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Monday  October 27, 2008

A discussion:

Sorry, pure Capitalism doesn't cause the business cycle.

Government intervention in the banking industry does.

Markets fluctuate; that's what they do. Price change to reflect real world conditions, fears and desires. You can have a temporary pricing phenomenon in anything, but if all businesses rise together and crash together, then there must be an external cause. What is it? Price inflation is a direct result of monetary inflation. But, it usually takes time after increasing the money supply for these facts to effect the markets. Economists have known this since John Law and the South Seas Bubble.

Much of this price inflation depends on whether the people catch on to how the government is instituting a hidden tax on wealth. If people perceive that the government is running the printing press overtime or inflating through banking processes, then they will take evasive action, by getting out of dollars and into goods--into Gold. It is that mechanism which causes the value of the currency to nose dive.

You can get the same effect if someone is clever about counterfeiting. If they are able to pass off enormous amounts of funny money, but no one notices, at first, there is still an increase in price inflation, because the phony money is snapping up goods creating shortages. Then, when the secret is discovered, people find out that a substantial portion of the cash in their wallets and much that is in their bank account is worthless. When you discover that your wealth has vanished, you tend to cut back on your purchases. This is what a recession or depression does.

The mechanism that I described is used by the Federal Reserve Bank to regulate the so-called business cycle. When the economy is bad and unemployment is high, the FED lowers the interest rate to stimulate borrowing by businesses. It can also encourage congress to spend money-- they love to do that. When the economy is overheated and is heading toward a hyper-inflation then the FED cuts back on money creation by raising interest rates. This is Keynesan Economics in action. It is in almost every economics book.

The idea is that the government can balance monetary inflation and public spending to produce stability. The problem is that it doesn't work.

Under President Carter, and presumably a President Obama, we had high taxes, high public spending, high price inflation and high unemployment-- Stagflation. The solution which President Reagan used to solve this was to cut taxes, business regulations and he attempted to lower government spending, but the Democrats in Congress reneged on their promises. Even so, we came out of Carter's recession. It would have been sooner if Congress had been honest.

The point about this that, if the government has the power to regulate interest rates and who gets the loans, then they will manipulate these rates for political purposes. Mostly, it is to buy votes.

The reason we have a financial meltdown, now, is that the Democrats in Congress forced the Banks to give loans to people who couldn't afford to repay them. Then, President Clinton allowed Fannie Mae and Freddie Mac to repackage their risky loans and sell them to commercial bankers.

This was fine as long as the price of houses went up. But, markets fluctuate-- they go up and down depending on external factors. The FED had to raise interest rates to adjust for this. so the variable rate mortgages suddenly cost more money every month. People began to default on their loans. When you get enough of that, then the whole house of cards crashes.

All this means is that if there is any Phoniness at work, eventually, it will be found out. Of course, The crash came just in time to sabotage the Republican Candidates chances in a September surprise. Naturally the Lying Press and TV News blamed the problem on the President in office when he had nothing to do with any of it. Fannie Mae and Freddy Mac were the creation of Democrats in Congress. Those Democrats resisted any attempt to fix the problem.

The Current housing bubble is nothing compared to the Medicare and Social Security fiascos which are coming up. They will have to wait for the next time the Republicans might hold the Presidency.

Lou Wheeler

I confess that I am usually annoyed when someone begins with "Sorry, you're so wrong..." and then proceeds to tell me what I have been saying for years. Incidentally, the Fed continued to feed the boom by lowering interest rates during the boom period, which is not what Keynes would advise. In any event, I kept my answer simple:

And you, of course, know what does.

Yes, Free Market Economists have known about this for hundreds of years. They have followed the process through many booms and busts.

I'm not an economist. I just read them for pleasure.

Evidently, you are unable to read and think about my statements. I was quite clear. That's too Bad. Such is the price of economic bigotry.

You did not attempt to disprove my arguments, just dismiss them.


I had also said

There is a difference between fluctuation and periodic busts with depressions.  Or do you think the current mess is just a natural fluctuation, something to be expected every now and then?

As I said markets always move to adjust to changing conditions, unless prevented. The only time you can get a general price decline (a recession) is through a monetary manipulation. Busts are the natural consequence of artificial Booms. The longer you stave off the Bust, the deeper it will be.

The current mess is a manufactured crisis made out of many parts. Some of it is the result of the Democrats attempt to buy the votes of the poor through giving them below market loans. Partly, it is from an unwise political decisions to allow Fannie Mae and Freddy Mac to re- package and sell these risky loans to commercial bankers. And too, it is the speculators who benefited from the government's unwise decisions.

Finally, it is that the time to correct this problem was before these institutions lost the public's confidence. That was back in 2003 when the Bush administration tried to reign in Fannie Mae and Freddy Mac. Or in 2005 when McCain tried. But, the Democrats had the votes to block any change.

At this date, nothing has been done to correct the initial problems at Fannie Mae and Freddy Mac. These institutions must die, taking with them all their stockholders.

> We seem to have lost more money than banks ever made through history

True. What we don't have is any TRUST.

No one has any idea what anything is worth any more. The market place determines what has value, but the government guaranteed these loans. What is the worth of the government's guarantee? Why should anyone trust the bunglers who created this mess?

Oh! This crisis will be washed out. The bank who have any money will throw away their bad paper. But, that will not happen until the government stops trying everything that WON'T work. This is not a liquidity crisis, it is a Trust crisis. We are not even close to it being over.

> Sure everyone got into gold. Sure they did >

Not yet. It may well go there. It depends on how stupidly the government acts. I was speaking about the long history of currency manipulations, in general, not of this crisis, in particular.

Gold is the world's "scared money." Gold is a lousy investment in good times, because Gold gives no interest. But, if you are afraid that the dollar, itself, is going belly up, then you should have some gold, just in case. You may need to flee the country one step before the tax collector.

But, it is too soon to fear this, yet. We have weeks yet. If the government allows the commercial banker's businesses to fail. If it allows the prices to drop until even ordinary people can see the bargains, then the market will recover. That is how you traditionally handle a "banking panic."

If the government tries to lower the tax burdens on the Public, then people will have the money to make the recovery. If the government sets out to "Soak the Rich," then, the consequences will be long and deep.

