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  Quotations - Invest  
[Quote No.37968] Need Area: Money > Invest
"It is one thing for a value investor to know that in the absence of opportunity you should hold cash, quite another to actually do it...Doing nothing is doing something, we have argued again and again; doing nothing means prospecting for potential investments and rejecting those that fail to meet one’s criteria. But emotionally, doing nothing seems exactly like doing nothing; it feels uncomfortable, unproductive, unimaginative, uninspired and, probably for a while, underperforming...Also, believing that better opportunities will arise in the future than exist today doesn’t ensure that they will. Standing apart from the fully invested crowd for significant periods of time can be a gruelling, humbling and even demoralizing experience [and yet that is often how value investing discipline turns into exceptional profit. Value investors make their profit by waiting to buy when a company is wrongly priced below its true intrinsic value, usually due to irrational fear driving prices down, either from an isolated company-specific problem or a general economic recession]." - Seth Klarman
Highly successful value share investor. Quote from 'Outstanding Investor Digest'.
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[Quote No.37972] Need Area: Money > Invest
"Money doesn't sleep." - 'Wall Street', the movie

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[Quote No.37983] Need Area: Money > Invest
"The laws of probability, so true in general [large numbers of instances], so fallacious in particular [small numbers of instances]." - Edward Gibbon

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[Quote No.37985] Need Area: Money > Invest
"Every noble acquisition is attended with its risks; he who fears to encounter the one must not expect to obtain the other." - Pietro Metastasio

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[Quote No.38046] Need Area: Money > Invest
"The boom, not the slump, is the right time for austerity at the Treasury." - John Maynard Keynes
Famous economist. He made this statement in 1937.
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[Quote No.38048] Need Area: Money > Invest
"'Great Myths of the Great Depression' :- Introduction: Many volumes have been written about the Great Depression of 1929-1941 and its impact on the lives of millions of Americans. Historians, economists and politicians have all combed the wreckage searching for the ‘black box’ that will reveal the cause of the calamity. Sadly, all too many of them decide to abandon their search, finding it easier perhaps to circulate a host of false and harmful conclusions about the events of seven decades ago. Consequently, many people today continue to accept critiques of free-market capitalism that are unjustified and support government policies that are economically destructive. How bad was the Great Depression? Over the four years from 1929 to 1933, production at the nation’s factories, mines and utilities fell by more than half. People’s real disposable incomes dropped 28 percent. Stock prices collapsed to one-tenth of their pre-crash height. The number of unemployed Americans rose from 1.6 million in 1929 to 12.8 million in 1933. One of every four workers was out of a job at the Depression’s nadir, and ugly rumors of revolt simmered for the first time since the Civil War. ‘The terror of the Great Crash has been the failure to explain it,’ writes economist Alan Reynolds. ‘People were left with the feeling that massive economic contractions could occur at any moment, without warning, without cause. That fear has been exploited ever since as the major justification for virtually unlimited federal intervention in economic affairs.’[1] Old myths never die; they just keep showing up in economics and political science textbooks. With only an occasional exception, it is there you will find what may be the 20th century’s greatest myth: Capitalism and the free-market economy were responsible for the Great Depression, and only government intervention brought about America’s economic recovery. A Modern Fairy Tale: According to this simplistic perspective, an important pillar of capitalism, the stock market, crashed and dragged America into depression. President Herbert Hoover, an advocate of ‘hands-off,’ or laissez-faire, economic policy, refused to use the power of government and conditions worsened as a result. It was up to Hoover’s successor, Franklin Delano Roosevelt, to ride in on the white horse of government intervention and steer the nation toward recovery. The apparent lesson to be drawn is that capitalism cannot be trusted; government needs to take an active role in the economy to save us from inevitable decline. But those who propagate this version of history might just as well top off their remarks by saying, ‘And Goldilocks found her way out of the forest, Dorothy made it from Oz back to Kansas, and Little Red Riding Hood won the New York State Lottery.’ The popular account of the Depression as outlined above belongs in a book of fairy tales and not in a serious discussion of economic history. The Great, Great,Great,Great Depression: To properly understand the events of the time, it is factually appropriate to view the Great Depression as not one, but four consecutive downturns rolled into one. These four ‘phases’ are:[2] I. Monetary Policy and the Business Cycle II. The Disintegration of the World Economy III. The New Deal IV. The Wagner Act The first phase covers why the crash of 1929 happened in the first place; the other three show how government intervention worsened it and kept the economy in a stupor for over a decade. Let’s consider each one in turn. Phase I: The Business Cycle: The Great Depression was not the country’s first depression, though it proved to be the longest. Several others preceded it. A common thread woven through all of those earlier debacles was disastrous intervention by government, often in the form of political mismanagement of the money and credit supply. None of these depressions, however, lasted more than four years and most of them were over in two. The calamity that began in 1929 lasted at least three times longer than any of the country’s previous depressions because the government compounded its initial errors with a series of additional and harmful interventions. Central Planners Fail at Monetary Policy: A popular explanation for the stock market collapse of 1929 concerns the practice of borrowing money to buy stock. Many history texts blithely assert that a frenzied speculation in shares was fed by excessive ‘margin lending.’ But Marquette University economist Gene Smiley, in his 2002 book ‘Rethinking the Great Depression’, explains why this is not a fruitful observation: There was already a long history of margin lending on stock exchanges, and margin requirements — the share of the purchase price paid in cash — were no lower in the late twenties than in the early twenties or in previous decades. In fact, in the fall of 1928 margin requirements began to rise, and borrowers were required to pay a larger share of the purchase price of the stocks. The margin lending argument doesn’t hold much water. Mischief with the money and credit supply, however, is another story. Most monetary economists, particularly those of the ‘Austrian School,’ have observed the close relationship between money supply and economic activity. When government inflates the money and credit supply, interest rates at first fall. Businesses invest this ‘easy money’ in new production projects and a boom takes place in capital goods. As the boom matures, business costs rise, interest rates readjust upward, and profits are squeezed. The easy-money effects thus wear off and the monetary authorities, fearing price inflation, slow the growth of, or even contract, the money supply. In either case, the manipulation is enough to knock out the shaky supports from underneath the economic house of cards. One prominent interpretation of the Federal Reserve System’s actions prior to 1929 can be found in ‘America’s Great Depression’ by economist Murray Rothbard. Using a broad measure that includes currency, demand and time deposits, and other ingredients, he estimated that the Fed bloated the money supply by more than 60 percent from mid-1921 to mid-1928.[3] Rothbard argued that this expansion of money and credit drove interest rates down, pushed the stock market to dizzy heights, and gave birth to the ‘Roaring Twenties.’ Reckless money and credit growth constituted what economist Benjamin M. Anderson called ‘the beginning of the New Deal’[4] — the name for the better-known but highly interventionist policies that would come later under President Franklin Roosevelt. However, other scholars raise doubts that Fed action was as inflationary as Rothbard believed, pointing to relatively flat commodity and consumer prices in the 1920s as evidence that monetary policy was not so wildly irresponsible. Substantial cuts in high marginal income tax rates in the Coolidge years certainly helped the economy and may have ameliorated the price effect of Fed policy. Tax reductions spurred investment and real economic growth, which in turn yielded a burst of technological advancement and entrepreneurial discoveries of cheaper ways to produce goods. This explosion in productivity undoubtedly helped to keep prices lower than they would have otherwise been. Regarding Fed policy, free-market economists who differ on the extent of the Fed’s monetary expansion of the early and mid-1920s are of one view about what happened next: The central bank presided over a dramatic contraction of the money supply that began late in the decade. The federal government’s responses to the resulting recession took a bad situation and made it far, far worse. The Bottom Drops Out: By 1928, the Federal Reserve was raising interest rates and choking off the money supply. For example, its discount rate (the rate the Fed charges member banks for loans) was increased four times, from 3.5 percent to 6 percent, between January 1928 and August 1929. The central bank took further deflationary action by aggressively selling government securities for months after the stock market crashed. For the next three years, the money supply shrank by 30 percent. As prices then tumbled throughout the economy, the Fed’s higher interest rate policy boosted real (inflation-adjusted) rates dramatically. The most comprehensive chronicle of the monetary policies of the period can be found in the classic work of Nobel Laureate Milton Friedman and his colleague Anna Schwartz, ‘A Monetary History of the United States’, 1867-1960. Friedman and Schwartz argue conclusively that the contraction of the nation’s money supply by one-third between August 1929 and March 1933 was an enormous drag on the economy and largely the result of seismic incompetence by the Fed. The death in October 1928 of Benjamin Strong, a powerful figure who had exerted great influence as head of the Fed’s New York district bank, left the Fed floundering without capable leadership — making bad policy even worse.[5] At first, only the ‘smart’ money — the Bernard Baruchs and the Joseph Kennedys who watched things like money supply and other government policies — saw that the party was coming to an end. Baruch actually began selling stocks and buying bonds and gold as early as 1928; Kennedy did likewise, commenting, ‘only a fool holds out for the top dollar.’[6] The masses of investors eventually sensed the change at the Fed and then the stampede began. In a special issue commemorating the 50th anniversary of the stock market collapse, U.S. News & World Report described it this way: Actually the Great Crash was by no means a one-day affair, despite frequent references to Black Thursday, October 24, and the following week’s Black Tuesday. As early as September 5, stocks were weak in heavy trading, after having moved into new high ground two days earlier. Declines in early October were called a ‘desirable correction.’ The Wall Street Journal, predicting an autumn rally, noted that ‘some stocks rise, some fall.’ Then, on October 3, stocks suffered their worst pummeling of the year. Margin calls went out; some traders grew apprehensive. But the next day, prices rose again and thereafter seesawed for a fortnight. The real crunch began on Wednesday, October 23, with what one observer called ‘a Niagara of liquidation.’ Six million shares changed hands. The industrial average fell 21 points. ‘Tomorrow, the turn will come,’ brokers told one another. Prices, they said, had been carried to ‘unreasonably low’ levels. But the next day, Black Thursday, stocks were dumped in even heavier selling. The ticker fell behind more than 5 hours, and finally stopped grinding out quotations at 7:08 p.m.[7] At their peak, stocks in the Dow Jones Industrial Average were selling for 19 times their earnings — somewhat high, but hardly what stock market analysts regard as a sign of inordinate speculation. The distortions in the economy promoted by the Fed’s monetary policy had set the country up for a recession, but other impositions to come would soon turn the recession into a full-scale disaster. As stocks took a beating, Congress was playing with fire: On the very morning of Black Thursday, the nation’s newspapers reported that the political forces for higher trade-damaging tariffs were making gains on Capitol Hill. The stock market crash was only a reflection — not the direct cause — of the destructive government policies that would ultimately produce the Great Depression: The market rose and fell in almost direct synchronization with what the Fed and Congress were doing. And what they did in the 1930s ranks way up there in the annals of history’s greatest follies. Buddy, Can You Spare $20 Million? Black Thursday shook Michigan harder than almost any other state. Stocks of auto and mining companies were hammered. Auto production in 1929 reached an all-time high of slightly more than 5 million vehicles, then quickly slumped by 2 million in 1930. By 1932, near the deepest point of the Depression, they had fallen by another 2 million to just 1,331,860 — down an astonishing 75 percent from the 1929 peak. Thousands of investors everywhere, including many well-known people, were hit hard in the 1929 crash. Among them was Winston Churchill. He had invested heavily in American stocks before the crash. Afterward, only his writing skills and positions in government restored his finances. Clarence Birdseye, an early developer of packaged frozen foods, had sold his business for $30 million and put all his money into stocks. He was wiped out. William C. Durant, founder of General Motors, lost more than $40 million in the stock market and wound up a virtual pauper. (GM itself stayed in the black throughout the Depression under the cost-cutting leadership of Alfred P. Sloan.) Phase II: Disintegration of the World Economy: Though modern myth claims that the free market ‘self-destructed’ in 1929, government policy was the debacle’s principal culprit. If this crash had been like previous ones, the hard times would have ended in two or three years at the most, and likely sooner than that. But unprecedented political bungling instead prolonged the misery for over 10 years. Unemployment in 1930 averaged a mildly recessionary 8.9 percent, up from 3.2 percent in 1929. It shot up rapidly until peaking out at more than 25 percent in 1933. Until March of 1933, these were the years of President Herbert Hoover — a man often depicted as a champion of noninterventionist, laissez-faire economics. ‘The greatest spending administration in all of history’: Did Hoover really subscribe to a ‘hands-off-the-economy,’ free-market philosophy? His opponent in the 1932 election, Franklin Roosevelt, didn’t think so. During the campaign, Roosevelt blasted Hoover for spending and taxing too much, boosting the national debt, choking off trade, and putting millions on the dole. He accused the president of ‘reckless and extravagant’ spending, of thinking ‘that we ought to center control of everything in Washington as rapidly as possible,’ and of presiding over ‘the greatest spending administration in peacetime in all of history.’ Roosevelt’s running mate, John Nance Garner, charged that Hoover was ‘leading the country down the path of socialism.’[8] Contrary to the conventional view about Hoover, Roosevelt and Garner were absolutely right. The crowning folly of the Hoover administration was the Smoot-Hawley Tariff, passed in June 1930. It came on top of the Fordney-McCumber Tariff of 1922, which had already put American agriculture in a tailspin during the preceding decade. The most protectionist legislation in U.S. history, Smoot-Hawley virtually closed the borders to foreign goods and ignited a vicious international trade war. Professor Barry Poulson describes the scope of the act: The act raised the rates on the entire range of dutiable commodities; for example, the average rate increased from 20 percent to 34 percent on agricultural products; from 36 percent to 47 percent on wines, spirits, and beverages; from 50 to 60 percent on wool and woolen manufactures. In all, 887 tariffs were sharply increased and the act broadened the list of dutiable commodities to 3,218 items. A crucial part of the Smoot-Hawley Tariff was that many tariffs were for a specific amount of money rather than a percentage of the price. As prices fell by half or more during the Great Depression, the effective rate of these specific tariffs doubled, increasing the protection afforded under the act.[9] Smoot-Hawley was as broad as it was deep, affecting a multitude of products. Before its passage, clocks had faced a tariff of 45 percent; the act raised that to 55 percent, plus as much as another $4.50 per clock. Tariffs on corn and butter were roughly doubled. Even sauerkraut was tariffed for the first time. Among the few remaining tariff-free goods, strangely enough, were leeches and skeletons (perhaps as a political sop to the American Medical Association, as one wag wryly remarked). Tariffs on linseed oil, tungsten, and casein hammered the U.S. paint, steel and paper industries, respectively. More than 800 items used in automobile production were taxed by Smoot-Hawley. Most of the 60,000 people employed in U.S. plants making cheap clothing out of imported wool rags went home jobless after the tariff on wool rags rose by 140 percent.