Did Greedy Execs Really Cause the Problem?

All the events with the economic meltdown in the housing finance industry made me think about reality and rational behavior... We are told (over and over) that the whole problem came from greedy wall-street executives, that they were purposely giving out loans to people who could not afford them, and that we need more regulation to stop it from happening again! But does that make any sense? Let's first ask some basic questions.

Pretend that you are a business owner- What is the basic reason that you are in business, or the reason why you engage in any business transaction? To earn a profit. If you thought of something else, then you may want to think about the question some more. If your first motivation isn't first to make a profit, then you can't really ever accomplish any of your other desires like providing meaningful employment or other worthwhile goals. Say that you are a banker- For what purpose would you give a person a loan? To earn a profit! There can't be any other reason otherwise you will not stay in business long. How would you determine who to give a mortgage to? Would it be based on the person's need, based on whether or not they deserved a house, or would it be based on an analysis of whether the person will likely be able to pay the payments? Clearly you would look at the applicant and weigh the risk of giving that person a mortgage, and if the risk was high that he or she would default, you would not make the loan.

If these banks executives were driven solely by greed in pursuit of profit, then does it make any sense that they would give loans to people who they knew could not afford them? No. People defaulting on the loans that you give them is not a way to gain profit. So, if it doesn't make sense that greed was driving the lending behavior, something else must have motivated such industry wide behaviors...

"I'll give you a hint. Contradictions do not exist. Whenever you think that you are facing a contradiction, check your premises. You will find that one of them is wrong." Francisco d'Anconia to Dagny Taggart in Atlas Shrugged

The behavior was going on, however, my purpose is not to answer the question of why the behavior was going on, but to point out that the reason we have been told doesn't make sense. It has contradictions. There are lots more questions to ask about this episode in our history. Keep asking them, and you will likely find that lack of regulation was not even a small factor... You may even find that those calling for more regulations were a large part of the problem to begin with.

There is a new book out (I have not read it but plan to) that addresses the behaviors that were going on. The book is- Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon
By: Gretchen Morgenson, Joshua Rosner

Gretchen is a business writer for the New York Times

Do Boot-Camp Workouts "Work"- A Case Study

I am a casual mountain bike rider (casual because when the weather turns cold, my bike goes into hibernation, and during the “good” weather season my rides can often get put off for other priorities). For the last 15 or more years, each year, I have mountain biked up the quarry trail in Boise up to the table-rock cross, so I have a pretty long standing baseline to judge my fitness level. On the first ride of the year this is my typical baseline- About half way up the trail my heart is pounding well into the anaerobic phase, and my breathing is fast with heavy gasps for oxygen. Some years I do not make it to the top on my first ride of the season, but in years when my fitness is a little better I have to stop once or twice to rest before I make it to the top. When I get to the top I am typically moments away from collapse, and I must get off and spend several minutes recuperating and getting my breathing under control before I can start the ride down. As the riding season continues I can ride to the top without stopping but typically with still a couple minutes of recuperation time at the top.

This year on New Year’s Day I started doing boot-camp workouts three times a week for 45 minutes at FitMania. After a cold wet spring, finally on Saturday May 21st, I got my new mountain bike out (Christmas present) for its first ride in the dirt. I was a bit concerned about my energy level as I started my ride towards the quarry trail, because I had spent Friday night camping with some boy scouts who kept me up well past 1:00AM… I got to the trail, about a 5 mile ride from my house, and started up. I got through the first section with relative ease and was feeling pretty good. At about the half-way point I was breathing comfortably, but my legs were feeling a bit fatigued. On this trail, the last three sections are the worst- one climb straight toward the hill-top, then a left turn and steep climb up to an outcropping of rocks, followed by a right turn and the last long climb up to the top. As I headed into these last three sections I started entertaining thoughts about where would be a good place to stop and go back, but I finished the first climb and turned left heading up to the rocks and I was feeling OK. My legs, again, were feeling the fatigue, but I was still moving at a reasonable pace. When I made the right turn for the final climb to the top, I realized that I was going to make it all the way without stopping. As I reached the top I slowed my bike, popped my feet out of the clips and got off the bike. As I stood there, I realized that I did not need to rest before heading back down and that I was ready to go! The ride down and back to my house was much stronger than I was expecting it to be. In my 15+ years of riding this trail, I have never had this good of a ride on my first ride of the season!

Thanks Boot-Camp workouts and thanks FitMania!

Econ. Bottom up or Top Down

Top down vs. bottom up-

Many economists today teach that Keynesian (top down) economics has failed. This is also the learning that I was lead to understand in my MBA economics classes, so for this writing we are going to assume that this is true.

This leads to the question- if top-down economics has failed then why do we continue to see government intervention, stimulus packages, increased regulations, and favorite industry subsidies? If all these actions have negative impact on the economy, then what is the motivation behind our government's actions? Some possible answers-

Our leaders-

1) are simply incompetent.

2) don't believe what the data is telling them.

3) believe they can plan and spend your money better than you can.

4) are power hungry, seek to control the lives of others, and see themselves as a ruling class who are above the "masses."

Sadly for many of our leaders all four of these exist to some extent or another. You don't have to look very far to see the evidence of incompetence- when a high ranking official calls extending unemployment benefits one of the best job creation stimulus methods not much more needs to be said.

What about those who don't believe what the data is telling them? Many fall into this trap republicans and democrats. Before he left office President Bush started with the first stimulus and started pushing for bailouts of the auto industry. President Obama came into office to fire off a huge 2nd stimulus and bailouts of the auto and financial industries. This was followed by a jobs bill and more. Surely at least one of these presidents saw economic data that showed that this kind of market intervention is ineffective at best and destructive at worst, but clearly they did not believe it. You can get away with ignorance by claiming "just think how bad it would have been if we would not have acted." Regardless of such silly claims, just consider where our economy now stands. A rational mind will say that we probably did no good with these measures and certainly made things worse for the long run.

The "do gooders" as Reagan called them believe, regardless of what reality and data says, that if they are in charge of spending, job creation and all economic planning that they can create a utopian society. It doesn't matter that no one has ever succeeded in creating such a utopia with these methods, because surely it has not succeeded because "they" were not the ones to implement the scheme. Not believing actual life data makes this group no better than the ignorant and possibly much more dangerous.

Finally the power hungry- Many of us average folks have a hard time believing that we have any leaders who view themselves as being in the ruling class and above the "masses" seeking for power over others, but let's not fall for the same fail mode of not believing the data. When our leader says "with my plan [energy] rates will necessarily skyrocket" how can this possibly be justified as a reasonable policy. We could review the "reasons" stated by leaders and in the media why we would want such policies, but let's not... Instead consider the effects of these kinds of policies. What is the best way to control the behavior of all the "masses" in a country of people who love liberty? Make the costs of living high enough that the lower and middle classes can no longer afford to travel and move about the country. Add to those costs government controlling more and more areas of our life (health-care) and "their" power over the "masses" grows quickly. Before I get accused of being crazy and seeing conspiracies where none exist, can you really believe that we have wonderful benevolent leaders and government who exist solely to do what is best for every one of us? Who is the crazy one? Washington knew what he was talking about when he said-

"Government is not reason, it is not eloquence, it is force; like fire, it is a dangerous servant and a fearful master."

"Plans by the many not by the few" is the fundamental aspect of economic liberty and freedom. Not only do we loose that liberty with Keynesian type policies it is also destructive to the economic health of the country.