I'm just not imputing any intelligence to these people. They have shown none so far. They seem not to understand the nature of the problem, so how can they adopt ant corrections?


> Interesting how few actually seem to know this. Tell me about the > derivatives which were unregulated,

They were not unregulated. The securities markets are one of the most heavily regulated markets in America. They were mis-regulated in a way that provoked this crisis. This was government mismanagement from beginning to end.

> and how they were not capitalistic?

Regulated and controlled markets are NOT Capitalistic; they are Socialistic. Why? Because they do not allow the necessary freedom which Capitalism demands. There are NO businesses, in Capitalism, which are too large to fail.

This is known as Crony Capitalism, State Capitalism or Social Democracy. There are stock markets in the European Union, but they are controlled the the state. The stock markets like, the businesses, do not have the freedom to act. This very much how the NAZI's took over the German economy and turned it into a war machine. Europe's Social Democracy may have a different goasl than the NAZI's, but they use the same methods. Evidently, so do our financial regulators.

Which is, I suspect, what most of those who believe the "free market economists" understand everything, and if only they are allowed to run things, all will be well.

The fact is that in 2000 the laws that forbade investment houses from betting on stocks without investment -- the derivatives that actually destroyed the market -- were repealed. In addition, the states were forbidden to regulate those derivatives. Sixty Minutes, not a program I usually credit with careful research, had a fairly good segment on this last night. The law was one of the last actions of the outgoing Congress, and was signed by Clinton. I don't know who opposed it; few had even heard of it until recently.

But by allowing investment houses to bet that the mortgage based securities were worth what was paid for them -- in other words to sell insurance on those mortgage based securities -- a great deal more than the value of the mortgage based securities was put to risk. Think on it: the mortgage based securities were at least based on real property. It wasn't likely that they'd be worth NOTHING -- at least the land would survive nearly any neglect or disaster.

But the derivative bets were based on nothing: if people defaulted and the bubble burst, there was nothing for it but to pay -- only the insurance company regulations that the states have in place that require reserves were forbidden by the federal government. This was deregulation with a real vengeance.

Now in general regulations do not accomplish what they intend to accomplish. In general I agree with the notion of free markets: but I also understand that unregulated free unrestricted capitalism always starts a race to the bottom. Eventually it ends with human flesh for sale in the market place.

We very nearly saw that this time with those derivatives. And there were tens of trillions of dollars' worth sold. They were bets that the real estate boom would continue. When it didn't, the investment houses were done for.

We had one more iteration of this:

> So who, precisely, was in charge here?

Why does any person have to be in charge? Why can't people be responding to governmental stupidity?

> I'd say that the speculation in derivatives is what really wiped > things out.

Yes, but the speculators never had the power to do this until President Bill Clinton gave to Fannie Mae and Freddy Mac the power to package these derivatives. And CRA was a very minor deal created by President Jimmy Carter until Clinton allow the Community Activists in ACORN to use it browbeat the banking industry into giving out risky loans. Where did it start?

Does it matter? It took the efforts of many people to get us into this mess. All should be blamed. Many of them, in an out of government, should got to jail. But, that is for after we are beyond this mess.

> It's much as if > your banker decided to use the deposits to play the horses.

The Bankers were forced into giving those risky loans by CRA under Clinton. Sure, they can be faulted for going along with it, but they did not start this.

> Or to bet on the Dow-Jones price without actually buying stocks. The > result was that the bank was wiped out the moment the depositors had > any suspicion that their money was in danger.

Yes. This is a matter of bad incentives. The bankers thought they were covered because they had government guarantees. What are those guarantees worth today? Zilch. Why? Because no one trusts the government any more

> > > The free market economists are right most of the time : but every now > and then everything collapses. They say, well, we were right 99% of > the time. So, really, was nearly everyone else. It's easy to make > money when things keep going up.

We do not have a free market. Government Guaranteed Enterprises like Fannie Mae and Freddy Mac are not free market. They are political institutions which had to fail. The government is not yet letting the free market work.

If the free market were allowed, then most of those investments would be worthless and the banking institutions who own them would be bankrupt.

There is a "creative destruction" in free markets. Bad institutions are allowed to fail. It keeps people from repeatedly acting stupid. When they lose all their money, they are out of the game.

> > > There wasn't any government interference with the derivatives market

That is an absurd position. It was all set into motion by the government.

Foreign hedge funds owned by George Soros, regulated by no one, have made billions on this collapse. They rocked the boat to destabilize the markets. And they timed it perfectly to explode in the Republican candidate's face. The mainstream media lies to cast the blame on the wrong people.

I have let this go on at length. If allowing them to bet on the derivatives was not deregulation then I am confused as to what regulation was involved, and I don't have time to continue the conversation further. Moreover I don't know what is absurd about pointing out that no one told the bankers that their "insurance" derivative bets were in any way guaranteed by government, and I don't have time to find out about my absurdity.

But this is the argument of the free market theorists, who insist that unrestrained free markets will not produce business cycles. Perhaps so. I haven't time to continue this. Note that most of the arguments are similar or even identical to some I have made. In general free trade is the right way t9 maximize production -- assuming you can manage to avoid the great swings that wipe out all the gains and set nations up for revolutions. Economics is, after all, not a complete science: political intervention can, and usually will, interfere with the pure theory of economic activity. Any economic theory that does not take account of politics is not likely to be very useful in guiding real statesmen and politicians in real world problems. The so called free market -- which never really exists -- often produces conditions that tempt politicians to  interfere with the free market.

And sometimes there is a need for regulation.

My own view is that ruthless competition does not always produce the results we want. As my astronaut friends used to say, it was a bit nervous making to realize that you are at the top of a machine made of 10,000 parts, each provided by the lowest bidder.

That is hardly a condemnation of free markets; it is a caution against the notion that unrestrained and unregulated capitalism is the solution to all problems. It's not, and without some kind of restraint, there is literally nothing that will not be offered for sale by someone. Competition sometimes drives people to desperate measures.

