Tag: Economics

Crystal Ball Watch 2010

Every year I make a bunch of predictions for the coming year, and each subsequent year I note just how far off I was. And this year is no exception.

Last year’s predictions ranged from politics to technology and everywhere in between. It’s hard to believe that last year at this time the iPad was just a rumor, Democrats were crowing about the popularity of their health care plans, and 3D movies weren’t yet an overused gimmick.

Let’s see how my prognostications actually matched the reality of the past
year:

Politics

Prediction: President Obama’s popularity will remain mired below 50% throughout most of the year.

Verdict: Correct. The health care debate and the BP oil spill sapped Obama’s popularity, and he never really recovered from either. Obama’s approval rating went underwater right along with the Deepwater Horizon oil platform, and his low popularity contributed to the GOP gains in November.

Prediction:The Democrats will lose more the 40 seats, putting the GOP in control of the House.

Verdict: Correct. The GOP gained over 60 seats in November, which was more than they gained in the 1994 cycle. The GOP’s gains in the House were substantial, and bigger than I would have predicted.

Prediction: In the Senate, Democrats will not fare much better. Majority Leader Reid will lose his seat, following in the footsteps of Tom Daschle. Chris Dodd also loses his seat to a GOP upstart. Same with Blanche Lincoln.

Verdict: Not quite. Harry Reid kept his seat, thanks to Sharron Angle being an even worse alternative in the eyes of Nevada voters. Chris Dodd resigned before his inevitable loss, and once again the Tea Party nominated a candidate that was simply not electable. On the other hand, Blanche Lincoln lost handily, along with several other Democratic incumbents. But the GOP didn’t take the Senate, even in a year that gave them a clear opportunity to do so. You can have a fire breathing conservative candidate who can win—see Rand Paul. But being a fire-breathing Tea Party candidate is not in itself enough, and it certainly doesn’t make up for being a complete and utter basket case—see Christine O’Donnell.

Prediction: The health care bill will be signed into law, and will be a major albatross around the necks of Democrats.

Verdict: Absolutely correct.

Prediction: The Democrats, rather than moving towards the center, will lurch left as the “netroots” convinces many in the party that the reason for the 2010 defeat was because the party was insufficiently “progressive.” The Democrats will end up in the same position the Republicans were in a year ago.

Verdict: Partially correct. The Democrats wisely divorced themselves from their own positions of the past 10 months and tried to run as centrists. But many “progressives” wanted them to run to the far left—convinced that the reason why health care was so unpopular was because it was insufficiently socialist instead of too much so. Now even Barack Obama’s positions are becoming indistinguishable from his predecessor, and the “netroots” are not happy with it.

Prediction: But Republicans should be wary as well. They will have won not on their own laurels, but because of disgust with the current Congress.

Verdict: Again correct. The GOP had better not get cocky in 2011.

Prediction: Cap and trade will be DOA as Congress gets increasingly worried about the political backlash.

Verdict: Again, correct. Cap and trade was even more politically poisonous than health care, and for good reason.

International

Prediction: The protests in Iran continue in fits and starts, weakening the foundations of the regime. The Iranian government continues to brutalize its own people, while the West does little of consequence to stop them.

Verdict: Iran has been much quieter than I would have expected: the regime has brutalized the opposition to the point where widespread protests aren’t gaining traction. Every year I predict that the regime in Iran will be weakened to near collapse—and every year it is less a prediction than a hope for something better for the Iranian people.

Prediction: President Obama launches further military action in Yemen to try to remove al-Qaeda.

Verdict: Covertly, this may be happening. But the conflict in Afghanistan is continuing to be the major flashpoint in the world.

Prediction: A major economic collapse in the EU shakes the foundation of the Euro.

Verdict: The Greek fiscal crisis fits the bill, and the contagion continues to spread across the Eurozone. The once unthinkable idea of a collapse of the Euro remains a distant possibility, but it gets closer as more and more countries in the Eurozone continue to see their economies decline.

Prediction: Gordon Brown faces a vote of no-confidence in Parliament, causing the him to call new elections in the UK.

