we win out and survive as men is through freedom. Learn about what is happening. Attack regulation.

Thursday, July 11, 2013

Economic Predictions in News Media

Have you noticed the headlines and articles about economic data, things like the unemployment figures and growth rates, that often include references to predictions by a group of economists? The headline will say, “New jobs exceed expectations!” “Growth rate falls below predictions.” What predictions? So what?

I have seen no complete explanation of where these predictions come from. In a couple articles I have read, the author has offered a one or two sentence note to give some credence to the prediction, but nowhere I have I seen any statement about why the expectation has any meaning or what that meaning could be.

From what I can tell, the set up is something like this: A news company has contracted or at least asked several economists, presumably people with the appropriate background, who will periodically provide their expectation as to what the figures in soon to be published reports will be. This practice is used in at least a few different countries.

Which economists are used isn’t mentioned or if they are academic, government, or private economists. Nor has any mention been made about what methods of prediction are being used by any individual predictors.

One reporter mentioned that the news company did drop extreme predictions, i.e., ones that were considerable different from the majority of responses from the predictors. Otherwise, the process seems to be that when the responses are in, the news company averages the numbers, and that becomes the standard for evaluating the real number when it is announced.

One wonders if the predictors are evaluated in any way. For example, if one economists consistently offers numbers that are way off or always in the wrong direction, would he be stricken from the list? Should there be any weight given to the predictor is usually closest to the real number? One wonders if there is any consistency between the methods used by the various economists offering predictions. If one, for example, uses the Mystery 8 Ball, another uses a computer model based upon the proportional orbits of the planets, and a third uses a model based upon Keynesian precepts, what could it mean to average the predictions? That is an extreme example (who in their right mind would use Keynes?), but if everyone’s methods were inconsistent, what would an average mean? What would any comparison of answers mean?

But the real thing is that the meaning of the prediction is the opposite from what the news organization suggests. What should be happening is an evaluation of the method and underlying reasoning for the prediction in comparison to the real numbers, i.e., reality (assuming that the “real numbers” are themselves generated by a rational method). If the predictions by a particular method and theoretical framework consistently provide a figure reasonably close to the reality then the validity and truthfulness of the theory is supported. Possibly, if the theory is consistently correct in its predictions, then that particular approach could be used in the future for predictions for some reason. But that still wouldn’t support the present news organization approach. You certainly wouldn’t take a poll.

But the relation of the real number to the prediction means nothing. The relation of the two provides no knowledge about the consequences or importance of the real number.

No one should care. (Well, except the economist who truly wants to understand the economy.)

Wednesday, July 10, 2013

An Implication of The DIM Theory for Activism

One important element of the philosophy of Objectivism is that it has a purpose: that of living as a human in this world. Each insight of Objectivism has implications about what a man should do to achieve happiness and prosperity.

The DIM Theory is an excellent application of philosophy, and, in the breath of its reach, it is fundamental in understanding how philosophy underlies a culture. I think that it has implications for us.

I want to expand the response I have seen to Dr. Peikoff’s book. From what I have seen, the idea is that LP has given us a prediction and we now sit and watch to see if it proves out. LP makes clear in the book’s closing pages that he isn’t suggesting giving up and that his prediction isn’t a mathematical certainty, but other than clarifying who our ultimate enemy is, people have acted as if there is nothing more to say.

I disagree. I think that the book, in its identifications of fundamental movers of cultural change, has given us a greater understanding of what we should be doing. Our actions to mold our culture should be amended by what we learned from LP. Our activism needs to include a specific purpose to be more effective.

By activism I mean action (meaning attempts to persuade) taken to change the culture, which I think should include actions taken to keep things together long enough for cultural change to occur.

Dr. Leonard Peikoff’s (LP) theory is that the fundamental fact of a culture is its attitude towards integration, i.e., concept formation and the structure of knowledge. Consequently, to change a culture, one has to change its mode of integration.