[10] Officials in the administration and in Congress believed that raising trade barriers would force Americans to buy more goods made at home, which would solve the nagging unemployment problem. But they ignored an important principle of international commerce: Trade is ultimately a two-way street; if foreigners cannot sell their goods here, then they cannot earn the dollars they need to buy here. Or, to put it another way, government cannot shut off imports without simultaneously shutting off exports. You Tax Me, I Tax You: Foreign companies and their workers were flattened by Smoot-Hawley’s steep tariff rates and foreign governments soon retaliated with trade barriers of their own. With their ability to sell in the American market severely hampered, they curtailed their purchases of American goods. American agriculture was particularly hard hit. With a stroke of the presidential pen, farmers in this country lost nearly a third of their markets. Farm prices plummeted and tens of thousands of farmers went bankrupt. A bushel of wheat that sold for $1 in 1929 was selling for a mere 30 cents by 1932. With the collapse of agriculture, rural banks failed in record numbers, dragging down hundreds of thousands of their customers. Nine thousand banks closed their doors in the United States between 1930 and 1933. The stock market, which had regained much of the ground it had lost since the previous October, tumbled 20 points on the day Hoover signed Smoot-Hawley into law, and fell almost without respite for the next two years. (The market’s high, as measured by the Dow Jones Industrial Average, was set on Sept. 3, 1929, at 381. It hit its 1929 low of 198 on Nov. 13, then rebounded to 294 by April 1930. It declined again as the tariff bill made its way toward Hoover’s desk in June and did not bottom out until it reached a mere 41 two years later. It would be a quarter-century before the Dow would climb to 381 again.) The shrinkage in world trade brought on by the tariff wars helped set the stage for World War II a few years later. In 1929, the rest of the world owed American citizens $30 billion. Germany’s Weimar Republic was struggling to pay the enormous reparations bill imposed by the disastrous Treaty of Versailles. When tariffs made it nearly impossible for foreign businessmen to sell their goods in American markets, the burden of their debts became massively heavier and emboldened demagogues like Adolf Hitler. ‘When goods don’t cross frontiers, armies will,’ warns an old but painfully true maxim. Free Markets or Free Lunches? Smoot-Hawley by itself should lay to rest the myth that Hoover was a free market practitioner, but there is even more to the story of his administration’s interventionist mistakes. Within a month of the stock market crash, he convened conferences of business leaders for the purpose of jawboning them into keeping wages artificially high even though both profits and prices were falling. Consumer prices plunged almost 25 percent between 1929 and 1933 while nominal wages on average decreased only 15 percent — translating into a substantial increase in wages in real terms, a major component of the cost of doing business. As economist Richard Ebeling notes, ‘The ‘high-wage’ policy of the Hoover administration and the trade unions … succeeded only in pricing workers out of the labor market, generating an increasing circle of unemployment.’[11] Hoover dramatically increased government spending for subsidy and relief schemes. In the space of one year alone, from 1930 to 1931, the federal government’s share of GNP soared from 16.4 percent to 21.5 percent.[12] Hoover’s agricultural bureaucracy doled out hundreds of millions of dollars to wheat and cotton farmers even as the new tariffs wiped out their markets. His Reconstruction Finance Corporation ladled out billions more in business subsidies. Commenting decades later on Hoover’s administration, Rexford Guy Tugwell, one of the architects of Franklin Roosevelt’s policies of the 1930s, explained, ‘We didn’t admit it at the time, but practically the whole New Deal was extrapolated from programs that Hoover started.’[13] Though Hoover at first did lower taxes for the poorest of Americans, Larry Schweikart and Michael Allen in their sweeping A Patriot’s History of the United States: From Columbus’s Great Discovery to the War on Terror stress that he ‘offered no incentives to the wealthy to invest in new plants to stimulate hiring.’ He even taxed bank checks, ‘which accelerated the decline in the availability of money by penalizing people for writing checks.’[14] In September 1931, with the money supply tumbling and the economy reeling from the impact of Smoot-Hawley, the Fed imposed the biggest hike in its discount rate in history. Bank deposits fell 15 percent within four months and sizable, deflationary declines in the nation’s money supply persisted through the first half of 1932. Compounding the error of high tariffs, huge subsidies and deflationary monetary policy, Congress then passed and Hoover signed the Revenue Act of 1932. The largest tax increase in peacetime history, it doubled the income tax. The top bracket actually more than doubled, soaring from 24 percent to 63 percent. Exemptions were lowered; the earned income credit was abolished; corporate and estate taxes were raised; new gift, gasoline and auto taxes were imposed; and postal rates were sharply hiked. Can any serious scholar observe the Hoover administration’s massive economic intervention and, with a straight face, pronounce the inevitably deleterious effects as the fault of free markets? Schweikart and Allen survey some of the wreckage: By 1933, the numbers produced by this comedy of errors were staggering: national unemployment rates reached 25 percent, but within some individual cities, the statistics seemed beyond comprehension. Cleveland reported that 50 percent of its labor force was unemployed; Toledo, 80 percent; and some states even averaged over 40 percent. Because of the dual-edged sword of declining revenues and increasing welfare demands, the burden on the cities pushed many municipalities to the brink. Schools in New York shut down, and teachers in Chicago were owed some $20 million. Private schools, in many cases, failed completely. One government study found that by 1933 some fifteen hundred colleges had gone belly-up, and book sales plummeted. Chicago’s library system did not purchase a single book in a year-long period.[15] Phase III: The New Deal: Franklin Delano Roosevelt won the 1932 presidential election in a landslide, collecting 472 electoral votes to just 59 for the incumbent Herbert Hoover. The platform of the Democratic Party, whose ticket Roosevelt headed, declared, ‘We believe that a party platform is a covenant with the people to be faithfully kept by the party entrusted with power.’ It called for a 25 percent reduction in federal spending, a balanced federal budget, a sound gold currency ‘to be preserved at all hazards,’ the removal of government from areas that belonged more appropriately to private enterprise and an end to the ‘extravagance’ of Hoover’s farm programs. This is what candidate Roosevelt promised, but it bears no resemblance to what President Roosevelt actually delivered. Washington was rife with both fear and optimism as Roosevelt was sworn in on March 4, 1933 — fear that the economy might not recover and optimism that the new and assertive president just might make a difference. Humorist Will Rogers captured the popular feeling toward FDR as he assembled the new administration: ‘The whole country is with him, just so he does something. If he burned down the Capitol, we would all cheer and say, well, we at least got a fire started anyhow.’[16] ‘Nothing to fear but fear itself’: Roosevelt did indeed make a difference, though probably not the sort of difference for which the country had hoped. He started off on the wrong foot when, in his inaugural address, he blamed the Depression on ‘unscrupulous money changers.’ He said nothing about the role of the Fed’s mismanagement and little about the follies of Congress that had contributed to the problem. As a result of his efforts, the economy would linger in depression for the rest of the decade. Adapting a phrase from 19th century writer Henry David Thoreau, Roosevelt famously declared in his address that, ‘We have nothing to fear but fear itself.’ But as Dr. Hans Sennholz of Grove City College explains, it was FDR’s policies to come that Americans had genuine reason to fear: In his first 100 days, he swung hard at the profit order. Instead of clearing away the prosperity barriers erected by his predecessor, he built new ones of his own. He struck in every known way at the integrity of the U.S. dollar through quantitative increases and qualitative deterioration. He seized the people’s gold holdings and subsequently devalued the dollar by 40 percent.[17] Frustrated and angered that Roosevelt had so quickly and thoroughly abandoned the platform on which he was elected, Director of the Bureau of the Budget Lewis W. Douglas resigned after only one year on the job. At Harvard University in May 1935, Douglas made it plain that America was facing a momentous choice: Will we choose to subject ourselves — this great country — to the despotism of bureaucracy, controlling our every act, destroying what equality we have attained, reducing us eventually to the condition of impoverished slaves of the state? Or will we cling to the liberties for which man has struggled for more than a thousand years? It is important to understand the magnitude of the issue before us. … If we do not elect to have a tyrannical, oppressive bureaucracy controlling our lives, destroying progress, depressing the standard of living … then should it not be the function of the Federal government under a democracy to limit its activities to those which a democracy may adequately deal, such for example as national defense, maintaining law and order, protecting life and property, preventing dishonesty, and … guarding the public against … vested special interests?[18] New Dealing from the Bottom of the Deck: Crisis gripped the banking system when the new president assumed office on March 4, 1933. Roosevelt’s action to close the banks and declare a nationwide ‘banking holiday’ on March 6 (which did not completely end until nine days later) is still hailed as a decisive and necessary action by Roosevelt apologists. Friedman and Schwartz, however, make it plain that this supposed cure was ‘worse than the disease.’ The Smoot-Hawley tariff and the Fed’s unconscionable monetary mischief were primary culprits in producing the conditions that gave Roosevelt his excuse to temporarily deprive depositors of their money, and the bank holiday did nothing to alter those fundamentals. ‘More than 5,000 banks still in operation when the holiday was declared did not reopen their doors when it ended, and of these, over 2,000 never did thereafter,’ report Friedman and Schwartz.[19] Economist Jim Powell of the Cato Institute authored a splendid book on the Great Depression in 2003, titled ‘FDR’s Folly: How Roosevelt and His New Deal Prolonged the Great Depression’. He points out that ‘Almost all the failed banks were in states with unit banking laws’ — laws that prohibited banks from opening branches and thereby diversifying their portfolios and reducing their risks. Powell writes: ‘Although the United States, with its unit banking laws, had thousands of bank failures, Canada, which permitted branch banking, didn’t have a single failure …’[20] Strangely, critics of capitalism who love to blame the market for the Depression never mention that fact. Congress gave the president the power first to seize the private gold holdings of American citizens and then to fix the price of gold. One morning, as Roosevelt ate eggs in bed, he and Secretary of the Treasury Henry Morgenthau decided to change the ratio between gold and paper dollars. After weighing his options, Roosevelt settled on a 21 cent price hike because ‘it’s a lucky number.’ In his diary, Morgenthau wrote, ‘If anybody ever knew how we really set the gold price through a combination of lucky numbers, I think they would be frightened.’[21] Roosevelt also single-handedly torpedoed the London Economic Conference in 1933, which was convened at the request of other major nations to bring down tariff rates and restore the gold standard. Washington and its reckless central bank had already made mincemeat of the gold standard by the early 1930s. Roosevelt’s rejection of it removed most of the remaining impediments to limitless currency and credit expansion, for which the nation would pay a high price in later years in the form of a depreciating currency. Sen. Carter Glass put it well when he warned Roosevelt in early 1933: ‘It’s dishonor, sir. This great government, strong in gold, is breaking its promises to pay gold to widows and orphans to whom it has sold government bonds with a pledge to pay gold coin of the present standard of value. It is breaking its promise to redeem its paper money in gold coin of the present standard of value. It’s dishonor, sir.’[22] Though he seized the country’s gold, Roosevelt did return booze to America’s bars and parlor rooms. On his second Sunday in the White House, he remarked at dinner, ‘I think this would be a good time for beer.’[23] That same night, he drafted a message asking Congress to end Prohibition. The House approved a repeal measure on Tuesday, the Senate passed it on Thursday and before the year was out, enough states had ratified it so that the 21st Amendment became part of the Constitution. One observer, commenting on this remarkable turn of events, noted that of two men walking down the street at the start of 1933 — one with a gold coin in his pocket and the other with a bottle of whiskey in his coat — the man with the coin would be an upstanding citizen and the man with the whiskey would be the outlaw. A year later, precisely the reverse was true. In the first year of the New Deal, Roosevelt proposed spending $10 billion while revenues were only $3 billion. Between 1933 and 1936, government expenditures rose by more than 83 percent. Federal debt skyrocketed by 73 percent. FDR talked Congress into creating Social Security in 1935 and imposing the nation’s first comprehensive minimum wage law in 1938. While to this day he gets a great deal of credit for these two measures from the general public, many economists have a different perspective. The minimum wage law prices many of the inexperienced, the young, the unskilled and the disadvantaged out of the labor market. (For example, the minimum wage provisions passed as part of another act in 1933 threw an estimated 500,000 blacks out of work).[24] And current studies and estimates reveal that Social Security has become such a long-term actuarial nightmare that it will either have to be privatized or the already high taxes needed to keep it afloat will have to be raised to the stratosphere. Roosevelt secured passage of the Agricultural Adjustment Act, which levied a new tax on agricultural processors and used the revenue to supervise the wholesale destruction of valuable crops and cattle. Federal agents oversaw the ugly spectacle of perfectly good fields of cotton, wheat and corn being plowed under (the mules had to be convinced to trample the crops; they had been trained, of course, to walk between the rows). Healthy cattle, sheep and pigs were slaughtered and buried in mass graves. Secretary of Agriculture Henry Wallace personally gave the order to slaughter 6 million baby pigs before they grew to full size. The administration also paid farmers for the first time for not working at all. Even if the AAA had helped farmers by curtailing supplies and raising prices, it could have done so only by hurting millions of others who had to pay those prices or make do with less to eat. Blue Eagles, Red Ducks: Perhaps the most radical aspect of the New Deal was the National Industrial Recovery Act, passed in June 1933, which created a massive new bureaucracy called the National Recovery Administration. Under the NRA, most manufacturing industries were suddenly forced into government-mandated cartels. Codes that regulated prices and terms of sale briefly transformed much of the American economy into a fascist-style arrangement, while the NRA was financed by new taxes on the very industries it controlled. Some economists have estimated that the NRA boosted the cost of doing business by an average of 40 percent — not something a depressed economy needed for recovery. The economic impact of the NRA was immediate and powerful. In the five months leading up to the act’s passage, signs of recovery were evident: factory employment and payrolls had increased by 23 and 35 percent, respectively. Then came the NRA, shortening hours of work, raising wages arbitrarily and imposing other new costs on enterprise. In the six months after the law took effect, industrial production dropped 25 percent. Benjamin M. Anderson writes, ‘NRA was not a revival measure. It was an antirevival measure. … Through the whole of the NRA period industrial production did not rise as high as it had been in July 1933, before NRA came in.’[25] The man Roosevelt picked to direct the NRA effort was General Hugh ‘Iron Pants’ Johnson, a profane, red-faced bully and professed admirer of Italian dictator Benito Mussolini. Thundered Johnson, ‘May Almighty God have mercy on anyone who attempts to interfere with the Blue Eagle’ (the official symbol of the NRA, which one senator derisively referred to as the ‘Soviet duck’). Those who refused to comply with the NRA Johnson personally threatened with public boycotts and ‘a punch in the nose.’ There were ultimately more than 500 NRA codes, ‘ranging from the production of lightning rods to the manufacture of corsets and brassieres, covering more than 2 million employers and 22 million workers.’[26] There were codes for the production of hair tonic, dog leashes, and even musical comedies. A New Jersey tailor named Jack Magid was arrested and sent to jail for the ‘crime’ of pressing a suit of clothes for 35 cents rather than the NRA-inspired ‘Tailor’s Code’ of 40 cents. In ‘The Roosevelt Myth’, historian John T. Flynn described how the NRA’s partisans sometimes conducted ‘business’: The NRA was discovering it could not enforce its rules. Black markets grew up. Only the most violent police methods could procure enforcement. In Sidney Hillman’s garment industry the code authority employed enforcement police. They roamed through the garment district like storm troopers. They could enter a man’s factory, send him out, line up his employees, subject them to minute interrogation, take over his books on the instant. Night work was forbidden. Flying squadrons of these private coat-and-suit police went through the district at night, battering down doors with axes looking for men who were committing the crime of sewing together a pair of pants at night. But without these harsh methods many code authorities said there could be no compliance because the public was not back of it.