Brains Not Included

Cracked Up, Whacked Out and Completely Out of Control

Keynesian Kooks – Why Keynesian Theory Doesn’t Work

KeynesianWhose Theory is This?

Keynesian Theory was developed by John Maynard Keynes, a man who would eventually have the royal title of Duke bestowed upon him in England.  Born in 1883, he came to prominence as an economist and philosopher around the time of The Great Depression. 

 His theories were adopted by the government in England in the late 1930’s and were eventually adopted by the Americans towards the end of World War II.  Essentially he believed that government could and should control capital in order to abate the swings in unemployment that can be typical in capitalist economic systems.

His theory basically states that high rates of savings by the population should be discouraged because those rates of savings hamper growth.  He also believed that supply drove demand not the other way around.

One of his largest critics was Milton Friedman who believed there were some basic flaws in Keynes theory.  One of the things that bothered Friedman the most was that much of Keynes economic themes were based on his feelings or his philosophy and had very little to do with actual mathimatical formulaic proof.

Friedman actually disproved Keynes theory that supply created demand and proved mathematically the opposite was in fact true.

What is the Keynesian Theory of Economics?

Simply put, Keynesian theory states that government can place capital more efficiently than the private sector.  When government controls capital and directs its placement through taxation and heavy regulation or through deficit spending, then swings in economic cycles are flattened and full employment is brought into equilibrium for long periods of time.

It further hypothesizes that high savings rates are unsafe and destabilize the economy and that only low savings rates and high rates of spending by the population can sustain growth and fuel stable economic cycles. 

Therefore, when the public is saving in large numbers, the government must encourage spending through regulation and if government cannot encourage spending then it should tax heavily in order to put the saved money to work in the economy.

Why Keynesian Theory is Still a Theory

Keynesian Theory is still a theory because it’s never been proven to work.  While America embraced Keynesian Theory in the lat 70’s under Nixon and Carter, the British were quickly squeezing the vestiges of this failed theory out of their government.

Theories remain theories until they are proven at which time they receive the title of Rule or Law.  We don’t call it a law because the theory’s concepts have failed time and again.  If it worked we would call it a Keynesian’s Law or the Keynesian Rule.

Milton FriedmanCommon Sense Shows Us the Way

Think about the two basic tenants of Keynesian Theory.  1.)  That saving is bad and; 2. )  That capital in the hands of a few (the government) is better than the profit motive of capital in the hands of many.

Instinctively we know that having savings is good.  ‘Save for a rainy day’… ‘Neither a beggar or a borrower be’…  ‘Waste not, want not’…  All of these wise old sayings are telling us something.  SAVE FOR A RAINY DAY!  Saving is a good thing.

Next lets take a look at human nature.  How good would a person have to be if you put millions, billions or even trillions of dollars in their hands and said, this doesn’t belong to you but you have complete control over it? 

Now the rules say this person can’t use their emotions in deciding what to do with the money and they can’t let their personal opinions play on their decisions, but…  How does this person or these few people in control that kind of money keep their own human nature in check? 

They don’t, just look at the Marxist utopia that should have bloomed from the Bolshevik revolution.  Instead of Utopia we got the USSR.  Socialism and Communism are the end result of basic Keynesian Theory.

Friedman Got It Right

Milton Friedman used mathematics to prove his economic theories and to disprove Keynesian Theory.  While Keynesian approached economics from the viewpoint of philosophy first and mathematics second, Friedman comes at from the other side.

While the Keynesian experiment was all the rage in Europe and was being put into practice in the U.S.A., Friedman was being decried by his piers for his opposition to this ‘enlightened’ economic theory. 

But, armed with the mathematical facts and penchant for philosophy himself, Friedman was able to write one of the greatest books of all times.  Capitalism and Freedom is a must read for anyone that wants to understand why Capitalism works and how it creates freedom.

We can try Keynes ideas one more time, but doesn’t make more since to turn to the logical rules that are proven and documented for us by Friedman?  Capitalism may give us some ups and downs in our economy, but it is still the worlds last best chance for strong free societies where people have an opportunity to live free from tyranny and where people are free to live their lives as they see fit!


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Creating The Socialist National Bank of Amerika

How much is enough?  Well, how about another $250 Billion!  That’s BILLION with a ‘B’!  So we’ve poured billions and billions into this bailout with no end in site. 

Obama seems to see the bailout and the economy as a way to make political hay.  His answer is to tax more and spend more.  My questions to Senator Obama are:  How does taking more money out of my pocket and giving it to others help the situation? ……and…..  How does spending MORE money and creating larger government bureaucracy help? 

Isn’t our problem that a liberal government has been to involved in making policy like the Community Reinvestment Act that forced banks to make bad loans?  Isn’t the problem also that through our ‘social engineering’ strategies, government spends way to much money?  I say yes, that is the problem. 

For those that would point to the war and say we spent to much there, I say you are correct.  But, be honest about why you say that, you wouldn’t save that money.  You just want it to poor into other government programs.