In any event, my essays on size and distributism were intended to promote this thought: is there such a thing as too much efficiency? Would we not have been better off if there had been a hundred investment banks, each small enough that if it failed the world would not end? Is it not likely that some of them would have behaved in a more sane manner, and anticipated the collapse?

I fear, though, that relying on the above analysis may not be the solution to the way out of this mess.

I might have continued the discussion but my correspondent solemnly informed me that I was both ignorant and arrogant:

In other words, you are a dupe-- a pawn- a drone. You are talking through your hat.

Then, you come off as arrogant, dismissive and prejudiced. You were not worth my time.



At which point I terminated the conversation. At least we have a sample of the reasoning behind those who insist they understand what is happening.


Too big to fail?

Fixing Too Big to Fail Why don't we break up companies that are "too big to fail"? Every year, put out a survey to NYSE, S&P whatever and ask if they are so great and important that their failure cannot be allowed to occur and should be bailed out by taxpayers. Check yes and get busted up fast.

Mike in TN

When it comes time for the nation to divest itself of the bank stock it has bought, this ought to be kept in mind: we do not want to produce a company that is too big to be allowed to fail.

Sometime this week we will have a new discussion of anti-trust and trust busting, and when it ought and ought not be applied.


Continuing the economic discussion


Dear Dr. Pournelle:

It seems to me that the weakness of the argument in favor of antitrust is much the same as that for any other government intervention: regulatory capture.

At least in recent years, it has become clear that many antitrust actions are for the benefit of other producers rather than consumers. This has led to such obvious absurdities as Microsoft being compelled by the EU to sell two versions of Windows, one with Internet Explorer and one without...which they sell at the same price (hmm, wonder which sells more copies?), allowing (as they always have) IE as a free download.

This seems to me to be even more problematic in an environment where company assets are mostly inside the heads of the employees: the availability of "free IE" certainly doesn't seem to have impaired the existence of Firefox, Opera, and so forth.

At least in the old, second-wave industrial world, you could construct some sort of plausible argument about "barriers to entry" in the form of all the capital investment required to compete. But my readings on the subject suggest that even the sort of antitrust that has been historically held up as exemplary (e.g., versus Standard Oil or U.S. Steel) was not altogether good for the consumer--but very good for the other producers.

Of course, helping other producers may be the best outcome one might hope for: the *worst* outcome is what you got in the application of antitrust to the railroads--murder by slow strangulation of the railroad industry with one hand, while the government blithely used the other to shovel subsidies onto their competitors, the airlines and highways.

I assume you are well aware of Frederic Bastiat's "Petition of the Candlemakers". Of course that is primarily an argument about tariff barriers but the analogies certainly seem pertinent to antitrust as well.

Very respectfully,

David G.D. Hecht

I do not doubt that anti-trust can be abused, and there are industries where it is not appropriate. I was not in favor of breaking up Microsoft. I am concerned about the concentration of wealth in financial companies, and in particular about such companies being too big to fail.

And I will repeat, I think it would be better to have 100 companies with CEO's getting a million a year than one company with a CEO paid $100 million a year.


Arthur Laffer on the Economy

Dr. Pournelle --

Arthur Laffer has a depressing article in the Wall Street Journal. He doesn't seem to have much hope for the economy with all that the government is trying to do to "help" it.

The Age of Prosperity is Over by Arthur B. Laffer


"Financial panics, if left alone, rarely cause much damage to the real economy, output, employment or production. Asset values fall sharply and wipe out those who borrowed and lent too much, thereby redistributing wealth from the foolish to the prudent. ..."

"When markets are free, asset values are supposed to go up and down, and competition opens up opportunities for profits and losses. Profits and stock appreciation are not rights, but rewards for insight mixed with a willingness to take risk. People who buy homes and the banks who give them mortgages are no different, in principle, than investors in the stock market, commodity speculators or shop owners. Good decisions should be rewarded and bad decisions should be punished. The market does just that with its profits and losses."

"These issues aren't Republican or Democrat, left or right, liberal or conservative. They are simply economics, and wish as you might, bad economics will sink any economy no matter how much they believe this time things are different. They aren't."

It's looking like this will be something I tell any future grandchildren I might have -- when they want a scary story.



Subject: Economics 102 


Regarding the posts from correspondent "Lou," I think he had some good points (including the one about Soros raking in a bundle from this, which I've been saying for years is why he's backed the Democrats) and about government manipulation of the economy to failure.

At some point he lost the thread of his argument.

Admittedly I'm not an economist either, but I do understand mathematics and large systems and I'm applying that to my understanding of the economy. Not sure I'm there yet, and I would appreciate your thoughts about my assessment and conclusion.

One thing I've done has been to characterize every "Panic" in US economic history. Almost all have had a component of government-manipulated speculation and / or gross change in monetary policy (including the energy crisis of the early 1970's, which happened when OPEC froze production in response to Nixon's manipulations), and they've happened almost like clockwork every eighteen to twenty years since 1809. But note that I said "almost all" and "some component." Many of the post-Civil War panics also featured individual investors trying to achieve monopolies over gold and silver at a time we were on the gold standard. (Come to think of it, it didn't turn up in my original research but I just had a "living" memory that silver collapsed about the same time as the Energy Crisis due to an investor attempting a monopoly; I'll need to go back and look that up).

I think the point that Lou is trying to make is not that the markets were, in these cases, deregulated in the sense by which you meant deregulation, but that the regulatory environment (Community Reinvestment Act, etc.) combined with extra-regulatory pressure from community activists organization (such as the infamous ACORN) encouraged mortgage bankers to take economically bad risks with some expectation (initiated under Clinton and perpetuated by the Democratic refusal to evaluate the risks during the Bush 2003 and McCain 2005 efforts to investigate and reregulate Fannie Mae and Freddie Mac) that the government would effectively insure the risk through those two organizations. The reregulation which eventually occurred after the Democratic congress was seated in 2007 -- forcing the investment houses to depreciate the value of their bad loans as the housing bubble burst -- completed the cycle of crashing the bubble just in time for the 2008 elections.

The relevant regulation / deregulation / reregulation is that which allowed some investors (e.g. Soros) to profit from this Ponzi scheme at the expense of the rest of the economy. Why anyone would be surprised when he did it in Britain in 1992-3 (something the New York Times now blames on the collapse of Thatcher's economic policies) or not see through his support of the Democratic party (as a foreign citizen) remains beyond me.