[27] The Alphabet Commissars: Roosevelt next signed into law steep income tax increases on the higher brackets and introduced a 5 percent withholding tax on corporate dividends. He secured another tax increase in 1934. In fact, tax hikes became a favorite policy of Roosevelt for the next 10 years, culminating in a top income tax rate of 90 percent. Sen. Arthur Vandenberg of Michigan, who opposed much of the New Deal, lambasted Roosevelt’s massive tax increases. A sound economy would not be restored, he said, by following the socialist notion that America could ‘lift the lower one-third up’ by pulling ‘the upper two-thirds down.’[28] Vandenberg also condemned ‘the congressional surrender to alphabet commissars who deeply believe the American people need to be regimented by powerful overlords in order to be saved.’[29] Alphabet commissars spent the public’s money like it was so much bilge. They were what influential journalist and social critic Albert Jay Nock had in mind when he described the New Deal as ‘a nation-wide, State-managed mobilization of inane buffoonery and aimless commotion.’[30] Roosevelt’s Civil Works Administration hired actors to give free shows and librarians to catalog archives. It even paid researchers to study the history of the safety pin, hired 100 Washington workers to patrol the streets with balloons to frighten starlings away from public buildings, and put men on the public payroll to chase tumbleweeds on windy days. The CWA, when it was started in the fall of 1933, was supposed to be a short-lived jobs program. Roosevelt assured Congress in his State of the Union message that any new such program would be abolished within a year. ‘The federal government,’ said the president, ‘must and shall quit this business of relief. I am not willing that the vitality of our people be further stopped by the giving of cash, of market baskets, of a few bits of weekly work cutting grass, raking leaves, or picking up papers in the public parks.’ Harry Hopkins was put in charge of the agency and later said, ‘I’ve got four million at work but for God’s sake, don’t ask me what they are doing.’ The CWA came to an end within a few months but was replaced with another temporary relief program that evolved into the Works Progress Administration, or WPA, by 1935. It is known today as the very government program that gave rise to the new term, ‘boondoggle,’ because it ‘produced’ a lot more than the 77,000 bridges and 116,000 buildings to which its advocates loved to point as evidence of its efficacy.[31] With good reason, critics often referred to the WPA as ‘We Piddle Around.’ In Kentucky, WPA workers catalogued 350 different ways to cook spinach. The agency employed 6,000 ‘actors’ though the nation’s actors’ union claimed only 4,500 members. Hundreds of WPA workers were used to collect campaign contributions for Democratic Party candidates. In Tennessee, WPA workers were fired if they refused to donate 2 percent of their wages to the incumbent governor. By 1941, only 59 percent of the WPA budget went to paying workers anything at all; the rest was sucked up in administration and overhead. The editors of The New Republic asked, ‘Has [Roosevelt] the moral stature to admit now that the WPA was a hasty and grandiose political gesture, that it is a wretched failure and should be abolished?’[32] The last of the WPA’s projects was not eliminated until July of 1943. Roosevelt has been lauded for his ‘job-creating’ acts such as the CWA and the WPA. Many people think that they helped relieve the Depression. What they fail to realize is that it was the rest of Roosevelt’s tinkering that prolonged the Depression and which largely prevented the jobless from finding real jobs in the first place. The stupefying roster of wasteful spending generated by these jobs programs represented a diversion of valuable resources to politically motivated and economically counterproductive purposes. A brief analogy will illustrate this point. If a thief goes house to house robbing everybody in the neighborhood, then heads off to a nearby shopping mall to spend his ill-gotten loot, it is not assumed that because his spending ‘stimulated’ the stores at the mall he has thereby performed a national service or provided a general economic benefit. Likewise, when the government hires someone to catalog the many ways of cooking spinach, his tax-supported paycheck cannot be counted as a net increase to the economy because the wealth used to pay him was simply diverted, not created. Economists today must still battle this ‘magical thinking’ every time more government spending is proposed — as if money comes not from productive citizens, but rather from the tooth fairy. ‘An astonishing rabble of impudent nobodies’: Roosevelt’s haphazard economic interventions garnered credit from people who put high value on the appearance of being in charge and ‘doing something.’ Meanwhile, the great majority of Americans were patient. They wanted very much to give this charismatic polio victim and former New York governor the benefit of the doubt. But Roosevelt always had his critics, and they would grow more numerous as the years groaned on. One of them was the inimitable ‘Sage of Baltimore,’ H. L. Mencken, who rhetorically threw everything but the kitchen sink at the president. Paul Johnson sums up Mencken’s stinging but often-humorous barbs this way: Mencken excelled himself in attacking the triumphant FDR, whose whiff of fraudulent collectivism filled him with genuine disgust. He was the ‘Fuhrer,’ the ‘Quack,’ surrounded by ‘an astonishing rabble of impudent nobodies,’ ‘a gang of half-educated pedagogues, nonconstitutional lawyers, starry-eyed uplifters and other such sorry wizards.’ His New Deal was a ‘political racket,’ a ‘series of stupendous bogus miracles,’ with its ‘constant appeals to class envy and hatred,’ treating government as ‘a milch-cow with 125 million teats’ and marked by ‘frequent repudiations of categorical pledges.’[33] Signs of Life: The American economy was soon relieved of the burden of some of the New Deal’s worst excesses when the Supreme Court outlawed the NRA in 1935 and the AAA in 1936, earning Roosevelt’s eternal wrath and derision. Recognizing much of what Roosevelt did as unconstitutional, the ‘nine old men’ of the Court also threw out other, more minor acts and programs which hindered recovery. Freed from the worst of the New Deal, the economy showed some signs of life. Unemployment dropped to 18 percent in 1935, 14 percent in 1936, and even lower in 1937. But by 1938, it was back up to nearly 20 percent as the economy slumped again. The stock market crashed nearly 50 percent between August 1937 and March 1938. The ‘economic stimulus’ of Franklin Delano Roosevelt’s New Deal had achieved a real ‘first’: a depression within a depression! Phase IV: The Wagner Act: The stage was set for the 1937-38 collapse with the passage of the National Labor Relations Act in 1935 — better known as the ‘Wagner Act’ and organized labor’s ‘Magna Carta.’ To quote Sennholz again: This law revolutionized American labor relations. It took labor disputes out of the courts of law and brought them under a newly created Federal agency, the National Labor Relations Board, which became prosecutor, judge, and jury, all in one. Labor union sympathizers on the Board further perverted this law, which already afforded legal immunities and privileges to labor unions. The U.S. thereby abandoned a great achievement of Western civilization, equality under the law. The Wagner Act, or National Labor Relations Act, was passed in reaction to the Supreme Court’s voidance of NRA and its labor codes. It aimed at crushing all employer resistance to labor unions. Anything an employer might do in self-defense became an ‘unfair labor practice’ punishable by the Board. The law not only obliged employers to deal and bargain with the unions designated as the employees’ representative; later Board decisions also made it unlawful to resist the demands of labor union leaders.[34] Armed with these sweeping new powers, labor unions went on a militant organizing frenzy. Threats, boycotts, strikes, seizures of plants and widespread violence pushed productivity down sharply and unemployment up dramatically. Membership in the nation’s labor unions soared: By 1941, there were two and a half times as many Americans in unions as had been the case in 1935. Historian William E. Leuchtenburg, himself no friend of free enterprise, observed, ‘Property-minded citizens were scared by the seizure of factories, incensed when strikers interfered with the mails, vexed by the intimidation of nonunionists, and alarmed by flying squadrons of workers who marched, or threatened to march, from city to city.’[35] An Unfriendly Climate for Business: From the White House on the heels of the Wagner Act came a thunderous barrage of insults against business. Businessmen, Roosevelt fumed, were obstacles on the road to recovery. He blasted them as ‘economic royalists’ and said that businessmen as a class were ‘stupid.’[36] He followed up the insults with a rash of new punitive measures. New strictures on the stock market were imposed. A tax on corporate retained earnings, called the ‘undistributed profits tax,’ was levied. ‘These soak-the-rich efforts,’ writes economist Robert Higgs, ‘left little doubt that the president and his administration intended to push through Congress everything they could to extract wealth from the high-income earners responsible for making the bulk of the nation’s decisions about private investment.’[37] During a period of barely two months during late 1937, the market for steel — a key economic barometer — plummeted from 83 percent of capacity to 35 percent. When that news emblazoned headlines, Roosevelt took an ill-timed nine-day fishing trip. The New York Herald-Tribune implored him to get back to work to stem the tide of the renewed Depression. What was needed, said the newspaper’s editors, was a reversal of the Roosevelt policy ‘of bitterness and hate, of setting class against class and punishing all who disagreed with him.’[38] Columnist Walter Lippmann wrote in March 1938 that ‘with almost no important exception every measure he [Roosevelt] has been interested in for the past five months has been to reduce or discourage the production of wealth.’[39] As pointed out earlier in this essay, Herbert Hoover’s own version of a ‘New Deal’ had hiked the top marginal income tax rate from 24 to 63 percent in 1932. But he was a piker compared to his tax-happy successor. Under Roosevelt, the top rate was raised at first to 79 percent and then later to 90 percent. Economic historian Burton Folsom notes that in 1941 Roosevelt even proposed a whopping 99.5-percent marginal rate on all incomes over $100,000. ‘Why not?’ he said when an advisor questioned the idea.[40] After that confiscatory proposal failed, Roosevelt issued an executive order to tax all income over $25,000 at the astonishing rate of 100 percent. He also promoted the lowering of the personal exemption to only $600, a tactic that pushed most American families into paying at least some income tax for the first time. Shortly thereafter, Congress rescinded the executive order, but went along with the reduction of the personal exemption.[41] Meanwhile, the Federal Reserve again seesawed its monetary policy in the mid-1930s, first up then down, then up sharply through America’s entry into World War II. Contributing to the economic slide of 1937 was this fact: From the summer of 1936 to the spring of 1937, the Fed doubled reserve requirements on the nation’s banks. Experience has shown time and again that a roller-coaster monetary policy is enough by itself to produce a roller-coaster economy. Still stinging from his earlier Supreme Court defeats, Roosevelt tried in 1937 to ‘pack’ the Supreme Court with a proposal to allow the president to appoint an additional justice to the Court for every sitting justice who had reached the age of 70 and did not retire. Had this proposal passed, Roosevelt could have appointed six new justices favorable to his views, increasing the members of the Court from 9 to 15. His plan failed in Congress, but the Court later began rubber-stamping his policies after a number of opposing justices retired. Until Congress killed the packing scheme, however, business fears that a Court sympathetic to Roosevelt’s goals would endorse more of the old New Deal prevented investment and confidence from reviving. Economic historian Robert Higgs draws a close connection between the level of private investment and the course of the American economy in the 1930s. The relentless assaults of the Roosevelt administration — in both word and deed — against business, property, and free enterprise guaranteed that the capital needed to jump-start the economy was either taxed away or forced into hiding. When FDR took America to war in 1941, he eased up on his anti-business agenda, but a great deal of the nation’s capital was diverted into the war effort instead of into plant expansion or consumer goods. Not until both Roosevelt and the war were gone did investors feel confident enough to ‘set in motion the postwar investment boom that powered the economy’s return to sustained prosperity.’[42] This view gains support in these comments from one of the country’s leading investors of the time, Lammot du Pont, offered in 1937: Uncertainty rules the tax situation, the labor situation, the monetary situation, and practically every legal condition under which industry must operate. Are taxes to go higher, lower or stay where they are? We don’t know. Is labor to be union or non-union? . . . Are we to have inflation or deflation, more government spending or less? … Are new restrictions to be placed on capital, new limits on profits? … It is impossible to even guess at the answers.’[43] Many modern historians tend to be reflexively anti-capitalist and distrustful of free markets; they find Roosevelt’s exercise of power, constitutional or not, to be impressive and historically ‘interesting.’ In surveys, a majority consistently rank FDR near the top of the list for presidential greatness, so it is likely they would disdain the notion that the New Deal was responsible for prolonging the Great Depression. But when a nationally representative poll by the American Institute of Public Opinion in the spring of 1939 asked, ‘Do you think the attitude of the Roosevelt administration toward business is delaying business recovery?’ the American people responded ‘yes’ by a margin of more than 2-to-1. The business community felt even more strongly so.[44] In his private diary, FDR’s very own Treasury Secretary, Henry Morgenthau, seemed to agree. He wrote: ‘We have tried spending money. We are spending more than we have ever spent before and it does not work. … We have never made good on our promises. … I say after eight years of this Administration we have just as much unemployment as when we started … and an enormous debt to boot!’[45] At the end of the decade and 12 years after the stock market crash of Black Thursday, 10 million Americans were jobless. The unemployment rate was in excess of 17 percent. Roosevelt had pledged in 1932 to end the crisis, but it persisted two presidential terms and countless interventions later. Whither Free Enterprise? How was it that FDR was elected four times if his policies were deepening and prolonging an economic catastrophe? Ignorance and a willingness to give the president the benefit of the doubt explain a lot. Roosevelt beat Hoover in 1932 with promises of less government. He instead gave Americans more government, but he did so with fanfare and fireside chats that mesmerized a desperate people. By the time they began to realize that his policies were harmful, World War II came, the people rallied around their commander-in-chief, and there was little desire to change the proverbial horse in the middle of the stream by electing someone new. Along with the holocaust of World War II came a revival of trade with America’s allies. The war’s destruction of people and resources did not help the U.S. economy, but this renewed trade did. A reinflation of the nation’s money supply counteracted the high costs of the New Deal, but brought with it a problem that plagues us to this day: a dollar that buys less and less in goods and services year after year. Most importantly, the Truman administration that followed Roosevelt was decidedly less eager to berate and bludgeon private investors and as a result, those investors re-entered the economy and fueled a powerful postwar boom. The Great Depression finally ended, but it should linger in our minds today as one of the most colossal and tragic failures of government and public policy in American history. The genesis of the Great Depression lay in the irresponsible monetary and fiscal policies of the U.S. government in the late 1920s and early 1930s. These policies included a litany of political missteps: central bank mismanagement, trade-crushing tariffs, incentive-sapping taxes, mind-numbing controls on production and competition, senseless destruction of crops and cattle and coercive labor laws, to recount just a few. It was not the free market that produced 12 years of agony; rather, it was political bungling on a grand scale. Those who can survey the events of the 1920s and 1930s and blame free-market capitalism for the economic calamity have their eyes, ears and minds firmly closed to the facts. Changing the wrong-headed thinking that constitutes much of today’s conventional wisdom about this sordid historical episode is vital to reviving faith in free markets and preserving our liberties. The nation managed to survive both Hoover’s activism and Roosevelt’s New Deal quackery, and now the American heritage of freedom awaits a rediscovery by a new generation of citizens. This time we have nothing to fear but myths and misconceptions. - END - Postscript: Have We Learned Our Lessons? Eighty years after the Great Depression began, the literature on this painful episode of American history is undergoing an encouraging metamorphosis. The conventional assessment that so dominated historical writings for decades argued that free markets caused the debacle and that FDR’s New Deal saved the country. Surely, there are plenty of poorly-informed partisans, ideologues and quacks that still make these superficial claims. Serious historians and economists, however, have been busy chipping away at the falsehoods. The essay you have just read cites many recent works worth careful reading in their entirety. At the very moment this latest edition of ‘Great Myths of the Great Depression’ was about to go to press, Simon & Schuster published a splendid new volume I strongly recommend. Authored by the Foundation for Economic Education’s senior historian and Hillsdale College professor, Dr. Burton W. Folsom, the book is provocatively titled ‘New Deal or Raw Deal? — How FDR’s Economic Legacy Has Damaged America.’ It’s one of the most illuminating works on the subject. It will help mightily to correct the record and educate our fellow citizens about what really happened in the 1930s. Another great addition to the literature, appearing in 2007, is ‘The Forgotten Man: A New History of the Great Depression’ by Amity Shlaes. The fact that it has been a New York Times bestseller suggests there is a real hunger for the truth about this period of history. While Americans may be unlearning some of what they thought they knew about the Great Depression, that’s not the same as saying we have learned the important lessons well enough to avoid making the same mistakes again. Indeed, today we are no closer to fixing the primary cause of the business cycle — monetary mischief — than we were 80 years ago. The financial crisis that gripped America in 2008 ought to be a wake-up call. The fingerprints of government meddling are all over it. From 2001 to 2005, the Federal Reserve revved up the money supply, expanding it at a feverish double-digit rate. The dollar plunged in overseas markets and commodity prices soared. With the banks flush with liquidity from the Fed, interest rates plummeted and risky loans to borrowers of dubious merit ballooned. Politicians threw more fuel on the fire by jawboning banks to lend hundreds of billions of dollars for subprime mortgages. When the bubble burst, some of the very culprits who promoted the policies that caused it postured as our rescuers while endorsing new interventions, bigger government, more inflation of money and credit and massive taxpayer bailouts of failing firms. Many of them are also calling for higher taxes and tariffs, the very nonsense that took a recession in 1930 and made it a long and deep depression. The taxpayer bailouts of agencies such as Fannie Mae and Freddie Mac, as well as a growing number of private firms in the early fall of 2008, represent more folly with a monumental price tag. Not only will we and future generations be paying those bills for decades, the very process of throwing good money after bad will pile moral hazard on top of moral hazard, fostering more bad decisions and future bailouts. This is the stuff that undermines both free enterprise and the soundness of the currency. Much more inflation to pay these bills is more than a little likely, sooner or later. ‘Government,’ observed the renowned Austrian economist Ludwig von Mises, ‘is the only institution that can take a valuable commodity like paper, and make it worthless by applying ink.’ Mises was describing the curse of inflation, the process whereby government expands a nation’s money supply and thereby erodes the value of each monetary unit — dollar, peso, pound, franc or whatever. It often shows up in the form of rising prices, which most people confuse with the inflation itself. The distinction is an important one because, as economist Percy Greaves explained so eloquently, ‘Changing the definition changes the responsibility.’ Define inflation as rising prices and, like the clueless Jimmy Carter of the 1970s, you’ll think that oil sheiks, credit cards and private businesses are the culprits, and price controls are the answer. Define inflation in the classic fashion as an increase in the supply of money and credit, with rising prices as a consequence, and you then have to ask the revealing question, ‘Who increases the money supply?’ Only one entity can do that legally; all others are called ‘counterfeiters’ and go to jail. Nobel laureate Milton Friedman argued indisputably that inflation is always and everywhere a monetary matter. Rising prices no more cause inflation than wet streets cause rain. Before paper money, governments inflated by diminishing the precious-metal content of their coinage. The ancient prophet Isaiah reprimanded the Israelites with these words: ‘Thy silver has become dross, thy wine mixed with water.’ Roman emperors repeatedly melted down the silver denarius and added junk metals until the denarius was less than one percent silver. The Saracens of Spain clipped the edges of their coins so they could mint more until the coins became too small to circulate. Prices rose as a mirror image of the currency’s worth. Rising prices are not the only consequence of monetary and credit expansion. Inflation also erodes savings and encourages debt. It undermines confidence and deters investment. It destabilizes the economy by fostering booms and busts. If it’s bad enough, it can even wipe out the very government responsible for it in the first place and then lead to even worse afflictions. Hitler and Napoleon both rose to power in part because of the chaos of runaway inflations. All this raises many issues economists have long debated: Who or what should determine a nation’s supply of money? Why do governments so regularly mismanage it? What is the connection between fiscal and monetary policy? Suffice it to say here that governments inflate because their appetite for revenue exceeds their willingness to tax or their ability to borrow. British economist John Maynard Keynes was an influential charlatan in many ways, but he nailed it when he wrote, ‘By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.’ So, you say, inflation is nasty business but it’s just an isolated phenomenon with the worst cases confined to obscure nooks and crannies like Zimbabwe. Not so. The late Frederick Leith-Ross, a famous authority on international finance, observed: ‘Inflation is like sin; every government denounces it and every government practices it.’ Even Americans have witnessed hyperinflations that destroyed two currencies — the ill-fated continental dollar of the Revolutionary War and the doomed Confederate money of the Civil War. Today’s slow-motion dollar depreciation, with consumer prices rising at persistent but mere single-digit rates, is just a limited version of the same process. Government spends, runs deficits and pays some of its bills through the inflation tax. How long it can go on is a matter of speculation, but trillions in national debt and politicians who make misers of drunken sailors and get elected by promising even more are not factors that should encourage us. Inflation is very much with us but it must end someday. A currency’s value is not bottomless. Its erosion must cease either because government stops its reckless printing or prints until it wrecks the money. But surely, which way it concludes will depend in large measure on whether its victims come to understand what it is and where it comes from. Meanwhile, our economy looks like a roller coaster because Congresses, Presidents and the agencies they’ve empowered never cease their monetary mischief. Are you tired of politicians blaming each other, scrambling to cover their behinds and score political points in the midst of a crisis, and piling debts upon debts they audaciously label ‘stimulus packages’? Why do so many Americans want to trust them with their health care, education, retirement and a host of other aspects of their lives? It’s madness writ large. The antidote is the truth. We must learn the lessons of our follies and resolve to fix them now, not later. To that end, I invite the reader to join the education process. Support organizations like FEE that are working to inform citizens about the proper role of government and how a free economy operates. Help distribute copies of this essay and other good publications that promote liberty and free enterprise. Demand that your representatives in government balance the budget, conform to the spirit and letter of the Constitution and stop trying to buy your vote with other people’s money. Everyone has heard the sage observation of philosopher George Santayana: ‘Those who cannot remember the past are condemned to repeat it.’ It’s a warning we should not fail to heed. -Endnotes: -1 Alan Reynolds, ‘What Do We Know About the Great Crash?’ National Review, November 9, 1979, p. 1416. -2 Hans F. Sennholz, ‘The Great Depression,’ The Freeman, April 1975, p. 205. -3 Murray Rothbard, America’s Great Depression (Kansas City: Sheed and Ward, Inc., 1975), p. 89. -4 Benjamin M. Anderson, Economics and the Public Welfare: A Financial and Economic History of the United States, 1914-46, 2nd edition (Indianapolis: Liberty Press, 1979), p. 127. -5 Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the United States, 1867-1960 (New York: National Bureau of Economic Research, 1963; ninth paperback printing by Princeton University Press, 1993), pp. 411-415. -6 Lindley H. Clark, Jr., ‘After the Fall,’ The Wall Street Journal, October 26, 1979, p. 18. -7 ‘Tearful Memories That Just Won’t Fade Away,’ U. S. News & World Report, October 29, 1979, pp. 36-37. -8 ‘FDR’s Disputed Legacy,’ Time, February 1, 1982, p. 23. -9 Barry W. Poulson, Economic History of the United States (New York: Macmillan Publishing Co., Inc., 1981), p. 508. -10 Reynolds, p. 1419. -11 Richard M. Ebeling, ‘Monetary Central Planning and the State-Part XI: The Great Depression and the Crisis of Government Intervention,’ Freedom Daily (Fairfax, Virginia: The Future of Freedom Foundation, November 1997), p. 15. -12 Paul Johnson, A History of the American People (New York: HarperCollins Publishers, 1997), p. 740. -13 Ibid., p. 741. -14 Larry Schweikart and Michael Allen, A Patriot’s History of the United States: From Columbus’s Great Discovery to the War on Terror (New York: Sentinel, 2004), p. 553. -15 Ibid., p. 554. -16 ‘FDR’s Disputed Legacy,’ p. 24. -17 Sennholz, p. 210. -18 From The Liberal Tradition: A Free People and a Free Economy by Lewis W. Douglas, as quoted in ‘Monetary Central Planning and the State, Part XIV: The New Deal and Its Critics,’ by Richard M. Ebeling in Freedom Daily, February 1998, p. 12. -19 Friedman and Schwartz, p. 330. -20 Jim Powell, FDR’s Folly: How Roosevelt and His New Deal Prolonged the Great Depression (New York: Crown Forum, 2003), p. 32. " - Lawrence W. Reed
Lawrence W. Reed is president of the Foundation For Economic Education in Irvington, New York. [http://www.fee.org/articles/great-myths-of-the-great-depression/ ]
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[Quote No.38050] Need Area: Money > Invest
"Inflation is like sin; every government denounces it and every government practices it." - Frederick Leith-Ross
a famous authority on international finance
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[Quote No.38095] Need Area: Money > Invest
"The way to make money is to buy when blood is running in the streets." - John D. Rockefeller

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[Quote No.38099] Need Area: Money > Invest
"Examining The Model For ECRI's Black Box: Two weeks ago, an article I wrote, A Peek inside ECRI's black box gained considerable traction. There I examined a number of data series which likely generated ECRI's recession warning in September, using as my starting point the work of ECRI's founder, Prof. Geoffrey Moore, who in a 1961 manuscript set forth a number of leading indicators that predicted recessions and recoveries both before and after World War 2. A commenter at Seeking Alpha, dlamba, suggested reading Prof. Moore's later work, 'Leading Indicators for the 1990's' (1991) in which he laid out in considerable detail his 1980's research into both Long and Short leading indicators, and also suggested a high-frequency Weekly Leading Index which, while slightly less reliable, could be updated in a much more timely and frequent fashion. The book itself describes the research and the results thereof, as well as setting forth the methods by which values for each indicator were computed. A description of all of that, and the present values of each indicator, are beyond the scope of this post. Instead, let me simply describe the data that as of 1990, Moore recommended for each index. Moore proposed 4 Long Leading Indicators: -Real M2 -Dow Jones Bond Average -Housing Permits -The ratio of price to unit labor cost in manufacturing These turn negative at least 12 months before the onset of recession, and on average 14 months before, and turn positive on average about 11 months before the end of a recession. He also proposed 11 Short Leading Indicators: -S&P 500 stock price index -Average workweek in manufacturing -Layoff rate under 5 weeks -Initial claims for unemployment insurance -ISM manufacturing vendor performance -ISM manufacturing inventory change -Journal of Commerce change in commodity prices -Change in deflated nonfinancial debt -New orders for consumer goods and materials -Dun and Bradstreet change in business population -Contracts and orders for plant and equipment On average these turn negative about 8 months before the onset of recession and turn positive 2 months before the end of a recession. Finally, he proposed a Weekly Leading Index made up of indicators whose values could be computed weekly, or if monthly were reported at the beginning of the next month. While this index would be a little less reliable than the two others, it would have the advantage of being more timely. It's components are: -Real M2 -Dow Jones Bond Average -S&P 500 stock price index -Average workweek in manufacturing -Layoff rate under 5 weeks -Initial claims for unemployment insurance -ISM manufacturing vendor performance -ISM manufacturing inventory change -Journal of Commerce change in commodity prices -Dun and Bradstreet new business formation and large business failure -Real estate loans, deflated, growth rate Many of these are the same as on the Long and Short Leading Indicator list, but are calculated weekly for purpose of the weekly index. On average these turn 12 months before the onset of a recession and turn positive three months before the end of a recession. Prof. Moore also set forth a series of signals that could be used to predict recessions and recoveries (p. 76): 'The first signal of recession occurs when the six-month smoothed growth rate in the leading index first declines below 2.3%. The second signal requires the leading index growth rate to fall below -1.0% and the coincident index to fall below 2.3%. The third signal is set off when the leading rate is below zero and the coincident below -1.0%. ... [T]he first signal of recovery ... is set off when the six month smoothed rate of change in the leading composite first goes above +1.0%.' In case it isn't clear from the above quote, in a recent interview Lakshman Achuthan explicitly stated that it is a decline in the coincident indicators -- nonfarm payrolls, industrial production, real income, and real retail sales -- rather than a decline in GDP, that defines a recession for them. At its website, ECRI maintains that it 'refined' the above indicators throughout the 1990's both before and after its founding in 1995. My examination of the Long Leading Indicators in the above list, for example, strongly suggests that at least one of those has subsequently been replaced." - Hale Stewart
He spent 5 years as a bond broker in the late 1990s before returning to law school in the early 2000s. He is currently a tax lawyer in Houston, Texas. Published on seekingalpha.com, December 29, 2011. [http://seekingalpha.com/article/316535-examining-the-model-for-ecri-s-black-box?source=email_macro_view&ifp=0 ]
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[Quote No.38102] Need Area: Money > Invest
"[It is well known that the first casualty in war is the truth. It is also the first casualty in a financial crisis as the following quote describes:] The 2008 [company, financial and banking] problem was a private economy problem and businesses – the business owners – do try, and are incentivized by laws and penalties, to tell the truth when they have earnings calls every quarter. The difference here [in late 2011] is it [the sovereign debt crisis] is not company-based. This is a government-based problem and a public economy, public sector problem and the issue that’s so problematic is that the politicians won’t tell you the truth [as politicians have hypocritically ensured there are no laws and punishments on the books that direct and enforce them to tell the truth so the public can make informed decisions about their own lives]." - Jeffery Gundlach
Manager of the 2011 top-performing U.S. bond fund. Quote from the 'Financial Times', 12th December, 2011.
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[Quote No.38103] Need Area: Money > Invest
"According to [respected economist] Irving Fisher and just about every economist who followed him, the long run [10 year] interest rate on a [Government Treasury] bond should equal the expected real rate [of GDP growth] plus the expected rate of inflation." - Peter T. Treadway
[http://www.ritholtz.com/blog/2012/01/the-dismal-outlook-for-2012/ ]
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[Quote No.38104] Need Area: Money > Invest
"...democracies with universal suffrage have a long run tendency to spend their way into fiscal bankruptcy and degrade their currencies along the way... [because] Politicians [having made promises to buy enough votes to win election] pass measures to please the majority that elected them, regardless of whether the country can afford it or not." - Dr. Peter T Treadway
Principal of Historical Analytics LLC. Historical Analytics is a consulting/investment management firm dedicated to global portfolio management. Its investment approach is based on Dr. Treadway’s combined top-down and bottom-up Wall Street experience as economist, strategist and securities analyst. [http://www.ritholtz.com/blog/2012/01/the-dismal-outlook-for-2012/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+TheBigPicture+%28The+Big+Picture%29 ]
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[Quote No.38105] Need Area: Money > Invest
"The sense of security more frequently springs from habit than from conviction, and for this reason it often subsists after such a change in the conditions as might have been expected to suggest alarm. The lapse of time during which a given event has not happened, is, in this logic of habit, constantly alleged as a reason why the event should never happen, even when the lapse of time is precisely the added condition which makes the event imminent." - George Eliot
From her book, 'Silas Marner'
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[Quote No.38106] Need Area: Money > Invest
"The ’08 crisis is considered a low-probability 'tail event' – a so-called rare 'black swan' or 'hundred-year flood.' Yet I would argue that such a financial crisis was in reality a high probability outcome. Bubbles burst – plain and simple. It is the act of predicting the timing of their demise that tends to be an exercise in low probability outcomes. This is especially the case when government policymaking is a major factor fueling Credit and asset Bubble excess... " - Doug Noland
January 6, 2012, 'Credit Bubble Bulletin'.