Verdict: Indeed, Gordon Brown was defeated by the charismatic Conservative David Cameron in May. But the Tories fell short of a majority, leading to the first hung Parliament since 1974 and eventually to a coalition government.

Prediction: The situation in Afghanistan remains unsettled, but the addition of U.S. troops helps calm some of the tensions.

Verdict: This year has been the bloodiest year in Afghanistan for US and coalition troops and the country remains unstable. The addition of more troops does not seem to have substantially calmed the country, and it’s uncertain whether the Obama Administration will have the political will to continue to try and stabilize the country over the long term.

Prediction: Iran will come closer to testing a nuclear weapon, and will likely have the capability of doing so by the end of 2010.

Verdict: Had it not been for the Stuxnet worm—which was almost certainly the product of Israeil or Western sabotage—Iran might have been much closer to a working nuclear weapon. But Stuxnet actually appears to have worked in slowing down Tehran’s progress. It sounds like the plot of a bad thriller novel, but Stuxnet was probably one of the most ingenuous covert weapons ever used. Whoever came up with it deserves a medal.

Economics

Prediction: Unemployment will remain high throughout the year as discouraged workers reenter the workforce. This will be a huge political problem for the Democrats in the 2010 cycle.

Verdict: Indeed, this was true. Unemployment continues to flirt with double-digit levels, and may not go down that much in 2011. Not only was this a political problem for the Democrats in 2010, but the human cost of this kind of endemic unemployment is far too high.

Prediction: The price of gold and other hard assets will continue to skyrocket on inflation fears, leading to a mini-bubble in asset prices.

Verdict: I keep hearing all those advertisements telling people to buy gold: consider me a skeptic. Perhaps gold and other asset prices will continue to climb at a steady rates, but the risk of a bubble is still very real.

Prediction: The government will continue with bailouts of major companies, despite President Obama’s focus on debt reduction.

Verdict: The bailout culture didn’t reach the fever pitch of 2009, but it was still alive and well in 2010.

Prediction: The national deficit will continue to skyrocket as Congress is unable to restrain spending.

Verdict: Predicting this was as obvious as predicting that the sun would rise in the east…

Society/Culture/Technology

Prediction: Apple will announce their tablet in early 2010, with a 10-inch touch screen and optional 3G wireless through Verizon rather than AT&T. The tablet (probably not called the iSlate) will have a major effect on the e-reader market, although Amazon will counter by making Kindle content available on the new device. Critics will complain that the price point is too high, but the device will sell like hotcakes anyway.

Verdict: Of course, Apple announced the iPad in early 2010, with a 9.7 inch screen and 3G wireless through AT&T. But Verizon is already selling the iPad, and it’s likely that a version with built-in Verizon 3G will be coming in 2011. And Amazon has been selling Kindles like hotcakes, along with selling books on their Kindle app for the iPad. The iPad is the hit device of the year, and for good reason—Apple priced it very competitively and helped to define the market.

Prediction: E-Books will begin to outsell physical book copies.

Verdict: Not quite true yet, but within a few years this could be a real possibility.

Prediction: The reality TV show craze will finally, mercifully die off as people get sick of the them.

Verdict: If only…

Prediction: Web series will continue to take off from being largely low-budget affairs to being more like regular TV shows. Shows akin to Dr. Horrible’s Sing-Along Blog will receive much critical acclaim and will begin to supplant conventional TV.

Verdict: Not quite yet, although there are web series like SyFy’s Sanctuary that crossed over from web series to cable TV. But there isn’t an online show that’s been a true widespread hit… at least not in 2010.

Prediction: “Steampunk” will go from a small subculture to the next major popular phenomenon. Things like home canning, writing letters on fine stationery, and Victorian styles will become increasingly popular.

Verdict: No, not even close. The “steampunk” subculture remains just that.

Prediction: The death of the newspaper industry will not stop, even though many papers start
reconciling themselves with the digital world.

Verdict: Newspapers continue to struggle with the digital world, and traditional newsprint is still in deep trouble.

The Final Word

Once again, there were some hits and some misses in my predictions last year, Many of my predictions were fairly obvious even back in December: the Democrats’ political misfortunes were widely predicted even a year ago. The rumors of an Apple tablet were rampant. And my usual predictions on Iran were once again not quite as prescient as I would have hoped.