McCain is a different story.  He doesn’t have a clue about how the economy works.  He seems to be walking lock step with what Paulson and Bernanke are recommending and he has no original ideas of his own.  To his credit he wants to freeze spending, but to his discredit he has suggested drastic cuts in spending.

Conservatives and Republicans in general are way to far to the other side of this issue.  There needs to be some SERIOUS regulation of banks and investment banking operations.  There needs to be oversight to make sure that these organizations are taking advantage of the public.

Both sides have it wrong.  Seems like we are ruled by the extreme left and the extreme right and the only candidates we get that are in the middle don’t have the backbone to make a stand against the extremes on both sides!  We need someone in the middle to say enough!  and stand up to both the left and the right.

Sorry, back to the subject at hand…..

So Paulson decides he’s going to take $250,000,000 and ‘invest’ in America’s banks.  Now we have the ‘socialization’ of the American Banking System and neither candidate ….let me say that again…. NEITHER CANDIDATE! has said anything about it!

And who gets the largest portion of that money, 9 of the nations largest banking institutions!  I would love to see the ‘formula’ where they figured that one out.

One last thing and I’ll close; I just read the U.S. Constitution.  Funny thing is I didn’t see anywhere in there where the Federal Government was given the power to own bank stocks.  Can someone help me out with this?  Please, I’m just sure my head is going to pop right off of my shoulders!

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Bingo! There is a Plan

McCain is getting hammered by the press, by the Dems and by the conservatives.  His egregious mistake?  He mentioned that he would take $300 Billion and buy up all the bad loans and then reset those loans to make them affordable for the homeowners.

Now everybody is hammering him for his plan.  Let me just say this, AT LEAST HE HAS A PLAN!.  He’s not playing the Paulson/Bernanke game and just shooting in the dark.  He’s looked at the problem and said; ‘hey, if the real problem is bad mortgages clogging the system, then let’s get them out of the system.’

BINGO!  If that is the problem, then remove the problem.  What Paulson and Bernanke have done is said they’ve identified the cancer, they see the tumor and it’s in the gut.  BUT, we have to go through the foot, up the leg, through the groin and then maybe we can get to the problem area. 

McCain says, hey I see the tumor, let’s go in there and pluck it out!

I for one do not relish the thought of sitting around over the next three years while the current plan slowly weeds these bad mortgages out of the system.  Furthermore, can someone telll me where the authority was given to Paulson to invest our $700 Billion into bank stocks? ….both good and bad companies…..

So now the Fed is in the business of being a stock holder in America’s banks?  What, are we turning into United Socialist State of AmeriKa?

Look, I’m in the mortgage business so I see this stuff every day.  I’ve seen the bad players and I’ve fought against the predatory lenders.  I’ve watched our stock market and bond markets slowly detach themselves from one another and now they are completely working as opposing forces instead of working in unison.

There is a huge problem out there and at lease McCain has a fix.  It may be unpalatable to those of us who play by the rules and pay our bills on time, but what is the alternative?  The alternative is what we are dealing with right now ….or worse!  Let’s just swallow this one last BAD bite and be done with it.

The more I think about it, the more I’m beginning to think McCain is on to something.

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Bar Stool Economics – The Analysis

We’ve all seen the bar stool economics email, right?  The one where the 10 buddies go to the bar and they all pay according to their ability rather than dividing the bill up equally.  (by the way – this is a communist principal ….each according to their ability to each according to their need…. but that’s for another post, let’s move on.)

Well my lovely bride sent this email out to a friend of hers and he responded with a well thought out recalculation.  I won’t go into his response in detail because this post is not about the numbers.  This post is all about the fact that he needed to respond in a way that would prove his point.

His analogy was to point out that his grand father, a very wealthy man in his own right, paid less tax than a lot of people that mad eless than he did.  His analogy showed the wealthy guy paying less than the others as a percentage, thereby creating a deficit to the bar owner, he also disparages his grand father for only paying Social Security Tax to a certain limit.

While he had a decent analogy, he forgot one thing.  The people that put the SS tax in place were the democrats and the people that started the ‘tiered’ system  of taxation were democrats. Regardless of the reasoning behind these ‘systems’ the truth of our day and of this political environment is that the current system is used to pit one American against the other.

So here we sit. Al off us Americans…..many of us in the same tax bracket……taking a simple analogy of how our tax system works and turning it into some complex manipulation of numbers to show how it all ‘really’ works! LOL

and I say, isn’t that the real problem anyway?!!?

Don’t we need to quit worrying about what other people make and/or pay and go to a system that doesn’t promote class warfare? I look at the parties and I see one side always trying to tax the heck out of me and I see the other always trying to remove taxes from me. But then I see one party trying to legislate morality while the other isn’t.

I say the government should stay out of our wallets AND out of our bedrooms. It’s a shame we don’t have a singular choice that meets both tenants. In the end I vote for the party that stays ‘mostly’ out of my wallet. That would be the Republicans ….this year anyway….