As you noted in your response and as we've discussed in off-line conversations, economics analysis must have some mechanism of defining and incorporating the constraints imposed by regulation and deregulation, as well as other factors of perception of individuals, corporations, and even segments of the economy.


Fox and Friends just reports (8:40 ET) that the Obama campaign is accepting credit card donations based on validity of the credit card and without correlation of the name and address of the donor to the credit card number, a policy that both Clinton and McCain avoided.


I think I said here early on that the beginning of the crisis was the ACORN and CRA requirements that Fan and Fred loan money to people who shouldn't be borrowing that much. But the insurance derivatives were the ten trillion dollar disaster that did in the companies, and those bets weren't legal until the "reform" act of 2000.

But I still believe the real problem was that there was such a concentration in a few companies. Any company that didn't get in on the derivatives and get the numbers up soon got a less risk conscious CEO. (Michael Miller formerly EIF of Infoworld and an old friend was making that point at lunch today.) Absent regulation of some kind unrestricted capitalism becomes a race to the bottom. There needed to be some protection for investor money other than greed...

It's as if Lehman Brothers decided to take the depositor money, use it as security to borrow a very great deal more, then bet on the horses using markers for ten times that much.

State regulations of insurance companies required certain capital reserves. There used to be margin leverage limits. All this we learned from previous crashes -- then threw those lessons out.

Forty years of "confirming instances" do not validate models on which you bet the entire wealth of the nation...


Harry Erwin's Letter from England

Recession comes to the UK

Guardian story <http://tinyurl.com/6jkbba> Times story <http://tinyurl.com/5m3lj7> Local story (we're a working class town) <http://tinyurl.com/5j5hwv> Independent story <http://tinyurl.com/5z7wwf> Telegraph story <http://tinyurl.com/5grh39>


And the world

BBC story <http://tinyurl.com/5o6yav>


Educational botches

Guardian story about student grants <http://tinyurl.com/5mz8xo> BBC story <http://tinyurl.com/66sybp>


Compulsory sex education introduced for all ages Times story <http://tinyurl.com/5lx5we> Independent story <http://tinyurl.com/6q8fqs>


Scrapping traditional subjects in favour of skills classes Telegraph story <http://tinyurl.com/5l9kmw>


Dumbing it down at the university

THE story <http://tinyurl.com/62786g>


Linking university cash to their producing employable graduates THE story <http://tinyurl.com/6ocfmu>


Richard Dawkins takes on Harry Potter

Telegraph story <http://tinyurl.com/5vrf2t>


Fuzzy figures and the speed camera debate Register story <http://tinyurl.com/5sdtcm>


NHS patients will now be allowed to pay for 'top up' care Telegraph story <http://tinyurl.com/6m2h9l>



Harry Erwin, PhD

"If you can't be a good example, then you'll just have to be a horrible warning." (Catherine Aird)



Muslim problem

Re Ian Campbell’s letter:

“Second path; we wake up while there is still time, and do the things necessary; which include expelling and/or banning the practice of Islam and all its adherents from any Western country, particularly the USA...”<clip>

Is it necessary to go nuts? It’s a big problem that a considerable fraction of Muslims support the militant overthrow of Western civilization. But surely it is also relevant that every survey shows that an even more considerable fraction doesn’t. Scholarly studies (by Robert Spencer, for instance) that “prove” that Islam is irreconcilably militant are missing the point IMHO. Loads of Muslims, even religious ones, are finding ways to assimilate Western civilization without becoming schizophrenic. This is especially true for Muslims from some non-Arab countries, but it’s happening everywhere. It’s just not happening fast enough, and we should be encouraging it. Plus, of course, weeding out the evil ones wherever we can find them, certainly not allowing Political Correctness to stop us.

And I continue to hold that keeping Muslim extremists from getting control of a nuclear weapon is the only really critical foreign policy issue today, far ahead of anything else. I hope Iraq works out, but it will be a tragedy if our weariness from it causes us to lose sight of the main issue of our times.

Glad to hear you’re getting back into form,

Michoel Reach





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Tuesday,  October 28. 2008

Spent the day at PDC and in discussion with old friends. More tomorrow.



My mind twists with each paragraph.

-- David Couvillon Colonel of Marines; Former Governor of Wasit Province, Iraq; Righter of Wrongs; Wrong most of the time; Distinguished Expert, TV remote control; Chef de Hot Dog Excellance; Collector of Hot Sauce; Avoider of Yard Work


German magazine interview

Fascinating! Really read the questions...



-- David Couvillon Colonel of Marines; Former Governor of Wasit Province, Iraq; Righter of Wrongs; Wrong most of the time; Distinguished Expert, TV remote control; Chef de Hot Dog Excellance; Collector of Hot Sauce; Avoider of Yard Work


Subject: The Role of the Federal Reserve in the Economic Meltdown

The Role of the Federal Reserve in the Economic Meltdown

Every discussion I've read about our current crisis ignores the most vital fact: That our money is issued by a private, for profit cartel of banks. As long as we have a fiat currency unbacked by anything other than our faith in what basically amounts to white collar criminals how can we ever avoid damaging business cycles? The dollar is born out of debt and the pyramid must always be expanded and fed or else it will collapse.

I remember a few years back you asking what the obsession was with constant corporate growth and wondering why a company who makes a steady, say 20% profit can't just do that forever. I think the schools emphasize constant growth because if they didn't our whole system would become unviable. The only way to keep paying the debt is to grow and grow and until the whole house of cards comes crashing down. The hows and why's are almost incidental and a distraction from the real problem of debt based fiat money created for a profit by a privately run central bank. Unless we in this country are willing to have a serious discussion about the Federal Reserve we're just wasting our time with band aids on the dyke. Ron Paul and Peter Schiff (Not of the Federal Reserve Schiff's) make a lot of sense on this topic. Schiff has predicted this entire mess going back to 2002. It's fun to put his name in Youtube and watch the 'experts' mocking him for being right.

