Posts Tagged ‘free markets’

Hayek and Bailouts

October 5, 2010

I’m in the middle of reading The Road to Serfdom, by FA Hayek.  I’m on a part right now that talks about the role of government and the free market.

People now think that free market supporters want no regulation and financial anarchy.  This is especially true with the criticism of the Tea Party.

However, Hayek claims that laws are necessary and that there are two main points:

1.  The rules have to be predictable and known in advance.

2.  The rules have to be set with no regard of who they will benefit.  A law created to benefit a particular group will create imbalances.

Unfortunately, we actually have not violated rule #1 in our economic system today.  The rules are very predictable, that our government will bail out big corporations at the expense of the individual family.  This is predictable in all the wrong ways.

We have violated rule #2 and you would be hard pressed to find any legislation that does not seek to help one particular group.  The healthcare laws are supposed to help the uninsured.  The financial overhaul is supposed to benefit the consumer.  While the laws are well meaning, we know that they will not work because business will exploit the laws that they lobbied for in their favor.

As I read more of The Road to Serfdom, I’ll keep posting my thoughts.  It is not a very easy read (Hayek’s sentences last forever!) but the ideas that he was expressing in the 1940’s are as true today as they have ever been.

Obama’s Misguided Fuel Efficiency Policy

May 19, 2009

Today, President Obama announced his goal to increase fuel efficiency standards in our cars to an average of 35.5 gallons by 2016.  What he didn’t say is that he is going to keep using the horrible and unfair CAFE fuel efficiency standards and how this is going to absolutely kill the American automakers.  His policies are straight out of a “Politics 101” textbook.  They are so naive and idealistic and he does not realize that there are unintended consequences of his policies.

I’m not an expert on fuel efficiency and the auto industry, but a quick search on wikipedia for “CAFE Fuel Standards” was all I needed.  A little research showed me how the rules and regulations are broken.  Instead of addressing the root of the problem with our auto industry and efficiency standards, our President just reaches for pie in the sky goals with no regard for the blowback of his actions.

As I wrote before, the problem with the Corporate Average Fuel Efficiency (CAFE) standards is that they measure the harmonic mean of all the cars sold domestically by automakers.  Since the domestic automakers sell mostly trucks, they then have to sell – not just produce – an equal amount of crappy, fuel efficient cars that no one wants to buy in order to meet the standard.  They end up having to sell these at huge discounts or even at a loss to rental car agencies.  The Big Three lose money on every compact car they make because of labor and union costs, but make money on every truck and SUV they sell.  The importers from Asia and Europe sell mostly compact cars, so they are at an advantage.  They build these cars using the same US labor, but they are not burdened with the labor costs the US automakers are strapped with.   They can meet the fuel standards and be profitable at the same time.

On a side note, we know that US labor costs are not going to go down either.   The United Auto Workers are now majority owners in Chrysler, and will probably come out the same with GM.  With a partnership of labor and the government running the company, how can we expect labor costs to decrease?  Instead, they will continue to increase, and the taxpayers will keep giving them more money to prop them up.

But back to fuel efficiency.  I believe that we need more efficient cars, and we are already on our way there.  Hybrids are all the rage, and the automakers can’t keep up with the demand.  But are hybrids really green?  Massive amounts of energy go into producing the electric batteries they use.  I won’t get into that debate here, but the consumer demand for more efficient cars is very, very strong.

Why not just let the consumer and the market dictate fuel efficiency?  Why do we need laws created by bureaucrats to overregulate the industry?  Look at how competitive and innovative trucks have become in the last year or so.  As gas prices skyrocketed, consumers wanted fuel efficiency.  Toyota came out marketing their Tundra aggressively, and Ford, Chevy and Dodge responded.  All of the commercials touting features and miles per gallon were a testament that the market works and if consumers demand something, the automakers will listen.  It was capitalism and the free markets at their finest!

But why punish our auto industry for making the best trucks?  Even if they get a truck that can average 30 MPG by 2016, they will have sell an equal amount of compact cars that average 40 MPG to meet the tougher standard.  Or, if they can only get 25 MPG out of the truck, they will have to sell even more 40 MPG compacts.  The smaller cars are money losers for the US auto makers, so we are forcing them to make an unprofitable product.  What kind of business can succeed with that kind of regulation placed on them?