Oh and BTW – This current economic crisis was not caused completely by the Republicans. It was caused mostly by the Dems. I know because I have followed the issue for years and have railed against the abuses in lending for years. I’m in the mortgage/real estate industry and I watched this crash coming.

There is no debating that the democrats staved off heavier regulation of the GSE’s and that the Republicans the Bush Admin. wanted more regulation on those companies.

Visit this link and watch the politicians say in their own words:

It’s also no secret that J. Carter created the Community Reinvestment Act and it was Clinton who expanded it and forced banks under the threat of a law suit to prove that they were making loans in ‘under developed’ communities. This act essentially created the Sub Prime mortgage market and forced banks to make loans to people that couldn’t afford them.

We can go into all the predatory lender comments and bad players and play the blame game, but everyone needs to realize that these players would never have existed if a playing field had not been created for them to play on. This field was created by the expansion of the Community Reinvestment Act and through the lack of the political will of Democrats on the hill to allow tighter regulation of the GSE’s

These facts are undeniable. So here we sit, good people, reasonable people and knowledgeable people, arguing (in a playful way of course) over who to vote for. We are probably very close in our belief systems but the pimps from both parties have achieved their goal…..they’ve gotten fairly like minded individuals to play the ‘class warfare’ game and even have some people disparaging their own grandfather to make thier point.

We all need to band together and find a way to remove these pimps from office. The socialist and the facist need to go and we need to elect some people that truly understand that our nation was founded as a Democratic Republic and not a democracy. We need the Fair Tax so pimp politicians can’t pit good people against each other even if we are against each other in jest.

Much love for everybody’s passion in taking the time to recalculate but I think they may have been blinded by a little ‘class warfareism’ with the response.

Take care and hope everyone is making it through this down economy.

Read this and other comments on my blog I would love to get your feedback. Remember when you read it, I said brains NOT included, that would mean the politicians and MINE! LOL

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When the Roof Leaks Put a TARP On It

The night was stormy.  The wind was trashing and thunder was crashing and trees were falling all around us.  It was a horrible storm.  The rain was coming down in sheets and water flowed through a gash in the roof filling bucket after bucket with water.

The next day we surveyed the damage.  After pulling a huge tree limb out of the roof it revealed a gaping hole.  Something had to be done so a huge blue tarp was strung across the house.  It was a temporary fix but it worked until the roof could be repaired and all could be made right again.

In a way, this is what has happened to our economic system and isn’t it appropriate that the government would name the portion of HR 1424 Emergency Economic Stabilization Act that is designed to stabilize home ownership T.A.R.P. (Troubled Asset Relief Program)

Many people ask me what this bill is all about and the answer is complex.  You see the bill is about a lot of things.  Some of what is in the bill is important, however I am sad to say that there is a lot in the bill that is not.  So let’s focus on what is important in the bill and for the time being, leave the pontification of what should not be there to the pundits.

One of the most important parts of this bill is the TARP (Troubled Asset Relief Program).  The TARP is the portion of the bill that gives the Secretary of the Treasury the authority to purchase non-performing and under-performing loan assets from banks.  This huge fund should start to get all of the bad loans out of the credit system so that the real value of the loan pools that are performing can be determined.

The American economy, our financial house, has just been through a really bad storm.  The TARP is there to temporarily cover the hole in the rough until it can be fixed properly.  It is truly and temporary fix.

However, don’t fret, there is a portion of this bill that is designed to permanently fix the hole and put our economic house in order.  After the Sec. Tres. buys these troubled assets he has several tools he can use to transform the troubled assets from worthless pieces of paper into valuable streams of income.

  • First, the bill gives the Secretary the ability to adjust non-performing loans.  The secretary can lower the interest rate, lower the loan balance or reset the loan to a 30 year fixed.  He can do one or all of these things to help the borrower stay in their home and to make the home affordable based on the current income of the homeowner.  This should allow the homeowner to start making their payments on time and should turn a non-performing asset with no value into a performing asset that can be sold for a profit.
  • Second, the Secretary has the authority to insure the payments on the new loan.  If the secretary feels that the new loan would sell faster and for more money in the tertiary market if it were insured, the secretary can add a premium to the payment.  This premium would insure the loan for up to 100% of it’s payment if it went into default.  Essentially this means that anyone purchasing the loan as an investment would have no downside risk.

As I said, there is much more in this bill that can be discussed.  Much of it has to do with technical issues relating to how banks lend to each other and how they borrower from the Fed.  The bottom line is that the TARP is the major portion of the bill that will help homeowners and that will stabilize the real estate markets.

So we’ve decided to do something about the hole in the roof caused by the storm.  We’ve put a TARP over it to stop the damage.  Now let’s hope our politicians have the knowledge and foresight to take the next steps to do the hard work to remove the TARP as quickly as possible and truly fix the gaping hole in our economic house.

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