But all in all, not a bad set of predictions, even if there were some stinkers there. Shortly I’ll be posting some predictions for 2011, and a year from now we’ll see if my crystal ball remains clear or is stuffed with crap…

Income Inequality, The Higher-Ed Bubble, And The Crash

In The New Republic, Raghuram G. Rajan argues that income inequality is the real reason for the financial crash. Income inequality is one of the favorite themes of the left, but Rajan’s argument has some merit to it. He observes:

Economists argue over the reasons for the growing inequality—changes in taxation, increasing trade, weaker unions, stagnant minimum wages, and growing immigration have all been flagged. Perhaps the most important, according to Harvard professors Claudia Golden and Larry Katz, is that although technological progress requires the labor force to have ever greater skills, our educational system has not kept pace by providing the labor force with greater education and skills. While a high school diploma may have been sufficient for our parents, an office worker in many knowledge-based industries today can’t get hired without an undergraduate degree. Yet, according to Golden and Katz, rates of graduation from high school in the United States have barely budged since the 1970s, and neither have male graduation rates from college. For the middle class, that has meant a stagnant paycheck and growing job insecurity, as the old well-paying, low-skilled jobs with good benefits disappear.

There’s something to this: to get a decent job these days, one is practically required to have a four-year college degree. Employers won’t hire you without it. But the simple fact of the matter is that most people don’t need a four-year college degree. How much of that education is wasted? Is it really necessary for someone to spend four years partying, barely passing mediocre classes, delaying their ability to earn income for themselves, and taking on massive amounts of debt to do it? This process ends up leaving entire generations starting out in debt and without valuable skills. A college degree is simply a poor proxy for real-world skills. How many college graduates can’t balance their own checkbook. How does a humanities degree prepare one to be a manager? How many people actually use their degree unless they go into a specific profession?

All of that does create income inequality. We push people into getting an expensive degree when they don’t need it, and substantial portions of their income go into paying off that debt.

Ultimately, we have to take a new look at education in America. But that’s not easy. We have to reform K-12 education in this country—but good luck doing that if the teacher’s unions don’t get their demands met. We have to reform higher education, but right now student lenders, public and private universities, and educational companies all want to keep the gravy train running as long as they can. And the public has taken the idea that “education is fundamental” to the extreme—assuming that a college degree from a four-year institution is necessary to do jobs that don’t remotely require it.

And of course, most (but not all) of that pushback comes from the left, especially the politically powerful teacher’s unions.

Rajan is at least partially right: income inequality can be a problem, although it’s a stretch to say that it’s the cause of the crash. He’s also right that many of the steps that politicians have taken to address it have failed. If we want to have a country in which people have less debt, we can’t just look at housing or credit: we have to look at educational debt as well. And with the housing market, we are in the midst of a higher-education bubble, and that bubble is threatening to pop.

If we really care about income inequality, we need to stop pushing everyone into a one-size-fits-all system that leaves them with tens of thousands of dollars in debt before they ever have a chance to start working. Whether that means emphasizing technical and vocational education, whether that means more emphasis on non-traditional students, or whether that means tying student loans to academic performance, every option needs to be on the table.

All The Things I Missed…

I’ve been outside the world of politics for the past year, and what a year it has been! When I started my job, Obama’s approval ratings were still sky-high, and the Tea Party movement was just getting started. Now, we face a political dynamic that’s looking a lot more like 1994 than 2008. What a long, strange year it’s been!

The passage of the health care bill was a Pyrrhic victory for the Democrats. They sold their souls for a watered-down version of the single-payer European-style system they wanted and will likely lose the House as a result. The health care bill was the classic version of why laws and sausages are made in much the same way. It was an unholy mish-mash of bad ideas wrapped in false promises, and presented as though it were the greatest bill ever. It was a 2,700 page monstrosity that has already begun wreaking havoc with private employers. What the Democrats failed to realize is that many employers have their open-enrollment periods in November—which means that the immediate effects of the health care bill will be felt right around Election Day. When employees, who are already struggling, learn that their insurance premiums are going through the roof and their HSAs are less useful than before, that’s not exactly going to make them happy.