The approach to integration is in turn based upon the culture’s intellectual leaders position on two philosophic issues: the nature of reality and how man acquires knowledge. If one understands correctly these two issues, one will be lead to a rational, i.e., reality based, method of integration.

It follows then that the direct approach to changing a culture is to address these issues: integration, existence, and reason.

The proof for this conclusion is in The DIM Hypothesis and the writings of Ayn Rand and LP. I do not look at my reasoning as deductive despite appearances.

To apply the implication of LP’s insight requires much thought. I regard what I have to say as a small beginning.

In most cases, addressing the fundamental questions isn’t beneficial. In other words, don’t preach. It is often enough to push rational integration, LP’s I mode, by example, i.e., by referring to reality, facts, and at least implying that thought, a process is necessary to understand an issue. It won’t help to be too subtle. The implication has to be clear.

One way to do this that comes to my mind is to always concritize. Refer to facts connected with an abstraction, and point out that one without the other is meaningless.

My thought is that one should include some aspect of the fundamental issues in every written or spoken statement. You need not always refer to integration. Including the independence and absoluteness of physical reality or the requirement of a rational thought process would also be valuable.

I do not mean to say that addressing issues of rights, morality, government activities, and irrationality in general aren’t worthwhile. I am saying that the more the issues affecting cultural change are included in your arguments, the more impact our efforts will have.

Monday, July 8, 2013

Misallocation Leads to Training for the Wrong Jobs

I will be pointing at various excellent observation made by John Allison in his recent book, The Financial Crisis and the Free Market Cure. There are many. Several provide expanded insights into the effects of government intrusion into the economy. A favorite of mine is that one of the elements of the misallocation of investment in a welfare state is the training of people for the wrong jobs. The example in the crisis discussed in Allison’s book is the people trained in house construction. Way too many houses were constructed, meaning we had way too many people employed in that sector. They should have been employed and trained in some other occupation. Instead, we have lots of carpenters, bricklayer, etc., who then found themselves unemployed. When they looked for work, they tried to find a job doing what they were trained to do, but few if any employers needed those skills. To find a new job they need new skills, new training, somehow. Possibly many of these people are the ones who have given up in finding work and are no longer counted as part of the labor force.

The worker who choose to become a construction worker because of the plentiful work (at the time) choose to do so because government policy and manipulation of the economy gave him false information. You can’t expect someone in this country to see through all of the mess and realize that being in construction was a bad idea. Further, seeing that it was a bad idea and looking at things in the correct light does not provide the information necessary to decide what a good course of action would be. (This would be the context of someone who has not yet decided on a personal goal and career. Even then, the amount of earnings one’s goal could achieve is a rational consideration, and the welfare state economy does not provide good information.)

As Ayn Rand said, the government is the cause of unemployment, and one of the ways the result occurs is by the misallocation of investment.

Friday, July 5, 2013

The DIM Hypothesis is an Example of Philosophy as Science

Ayn Rand often called philosophy a science. We know that when she did not use allegory in her writing about fundamental ideas. When she said science she meant science, not “science,” or science like. She called physics and biology “special” sciences. They studies selected, well-defined aspects of reality. Philosophy studies reality and man in the broadest respect, but with the same cognitive framework, tools, and criteria of proof as any science. Philosophy is knowledge, and is acquired like all knowledge is: by a specific process called induction, i.e., using reason on the material provided by our senses.

Dr. Peikoff’s methodology is explicitly as rigorous as any, rational scientist. When one takes into account the context within which he is working, he is as exact as one could be.

His aim in the book is to demonstrate that there is evidence for his hypothesis and that his conclusion is warranted, i.e., is proven, as much as existing evidence allows.

He then states that his theory could be disproved if the results resulting from the theory do not occur. If a prediction fails to occur, the error is in the theory or the proof, not reality. (There are potential events in the real world that could prevent the prediction of an M2 dictatorship, but they would be consistent with the theory and its recognition of man’s free will.)