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[Quote No.38107] Need Area: Money > Invest
"What are the best indicators of an oncoming recession [or in other words the downturn in the economic cycle]? The most reliable indicators of an oncoming recession are not the widely followed data on retail sales, factory output, and employment. Rather, the best early warning signals come from 'forward-looking' indicators given by financial markets and key surveys of business and consumer confidence. The financial markets and confidence surveys offer an enormous amount of early information that only becomes apparent months later in the more widely followed economic reports. Surprisingly, the consensus among economists has been consistently optimistic at the beginning of every major U.S recession in the past. The problem is that most of the widely followed data lag the beginning of a recession, with the unemployment rate being the last to turn unfavorable. In addition, the best information is found in the 'spread' or difference between financial indicators and confidence surveys, rather than in the individual economic reports. Unless one carefully analyzes these spreads, the signs of an oncoming recession are rarely obvious. Financial markets are not perfect in their ability to convey information, but are an extremely useful way of summarizing the information available to market participants. In terms of statistical accuracy, no other approach comes close. When several key indicators turn unfavorable at once, the resulting signal is particularly important. Historically, the following combination has occurred immediately before or during each of the past 5 recessions in the U.S. economy: 1) The 'credit spread' between corporate securities and default-free Treasury securities becomes wider than it was 6 months earlier. This spread is measured by the difference between 10-year corporate bond yields and 10-year U.S. Treasury bond yields (or alternatively, by 6-month commercial paper minus 6- month U.S. Treasury bill yields). This spread is primarily an indication of market perceptions regarding earnings risk and default risk, which generally rises during recessions. 2) The 'maturity spread' between long-term and short-term interest rates falls to less than 2.5%, as measured by the difference between the 10-year Treasury bond yield and the 3-month Treasury bill yield. A narrow difference between these interest rates indicates that the financial markets expect slower economic growth ahead. If the other indicators are unfavorable, anything less than a very wide maturity spread indicates serious trouble, regardless of unemployment, inflation, or other data. 3) The stock market falls below where it was 6 months earlier, as measured by the S&P 500 Index. Stock prices are another important indicator of market perceptions toward credit risk and earnings expectations. While the economy does not always slow after a market decline, major economic downturns have tended to follow on the heels of a market drop. Stock markets tend to reach their highs when the economy 'cannot get any better' -- unemployment is low and factories are operating at full capacity. The problem is that when things cannot get any better, they may be about to get worse. 4) The National Association of Purchasing Managers Index declines below 50, indicating a contraction in manufacturing activity. This index is strongly related to GDP growth, and when combined with the previous three indicators, has signalled every recession in the past 40 years. The following are some additional early warning indicators of an oncoming recession. -A flat or 'inverted' yield curve in which long term interest rates are not significantly higher than short term rates. An inverted yield curve is a particularly negative signal, in which long term interest rates are actually below short term rates. This situation is generally the result of either high inflation or very tight monetary policy. -A sudden widening in the 'consumer confidence spread'. Deterioration in consumer confidence often signals an oncoming economic downturn. A drop in consumer confidence by more than 20 points below its 12-month average has generally accompanied the beginning of recessions. A useful leading indicator is the 'consumer confidence spread', measured as the difference between the 'Future Expectations' index and the 'Present Situation' index released by the Conference Board. A plunge in this spread, with 'Future Expectations' falling more sharply than 'Present Situation', is a classic signal that has usually foreshadowed recessions by less than 6 months. -A sharp slowing in the annual growth in consumer installment debt. In the late stage of an economic expansion, demand growth often rises faster than the ability of the economy to produce new output. Frequently, this demand growth is fueled by credit card borrowing and other installment debt. A sharp slowing in the growth of consumer debt is an important indicator that demand growth is beginning to turn down. -Low or negative real interest rates measured by the difference between the 3 month Treasury bill rate and the rate of inflation. Just as a nominal interest rate measures the number of dollars which will be paid tomorrow in return for lending one dollar today, the real interest rate measures the number of goods which will be paid tomorrow in return for lending one good today. A high real interest rate is a signal that goods are scarce today, and are expected to be plentiful tomorrow. This suggests market expectations for future growth. A low or negative real interest rate is a essentially a signal that the market believes that goods are more plentiful today than they will be tomorrow, which is another way of saying the market expects a recession. -Falling factory capacity utilization. A decline in capacity utilization from above 80 to below that level has generally accompanied the beginning of recessions. -Slowing growth in employment and hours worked. The unemployment rate itself rarely turns sharply higher until well into recessions (and rarely turns down until well into economic recoveries). So while the unemployment rate is an indicator of economic health, it is not useful to wait for major increases in unemployment as the primary indicator of oncoming economic changes. As for employment-related data, slowing growth in employment and hours worked tend to accompany the beginning of recessions. Specifically, when non-farm payrolls have grown by less than 1% over a 12 month period, or less than 0.5% over a 6 month period, the economy has always been at the start of a recession. Similarly, the beginning of a recession is generally marked by a quarterly decline in aggregate hours worked. While many economists believe that the best response to a recession is to pursue interest rate cuts, tax cuts or new government spending, this approach is too simplistic. It treats the economy as if it produces a single good, on demand, and the only problem is to stimulate that demand. I suggest that recessions are essentially periods when the mix of goods supplied by producers has become too different from the mix of goods demanded by consumers. Except during the deepest recessions, blindly stimulating demand is not a useful way to remedy these imbalances. Recession is a natural, even useful process. The economy requires a whole range of adjustments in prices, production and worker skills. Those adjustments can be costly, time consuming, and painful, but the lesson from other countries is that if you try to avoid the adjustments, you end up avoiding long term growth. The best policy response for the Federal Reserve is to ease only enough to keep the banks liquid, and to reassure the markets during any short term panics. The goal is to make sure that even in a recession, there is never a panic that prevents good, potentially successful business ventures from obtaining the capital they need to operate. As for Congress, quite frankly, the best policy response to a recession is to get out of the way." - John P. Hussman, Ph.D.
He manages Hussman Funds. Published 2001. [http://www.hussmanfunds.com/html/economy.htm ] [Note: See the November 12, 2007 Market Comment 'Expecting A Recession' for slightly modified criteria that improve the timeliness of the signal for a recession in the US:- http://www.hussmanfunds.com/wmc/wmc071112.htm ]
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[Quote No.38108] Need Area: Money > Invest
"...The Fed action is surreptitious. That's because the European Central Bank (ECB) wants to provide needed liquidity to Europe's anemic banks without printing a lot of Euros. If the ECB blatantly cranks out Euros it would undermine its status as an inflation-fighting stalwart and incur the wrath of Germany. At the same time, many European heads of state want the ECB to purchase more sovereign debt, so what you have is an obvious conflict. The U.S. Fed to the rescue. But shhhhhhh.... Here's what's going on. The Fed is engaging in a temporary U.S. dollar liquidity swap arrangement with the ECB. In common English, that means the Fed swaps dollars with the ECB for Euros. The ECB pays a small interest rate and guarantees to return a fixed number of dollars at a future date at a fixed exchange rate [...so its a foreign cyrrency loan without currency risk to either lender or borrower]. Then, the ECB lends the money to the European banks that need it most. In 2008, the Fed caught flak for loaning money to U.S. branches of the foreign banks, so this time they are attempting to maneuver by tip-toeing around the eggshells. The artful maneuvering provides cover for both the Fed and the ECB because it allows for helping European banks without printing a lot of Euros or dollars in an obvious manner. A most important part of the story now follows: In late 2008, the Fed had $600 billion of swaps on its balance sheet. By early 2010 they were mostly paid down as the panic of 2008 subsided and banks were able to raise capital from traditional sources, primarily by selling stock. By the end of last summer, the Fed's swap renewal agreement had a balance of only $2.4 billion. In recent weeks, the balance has grown to $64 billion. We fully expect to see much higher numbers in the coming weeks as more dollars are channeled to Europe." - Monty Guild
Published 6th January 2012. [http://www.financialsense.com/node/7285?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+fso+%28Financial+Sense%29&utm_term=FSO ]
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[Quote No.38109] Need Area: Money > Invest
"Here's a quick way to work out a company's payout ratio that should help you compare it to its historical payout ratio and decide if it is sustainable:] The way the math works out, the dividend yield multiplied by the P/E equals the payout ratio, the percentage of after-tax profits paid in dividends. A dividend yield of 3% multiplied by the current P/E of 14.5 implies a payout ratio of 44% vs. 29% at present. That’s a big jump, but would still be below the post-World War II average of 50%. " - A. Gary Shilling
Highly respected economist and author. Published in the January 2012 edition of his forecasting newsletter 'INSIGHT'.
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[Quote No.38110] Need Area: Money > Invest
"I place economy among the first and most important republican [political] virtues, and public debt as the greatest of the dangers to be feared. To preserve our independence, we must not let our rulers [politicians] load us with perpetual debt." - Thomas Jefferson

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[Quote No.38111] Need Area: Money > Invest
"The Liquidity Trap may soon be over :- About a decade ago, I wrote a paper on monetary policy in the 1990s (published in this book). I estimated the following simple formula for setting the federal funds rate: Federal funds rate = 8.5 + 1.4 (Core inflation - Unemployment). Here 'core inflation' is the CPI inflation rate over the previous 12 months excluding food and energy, and 'unemployment' is the seasonally-adjusted unemployment rate. The parameters in this formula were chosen to offer the best fit for data from the 1990s. You can think of this equation as a version of a Taylor rule. Eddy Elfenbein has recently replotted this equation. Here it is: [refer below web address to view the chart] Not surprisingly, the rule recommended a deeply negative federal funds rate during the recent severe recession [2007-9]. Of course, that is impossible, which is why the Fed took various extraordinary steps to get the economy going. But note that the rule is now moving back toward zero [which could suggest the Federal Reserve's dual mandate of managing maximum employment while curtailing excessive inflation may soon swing back to managing inflation and see interest rates rise]." - Greg Mankiw
American economist. January 11, 2012. [http://gregmankiw.blogspot.com/2012/01/liquidity-trap-may-soon-be-over.html ]
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[Quote No.38119] Need Area: Money > Invest
"Believe none of what you hear and only half of what you see." - Saying

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[Quote No.38132] Need Area: Money > Invest
"I hate to lose more than I love to win." - Jimmy Connors
Famous tennis champion
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[Quote No.38160] Need Area: Money > Invest
"'Tis hard if all is false that I advance, A fool must now and then be right, by chance." - William Cowper
(1731 - 1800)
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[Quote No.38172] Need Area: Money > Invest
"When a country is not on a gold standard, when its citizens are not even permitted to own gold, when they are told that irredeemable paper money is just as good, when they are compelled to accept payment in such paper of debts or pensions that are owed to them, when what they have put aside, for retirement or old age, in savings banks or insurance policies, consists of this irredeemable paper money, then they are left without protection as the issue of this paper money is increased and the purchasing power of each unit falls [inflation]; then they can be completely impoverished by the political decisions of the 'monetary managers'." - Henry Hazlitt
'The Freeman', October 1965.
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[Quote No.38211] Need Area: Money > Invest
"The sovereign debt crisis has become a gigantic stress test for synthetic exchange-traded funds (ETFs) that may well determine whether they can compete against physical ETFs or will survive only as niche products used in markets where physical replication is impractical. Synthetic ETFs make up about half the market in Europe, though only a handful exist in the United States where current regulations limit the ability of registered investment companies to replicate index performance using derivatives. Market participants have long debated the relative merits of physical and synthetic ETFs, but now investors are voting with their feet. Neil O'Hara reports. At first glance, a physical ETF, which owns the components of the index it seeks to track, is a less risky investment than a synthetic ETF, which delivers the return on the benchmark index through total return swaps. Appearances can be deceptive, however. Most physical ETFs offset part of their expenses through securities lending, a bilateral transaction that introduces the same collateralised counterparty credit risk a swap entails. If the counterparty defaults, a physical ETF must sell the collateral and use the proceeds to replace the securities lent out, just as a synthetic ETF would use collateral to replace its swap exposure. Except for commodity ETFs that own the underlying asset rather than futures contracts or swaps—the precious metal ETFs, for example—and a few early US ETFs such as the SPDR, the original ETF that tracks the Standard & Poor’s 500 index, physical ETFs do lend the securities they own. 'The early ETFs were unit investment trusts, which have no investment discretion,' says Townsend Lansing, head of regulator affairs at ETF Securities in London. 'The physical replicating ETF structures evolved to permit securities lending. Both synthetic ETFs and physical ETFs that engage in securities lending have similar counterparty credit risk.' For the vast majority of ETFs, the debate over the relative credit risk of physical versus synthetic vehicles is moot, at least in theory... The credit risk in a collateralised ETF product is the difference between the collateral value and the market price of the underlying asset after the counterparty fails, not the entire principal amount. Townsend says investors have three primary concerns: the quality of the collateral, how closely the collateral is correlated to the underlying asset, and how fast the fund can take possession of the collateral. 'Those three issues apply equally to a physical ETF that does securities lending and an ETF using swaps,' he says. Investors today enjoy greater transparency about the collateral backing a synthetic ETF than for the securities lending collateral in a physical ETF. In response to concerns that arose after Lehman Brothers failed, the leading synthetic ETF sponsors began to post on their websites daily updates about the collateral supporting the swaps in each product. Credit Suisse even posts the serial numbers and identifying marks for the individual bars held in its precious metals ETFs. Physical ETFs may even have greater credit exposure than their synthetic siblings, depending on the collateral guidelines applied to their securities lending programmes. The prospectus for a physical ETF discloses that the fund may engage in securities lending, but sponsors neither identify the counterparties to whom they lend nor give any information about the collateral received. In addition, the broker dealers who borrow the securities and lend them on to hedge fund clients often re-hypothecate the collateral they receive, which ratchets up broker dealer leverage and the credit risk associated with securities lending... Credit risk is a bigger concern for investors in exchange-traded notes (ETNs), which offer the return on a benchmark just like an ETF. Legally they are quite distinct, however: ETNs are unsecured obligations of the issuer, typically a major bank or securities house. Most ETNs enjoy collateral protection, but the issuer has considerable discretion over the type of collateral and may retain possession of it. 'Some ETNs have ring-fenced collateral,' says Phil Mackintosh, global head of portfolio strategy and ETF research at Credit Suisse. 'You have to look at notes products case by case.' ... Another critical risk in any ETF is tracking error, the extent to which fund returns differ from those on the benchmark it purports to mimic. Synthetic ETFs have the edge here. A total return swap delivers the exact return on the index, which limits tracking error to fund expenses plus the cost of index replication through swaps, including adjustments to the principal amount as fund assets wax or wane. A physical ETF bears similar costs, although the market impact of trading securities rather than adjusting the swap principal amount is higher, particularly in less liquid securities. A physical ETF may incur tax costs related to the dividends it receives, too. In addition, physical ETFs do not hold every security in the underlying reference index. A broad benchmark may have so many components, including some in countries where foreign ownership restrictions prevent an ETF from owning the correct weighting in each stock that it would be impractical to rebalance the fund whenever assets fluctuate or the index components change. For example, the MSCI World Index, which has about 1,600 components, goes through a major revision every year that sometimes adds or removes as many as 300 names. Physical ETF sponsors use 'optimised sampling', whereby the fund typically owns only the largest and most liquid index components, which cuts trading costs but raises tracking error. The error can be significant. Lyxor’s Klein says the largest physical emerging markets ETF in the US underperformed by more than 6% in 2009 and outperformed by the same amount the following year. 'An ETF cannot hold Indian stocks,' he says. 'It has to use sampling to replicate the index performance. The physical structure can be very inefficient in many instances; emerging markets, for example.' ... US Securities and Exchange Commission (SEC) rules preclude most synthetic ETFs in the United States except for some grandfathered leveraged and inverse products, which are among the most controversial ETFs on the market. They work as advertised on an intraday basis, but rebalance every day and make no claim to track the reference index over longer periods. They are trading chips designed for professional investors—but also available to retail investors who may not understand the risks. Inverse ETFs carry extra credit risk, too. If a counterparty fails, most markets will go down, inflating the defaulted swap value to the ETF—and the risk that collateral may not cover the full replacement cost of the swap..." - ftseglobalmarkets.com
Friday, 09 December 2011 [http://www.ftseglobalmarkets.com/index.php?option=com_k2&view=item&id=2879:can-synthetic-etfs-continue-to-compete?&Itemid=54 ]
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[Quote No.38212] Need Area: Money > Invest
"There can be no other criterion, no other standard than gold. Yes, gold which never changes, which can be shaped into ingots, bars, coins, which has no nationality and which is eternally and universally accepted as the unalterable fiduciary [monetary] value par excellence." - Charles De Gaulle
French general during World War II and later French President.