If we were to measure anything, we should measure how much progress is being made by a manufacturer for that particular make and model.  If the auto makers make a truck 250% more efficient than last year’s model, they should be rewarded.  If they can’t make money producing small compact cars, don’t force them to make them.  Let the imports fill that market and let the US automakers focus on making their breadwinners, the trucks and SUVs better.

The bottom line is that consumers are already demanding more efficient vehicles.  Let that demand drive what is produced and sold in the US.  Don’t regulate for the sake of regulating and sign the death sentence for the US auto industry.  We need real changes in the policies of our country, not more well intentioned but horribly executed Politics 101, pipe-dream nonsense from our leaders in Washington.

Credit Cards – Regulation for Regulation’s Sake

April 23, 2009

Today, President Obama is meeting with the CEOs of credit card companies, in an effort to protect consumers from rising rates and high fees.  Both the House and Senate are currently working on versions of such a bill.

I agree that a simple law, stating that credit card companies have to inform you when your rate increases and a chart showing the fees you could incur if you missed a payment or went over your limit, should be welcomed by consumers.  Right now, all you get is a little “average daily rate” table but it doesn’t tell you if your rate went up or down.  

However, the need for the government to enact laws to “protect” us are insane, and another example of the government meddling too much in private affairs.

Really, who’s fault was it that we ran up so much credit card debt?  Part of the blame has to fall on the card companies for giving cards with high limits to just about everyone.  The problem was that they were able to securitize their loans and sell them on Wall Street.  So the card companies were just intermediaries between the consumer and Wall Street.  They bore almost no risk.

A large portion of the blame has to fall on the Federal Reserve as well because their easy money policies allowed the card companies to just keep giving away money.  To stave off a recession after 9/11, the Fed kept rates too low for too long, pumping up a huge spending/debt fueled bubble.

However, to act like consumers were just taken advantage of is absolute nonsense.   Even the most uneducated person knows what credit cards are and how they operate.   The card companies did not take advantage of them and did not force them to spend.  Consumers wanted instant gratification and put items on their credit cards they could not afford, with the intent to pay it off later.  Rather than saving, they took out a loan for all sorts of purchases.

Instead of putting regulations on the credit card companies for the sake of regulation, the government should put simple laws in place to inform consumers, and then back away.  By placing all of these restrictions on the companies, we are not solving the problem, which was too many unqualified people having high limit credit cards.  

Obama needs to let the markets work, and let the companies set limits and interest rates in line with the risk of lending people the money.  Until the government stops propping up the securitized credit card debt and meddling in the credit markets, no one will have a clear picture of who should be able to lend and borrow.  The longer the government distorts the markets and meddles in private business, the longer the recession will last.

Why More Regulation Will Not Help

March 25, 2009

Treasury Secretary Tim Geithner wants to have the authority to intervene in any hedge fund or other company that is big enough to bring the banking system down.  The goal is to create oversight and regulation that will help protect us from another recession like we’re in now.

However, we are already supposed to have government agencies looking out for us, and the Supreme Court just ruled that even if they are in place, they are not responsible.

The case I am referring to is one where the Court ruled that even if there is an FDA approved label on a drug, the drug maker and patient are responsible in case something goes wrong.  I can’t remember the specifics right now, but the drug was causing potentially fatal side effects, and the Court just threw it back in the face of drugmakers.

They just passed the buck back to the drugmakers, doctors and patients.  Why then, does the FDA exist in the first place?  If they are supposed to be monitoring drugs that go out to make sure they are safe, why can they shed any sort of responsibility?

I’m sure the same thing would happen if a lawsuit was ever brought against the SEC.  The onus would end up falling on the investor and mangers to do their own due diligence.  Look at all the fraud that had to occur to create the real estate bubble.  Have they brought charges against anyone?

Why then, do we continue to believe that a regulating body will help at all?  Has government regulation proven to be effective?  And even if it works, when something goes wrong, they don’t have to bear any responsibility.

What we need is some good, old-fashioned tough medicine.  Let these banks fail.  Show them that you will not be there to stop their collapse.  If banks knew that they did not have the government as a backstop, they would make wiser decisions.  The moral hazard we have created is going to lead us to our demise as a nation.

We do not need more government regulating bodies, especially ones that have all the authority, but ultimately no responsibility.  The only proven regulator has been the free market.  Let’s let it work.

More Government Equals More Recession

February 22, 2009

The latest headlines have the government taking a larger stake in Citi, upping it’s share to 40%.  This is just going to stretch out the recession we’re in even longer.  If they are going to take a stake in the failing bank, the Feds need to stop taking baby steps and flat out nationalize already.