The economy is the albatross around the Democrats’ necks. Unemployment is stuck at 9.5%, and the real figure (counting unemployment, discouraged workers, and workers taking the only jobs they could get) is more like 20%. We’re facing a crisis of unemployment. And the reaction from the Democrats has been to do exactly the wrong things. More taxes, more regulations, more social experimentation. The results have been predictable: the level of joblessness is at crisis levels. We can’t have a functioning economy when we’ve got a developing underclass that are essentially shut out of employment. If this trend continues, the effects on both our economy and society will be dire.

As I write this, the last combat troops are leaving Baghdad. Remember when Sen. Harry Reid said that the war was “lost?” Thank heavens that we didn’t listen to him. We still have 50,000 troops left in Iraq, and we may have close to that number in the country for a very long time. The truth is that Iraq’s journey is just beginning. But what has happened in Iraq is something extraordinary: in 7 years Iraq has gone from the iron grip of tyranny to a failed state, to a developing nation that has the chance to prosper and flourish. The future of the Iraqi people is now in their hands, as it should be. We can and should help where asked, but now the main threat to the future of Iraq isn’t related to terrorism, but corruption. That may be a more dangerous enemy than al-Qaeda, but the Iraqi people have the ability to fight corruption and establish a better life for themselves. I cannot, nor can anyone else, say whether or not they will succeed in rebuilding their country. I hope and pray they will. But a chapter has been turned, and a battle has been won. Our military did an amazing job under intense pressure. We have never fought a war quite like this, and the conflicts of the future will be far less deadly because of the lesson’s we’re learned in Iraq.

Afghanistan is another story. I don’t know if we can “win” in Afghanistan. I’m not sure what the goal is—other than to keep the Taliban and al-Qaeda at bay. Can we rebuild a nation that’s never really been a nation in modern times? I’m not so sure that we can. Especially not when elements of the Pakistani government are working to destabilize Afghanistan. Yes, we need more troops and a better strategy to have any hope of success—but we also need to realize that Pakistan is part of the problem, and to find ways of ensuring that Pakistan is an ally rather than an enemy.

Finally, some site news. I’m planning on revamping the site in the next few days to have a new HTML 5 template that will look great on all sorts of devices from Droids to iPads. So forgive the dust as that transition gets underway.

Predictions 2010

It is another year, and that means time for another set of predictions. So, without further adieu, here are my predictions for the coming year:

Politics

  • President Obama’s popularity will remain mired below 50% throughout most of the year.
  • The Democrats will lose more the 40 seats, putting the GOP in control of the House.
  • In the Senate, Democrats will not fare much better. Majority Leader Reid will lose his seat, following in the footsteps of Tom Daschle. Chris Dodd also loses his seat to a GOP upstart. Same with Blanche Lincoln.
  • The health care bill will be signed into law, and will be a major albatross around the necks of Democrats.
  • The Democrats, rather than moving towards the center, will lurch left as the “netroots” convinces many in the party that the reason for the 2010 defeat was because the party was insufficiently “progressive.” The Democrats will end up in the same position the Republicans were in a year ago.
  • But Republicans should be wary as well. They will have won not on their own laurels, but because of disgust with the current Congress.
  • Cap and trade will be DOA as Congress gets increasingly worried about the political backlash.

International

  • The protests in Iran continue in fits and starts, weakening the foundations of the regime. The Iranian government continues to brutalize its own people, while the West does little of consequence to stop them.
  • President Obama launches further military action in Yemen to try to remove al-Qaeda.
  • A major economic collapse in the EU shakes the foundation of the Euro.
  • Gordon Brown faces a vote of no-confidence in Parliament, causing the him to call new elections in the UK.
  • The situation in Afghanistan remains unsettled, but the addition of U.S. troops helps calm some of the tensions.
  • Iran will come closer to testing a nuclear weapon, and will likely have the capability of doing so by the end of 2010.

