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May 29, 2008

Contrary Views at Telecosm – Part 2

Steve Forbes' economic advice would be (maybe is) a great help to anyone running for President even though he wasn't a successful candidate himself. He gave the keynote today at Telecosm 2008 which he and George Gilder sponsor. Below are the points I found most interesting; doesn't mean I agree with them all but the depth of thought is worth repeating:

"Belief" in global warming may possibly be an emotional substitute for traditional religious beliefs which many people no longer have. (nb. My smart and anonymous friend WAG has pointed out the similarity between buying carbon credits and buying indulgences).

The subprime credit crisis needs to be put in perspective. 800 billion to a trillion dollars were lost. Sounds like a big deal but the value of stocks traded on American exchanges can and have changed by more than that on a volatile day. The amount is very, very small compared to the assets net of debt owned by American families even if you value all our houses at zero.

Part of the problem has been accounting rules that require securities to be marked to market. Fine for publicly traded stocks but tough when there is no market to mark to. Accountants, fearful of meeting Arthur Anderson's fate, insist on marking way down. But marking down assets means that more capital must be raised which, of course, hurts existing investors in the institutions which hold the various subprime instruments.

But the capital has been there for recapitalization – a good sign.

The Bear Stearns rescue was "essential"; many other banks would have gone under if the Fed hadn't acted. This was the last good thing Steve had to say about the Fed.

The Fed's late 90s policies were too deflationary. Part of the reason for the over-investment in Internet stocks was that deflation makes traditional assets like factories and commodities unattractive. Starting in 2004, the Fed has been creating too much liquidity. One result was the mortgage bubble.

Forbes says that Fed Chairman Ben Bernanke has written that the Fed could have cured the great depression by throwing money out of helicopters (which weren't yet in use). He disagrees, says that would have just caused other problems. There should have been tax cuts instead of tax increases, more international trade rather than less.

The current soaring food and energy prices are a bubble caused by loose monetary policy. Oil might have gone up some 50% or more in the last five years on the basis of increased demand and slow growth in supply; it hasn't gone up more than that when priced in ounces of gold. It's gone up less in strong currencies like the euro than weak ones like the dollar.

We've had similar price runups in oil with a subsequent collapse in price. Oil fell from a peak of $40/barrel (not inflation-adjusted) to $10 in the 80s; from $30 to $11 in the 90s. That will happen again this time although prices may not fall as far since there has been more of an increase in demand than in supply.

The biggest mistake of the Bush administration has been its desire for a weak dollar. This amounts to a shortterm subsidy to domestic manufacturers at the expense of enormous distortions including commodity prices in the rest of the economy. "If you could get wealthy by debasing your currency, Argentina and Zimbabwe would own the world."

2010 is a crisis point when the 2003 tax cuts expire and the cap gains rate is scheduled to go up. A cap and trade policy on CO2 emissions would hurt the economy. "Economic policy is not about allocating scarce resources but about turning scarcities into abundance."

Medical cost problem could be solved by getting rid of third party payer system. The price of Lasik surgery which is not usually covered by insurance has gone DOWN 50% in the past five years. If the price of an MRI were set in a free-market, it would have fallen with the falling price of electronic components and now cost $39.95.

Although the money supply does not appear high by historical measures, modern technology makes each dollar of base go further in the real economy so the effective money supply is too high, weakens the dollar, and causes commodity inflation in the US. The Fed should be watching the price of gold in dollars and adjust the money supply accordingly; this does not mean that we need to hold gold in reserve as we once did. However, this is unlikely to happen in the nearterm since Bernanke has written papers hostile to any such use of gold.

We are on the verge of an extraordinary era.

Whether you agree with the specifics or not, wouldn't it be great if political debate were at this level?

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