Of course, letting the banks fail and letting the free markets work is out of the question now.  The reason is that government intervention has eliminated failure as an option.  It’s a tangled mess that all went back to the original TARP plan, that in hindsight, looks like what we needed.

The entire problem with the system right now is that there is too much bad debt and malinvestment.  The original goal of the TARP was to eliminate this debt.  Instead, though, the Feds realized that if they actually determined the market value for these securities, a lot of banks would fail.  They then modified the TARP to give money directly to the banks, so they could offset their bad assets.  This failed because the assets were basically worthless and no amount of money could offset the malinvestment.

So, here we are, with the banks still in the same predicament, and the taxpayers on the hook for $300-$700 billion.  We don’t the exact number because the government lost count somewhere along the way.  Remember, as protection for the taxpayers, we got shares in the banks.  So if they fail or get nationalized, we lose all our money.  Everyone else gets away for free while the taxpayers are left holding the bag.

Everyone talks about how bad the failures of Bear Stearns, Lehman Brothers, and Washington Mutual were.  Honestly, though, they weren’t that bad compared to the Great Depression II Obama is trying to create.  Shareholders lost everything, the bond holders got 20 cents on the dollar and a lot of people got screwed, but the failure was pretty orderly.  The bankruptcy system and the method of failure works.  Sure, it’s painful, but at least we know what we’re getting and we can move on.

We’re in a situation now where no one wants to let the banks fail, and we will bankrupt the nation and the taxpayers in order to make it work.  We’ve already been screwed over enough, and a couple more months of pain from the failure of a few more banks isn’t going to kill us.  Just get it over with so we can move on.  Don’t keep stringing this charade out.

The more the government gets involved, the bigger the conflict of interest and the bigger the problem gets.  We need the liquidate the bad debt.  Plain and simple.  We need failure and we need the free markets to work.  Why are we going to prop up these banks that made the terrible decisions that got us here?  It’s absolute nonsense.

A Great Example of the Free Market

January 11, 2009

This weekend, during the NFL Playoff games, I was bombarded with truck commercials from Toyota, Ford, Dodge and Chevy.  Each was touting their own features and downplaying those of their competitors, and all four talked about their great fuel economy.

This is a perfect example of the free market at work.  First, when Toyota came out with their new Tundra, and their new commercials (the see saw and braking ones, etc) the American automakers didn’t have an answer.  Now, they have all innovated to create new features to compete with the Tundra.

Secondly, when consumers demanded better fuel efficiency, the truck makers had to listen, and now all of these full size trucks are getting over 20 miles per gallon, highway, even with a V8.  The fact that they made these trucks so much more efficient so quickly shows how innovative the automakers can be.

The best part?  All of this was done without any sort of government intervention or mandates.  In order to sell their trucks, Toyota upped the ante with the Tundra and their marketing campaign, and the American companies countered with their own new features.  Then when oil and gas shot through the roof, they innovated again to make their trucks more efficient.  It was purely a function of the free market and competition.  Capitalism at it’s best.

I know this is only a small anectdote for economics, but it shows that we don’t need government to tell us what to do in order to make things better.  Lately we have been conditioned to think we need government intervention, and we just lack the vision to see when the free markets really work.  It also shows what happens when consumers demand a better product.  When more people bought Tundras, Ford, Chevy and Dodge all upped their efforts.

Imagine if we can get this kind of action in our healthcare industry.  Our costs would plummet and our care would improve.  Instead, with government’s heavy involvement, healthcare is one of the only industries where technology makes things more expensive.  You’d also be hard pressed to find people that are totally satisfied with their healthcare as well.  However, we are so tied to the current system that a consumer revolt is almost impossible.  If government would get out of the way, maybe there would be a chance of true reform, not little tweaks to a horribly broken system.

The lesson is that the government doesn’t always know best, and that we need to let the markets work.  Have you ever read the CAFE fuel standards?  It is the most idiotic way to measure fuel efficiency ever.  So, rather than make each model more efficient, they could just sell crappy, compact cars.  Now, that consumers have demanded better fuel efficiency in trucks, the companies have listened.

We need to carry this model over to every aspect of our economy.  Only then will we be able to weed out the failures and move forward in the new industries that are arising today.  We need government to stop propping up businesses and getting involved in industries they don’t understand.  Let the companies work and the consumers dictate what they want and we’ll all be better off!