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[Quote No.38217] Need Area: Money > Invest
"University of California, San Diego, economist James Hamilton noted in a recent study that 10 out of 11 post-World War II recessions in the United States were preceded by a sharp increase in the price of crude petroleum. The only exception was the mild recession of 1960-61 for which there was no preceding rise in oil prices. Hamilton has also written a fascinating short history [PDF] of U.S. and global oil price shocks. Until 1974 the United States was both the world’s biggest consumer and producer of crude oil. Although domestic oil production has recently upticked, the U.S. today produces about half the oil it did in 1971. It still is the biggest consumer. It turns out that boom/bust price shocks have been a feature of oil production ever since Edwin Drake drilled his first well in Pennsylvania in 1859. Before Drake’s well crude oil was being sold for the equivalent of $2,000 per barrel (2009 dollars). After Drake’s discovery, the price of oil collapsed by 1861 to about $2.50 per barrel. In those days, the products of crude oil chiefly competed against ethanol as illuminants. Oil became increasingly important to the U.S. economy as it took over as the chief transport fuel. In 1900, there were 0.1 internal combustion-engine vehicles per 1,000 residents, rising to 87 by 1920, and reaching 816 in 2008. Between 1915 and 1920 oil consumption in the U.S. nearly doubled. A gasoline 'famine' broke out in 1920 on the West Coast, provoking state governments to issue ration cards and prosecute 'joyriders.' The famine preceded the recession that began in January 1920. The giant oil fields in Texas, California, and Oklahoma came online and oil prices fell 40 percent between 1920 and 1926. By 1931, oil prices had fallen an additional 66 percent. To prevent overproduction, states began to set pumping quotas and Depression-era federal legislation prohibited interstate shipments of oil produced in violation of state regulatory limits. These restrictions did prevent waste, but also boosted prices for producers. The price shocks after the World War II were generally associated with geopolitical events that significantly disrupted global production. For example, Iran nationalized oil production in 1951 and during the Korean War the U.S. Office of Price Stabilization froze oil prices. In 1956 war broke out when Egypt nationalized the Suez Canal, disrupting oil imports. The biggest geopolitical event for oil prices was the 1973 OPEC oil embargo, which was imposed to punish countries that had supported Israel after it had been attacked by Egypt and Syria. The price of oil doubled. In 1979, the Iranian Revolution resulted in supply disruptions that were then made even worse by the outbreak of the Iran/Iraq War in 1980. Still, in the 1980s, global oil prices collapsed to $12 per barrel. The next run up in price was associated with Iraq’s invasion of Kuwait and the First Persian Gulf War in 1990. While oil prices slowly rose through most of the 1990s, the U.S. and global economy both continued to expand. The 1997 East Asian Financial Crisis led to another collapse during which oil prices once again fell to $12 per barrel by the end of 1998. 'A price that perhaps never will be seen again,' writes Hamilton. After 2001, Hamilton argues that oil production did not keep up with global economic growth. The result was that the price of oil eventually reached its highest level in modern history, about $142 per barrel in the summer of 2008. Interestingly, the U.S. economy entered what would become the Great Recession in December 2007. By December 2008, the price of oil had dropped to just over $30 per barrel. Hamilton is not arguing that oil price shocks are the sole cause of recessions, but that they tip an already vulnerable economy into contraction. A 2010 study by economists at the St. Louis Federal Reserve Bank agrees: 'For most countries, oil shocks do affect the likelihood of entering a recession. In particular, an average-sized shock to WTI [West Texas Intermediate crude] oil prices increases the probability of recession in the U.S. by nearly 50 percentage points after one year and nearly 90 percentage points after two years.' On the other hand, a 2005 study by the Stanford Energy Modeling Forum found that 'when oil prices move gradually higher (perhaps somewhat erratically), as they have done over the last several years, they do not directly result in economic recessions, even though the economy may grow modestly slower.' Gradual price increases do not derail economic growth because consumers and entrepreneurs are able to adjust smoothly to them. So how do oil shocks cause recessions? Hamilton and many other analysts note that the actual amount spent on oil relative to the overall size of the economy initially suggests that the effect of a price increase should be relatively small. For example, as a result of the 1973 oil embargo, the world spent an extra $5.1 billion ($23 billion in 2009 dollars) on oil. Yet, U.S. real GDP declined by 2.5 percent, which is about $38 billion ($164 billion). One of the key ways oil price hikes negatively affect the U.S. economy is by provoking a decline in demand for new automobiles. Unemployed autoworkers and idled factories can’t be rapidly deployed to other sectors. In addition, uncertainty over oil prices also leads people and firms to postpone purchases of capital and durable goods. While higher oil prices contribute to recessions, lower oil prices do not appear to have much effect on economic expansions. People may postpone buying a new car when gas prices are high, but they don’t rush out to buy one just because pump prices are low. [It could also be argued that increases in oil prices lead to inflation increases including even food prices as oil costs are important to fertilisers and transportation costs. Increased inflation forces central banks to raise short-term interest rates, which flattens or inverts the yield curve, making lending long and borrowing short unprofitable for banks so credit dries up along with the economy.] " - Ronald Bailey
Reason.com, March 8, 2011.
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[Quote No.38229] Need Area: Money > Invest
"Depressions and mass unemployment are not caused by the free market but by government interference in the economy." - Ludwig von Mises
Famous Austrian economist
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[Quote No.38277] Need Area: Money > Invest
" I strongly believe that an economy — all economies — do not move in linear but in cyclical fashion. And so do financial markets. And my goal is to catch most of the up cycles [buys] and most of the down cycles [sell short], because assets are priced based on where we are in the cycle." - Felix Zulauf
He is the owner and president of Zulauf Asset Management, a Zug, Switzerland-based hedge fund, which he founded in 1990. Zulauf Asset Management has $1.7 billion assets under management, according to MacroAxis as of 2011. Zulauf has been a regular member of the Barron's Roundtable for more than 20 years. Zulauf joined Union Bank of Switzerland in 1977, ultimately becoming the head of the institutional portfolio management unit and global strategist for the UBS Group.
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[Quote No.38278] Need Area: Money > Invest
"The word economics is derived from oikonomikos, which means skilled in household management. Although the word is very old, the discipline of economics as we understand it today is a relatively recent development. Modern economic thought emerged in the 17th and 18th centuries as the western world began its transformation from an agrarian to an industrial society. Despite the enormous differences between then and now, the economic problems with which society struggles remain the same: How do we decide what to produce with our limited resources? How do we ensure stable prices and full employment of our resources? How do we provide a rising standard of living both for ourselves and for future generations? Progress in economic thought toward answers to these questions tends to take discrete steps rather than to evolve smoothly over time. A new school of ideas suddenly emerges as changes in the economy yield fresh insights and make existing doctrines obsolete. The new school eventually becomes the consensus view, to be pushed aside by the next wave of new ideas. This process continues today and its motivating force remains the same as that three centuries ago: to understand the economy so that we may use it wisely to achieve society’s goals. --Mercantilists: Mercantilism was the economic philosophy adopted by merchants and statesmen during the 16th and 17th centuries. Mercantilists believed that a nation’s wealth came primarily from the accumulation of gold and silver. Nations without mines could obtain gold and silver only by selling more goods than they bought from abroad. Accordingly, the leaders of those nations intervened extensively in the market, imposing tariffs on foreign goods to restrict import trade, and granting subsidies to improve export prospects for domestic goods. Mercantilism represented the elevation of commercial interests to the level of national policy. --Physiocrats: Physiocrats, a group of 18th century French philosophers, developed the idea of the economy as a circular flow of income and output. They opposed the Mercantilist policy of promoting trade at the expense of agriculture because they believed that agriculture was the sole source of wealth in an economy. As a reaction against the Mercantilists’ copious trade regulations, the Physiocrats advocated a policy of laissez-faire, which called for minimal government interference in the economy. --Classical School: The Classical School of economic theory began with the publication in 1776 of Adam Smith’s monumental work, The Wealth of Nations. The book identified land, labor, and capital as the three factors of production and the major contributors to a nation’s wealth. In Smith’s view, the ideal economy is a self-regulating market system that automatically satisfies the economic needs of the populace. He described the market mechanism as an 'invisible hand' that leads all individuals, in pursuit of their own self-interests, to produce the greatest benefit for society as a whole. Smith incorporated some of the Physiocrats’ ideas, including laissez-faire, into his own economic theories, but rejected the idea that only agriculture was productive. While Adam Smith emphasized the production of income, David Ricardo focused on the distribution of income among landowners, workers, and capitalists. Ricardo saw a conflict between landowners on the one hand and labor and capital on the other. He posited that the growth of population and capital, pressing against a fixed supply of land, pushes up rents and holds down wages and profits. Thomas Robert Malthus used the idea of diminishing returns to explain low living standards. Population, he argued, tended to increase geometrically, outstripping the production of food, which increased arithmetically. The force of a rapidly growing population against a limited amount of land meant diminishing returns to labor. The result, he claimed, was chronically low wages, which prevented the standard of living for most of the population from rising above the subsistence level. Malthus also questioned the automatic tendency of a market economy to produce full employment. He blamed unemployment upon the economy’s tendency to limit its spending by saving too much, a theme that lay forgotten until John Maynard Keynes revived it in the 1930s. Coming at the end of the Classical tradition, John Stuart Mill parted company with the earlier classical economists on the inevitability of the distribution of income produced by the market system. Mill pointed to a distinct difference between the market’s two roles: allocation of resources and distribution of income. The market might be efficient in allocating resources but not in distributing income, he wrote, making it necessary for society to intervene. --Marginalist School: Classical economists theorized that prices are determined by the costs of production. Marginalist economists emphasized that prices also depend upon the level of demand, which in turn depends upon the amount of consumer satisfaction provided by individual goods and services. Marginalists provided modern macroeconomics with the basic analytic tools of demand and supply, consumer utility, and a mathematical framework for using those tools. Marginalists also showed that in a free market economy, the factors of production — land, labor, and capital — receive returns equal to their contributions to production. This principle was sometimes used to justify the existing distribution of income: that people earned exactly what they or their property contributed to production. --Marxist School: The Marxist School challenged the foundations of Classical theory. Writing during the mid-19th century, Karl Marx saw capitalism as an evolutionary phase in economic development. He believed that capitalism would ultimately destroy itself and be succeeded by a world without private property. An advocate of a labor theory of value, Marx believed that all production belongs to labor because workers produce all value within society. He believed that the market system allows capitalists, the owners of machinery and factories, to exploit workers by denying them a fair share of what they produce. Marx predicted that capitalism would produce growing misery for workers as competition for profit led capitalists to adopt labor-saving machinery, creating a 'reserve army of the unemployed' who would eventually rise up and seize the means of production. --Institutionalist School: Institutionalist economists regard individual economic behavior as part of a larger social pattern influenced by current ways of living and modes of thought. They rejected the narrow Classical view that people are primarily motivated by economic self-interest. Opposing the laissez-faire attitude towards government’s role in the economy, the Institutionalists called for government controls and social reform to bring about a more equal distribution of income. --Keynesian School: Reacting to the severity of the worldwide depression, John Maynard Keynes in 1936 broke from the Classical tradition with the publication of the General Theory of Employment, Interest, and Money. The Classical view assumed that in a recession, wages and prices would decline to restore full employment. Keynes held that the opposite was true. Falling prices and wages, by depressing people’s incomes, would prevent a revival of spending. He insisted that direct government intervention was necessary to increase total spending. Keynes’ arguments proved the modern rationale for the use of government spending and taxing to stabilize the economy. Government would spend and decrease taxes when private spending was insufficient and threatened a recession; it would reduce spending and increase taxes when private spending was too great and threatened inflation. His analytic framework, focusing on the factors that determine total spending, remains the core of modern macroeconomic analysis. --Summary: Economic theories are constantly changing. Keynesian theory, with its emphasis on activist government policies to promote high employment, dominated economic policymaking in the early post-war period. But, starting in the late 1960s, troubling inflation and lagging productivity prodded economists to look for new solutions. From this search, new theories emerged: Monetarism updates the Quantity Theory, the basis for macroeconomic analysis before Keynes. It reemphasizes the critical role of monetary growth in determining inflation. Rational Expectations Theory provides a contemporary rationale for the pre-Keynesian tradition of limited government involvement in the economy. It argues that the market’s ability to anticipate government policy actions limits their effectiveness. Supply-side Economics recalls the Classical School’s concern with economic growth as a fundamental prerequisite for improving society’s material well-being. It emphasizes the need for incentives to save and invest if the nation’s economy is to grow. These theories and others will be debated and tested. Some will be accepted, some modified, and others rejected as we search to answer these basic economic questions: How do we decide what to produce with our limited resources? How do we ensure stable prices and full employment of resources? How do we provide a rising standard of living both for now and the future?" - Shayne Heffernan
Shayne Heffernan oversees the management of funds for institutions and high net worth individuals. Shayne Heffernan holds a Ph.D. in Economics and brings with him over 25 years of trading experience in Asia and hands on experience in Venture Capital, he has been involved in several start ups that have seen market capitalization over $500m and one that reached a peak market cap of $15b. He has managed and overseen start ups in Mining, Shipping, Technology and Financial Services.
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[Quote No.38283] Need Area: Money > Invest
"The elementary truth is that the Great Depression was produced by government mismanagement [of money]. It was not produced by the failure of private enterprise [and free market capitalism]." - Milton Friedman
Famous American economist
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[Quote No.38289] Need Area: Money > Invest
"Let us be thankful for the fools. But for them the rest of us could not succeed." - Mark Twain

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[Quote No.38318] Need Area: Money > Invest
"[Governments are always trying to manage markets for capital, commodities, labor, interest rates and even the price of gold, despite their claims to the contrary and their promotion of so-called 'free' markets. As an example...] That day the United States announced that the dollar would be devalued by 10 percent. By switching the yen to a floating exchange rate, the Japanese currency appreciated, and a sufficient realignment in exchange rates was realized. Joint intervention in gold sales to prevent a steep rise in the price of gold, however, was not undertaken. That was a mistake." - Paul Volcker
He was the U.S. Treasury Department's undersecretary for international monetary affairs from 1969 to 1974 and became Fed chairman in 1979 – a post he held until 1987. More recently, Mr. Volcker has been a top economic advisor to President Obama. The quote was excerpted from Mr. Volcker’s memoirs and published in The Nikkei Weekly back on November 15, 2004.
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[Quote No.38320] Need Area: Money > Invest
"While we track a very broad set of data, a crude but useful rule of thumb is that the combination of (a) an upturn in the OECD leading indicators (U.S. and total world), coupled with (b) a turn to positive growth in the ECRI weekly leading index, has generally been a good sign that recession risk is receding." - John P. Hussman, Ph.D.
Manager of Hussman Funds. Quote from February 6, 2012. [http://www.hussman.net/wmc/wmc120206.htm ]
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[Quote No.38331] Need Area: Money > Invest
"...we note that the OECD leading indicator is below a year earlier, a condition that has always led to recession." - Comstock Partners, Inc.
Fund Managers at http://comstockfunds.com/. [http://pragcap.com/why-the-2012-global-economy-will-disappoint-to-the-downside ]
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[Quote No.38390] Need Area: Money > Invest
"The future of capitalism is again a question. Will it survive the ongoing crisis in its current form? If not, will it transform itself or will government take the lead? The term 'capitalism' used to mean an economic system in which capital was privately owned and traded; owners of capital got to judge how best to use it, and could draw on the foresight and creative ideas of entrepreneurs and innovative thinkers. This system of individual freedom and individual responsibility gave little scope for government to influence economic decision-making: success meant profits; failure meant losses. Corporations could exist only as long as free individuals willingly purchased their goods – and would go out of business quickly otherwise. Capitalism became a world-beater in the 1800’s, when it developed capabilities for endemic innovation. Societies that adopted the capitalist system gained unrivaled prosperity, enjoyed widespread job satisfaction, obtained productivity growth that was the marvel of the world and ended mass privation. Now the capitalist system has been corrupted. The managerial state has assumed responsibility for looking after everything from the incomes of the middle class to the profitability of large corporations to industrial advancement. This system, however, is not capitalism, but rather an economic order that harks back to Bismarck in the late nineteenth century and Mussolini in the twentieth: corporatism [sometimes called 'crony capitalism']. In various ways, corporatism chokes off the dynamism that makes for engaging work, faster economic growth, and greater opportunity and inclusiveness. It maintains lethargic, wasteful, unproductive, and well-connected firms at the expense of dynamic newcomers and outsiders, and favors declared goals such as industrialization, economic development, and national greatness over individuals’ economic freedom and responsibility. Today, airlines, auto manufacturers, agricultural companies, media, investment banks, hedge funds, and much more has at some point been deemed too important to weather the free market on its own, receiving a helping hand from government in the name of the 'public good.' The costs of corporatism are visible all around us: dysfunctional corporations that survive despite their gross inability to serve their customers; sclerotic economies with slow output growth, a dearth of engaging work, scant opportunities for young people; governments bankrupted by their efforts to palliate these problems; and increasing concentration of wealth in the hands of those connected enough to be on the right side of the corporatist deal [i.e. the politician-bureaucrat-businessperson partnership at the expense of everyone else]. This shift of power from owners and innovators to state officials is the antithesis of capitalism. Yet this system’s apologists and beneficiaries have the temerity to blame all these failures on 'reckless capitalism' and 'lack of regulation,' which they argue necessitates more oversight and regulation, which in reality means more corporatism and state favoritism. It seems unlikely that so disastrous a system is sustainable. The corporatist model makes no sense to younger generations who grew up using the Internet, the world’s freest market for goods and ideas. The success and failure of firms on the Internet is the best advertisement for the free market: social networking Web sites, for example, rise and fall almost instantaneously, depending on how well they serve their customers. Sites such as Friendster and MySpace sought extra profit by compromising the privacy of their users, and were instantly punished as users deserted them to relatively safer competitors like Facebook and Twitter. There was no need for government regulation to bring about this transition; in fact, had modern corporatist states attempted to do so, today they would be propping up MySpace with taxpayer dollars and campaigning on a promise to 'reform' its privacy features. The Internet, as a largely free marketplace for ideas, has not been kind to corporatism. People who grew up with its decentralization and free competition of ideas must find alien the idea of state support for large firms and industries. Many in the traditional media repeat the old line 'What's good for Firm X is good for America [or whatever country it is],' but it is not likely to be seen trending on Twitter. The legitimacy of corporatism is eroding along with the fiscal health of governments that have relied on it. If politicians cannot repeal corporatism, it will bury itself in debt and default, and a capitalist system could re-emerge from the discredited corporatist rubble. Then 'capitalism' would again carry its true meaning, rather than the one attributed to it by corporatists seeking to hide behind it and socialists wanting to vilify it." - Edmund S. Phelps and Saifedean Ammous
Edmund Phelps is a Nobel laureate - the 2006 Nobel laureate in economics - Professor of Economics at Columbia University and Director of Columbia University’s Center for Capitalism and Society. Saifedean Ammous is Assistant Professor of Economics in the Lebanese American University and Foreign Member at Columbia University’s Center for Capitalism and Society. Published 31st January, 2012 - http://www.project-syndicate.org/commentary/phelps14/English
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[Quote No.38391] Need Area: Money > Invest
"Find the premise which is false and bet against it." - George Soros
Share trader and one of the richest men in the world.