Peter Schiff vs Art Laffer 2006 http://www.youtube.com/watch?v=IU6PamCQ6zw 

Peter Schiff vs Ben Stein 2007 http://www.youtube.com/watch?v=RYX1AgEV0vo 

Thanks for your time, you've been on fire lately, the site is better than ever!

James Renner

But then:


A (Mild) rebuttal to free market uber alles capitalists

It's fascinating how many of the people who argue about the merits of unbridled capitalism are ignorant of its impacts.

The Panics of 1893, 1907 and 1913 all happened prior to the creation of that "evil instrument", the Federal Reserve. So did much smaller bank panics from the 1840s to the 1880s.

Similarly, anyone who thinks the Gold Standard is the cure all to financial ills is blindingly ignorant of history, and the impact that increasing the quantity of gold in circulation will have. William Jennings Bryan's "Cross of Gold" speech was in favor of bimetallism, which would have inflated the dollar from the production of new silver mines in the US West.

Money is not based on inherent value; it is based on the trust of your trading partner. All that a Gold Standard does is ensure that there are dire consequences to your trading partner for defaulting, until he can dilute the gold, or find more.


In 1933 mortgages were for a few years, and if you couldn't get it renewed you could lose your home -- even if you have paid off 95% of the principal. This may have been good economic capitalism; it was politically rather stupid. I could give other examples.





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Wednesday, October 29, 2008

Apologies. Still trying to catch up.






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Thursday, October 30, 2008

On Trust Busting

You state 'Sometime this week we will have a new discussion of anti-trust and trust busting, and when it ought and ought not be applied.'

The answer is obvious, to any parent.

When the kids are playing, experienced parents monitor the noise and activity in a background sense. As long as there are no tell-tale signs that the fun is exceeding a threshold, trending towards either sadness or tragedy, the experienced parent is willing, even happy, to let the kids play, 'to be kids', to be what they are and do what they are good at.

Note however that I pose the 'experienced' parent. Let's contrast that with both the over-protective or overly-permissive parent. We've all witnessed avoidable trips to the emergency room or the shock of a parent who discovers that their 'child' is smoking pot and hanging out with those that do.

What separates an experienced parent from over-protectiveness or over-permissiveness? Experience and humility.

Now, how does this relate to trust busting?

I hypothesize that capitalism is analogous to the 'kids', and the government to the 'parent'. Both should do what they are good at.

Only, how does government become good (that is, recognize the appropriate level of protection, ignorance, and permissiveness)?

At this point we need Mr. Twain's wisdom - 'Good judgment comes from experience, and a lot of that comes from bad judgment.'

My own wisdom is that judgment is useless without the humility to process experience, that is, to learn and apply lessons from bad (over protection, undue permissiveness) judgment.

My ultimate hypothesis is that the political environment in the present information age severely inhibits humility in our elected officials. Indeed, the establishment seems to reward confidence and 'expertism'. (my word)

Example - President Kennedy screwed up, very badly, at the beginning of his term. Reference the 'Bay of Pigs'. At that time, he had the good sense to exercise some humility, and most importantly, the press and country gave him the emotional room to do so, and he learned. He learned so well that, combined with his other strengths, was able to avert a nuclear exchange with the USSR over '13 days in October'.

Contrast - President Clinton seemed to revert - unable to exhibit any humility as his term progressed, he lied to the nation. He feared, despite his obvious strengths, including remarkable cooperation with the Republican political majority earlier in his first term, that his legacy would be irrevocably tarnished. He incorrectly judged that it would be better to deny than exhibit humility. And the press rewarded him, nay, continues to reward him to this day for this exercise of his judgment.

Both presidents had their indiscretions - why do I honor one more than the other?

Our current political environment is not conducive to humility. People want 'strong' leadership that can 'deliver'. In that context I agree with one statement your correspondent made.

'The current mess is a manufactured crisis made out of many parts. Some of it is the result of the Democrats attempt to buy the votes of the poor through giving them below market loans. Partly, it is from an unwise political decisions to allow Fannie Mae and Freddy Mac to re- package and sell these risky loans to commercial bankers. And too, it is the speculators who benefited from the government's unwise decisions.'

I'm not 100% sure of the truth of this entire statement, but it sure resonates with me. And the Republicans are more than guilty of trying to buy votes in order to retain power, that is to out-liberal the liberals.

So, following my analogy and hypotheses, the answer to your question is: we shouldn't bust any trusts until we have some experienced, humble grownups in the room.

The question is where are these grownups? And how do they get elected in these permissive days?

That's my $0.02 worth.


Good points. But finding 'the right man' is a problem. Heaven and Hell are both rumored to be absolute monarchies; few question that an absolute monarchy with a wise king is a good thing; perhaps better because a bit more stable is an aristocracy with well accomplished aristocrats willing to send their incompetent relatives out to unimportant posts or turn them into remittance men. An aristocratic republic -- Rome before the Civil wars, England at one time (which modeled itself on Rome) can be a wonderful thing.

The Framers decided to try to set up something new: by leaving power to the states and not trying to collect it into one place, they reduced the need for a Washington to head the nation. Had Washington had a talented and popular son, it is likely that the US would have had a more centralized federal government which was a whiggish Monarchy. With no reasonable succession and complete opposition from Washington himself we built an elective monarchy -- but limited the powers of the central government.

I quite agree with your premise: finding adults to do adult supervision is always the problem.

But I repeat my point: I would rather see 100 companies in key areas, each headed by a CEO paid $1 million a year than 1 company headed by a $100 million a year CEO because the consequences of mistakes are less likely to be drastic. The financial companies were too big and the financial "reform" of 2000 exempted them from State regulations. The States would not have allowed those insurance-like derivatives without some real financial reserves -- at least some of the states would not have allowed it. The Crash would have been a lot less drastic without the enormous  concentration of power.

I completely agree that the devil is in the details when it comes to trust busting. My proclivity is toward freedom; but at the moment I am more inclined to the notion that having many companies in key areas is a lot better than having very few.

I am also quite aware that an active trust busting economy will need something like 10 - 15% tariff protection, and that this will have international consequences.