Economics

  • Unemployment will remain high throughout the year as discouraged workers reenter the workforce. This will be a huge political problem for the Democrats in the 2010 cycle.
  • The price of gold and other hard assets will continue to skyrocket on inflation fears, leading to a mini-bubble in asset prices.
  • The government will continue with bailouts of major companies, despite President Obama’s focus on debt reduction.
  • The national deficit will continue to skyrocket as Congress is unable to restrain spending.

Society/Culture/Technology

  • Apple will announce their tablet in early 2010, with a 10-inch touch screen and optional 3G wireless through Verizon rather than AT&T. The tablet (probably not called the iSlate) will have a major effect on the e-reader market, although Amazon will counter by making Kindle content available on the new device. Critics will complain that the price point is too high, but the device will sell like hotcakes anyway.
  • E-Books will begin to outsell physical book copies.
  • The reality TV show craze will finally, mercifully die off as people get sick of the them.
  • Web series will continue to take off from being largely low-budget affairs to being more like regular TV shows. Shows akin to Dr. Horrible’s Sing-Along Blog will receive much critical acclaim and will begin to supplant conventional TV.
  • “Steampunk” will go from a small subculture to the next major popular phenomenon. Things like home canning, writing letters on fine stationery, and Victorian styles will become increasingly popular.
  • The death of the newspaper industry will not stop, even though many papers start reconciling themselves with the digital world.

Cash For A Clunker Of A Policy

Law prof Richard A. Epstein has a withering look at the “Cash for Clunkers” program that gave car buyers a $4500 check to trade in an old car for a new one. As with any government program, the intentions of the program and the reality of the program were not quite at odds with each other:

Yet exactly what does the American people get for this expenditure? On the bright side, the beleaguered automotive industry gets yet another shot in the arm. But that cheery argument repeats the common mistake that I addressed two weeks ago: Using tax dollars to stimulate one industry necessarily impairs the recovery prospects of everyone else. To make matters worse, some stimulus payments are just outright gifts, because lots of last week’s eager sellers might have traded in their clunker in the near future anyhow. And no one has a clue as to how many miles would be put on these clunkers anyhow.

The problem with the “Cash for Clunkers” program is that it won’t provide much stimulus, but it will burn through billions in in taxpayer dollars. Is the possible increase in overall gasoline efficiency worth the $1 billion now spent and the billions more that may be spend reviving the program? It’s doubtful we’ll know, because the actual results don’t matter. Congress is essentially buying support by raiding the public fisc under dubious pretenses.

Two thousand years ago, the called it panem et circenses—but “Cash for Clunkers” seems to have much more consonance, even if the concept remains essentially the same.

Soaking The Rich… Again

Carlos Watson argues that the solution to our fiscal problems is to tax the living daylights out of the “rich” in the hopes of making up for a $5 trillion hole in our national finances.

That solution will not work.

For one, there aren’t enough “rich” people to make up for the current deficit. We could raise taxes to 99% and not came close—and then the rich people would either cease to be rich, or get their assets out of the country faster than you can say “Nancy Pelosi.” What you would have would be capital flight on a truly nightmarish scale.

In order to make up that kind of shortfall, you would not have to tax only the Bill Gateses or Warren Buffetts of the U.S.—you’d have to start taxing everyone who makes a decent living. Our professional classes are already taking a huge hit in this economy—engineers and lawyers are applying for $10/hour jobs because of the economic downturn. If we start taxing them, they will buy less, they will use less services, and the ripple effect will continue right on down the line. It will make the economy worse rather than better.

Taxing the “rich” isn’t going to solve this mess, nor is more government intervention. The sad state of our economy is due to too much government intervention and far too much debt, both public and private. In order to fix this mess we all need to start spending in line with our realistic priorities and not spending money we don’t have.

Taking more money from people with their heads barely above water and giving it to an irresponsible government is not a solution for this economy; it is economic suicide.

Capping Prosperity, Trading It For Poverty

As the media fixates on the death of Michael Jackson, Congress stands ready to enact the largest and most regressive tax hike in history in the guise of “cap-and-trade.” Jim Lindgren explains why this bill is so dangerous:

The cap-and-trade bill, if passed by the Senate and actually implemented over the next few decades, would do more damage to the country than any economic legislation passed in at least 100 years. It would eventually send most American manufacturing jobs overseas, reduce American competitiveness, and make Americans much poorer than they would have been without it.