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[Quote No.38392] Need Area: Money > Invest
"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as the final and total catastrophe of the currency involved." - Ludwig von Mises
Famous Austrian economist
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[Quote No.38398] Need Area: Money > Invest
"[When socialist, paternalistic, big government politicians in the US argue that the sub-prime real estate crash of 2006-10, that brought on the worst financial crash since the Great Depression in 2008-9, was the result of a failure of free market capitalism and therefore they require still more bureaucratic power and taxes in order to have even greater regulatory oversight, it is worth reminding them that this problem would never have grown to be the size it was, without the well-meaning but poorly conceived plan and revisions that similar socialist, paternalistic, big government politicians put together, to bolster their political support from the less well-off, since the late 1970's, called the Community Reinvestment Act, that REQUIRED banks to loan to those not considered financially able to manage the repayments safely and in areas of dubious property value. While this Act went a long way to avoid race based descrimination and improve run down areas, many banks took on loans they wouldn't normally in order to meet the CRA criteria so that they could then be allowed to merge, etc and pursue other profitable business opportunities. This eventually led to the banks not wanting to keep the loans on their books and the use of securitisation of these 'poor' loans into financial products they could get off their books by selling to large investors from semi-government organisations, banks and insurance companies around the world, infecting the global economy with 'bad paper'. Here is a little more information about this Act, which while well intentioned, had unintentional bad consequences and perverse incentives built in, that the free market would not have created:] The Community Reinvestment Act (CRA, Pub.L. 95-128, title VIII of the Housing and Community Development Act of 1977, 91 Stat. 1147, 12 U.S.C. § 2901 et seq.) is a United States federal law designed to encourage commercial banks and savings associations to help meet the needs of borrowers in all segments of their communities, including low- and moderate-income neighborhoods. Congress passed the Act in 1977 to reduce discriminatory credit practices against low-income neighborhoods, a practice known as redlining. The Act instructs the appropriate federal financial supervisory agencies to encourage regulated financial institutions to help meet the credit needs of the local communities in which they are chartered, consistent with safe and sound operation (Section 802.) To enforce the statute, federal regulatory agencies examine banking institutions for CRA compliance, and take this information into consideration when approving applications for new bank branches or for mergers or acquisitions (Section 804.)...Legislative changes 1994:- The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, which repealed restrictions on interstate banking, listed the Community Reinvestment Act ratings received by the out-of-state bank as a consideration when determining whether to allow interstate branches. According to [Ben] Bernanke, a surge in bank merger and acquisition activities followed the passing of the act, and advocacy groups increasingly used the public comment process to protest bank applications on Community Reinvestment Act grounds. When applications were highly contested, federal agencies held public hearings to allow public comment on the bank's lending record. In response many institutions established separate business units and subsidiary corporations to facilitate CRA-related lending. Local and regional public-private partnerships and multi-bank loan consortia were formed to expand and manage such CRA-related lending. Regulatory changes 1995:- In July 1993, President Bill Clinton asked regulators to reform the CRA in order to make examinations more consistent, clarify performance standards, and reduce cost and compliance burden. Robert Rubin, the Assistant to the President for Economic Policy, under President Clinton, explained that this was in line with President Clinton's strategy to 'deal with the problems of the inner city and distressed rural communities'. Discussing the reasons for the Clinton administration's proposal to strengthen the CRA and further reduce red-lining, Lloyd Bentsen, Secretary of the Treasury at that time, affirmed his belief that availability of credit should not depend on where a person lives, 'The only thing that ought to matter on a loan application is whether or not you can pay it back, not where you live.' Bentsen said that the proposed changes would 'make it easier for lenders to show how they're complying with the Community Reinvestment Act', and 'cut back a lot of the paperwork and the cost on small business loans'. By early 1995, the proposed CRA regulations were substantially revised to address criticisms that the regulations, and the agencies' implementation of them through the examination process to date, were too process-oriented, burdensome, and not sufficiently focused on actual results. The CRA examination process itself was reformed to incorporate the pending changes. Information about banking institutions' CRA ratings was made available via web page for public review as well. The Office of the Comptroller of the Currency (OCC) also moved to revise its regulation structure allowing lenders subject to the CRA to claim community development loan credits for loans made to help finance the environmental cleanup or redevelopment of industrial sites when it was part of an effort to revitalize the low- and moderate-income community where the site was located. During one of the Congressional hearings addressing the proposed changes in 1995, William A. Niskanen, chair of the Cato Institute, criticized both the 1993 and 1994 sets of proposals for political favoritism in allocating credit, for micromanagement by regulators and for the lack of assurances that banks would not be expected to operate at a loss to achieve CRA compliance. He predicted the proposed changes would be very costly to the economy and the banking system in general. Niskanen believed that the primary long term effect would be an artificial contraction of the banking system. Niskanen recommended Congress repeal the Act. Niskanen's, and other respondents to the proposed changes, voiced their concerns during the public comment & testimony periods in late 1993 through early 1995. In response to the aggregate concerns recorded by then, the Federal financial supervisory agencies (the OCC, FRB, FDIC, and OTS) made further clarifications relating to definition, assessment, ratings and scope; sufficiently resolving many of the issues raised in the process. The agencies jointly reported their final amended regulations for implementing the Community Reinvestment Act in the Federal Register on May 4, 1995. The final amended regulations replaced the existing CRA regulations in their entirety. Legislative changes 1999:- In 1999 the Congress enacted and President Clinton signed into law the Gramm-Leach-Bliley Act, also known as the Financial Services Modernization Act. This law repealed the part of the Glass–Steagall Act that had prohibited a bank from offering a full range of investment, commercial banking, and insurance services since its enactment in 1933. A similar bill was introduced in 1998 by Senator Phil Gramm but it was unable to complete the legislative process into law. Resistance to enacting the 1998 bill, as well as the subsequent 1999 bill, centered around the legislation's language which would expand the types of banking institutions of the time into other areas of service but would not be subject to CRA compliance in order to do so. The Senator also demanded full disclosure of any financial 'deals' which community groups had with banks, accusing such groups of 'extortion'. In the fall of 1999, Senators Christopher Dodd and Charles E. Schumer prevented another impasse by securing a compromise between Sen. Gramm and the Clinton Administration by agreeing to amend the Federal Deposit Insurance Act (12 U.S.C. ch.16) to allow banks to merge or expand into other types of financial institutions. The new Gramm-Leach-Bliley Act's FDIC related provisions, along with the addition of sub-section § 2903(c) directly to Title 12, insured any bank holding institution wishing to be re-designated as a financial holding institution by the Board of Governors of the Federal Reserve System would also have to follow Community Reinvestment Act compliance guidelines before any merger or expansion could take effect. At the same time the G-L-B Act's changes to the Federal Deposit Insurance Act would now allow for bank expansions into new lines of business, non-affiliated groups entering into agreements with these bank or financial institutions would also have to be reported as outlined under the newly added section to Title 12, § 1831y. (CRA Sunshine Requirements), satisfying Sen. Gramm's concerns. In conjunction with the above Gramm-Leach-Bliley Act changes, smaller banks would be reviewed less frequently for CRA compliance by the addition of §2908. (Small Bank Regulatory Relief) directly to Chapter 30, (the existing CRA laws), itself. The 1999 Act also mandated two studies to be conducted in connection with the 'Community Reinvestment Act': the first report by the Federal Reserve, to be delivered to Congress by March 15, 2000, is a comprehensive study of CRA to focus on default and delinquency rates, and the profitability of loans made in connection with CRA; the second report to be conducted by the Treasury Department over the next two years, is intended to determine the impact of the Act on the provision of services to low- and moderate-income neighborhoods and people, as intended by CRA. On signing the Gramm-Leach-Bliley Act, President Clinton said that it, 'establishes the principles that, as we expand the powers of banks, we will expand the reach of the [Community Reinvestment] Act'. " - Wikipedia.com
http://en.wikipedia.org/wiki/Community_Reinvestment_Act
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[Quote No.38399] Need Area: Money > Invest
"[Governments, particularly but not exclusively socialist governments, that use fiat currency - that is currency not backed by something real, precious and limited like gold or silver and therefore not limiting government spending to the country's real wealth but making it easy for them to print money to inflate away and pay off government debts and create 'financial repression' which is where governments print till they raise inflation and the cost of living beyond bank interest rates - are particularly against seeing precious metals rise in price and people therefore buying and using that in transactions instead of their 'paper' currency and thereby escaping the deliberate government inflation. The following article describes this phenomena:] Vietnam battles gold fever as price soars - Stashing gold at home, rather than having cash in the bank, is a generations-old habit in communist Vietnam, but a recent surge in prices has sparked government attempts to bring the yellow metal to heel. Last year, the country bought more gold per capita than India or China, according to the World Gold Council, and domestic prices soared by 18 per cent - far outstripping the global market's 11 per cent increase. And old habits are dying hard, according to 60-year-old retiree Truong Van Hue, even if an ounce of gold bullion can now cost up to $US100 ($A93.91) more in Hanoi than anywhere else in the world. 'I still like to keep my savings in gold. It's safe for retired people like me. I can sell the gold any time, anywhere, when I need cash,' he told AFP. Although the treasure has long been perceived as a safe haven, the recent gold rush has alarmed Vietnam's government, which is faced with an 18 per cent inflation rate and an unstable national currency, the dong. Officials are trying to dampen gold fever by bringing the trade back into their hands, almost two decades after they formally legalised the already-common practice of private gold ownership and trading. An alchemy of financial measures initiated last summer include a decree that placed the gold bullion business of Saigon Jewelry Company, a dominant processor and trader, under the control of the central bank. Limiting widespread street-level trading of gold will, the official line goes, reduce price volatility and prevent retail investors from pouring into the precious metal, which undermines the already-shaky dong. To this end, officials are also considering a second measure which could force more than 10,000 jewellery shops to get out of the bullion business and focus strictly on jewellery instead. 'They want to control the gold,' said a manager at Phu Quy Jewelry Company, whose digital signs feature the bid and ask prices for local 'taels' - 37.5 grams of gold bullion. 'I really can't say if it's a good or bad idea. But here in Vietnam, we need (economic) stability,' he said, on condition of anonymity. For practical reasons, many Vietnamese prefer to keep their savings in gold, saying the 14 per cent maximum interest rates offered by banks for dong deposits fall well short of last year's 18.6 per cent cost-of-living rise. Recent slumps in the real estate and stock markets have further heightened the gold rush, economists say, as have signals from the central bank that the dong could be due for another devaluation later this year. 'People have tried to control the damage by fleeing into gold,' said Le Dang Doanh, a former senior government economist. Vietnam's love of the yellow metal is centuries-old, rooted in a history of strife, warfare and want. 'Empires may fall, currencies may change ... gold will always survive,' said sociologist Vu Duc Vuong. Restricting the gold trade dovetails with an ongoing national campaign to encourage Vietnamese to bank their gold, reversing the practice of keeping it at home. Details of the plan are not yet public, but bankers say the government is considering ways to lure savers by offering better returns and security. The government estimates that between 300 and 500 tons of gold are privately held by Vietnamese citizens outside of the banking system, the central bank governor said last month. Placing this private gold in banks, officials explain, would provide authorities with more leverage to stabilise the economy. 'If the profit is a little higher and the banks prove their credibility, I expect 80 per cent of the public will deposit their gold,' Nguyen Thanh Truc, CEO of the Agribank Jewelry Company said. The moves to rein in the gold trade come after a dramatic improvement of living standards since Vietnam started a shift to 'market-oriented socialism'. Two decades of economic growth lifted the country to middle income status in early 2011, as measured by the World Bank. But progress is threatened by macro-economic issues including persistently high inflation, and corruption. A return to single-digit inflation would restore public confidence and cool gold fever, the economist Doanh said, adding that any policy has to address the Vietnamese reliance on gold as a form of security. 'If the policy acts against the interest of the people, they (will) move into informal trading which could hardly be controlled,' he said, adding that already an estimated 20 to 60 tons of gold is smuggled into Vietnam each year. People on Hanoi's Ha Trung Street, a hub of the busy gold trade, are sceptical of the government's efforts. 'They will make it a bit harder, but I believe there will always be ways to trade the bars,' said Tran Hoang Long, a 40-year-old gold trader. " - BusinessSpectator.com
16th February, 2012. [http://www.businessspectator.com.au/bs.nsf/Article/Vietnam-battles-gold-fever-as-price-soars-RHUGE?opendocument&src=rss ]
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[Quote No.38400] Need Area: Money > Invest
"The opening up of new markets, foreign or domestic, and the organizational development from the craft shop and factory to such concerns as U.S. Steel illustrate the same process of industrial mutation - if I may use that biological term - that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in..." - Joseph Schumpeter
Famous ecocomist. Quote from his book, 'Capitalism, Socialism and Democracy'.