Anti-Trust & Trust Busting 

Dear Jerry,

>>a new discussion of anti-trust and trust busting, and when it ought and ought not be applied.<<

The two choices are a purely legal strategy or an application of "The Strategy of Technology". I think the preferable way to bust large trusts is to foster technologies that can favor the "small guy" economically. The first method merely transfers economic power from Big Business to Big Government rather than actually distributing it.

The steel industry is a simple example. A century ago we had a few huge steel trusts because the steel technology of the era favored massive scales and extreme centralization. There was effectively one prime iron range in Minnesota & Upper Michigan. Only a few coal mines in the Appalachians produced the best metallurgical grade coking coals. The ore and coal had to be brought together by cost-effective Great Lakes freighters and railroads. We thus saw Milwaukee, Chicago-Gary, Detroit, Cleveland, Erie, Cincinatti and Pittsburgh emerge as the leading steel centers since these were optimally sited with respect to cheap water transport, ore and coal.

T.R. Roosevelt went on an antitrust crusade but this only affected the business forms. It did not and could not influence the underlying real economics of steel making. These were dictated by technological realities, not by lawyers' and judges' ideas. The equation of metallurgical coal + coking battery + iron ore + blast furnace + plus cheap mass shipping = steel remained the same no matter what an Ivy League lawyer decreed.

In the mid-20th Century we saw the introduction of electric arc furnaces capable of melting scrap steel. And they worked very efficiently at much smaller sizes than blast furnaces. This meant they could be more widely distributed. They were so good they've come to represent over 50% of domestic US steel capacity, which is now more widely distributed geographically than in former times.

We can take this process further if we so will because iron ore reducing technology has advanced again. In fact it's reached the point where we could dispense with blast furnaces and their fairly dirty coking coal entirely if we so will. I refer to the Mesabi Nuggets process of concentrating ore to a 99% iron nugget. This is done at the mine head with low sulfur bituminous coals. This incidentally leaves all the slag at the mine rather at the blast furnace. Mesabi nuggets can used in mini-mill electric arc furnaces directly. They could also be used in much smaller iron melting cupolas and micro arc furnaces suitable for small enterprises. Scrap steel is difficult to use at small scales because it has to be sized properly to the furnace or cupola. Steel's principle quality - high tensile strength - also makes reducing it expensive. Small Mesabi nuggets don't present this problem. In this case we'd still have approximately the same number of mines. But their output would be distributed far more widely.

Looking further out, we could probably eliminate much steel usage by forcing changes in existing materials technologies and fostering entirely new materials technologies. Aluminum is the most widely distributed metal but is expensive due to the energy input required to separate it. This would change if the average cost of a kilowatt were reduced to 1/10th of a cent. Carbon is pretty ubiquitous too if we force technologies like Bucky Paper.

I agree with Jane Jacobs' and others concepts of rooting power at the local level. But this intent has to be matched with real technological-economic facts on the ground Otherwise it's just as impractical as believing in a mythical "unregulated pure capitalism" resting on the foundation of a government created money and credit monopoly called the "Federal Reserve System".

Best Wishes,


I am in complete agreement that it has to be done intelligently, and that each technology needs a different approach.  =====================

God is not without a sense of irony


"Snow fell as the House of Commons debated Global Warming yesterday - the first October fall in the metropolis since 1922."


The Gold Copyright

It seems to me that the "gold standard" crowd are coming from much the same place as the anti-copyright group (the ones that The Register calls "freetards".) They're both clinging to the childish idea that if you can't see something then it doesn't exist. You can't pick up property rights, weigh them, taste or smell them, carry them around the room; therefore they must not ACTUALLY exist. Similarly, fiat currency; I can't go to the bank and exchange a dollar bill for anything other than another dollar bill. Therefore that dollar bill isn't actually "worth" anything...

What they fail to realize is that property itself is an abstract concept. Ultimately, their attitude leads to a society where you only own what you can carry...

-- Mike T. Powers

Sound money is a requirement for commerce; the opposite is ghastly as with Germany in the 20's and Brazil until recently (I have a two billion cruziero bill from my visit to Sao Paulo about 1990). But there were many elements of truth in Bryant's Cross of Gold speech. Deflation can be as dangerous as inflation.

Everyone purports to understand money supply regulation, but I am not sure that anyone does.




Mr. Napolitano makes seriously good points. It's pretty grim.



Re: Michoel Reach on the "muslim problem"

Is it necessary to go nuts?

Yes, it is.

It's a big problem that a considerable fraction of Muslims support the militant overthrow of Western civilization. But surely it is also relevant that every survey shows that an even more considerable fraction doesn't. Scholarly studies (by Robert Spencer, for instance) that "prove" that Islam is irreconcilably militant are missing the point IMHO.

The only point being missed here is that of the entire history of Islam.

Yes there are moderate Muslims, meaning, Muslims who are perfectly content to live today in a certain harmony with a non-Muslim society. The problem is that the moderates never, ever, ever take overt action to oppose the radicals, and the radicals always emerge from a population of seeming moderates, and wherever Islam goes, blood and chaos follow. Those that "assimilate" are doing so in the short term (a matter of a few decades, not generations). In the long term? Many of the radicals - the 9/11 group, for example, or French "youths" - come from seemingly prosperous and assimilated backgrounds. Historically, the long term has tended to mean that Islam replaces whatever was present before, regardless of circumstances. The short term track record on assimilation is nothing on which to bet the future of the West.

All Muslims must leave all Western and European countries. Or renounce their religion, and do so through more than lip service. No exceptions. Doesn't matter if they have citizenship papers; those have been handed out far too freely anyway.

If and when Muslims in Muslim countries prove that they can create a civilized society that holds the natural rights of man sacrosanct, and that they've given up the parts of the religion that consist of instructions on how to violently conquer all humanity, then we can revisit the matter. But not before.



CSM goes online-only.


- Roland Dobbins

The future of newspapers. I am getting to the point where I would be willing to read the daily paper on a TabletPC or something equally convenient; the Kindle is a bit small for me. I read too fast for how much it can display in a size I can read. My old TabletPC works pretty well, but it's very old. At PDC I saw the latest HP Tablet and I lust, but I don't have the money just now.

But I intend to set up the Mac Book Pro so that I can subscribe to a good newspaper and read that at the breakfast table. We'll see. It's a good size, about right if I don't have a big newspaper taking up much of the table.