The cap-and-trade bill will have little, if any, positive effect on the environment — in part because the countries that would take jobs from US industries tend to be bigger polluters. By making the US — and the world — poorer, it would probably reduce the world’s ability to develop technologies that might solve its environmental problems in the future.

Cap-and-trade is a joke—it is a policy that has already failed in Europe and in virtually guaranteed to fail here in the United States. By giving in to the demands of radical environmentalists, Congress is preparing to take our current recession and plunge it into depression.

As the media focuses once again on celebrity, the advent of the next Great Depression comes closer. Cap-and-trade is terrible policy enacted for foolish reasons, and we will all pay the price for it if we allow it to pass.

Want To “Save The Earth?” Get Rich

In The New York Times, John Tierney has an excellent column about why getting rich is the best way to improve the environment:

As their wealth grows, people consume more energy, but they move to more efficient and cleaner sources — from wood to coal and oil, and then to natural gas and nuclear power, progressively emitting less carbon per unit of energy. This global decarbonization trend has been proceeding at a remarkably steady rate since 1850, according to Jesse Ausubel of Rockefeller University and Paul Waggoner of the Connecticut Agricultural Experiment Station.

“Once you have lots of high-rises filled with computers operating all the time, the energy delivered has to be very clean and compact,” said Mr. Ausubel, the director of the Program for the Human Environment at Rockefeller. “The long-term trend is toward natural gas and nuclear power, or conceivably solar power. If the energy system is left to its own devices, most of the carbon will be out of it by 2060 or 2070.”

The best way to “save the environment” is to grow the economy and embrace new technologies. That means stopping our irrational fear of nuclear power. That means working to make solar a reasonable means of producing power. That also means, however, that we can’t just let some government bureaucrat decide what is best—we have to have a competitive marketplace for green technologies in which the best system wins.

It also means that we must stop looking at dangerous and economically unsound policies like “cap and trade”. As this article notes, cap and trade systems do not work and fail to reduce CO2 emissions while simultaneously hurting the economy. That kind of strategy will reduce capital that can be applied to new technologies, raise the price of energy through the roof, and end up raising the cost of living for everyone, disproportionately hurting the worlds’ poor who cannot pay extra for their electricity. Such a program would end up turning into a massive tax increase on America’s vulnerable middle class. Cap and trade is not the right solution.

The right solution is a system that fosters innovation. That means reducing the barriers that keep green technologies off the market, and giving tax incentives to those willing to take the risks of bringing new technologies to market.

Finally, we have to stop believing the cheap energy and green energy are opposed to each other. Basic economics teaches that as supply goes down, costs will go up. If we are running low on fossil fuels, then the prices for those fuels will only rise until the cost of “green” energy is substantially less. At that point, without of hint of government intervention, there will be a green revolution.

But government doesn’t want to wait. By scaring people into seeing an environmental “crisis” they want people to give them unprecedented power and control&madsh;power and control that they can use and abuse. Yes, we need a clean environment. But we don’t need scare tactics. We must take measured and rational steps rather than being frightened into radical and ill-conceived ventures.

200 years ago the streets of every major city were awash in horse manure, water supplies were unsafe, and soot darkened every building. Today, we have made incredible advancements in expanding human quality of life without damaging the environment. Tomorrow, who knows how far we will come if we abandon the politics of environmental fear and embrace the value of human ingenuity and the entrepreneurial spirit.

The Myth Of The Laissez-Faire Meltdown

In The Spectator, Fraser Nelson has a searching piece on the myth that laissez-faire conservatives led to the current economic troubles:

So while it’s a statement of the obvious, the obvious can’t be stated enough at a time when we’re fighting (or should be) for the future of capitalism and the open society. The last ten years were not laissez-faire, as even Gordon Brown suggests. The crash was the result of bad regulation, not insufficient regulation. Brown told the Guardian last month that “laissez-faire had its day” and it did – in the 1880s. The problem this time was a blind, almost fundamentalist, faith in rules-based economics – the idea that, if inflation was low, everything else would be fine. And this stems from a blind faith in the power of governments.