The DIM Hypothesis is a scientific book. To think about it any other way is to miss the point and not understand the power of its conclusions. Being scientific, being objective, using reason is a process of acquiring knowledge. Specific applications that use more precise tools applicable for the subject matter aren’t more scientific or have conclusions with any more significance or intellectual power than other branches of knowledge. They are merely a different context and allow greater precision.

Philosophy sets the standards for all branches of knowledge, including applied philosophy. There are few books or arguments recognizing or using philosophy as a science. It is a sign of man’s failure to grow and his willingness to accept nonsense.

Tuesday, July 2, 2013

Objectivity and Knowledge: So Vital

Nothing like stating the blindingly obvious, right? It is to me, and, hopefully, to my readers. Of course, it also depends if you understand objectivity as a connection to reality and knowledge as the integration of what is provided by that connection, which is known by very few today.

I am reminded of the importance of objectivity and knowledge in considering the relative virtues of three of my favorite books on the 2007 financial crisis. I recommend all three. Each has its own virtue and benefits to the reader. But, one book is in a different class because of the objectivity and knowledge of the author. He is an accomplished businessman and a serious student of Ayn Rand’s philosophy, Objectivism.

The difference between the books written by economists and journalists and a banker can be huge. The difference is especially large when neither the economist or the journalist actually understands what it means to understand and know a subject, i.e., to know it objectively – tied to reality. This is the difference, in today’s culture, between a person whose method of thinking is objective, subjective, or intrinsic (the corresponding order would be a banker who understands their subject, the journalist who thinks anything goes and there is no actual truth, and the economist who thinks that laws themselves are part of reality and thus his ideas float). Obviously, only one of these three has a sound grasp of the morality of the individuals they write about.

The book by the journalists, Reckless Endangerment: How Outsized Ambition, Greed, and Corruption led to Economic Armageddon by Gretchen Morgenson and Joshua Rosner, does offer a well-researched account of some parts of the crisis, which is to say that they are trying to be objective. But they have no clue about several issues: how banking functions, how regulators function, how a functioning economy works and why, and what is morality. Consequently, at times they make wildly impossible accusations, misrepresent events, and hold the innocent accountable (they do point at some truly guilty people, too, which is one reason the book is worth reading). If you don’t have a better understanding than they do, the book may lead to some poor conclusions. (You could recommend this book if it was read after the other two books.) In that the book offers a lot of information that wasn’t published before, you do learn important details.

Then there is Meltdown by Thomas Woods, who is an economist with a foundation in modern Austrian economics (post-Hayek, libertarian). He also makes many very good points. His understanding is better than that of the journalist, and although he has some obvious intrinsicist leanings, he makes no real bloopers. He is known to be religious and believes in self-sacrifice, which results in a rather flat support for the capitalist economy that he sees as better than the command economy. His justification is the benefit of the consumer. He tends to ignore the businessman. It is also worth reading because of the details he offers of the crisis and his decent understanding of the economics. But when compared with someone with an objective understanding of the crisis, it is obviously deficient.

So, the place to begin, and the one to read whether you have or have not read any other book on the crisis, is John A. Allison’s The Financial Crisis and the Free Market Cure. Mr. Allison has done the work to understand what objectivity means, i.e., connecting one’s ideas to physical reality. He also has years in the banking industry. Thus, he offers a fact based, conceptual analysis of what happened, why, what the consequences are, what the supposed cures are that Congress and the regulators imposed, and what we should actually do about it. This is what real explanation and analysis should look like.

Allison concretizes important points: the impact of regulation; the attitude and style of regulators; the destruction of independent action by the banker; the elevation of political pull over the blindingly obvious; etc. Ayn Rand and her followers have been asserting the destructive nature of government controls for decades. In this book are some specifics.

In future posts I will mention some of John Allison’s observations.