Google's Copyright Case: Settlement Is A Wake Up Call - Tech Check with Jim Goldman - CNBC.com

Dear Jerry:

More details and it seems like there will be payments to authors. The critical questions is how much of the gross goes to creators. I was a Google Print (now Google Book) partner and dropped it. There one got a fee for clicks on ads, which totaled, gee, I don't know...pennies per month. My own research shows that public library usage for any particular article on an electronic database is thin; it's a niche. There may be rare instances where electronic text takes off and produces big bucks, but this will be the exception, not the rule. Whether or not the ability to sample online will inspire greater sales of print product remains to be seen. Amazon has "Search Inside The Book" but how many people actually use it? The real problem will be getting past the publishers to pay the authors, as is the case with magazine articles.


Francis Hamit


I would presume that my old American Legion articles on Americas Looming Energy Crisis are in there somewhere. I haven't investigated past the first few pages of the number of hits I get when I go to Google Books.

I am of mixed emotions on what they have done with books: they may increase sales by putting forth teasers with links to where you can buy the book.

I don't have all that much short work, fiction or non-fiction, available. Except for A Step Farther Out, which you can buy on line either separately from me, or as part of the Baen continuum package.

This discussion will continue....


Subject: Life imitates Star Trek Jerry,

Life imitates Star Trek in a big way...


An 'Earth' Near Spock's Star? It's Logical By Dan Vergano, USA Today

(Oct. 27) — Star Trek fans, take heart — Mr. Spock's fabled home star, the nearby Epsilon Eridani, could harbor an Earth-like planet. NASA astronomers today report that the triple-ringed star has an asteroid belt and a Jupiter-like giant planet in roughly the same orbits as in our own solar system. Only 850 million years old, a fifth the age of Earth's sun, Epsilon Eridani resembles a younger twin to our solar system. About 62 trillion miles away, it is the closest known solar system.<snip>












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CURRENT VIEW    Thursday


This week:


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Recovering from Thursday night.










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This week:


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Day devoured by locusts.










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CURRENT VIEW     Saturday

This week:


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Sunday, November 2, 2008      

Subject: Grits & Butter

Im Happy 2 C the Democrat Party Back In Power. That Translates to Lower Americans Lives Lost In Combat & Collateral Incidents Domestic & Foreign. The Statistics Prove That & Numbers Don't Err Far From The Truth...Cause & Effect People. Hopefully This Is A New Tide 2 Clean Up The Hot Mess Our Former Administration Got Us In. Fact Or Fiction? U Decide

I am presuming this is genuine, but I have no way of knowing. It was sent to a fairly long list of people and forwarded to me.


Subject: The Pournelle Continuum


I just want to let you know how much I enjoyed Footfall. I took advantage of the “Pournelle Continuum <http://www.jerrypournelle.com/
view/2008/Q4/view541.html#Continuum>  ” offer the same day that it was announced on your daybook… I have to admit that I have spent very little time reading fiction of any genera, but I found the experience of reading your book to be a very pleasant diversion indeed!

I read a few chapters a day until I got to the launch of Archangel. Then I couldn’t put it down! I’m sure you’ve heard that term so many times that it seems trite, but I mean that I actually could not stop …reading! What a great story!

I particularly appreciated your use of technology in the story. I don’t think that any of the devices or techniques used by Humans or Fifthp were scientifically impossible or even improbable. This story could actually happen pretty much the way you describe it. Scary!

Computer trivia: I started by downloading the rtf version and reading it with Word 2007 in “full screen reading” view. That was very comfortable on both my home computer and my laptop. However, I found myself wanting to continue reading one time while neither computer was available. So, I used my BlackBerry to navigate to Baen Books’ website where I purchased the books, and used the “read online” link. Worked beautifully! In fact, I finished the book on the BlackBerry in the same room with my home computer and it’s 24 inch LCD monitor sitting a couple of feet away (at 1:30AM)… Like I said, I couldn’t stop…

Please pass my compliments to Larry Niven.

-Jay Ward, originally a Byte Chaos Manor fan and now a science fiction fan as well.


One drawback of the electronic format of this book was that it was apparently scanned from the printed form leaving a small number of scan errors that probably passed the squiggly-line test. They didn’t bother me, but I thought you might want to know.



The Best Distributionism


Your recent essays on distributionism have reminded me of the best form thereof, which was described long before Marx. The society was, of course, the early Christian Church:

"Neither was there any among them that lacked: for as many as were possessors of lands or houses sold them, and brought the prices of the things that were sold, And laid them down at the apostles' feet: and distribution was made unto every man according as he had need."

The distribution supported those who could not provide for themselves and who had no relatives who could provide for them, those who were "widows indeed". It was not used to support the lazy, hence the famous commandment of the Apostle Paul's, "...if any would not work, neither should he eat." Every member of the Church who could work was instructed to "labour, working with his hands the thing which is good, that he may have to give to him that needeth." He who would not provide for his own family had "denied the faith, and is worse than an infidel." Those who had other relatives who could not provide for themselves were to "relieve them, and let not the church be charged; that it may relieve them that are widows indeed."

It is interesting to compare Christian distributionism with socialism and communism, for they may sound quite similar in theory. Marx's writings, I believe, reference the Apostle Paul's description of Christian distributionism found in one of his letters to the church at Corinth:

"For I mean not that other men be eased, and ye burdened: But by an equality, that now at this time your abundance may be a supply for their want, that their abundance also may be a supply for your want: that there may be equality: As it is written, He that had gathered much had nothing over; and he that had gathered little had no lack."

Nevertheless, Paul's later words on the subject reveal that socialism and communism are merely counterfeits of Christian distributionism:

"Every man according as he purposeth in his heart, so let him give; not grudgingly, or of necessity: for God loveth a cheerful giver."

That is, the distributionism of the early Church was entirely voluntary and separate from civil authority, whereas socialism and communism use the power of government in an attempt to force people to distribute their goods to others. That is slavery and a destructive counterfeit of true goodness, and the notion that it is compassionate and generous to force others to give to others is false. Furthermore, though the members of the Church did not consider their goods their own, they did not consider them to be the property of the collective but rather the property of God, for whom they were stewards.