He’s right. The crash was caused not be “Wild West capitalism” or anything similar. It was caused by a regulatory climate that encouraged systemic risk. The mortgage meltdown was not the product of evil capitalists meeting in smoky rooms to screw over everyone, it was the product of government meddling in the economy.

Our system of financial regulations has been based on a rules-based approach. Far from being unregulated, the financial markets are covered by a number of regulatory agencies—the Securities and Exchange Commission regulated the trade of stocks and other securities, along with FINRA (formerly the NASD) acting as a quasi-private regulatory body. Banks were governed by a massive amount of regulations by bodies like the Federal Deposit Insurance Company (FDIC) and the U.S. Treasury. Corporate books were governed by the Sarbanes-Oxley bill that was passed in the wake of the Enron and Worldcom scandals. The housing markets were heavily regulated by the Housing and Urban Development department, the Community Reinvestment Act, and the presence of Fannie Mae and Freddie Mac (who everyone know were “too big to fail” and would be bailed out by the government if things got too bad).

With all that going on, the argument that somehow the financial markets were totally unregulated is hardly justified by the facts. Quite the opposite, the government was doing plenty to tilt the market for various social policy reasons. Since President Carter signed the Community Reinvestment Act in 1977, it’s been government policy to expand home ownership to minorities and low-income people. President Bush’s “ownership society” was hardly a new direction from government policy, but rather a continuation of what came before.

Tilting the Playing Field: Why the Rules-Based Approach Failed

There are two rather huge problem with the rule-based approach: first, it gives incentives for industry to try to tilt the rules to their benefit, and secondly such an approach can’t work fast enough to effectively regulate a modern economy.

On the first point, it’s obvious to all that there was a cozy relationship between the regulators of the financial markets and those people they were supposed to be regulated. Take the example of Sen. Chris Dodd, who while having been supposed to be in charge of regulating the financial industry was getting sweetheart loan deals from Countrywide and raking in tons of cash from AIG. This is, sadly, not a case of one bad apple in a bunch—Rep. Barney Frank was one of the biggest impediments to reforming Fannie Mae and Freddie Mac and fixing the problems with the mortgage market.

This cozy relationship meant that efforts at substantive reform like the Federal Housing Enterprise Regulatory Reform Act of 2005 could never get off the ground. The regulators were in the pockets of the regulated agencies like Fannie Mae and Freddie Mac, and no way would they allow the world to inspect their books and see just how deeply in trouble they were.

Even if federal regulators were uniformly brilliant and far-sighted (and some of them are), they’re no more insulated from political pressure than the corrupt politicians. Regulatory capture remains a major and persistent problem. There is enormous political pressure, not only from the financial companies, but from special interest pressure groups like ACORN and the unions to push rules through that try to expand home ownership to those who would be enable to afford it. In the end, it wasn’t just about turning a profit, it was about “helping the poor” by lowering lending standards so that more people could buy homes they couldn’t otherwise afford.

A rules-based approach will always produce these results. Ban the giving of money and the transactions go under the table. There’s no way to prevent this kind of influence-peddling so long as there is influence to be peddled. As long as people like Barney Frank, Chris Dodd, and the rest of our corrupt legislative class can tilt the playing field, entities like AIG, Fannie Mae and Freddie Mac, and others will have every incentive to see that the rules get tilted in their favor. That is human nature, what James Madison called “faction” all the way back in Federalist #10 in 1787.

The other problem with a rules-based approach is that it’s slow. The process of passing a new federal regulatory rule takes at least a year on average. Yet the financial markets move much faster. New financial equations and methods like David X. Li’s Gaussian copula function (which Wiredcalls “the formula that killed Wall Street”) is something that is difficult for anyone, especially federal regulators to understand and predict. Trying to craft a rules-based approach to deal with a modern financial system in the Internet age is ultimately futile: by the time there’s been a rule that’s survived the rule-making process, the system has already changed.

It’s not possible to have a regulatory system that works fast enough to meet the demands of today’s economy. Even if it were, we don’t want to have a system that produces rules without time for interested parties to have some say. Even worse than our deliberative rule-making process is one that pushes through rules without considering the potential ramifications.

Preventing the Next Crisis: Make Regulations Simpler, Fairer, and Automatic

The rules-based approach is not going to work in the 21st Century, at least not in the form that we have it now. There’s too many opportunities for regulatory capture and the system cannot keep pace with the needs of a rapidly-evolving market. We need a better approach to the financial system.

That approach should come in the form of a smarter system of regulations. Gary Becker wisely suggests that regulations be automatic rather than subject to the discretion of regulators—such as capital requirements that keep financial institutions from getting “too big to fail”. This approach would reduce regulatory capture, but it may be difficult for regulators to set the right ratio of assets to capital. Still, it’s a step in the right direction.

In addition to that, what we need is a set of financial rules that are dramatically simpler. The more complexity there is in a rule-based system, the easier it is for companies to find loopholes. The large and sophisticated players can find their way around the rules, the smaller and less sophisticated players are easily caught up in a system they can scarcely understand. That tilts the playing field away from smaller competitors and towards the bigger ones. That is not a smart way to run any kind of economic system.

We need to clear away the layers of over-complicated, overlapping, and over-burdensome regulations and replace them with a comprehensive system based on simpler rules that anyone can follow. That will naturally be met with huge cries from both the government agencies and the companies that have captured them, but it’s a necessary step to fixing this mess.

We also have an urgent need to reduce moral hazard. Fannie Mae and Freddie Mac knew they could get away with anything because they were “too big to fail” and their close ties with government would mean they would be the recipients of a federal bailout. That means that they could take far more risks than was safe, and once they did it, others started to follow suit. In a functioning free market system, there has to be a system in which smart risks get rewarded and dumb risks get punished—otherwise everyone will start making dumb and risky moves.

Finally, we have to recognize that more government is not the right solution. More bad regulations will only make the system worse. They will continue to create even more problem with regulatory capture and corruption, and it’s quite likely that they will have a host of negative side effects that won’t be foreseeable for quite some time. Too much bad regulation got us into this mess, and trusting the same government actors that created the mess in the first place to get us out is a fool’s errand.

This crisis was not the result of laissez-faire capitalism, it was the result of bad regulation and corrupt government. In order to repair the damage and move ahead we must stop the culture of bailouts and expanding the power of the corrupt technocrats and move to a system that is fairer, less needlessly complicated, and less prone to regulatory capture. That will not make people like Chris Dodd and Barney Frank happy, nor will it be very welcome within the industries that have grown accustomed to buying favor with the government. But for the future of the American economy, it is the right thing to do.

China Invests In Pebble-Bed Technology

Next Big Future reports on a joint Chinese-South African project to advance pebble bed reactor technology. Pebble bed reactors are an advanced type of nuclear reactor design that promises to be significantly safer than conventional designs, for more details see here.

One of the reasons I’ve said that the future may well belong to the East is because the Chinese are willing to invest in this kind of technology while Western governments are too motivated by short-term political pressure to invest in projects such as these. The only way we will be able to meet the energy needs of the future and preserve the environment is to start moving towards nuclear energy. The truth is that wind, solar, geothermal, and other “green” technologies cannot produce enough power to meet our needs. They may be supplements to a nuclear infrastructure, but they will never supplant it.

If President Obama wished to be truly forward-looking, he would commission a similar program in the United States. For all the talk about the “Republican war on science,” the Democrats remain in thrall to an environmental lobby that wants to push for forms of alternative energy that will never be able to meet America’s needs. So instead, we keep our inefficient fossil fuels and push for stopgap solutions like “clean coal” rather than investing in an energy infrastructure that truly meets the needs of the 21st Century.

Pebble bed reactors promise a safer, cleaner, and more plentiful form of energy for America and for the world. If we are to remain a superpower into the 21st Century, we cannot turn our back to advances such as this. We cannot let the stigma of the word “nuclear”—and the irrational fear it engenders—stand in the way of our future.

Hat tip to Glenn Reynolds for the link.