The Founding Fathers created a system of government under which Christian distributionism might flourish, and under which it did flourish, as de Tocqueville noted. Furthermore, the Founding Fathers designed the republic to endure as much entropy in the nation's culture as possible, to provide as long as possible the opportunity for the nation to return to the integrity of its youth.

The bottom line is this: If there are not enough citizens in this nation who are willing to follow the principles of Christian distributionism (which principles may be summed by the words, Thou shalt love thy neighbor as thyself), that is, as I said, if there are not enough citizens who will take care of the truly needy in this nation through voluntary gifts of their own possessions, then this nation is dead at heart, and no system of governmental distributionism can resurrect it.

As de Tocqueville said, "America is great because she is good..."


If humans were angels, there would be no need for government. Heaven and Hell are both rumored to be absolute monarchies, although Niven and I have taken some pains to describe the bureaucracy -- a well meaning bureaucracy at that -- of Hell.


Subject: Islam and the Prophet Muhammad(pbuh)

Dear Dr. Pournelle,

I have said before that my experience with Islam is based on a 1996 one-year contract in Saudi Arabia, teaching Royal Saudi Air Force personnel and Phillipino employees how to maintain their communications system.

All contract personnel were given letters telling them how to behave in Saudi Arabia, cautioning them that behavior considered normal in the United States was unacceptable or illegal in Saudi Arabia, and that violations of Islamic customs or law could result in jail, deportation, or death. Public contact with women was forbidden unless the woman was a close relative or her male escort gave express permission for you to speak. This permission was so rare as to be unknown. Alcohol in any detectable amount led to instant jail and possible deportation. Drugs, due to a recent death in the royal family, meant death by execution, no exceptions. All contract personnel were expected to live according to Islamic rules and customs.

On arriving in Riyadh, Saudi Arabia, we were all given a briefing on Islam by a Muslim. A Muslim is defined as a person who has surrendered himself to the will of God, as defined by the religion of Islam. At this briefing I asked where I could buy an English translation of the Holy Qur'an for personal study. I had seen one in my hotel room, and knew they existed. He told me to wait, that he would get me a free one. The local Islamic mission (dawah) provided me with the A. Yusuf Ali translation. Professor Ali(peace be be unto him) wrote this translation and voluminous accompanying notes expressly for English speaking people who wished to study Islam. There was plenty of spare time to read it. Night clubs and movies do not exist there. Entertainment is in the home.

After returning to the United States, I bought _The Sealed Nectar_, a prize winning biography of the Prophet(pbuh). This ended study of Islamic literature, although study of the laws and customs in the Sunnah, Shariah, and Hadith were strongly recommended,as was a multivolume commentary on the Holy Qur'an. I am a mildly curious Christian, not a Muslim convert or scholar. I wished to study Islam, not teach it or convert to a new set of beliefs.

Muhammad(pbuh) was always illiterate. Born into the powerful Quraish clan, and soon orphaned, he was raised by family members. The Holy Kadijah(pbuh) , an Arab businesswoman, hired him to do business in Syria, and was impressed enough with his performance that she married him. He was illiterate, but not ill informed. He asked questions during his travels, and listened to the answers.

At the age of forty, he retired to the cave, Hira, near Makkah. There, he began his period of prophecy, which would last twenty-three years. The Archangel Gabriel revealed the text of the Holy Qur'an to him, and family members transcribed it.

Muhammad(pbuh) said that polytheism and idolatry were unnacceptable. He also worked hard for the rights of widows and orphans. These ideas were unpopular with the Arabian establishment, and some Muslims made a pilgimage to Abyssinia to escape the beatings. Later, Muhammad(pbuh) fled to Madinah. The Makkans were unhappy with his escape, and set out to kill him. Muhammad until this time used logic and persuasion as his only means to advance Islam, even under terrible provocation. These new circumstances made him pray for guidance. He was promised God's protection, and elected to fight.

Muhammad asked for, and obeyed, God's guidance in his battles. He would fight only when forced. Women did not belong in battle, but if they were found, there was no excuse for stripping or raping them. Battle was only for the glory of God and the advance of Islam (interchangeable terms), and never for personal gain. He won against terrible odds many times, and lost a few battles, too.

He instituted his religious and political philosophies in Madinah. Muslims would have political rule. Quranic law would prevail. People of the Book (Christians and Jews) would be accepted, but Muslims would rule. Other religions were not recognized. Idol worship was forbidden. In general, Christians ignored him and Jews lied to him. There were many exceptions. Muslim men could marry women of the Book, but were expected to convert their wives to Islam, if possible. Muslim women could marry only Muslim men. This is still strictly enforced, and is a matter of family honor.

The ideals of Muhammed(pbuh) lasted until his death, but were immediately corrupted by his successors. Fatimah's husband was considered too young to rule, so four Caliphs took over rule and the religion, beginning the Sunni sect. Interpretation of the Qur'an continued until about 900 AD, when it was considered complete, inviolate and unchangeable.

After the death of Kadijah(pbuh), Muhammad married several women, but not for the purpose of bearing children. They served mainly as teachers of Islam to other women. Aishah, very young when he married her, grew to be an authority on the law, and acquired enemies of her own. She once told a visitor that the diet of the household was water and dates. Mutton was not served.

Fatimah's husband eventually felt ready to rule. The Caliphs reacted to this by trying to kill the family. The family ran for present day Iraq, but lost all of Muhammad's grandsons to battle on the way. Descendents of Muhammad(pbuh) are easy to spot. The Shiite Ayatollahs in Iraq wear black turbans if they are direct descendants of the Prophet(pbuh).


William L. Jones


Obama lottery

Dr. Pournelle:

See http://www.freerepublic.com/focus/f-news/2121811/posts.  Obama's lottery.

Apparently there was no opportunity to win if one didn't contribute.


I suppose it's one way to raise money. I am more concerned that he agreed to limit campaign spending by conforming with the campaign finance control then decided he wouldn't bother. That does not argue well for his keeping his pledged word. As I said, I think Obama is a politician whose policies are both more liberal and more beholden to interest groups than McGovern ever was.








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