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[Quote No.38488] Need Area: Money > Invest
"[In this quote site there are a number of quotes about value investing from the investing genius of one of the world's richest men, Warren Buffet. He is clearly knowledgeable and witty on that subject. Here is an article though that discusses other questionable behaviour, namely alleged 'crony capitalism', that in an ideal world would be illegal, because it weakens the foundations of individual freedom and the equality of information and opportunity that is essential to free market capitalism, which so far is the best method developed for incentivising the fulfillment of personal potential in voluntary service to others. Free market capitalism works but only so long as crony capitalism and private lobbying is excluded and transparent information released to all at the same time is maintained by law. If any government or business allows it then it will always be a legitimate criticism of that government or business. The excuse that others do it and get away with it is immaterial as there are only cosmetic differences between it and trading with inside information which is justifiably against the law.] 'Warren Buffett: Baptist and Bootlegger' - How America’s favorite billionaire plays politics to make money. In 19th-century America, there was a concerted effort to ban alcohol sales on Sunday. ‘Blue laws,’ intended to protect the sanctity and sobriety of the Sabbath, were pushed by what seemed like an odd alliance: Baptists and bootleggers. Baptists backed the ban publicly on moral and religious grounds, while the bootleggers lobbied for the ban privately to boost their own bottom lines. Blocking legal alcohol purchases for even one day each week meant more opportunities for their illegal sales. Bans were enacted state by state, and many blue laws still exist (in Arkansas, Indiana, Minnesota, and Mississippi, for example), although restrictions have been steadily disappearing in recent years. Economist Bruce Yandle immortalized the phrase ‘Bootleggers and Baptists’ in a 1983 Regulation magazine article of the same name, making the point that ostensibly opposing sides will happily collude when it serves their mutual interests. The old paradox continues in modern-day Washington. Politicians enrich their friends and allies—and sometimes themselves—by coming off as earnest ‘Baptists’ for a worthy cause. Lobbyists for big corporate interests, by contrast, are widely considered bootleggers, no matter how nobly they cloak their arguments. This arrangement has created an opening for a third way: What if a capitalist could somehow manage to sound like a Baptist? Consider Warren Buffett. Often seen as a grandfatherly figure above the rough-and-tumble of politics, Buffett appears to be immune to the folly and excess of finance as well. He lives in Omaha, Nebraska, in a house he purchased in 1958 for $31,000. He made a fortune for himself and his investors at the business conglomerate Berkshire Hathaway through the humble-sounding approach of value-based investing. He uses folksy expressions: ‘You don’t know who’s swimming naked,’ he said during the height of the financial crisis, ‘until the tide goes out.’ He frequently takes to the nation’s op-ed pages with populist-sounding arguments, such as his August 2010 plea in The New York Times for the government to stop ‘coddling’ the ‘super-rich’ and start raising their taxes. Buffett the Bootlegger - But this image does not always reflect reality. Warren Buffett is very much a political entrepreneur; his best investments are often in political relationships. In recent years, Buffett has used taxpayer money as a vehicle to even greater profit and wealth. Indeed, the success of some of his biggest bets and the profitability of some of his largest investments rely on government largesse and ‘coddling’ with taxpayer money. During the financial crisis in the fall of 2008, Buffett became an important symbol on television. He filled the role of fiscal adult, a responsible father figure in the midst of irresponsible Wall Street speculators. While pushing for calm and advocating specific market interventions in both public and private, however, he was also investing (sometimes quietly) so he could profit once his policy advice was implemented. This put Buffett in the position of being both Baptist and bootlegger, praised for his moral character while shaking his finger all the way to the bank. In the summer of 2008, when several investment houses and the government-sponsored mortgage companies Fannie Mae and Freddie Mac teetered on the brink of financial collapse, Buffett was ‘uncharacteristically quiet,’ as the London Guardian observed. It was only on September 23 that he became a highly visible player in the drama, investing $5 billion in Goldman Sachs, which was overleveraged and short on cash. Buffett’s play gave the investment bank a much-needed cash infusion, making a heck of a deal for himself in return: Berkshire Hathaway received preferred stock with a 10 percent dividend yield and an attractive option to buy another $5 billion in stock at $115 a share. Wall Street was on fire, and Buffett was running toward the flames. But he was doing so with the expectation that the fire department (that is, the federal government) was right behind him with buckets of bailout money. As he admitted on CNBC at the time, ‘If I didn’t think the government was going to act, I wouldn’t be doing anything this week.’ Buffett needed the bailout. In addition to Goldman Sachs, which was not as badly leveraged as some of its competitors, Buffett was heavily invested in several other banks, such as Wells Fargo and U.S. Bancorp, that were also at risk and in need of federal cash. So it’s no surprise that Buffett began campaigning for the $700 billion Trouble Asset Relief Program (TARP) that was being hammered out in Washington. The first vote on the bill failed in the House of Representatives on September 29. But Buffett was in a unique position to help reverse its fate. During the 2008 presidential campaign Buffett was mentioned as a candidate for Treasury secretary by both John McCain and Barack Obama. But it was clear where his loyalties lay: He had been a financial supporter of Barack Obama going back to 2004, when Obama ran for the U.S. Senate. Each had been impressed when they met, and Buffett said at a 2007 fundraiser in Nebraska that the two ‘had a lot of time to talk.’ During his 2008 presidential campaign, Obama made it clear that while he received plenty of advice on the campaign trail, ‘Warren Buffett is one of those people that I listen to.’ Obama added that the Oracle of Omaha was one of his ‘economic advisers.’ Several senators and congressmen were shareholders in Berkshire Hathaway and therefore in a position to earn big returns by passing the bailout bill. Sen. Ben Nelson (D-Neb.), for example, held between $1 million and $6 million in Berkshire stock, by far the largest asset in his portfolio. Initially resistant to the bailout bill, Nelson ended up voting in favor of it. Buffett’s support was hardly the deciding factor in passing the bill. But his Baptist-bootlegger position was strong in both directions: Many people heeded his advice, then he (and they) made a lot of money after the bailout. Throughout the financial crisis and the debate over the stimulus in early 2009, several members of Congress were buying and trading Berkshire stock. Sen. Dick Durbin (D-Ill.) bought Berkshire shares four times over a three-week period in September and October 2008, up to $130,000 worth. He bought shares during the debate over the bailout, during the vote, and after the vote. Sen. Orrin Hatch (R-Utah) bought the stock, as did Sen. Claire McCaskill (D-Mo.), who bought up to $500,000 worth just days after the bailout bill was signed. Some legislators also followed Buffett’s example by buying shares in Goldman Sachs after the bailout. Among them were Rep. John Boehner (R-Ohio), Sen. Jeff Bingaman (D-N.M.), and Rep. Vern Buchanan (R-Fla.). Early in the financial crisis, Obama, then a senator and his party’s presidential nominee, had been cautious and lukewarm about a possible bailout. But in the days following Buffett’s multibillion-dollar play for Goldman Sachs, and with fears of economic collapse mounting, Obama became a powerful champion of the government rescue. As the top Democrat in the country, he had an important vote. The New York Times reported that Obama ‘intensified’ his efforts to ‘rally support for the $700 billion financial bailout package’ after September 28, 2008. The plan was necessary, said Obama, ‘to safeguard the economy.’ Publicly, Buffett struck a posture of cheering on the bailout from the sidelines. ‘I’m not brave enough to try to influence the Congress,’ he told The New York Times in a September 24 article. But Buffett’s actions directly contradicted his words. Days later, he participated in a conference call with House Speaker Nancy Pelosi (D-Calif.) and other House Democrats during which he pushed them to pass the bill, warning that otherwise the country faces ‘the biggest financial meltdown in American history.’ The stakes were high for Buffett as well. If the bailout went through, it would be a windfall for Goldman. If it failed, it would be disastrous for Berkshire Hathaway. The first vote failed, as Congress faced enormous heat from voters angry about the prospect of aiding Wall Street. On the eve of the second TARP vote in the House, Buffett moved toward the fire again, buying a $3 billion stake in corporate giant General Electric (GE). As with Goldman, he was able to negotiate advantageous terms, receiving a 10 percent dividend on his shares. He also purchased the option to buy $3 billion in stock at discounted terms. GE was in even worse financial shape than Goldman, thanks to its financial arm, GE Capital. Eventually it would receive $140 billion in taxpayer capital to stay afloat. Buffett, a genius at public relations, said he had ‘confidence in Congress to do the right thing.’ He appeared to be the private-sector savior of Goldman Sachs and GE, while giving members of Congress much-needed cover to bail out what had recently been among Wall Street’s most favored firms. Crony Capitalism Pays - With the passage of the Emergency Economic Stabilization Act, the Treasury Department was authorized to loan financial institutions a total of $700 billion, which gave it unprecedented authority to pick winners and losers. Access to TARP money was not guaranteed, and the terms of the loans were unclear. The process was opaque. As American Prospect Editor Robert Kuttner put it, the TARP proceedings were conducted ‘largely behind closed doors, and the design is by, for and in the interest of large banks, hedge funds, and private equity companies. Because there are no explicit criteria, it’s very hard to know’ if anyone got special treatment. The entire process, he said, ‘reeks of favoritism and special treatment.’ Having the correct political connections was critical. A National Bureau of Economic Research study by four researchers at the Massachusetts Institute of Technology, documented the power of such connections. Economist Daron Acemoglu and his colleagues found that when Timothy Geithner, a man who had spent his career shuttling back and forth between Wall Street and Washington, was announced as President Obama’s nominee for treasury secretary, it ‘produced a cumulative abnormal return for Geithner-connected financial firms of around 15 percent from day 0.’ The stock market reflects the thinking of all investors, and they clearly believed Geithner would be able to reward his friends directly or indirectly. Conversely, when there was word that Geithner’s nomination might be derailed by tax issues, those same firms were hit hard with ‘abnormal negative returns.’ Acemoglu et al. systematically examined companies that had corporate ties to Geithner, had executives who served with him on other boards, or had other direct relationships. They found that ‘the quantitative effect is comparable to standard findings’ in Third World countries with weak institutions and higher levels of corruption. In other words, markets react to government actions in the U.S. the same way they do in a corrupt developing country. Crony capitalism pays, and the market knows it. Buffett, of course, was not the only one with connections in Washington. Goldman Sachs had a direct line to Bush administration Treasury Secretary Henry Paulson, its former managing partner, as well as incoming officials in the Obama administration. But Buffett was far better liked by the American public than were the executives at Goldman Sachs. He was therefore a much more effective advocate for bailout funds than Paulson could ever be. An April 2011 working paper by researchers at the University of Michigan School of Business found that ‘firms with political connections’ were much more likely to get TARP funds than firms that were not well connected. The study looked at how much money companies contributed to election campaigns through PAC contributions and donations by executives as well as how much companies spent on lobbyists. Finance professors Ran Duchin and Denis Sosyura found that politically connected firms, despite the infusion of federal funds, were outperformed by unconnected firms. In other words, poorly run but well-connected companies got the loot. The fact that politically connected banks got good deals from the Treasury was not lost on the banking industry. Robert Wilmers, the chairman and CEO of M&T Bank, told shareholders in April 2009, ‘The pattern is clear: The bailout money and the perks are concentrated among the big banks, the ones who pay the lobbyists and make the campaign contributions, while the healthy banks pay the freight.’ Buffett needed the TARP bailout more than most. In all, Berkshire Hathaway firms received $95 billion in TARP money. Berkshire held stock in Wells Fargo, Bank of America, American Express, and Goldman Sachs, which received not only TARP money but also Federal Deposit Insurance Corporation (FDIC) backing for their debt, worth a total of $130 billion. All told, TARP-assisted companies constituted a whopping 30 percent of Buffett’s publicly disclosed stock portfolio. The folksy outsider with his home-spun investment wisdom, the Houston Chronicle concluded in an April 2009 investigative piece, was ‘one of the top beneficiaries of the banking bailout.’ Buffett received better terms for his Goldman investment than the government got for its bailout. His dividend was set at 10 percent, while the government’s was 5 percent. Had the bailout not gone through, and had Goldman not been given such generous terms under TARP, things would have been very different for Buffett. As it stood, the arrangement with Goldman Sachs earned Berkshire about $500 million a year in dividends. ‘We love the investment!’ he exclaimed to Berkshire investors. The General Electric deal also was profitable. As Reuters business columnist Rolfe Winkler noted on his blog in August 2009: ‘Were it not for government bailouts, for which Buffett lobbied hard, many of his company’s stock holdings would have been wiped out.’ By April 2009, Goldman share prices had more than doubled. By July 2009, Buffett had already received a return of $2.5 billion from his investment. Later, astonishingly, Buffett would publicly complain about the bailouts in his 2008 letter to Berkshire investors, claiming that government subsidies put Berkshire at a disadvantage. As he put it, funders ‘who are using imaginative methods (or lobbying skills) to come under the government’s umbrella have money costs that are minimal,’ whereas ‘highly-rated companies, such as Berkshire, are experiencing borrowing costs that…are at record levels.’ Berkshire, of course, is simply a holding company representing a long list of investment assets—including investments in eight banks that were helped by the FDIC’s Temporary Liquidity Guarantee Program. As Winkler put it, ‘It takes chutzpah to lobby for bailouts, make trades seeking to profit from them, and then complain that those doing so put you at a disadvantage.’ Unseemly but Legal - One financial observer, Graham Summers of Phoenix Capital Research, claimed on the finance blog site Seeking Alpha in October 2008 that Buffett’s conduct during the financial crisis involved a ‘a serious conflict of interest…seriously bordering on insider trading.’ But what Buffett did was entirely legal. It may have been an exercise in crony capitalism and manipulation, but he broke no law. He simply used his political connections to secure huge profits with taxpayer money. There are two main questions to ask about Buffett’s behavior. First, why do so many people continue to heed his policy advice without considering his enormous self-interest? Second, and more important, how did our politics get so warped by deep-pocketed, heavily invested advisers? After the bailout bill passed, Warren Buffett sat down and wrote Treasury Secretary Paulson a four-page letter proposing a larger solution to the financial crisis: a quasi-private fund backed by the U.S. government that would buy bad loans and other rapidly sinking investments. He proposed that for every $10 billion put up by the private sector, the federal government would kick in $40 billion. As Paulson put it in his memoir, ‘I knew, of course, that as an investor in financial institutions, including Wells Fargo and Goldman Sachs, Warren had a vested interest in the idea.’ The bootlegger’s interest does not necessarily mean the Baptist’s ideas are wrong. The Treasury Department considered Buffett’s proposal, but with Paulson leaving at the end of President George W. Bush’s term, it would fall to the incoming secretary, Tim Geithner, to act on it. Geithner tweaked the plan and announced the Public-Private Investment Program in March 2009. It was largely seen as a boon to banks, especially large banks with a lot of bad debt. What did Buffett do in the six months between writing the letter and watching the adapted policy get approved? He bought more bank stock. According to Berkshire’s quarterly reports, Buffett’s firm bought 12.4 million shares of Wells Fargo during this period and another 1.5 million shares in U.S. Bancorp. When Geithner announced the Public-Private Investment Program, bank stocks rallied and Buffett’s holdings did very well. We don’t know the exact price that Buffett paid for these millions of shares because he is not legally required to list the dates he bought them. But we do know those bank stocks all jumped after Geithner unveiled his program. Wells Fargo, which was trading around $20 per share early in 2009, jumped to $30 a share in the weeks following Geithner’s announcement. U.S. Bancorp did even better: It had hit a low of $8 a share in February 2009 but vaulted to more than $20 a share by May. And of course Buffett already owned tens of millions of shares in a host of financial companies, such as American Express and M&T Bank, which also benefited. Buffett did very well with Goldman Sachs and GE too after they received their bailout money. His net gain from General Electric as of April 2011 was $1.2 billion. His profits from the Goldman deal by then had exceeded the gains of July 2009, reaching as high as $3.7 billion. He had bet on his ability to help secure the bailout, and the bet paid off. In the fall of 2010, Buffet wrote a ‘Thank You, Uncle Sam’ op-ed piece in The New York Times, praising the role that the government played in stabilizing markets throughout the crisis. There was no disclaimer or disclosure of how much he personally gained from TARP or the Public-Private Investment Program. He simply endorsed both as good public policy. At the bottom of the article he was identified this way: ‘Warren E. Buffett is the chief executive of Berkshire Hathaway, a diversified holding company.’ With tongue in cheek, journalist Ira Stoll, the former managing editor of the New York Sun (and current columnist for reason.com), suggested the bio might have been more accurate with a bit of rewriting: ‘Warren Buffett, the largest crony capitalist in the world, shareholder of GE, Goldman Sachs, Wells Fargo, U.S. Bancorp, M&T Bank, and American Express, as well as competitor of private equity and hedge fund firms that have been threatened with new taxes and regulations, and behind the scenes, insider adviser to most of the government officials mentioned above.’ Again, to be clear, even though Buffett was the one who proposed the public-private partnership, there is absolutely nothing illegal about lobbying for a policy while investing in the companies that stand to gain most if that policy is adopted. But consider this: Had Buffett instead pushed a private investment house to make an acquisition that would benefit certain stocks while quietly buying shares in those same stocks, he would have been vulnerable to charges of insider trading. Indeed, this is what his lieutenant David Sokol was accused of doing in 2010, landing him in legal hot water. Sokol, who resigned amidst insider trading accusations, apparently bought shares in Lubrizol, a chemical company, and then encouraged his employer, Berkshire Hathaway, to buy a large stake in the company, thereby driving up the price of the stock. All Buffett did differently was use the federal government instead of a private company to boost the fortunes of certain stocks. This is why crony capitalism is so perennially attractive to financiers: It’s legal, and it’s often more remunerative than the illegal private-sector version might be. Because government officials are dealing with other people’s money, they are less likely than a private firm to drive a hard bargain. Buffett has long believed that corporate-government partnerships provide excellent investment opportunities. While he’s famous for owning Dairy Queen and other all-American private companies, two of his largest holdings are in railroads and regulated utilities. He regularly lobbies on their behalf and counts on significant public money to make them more profitable. After the 2008 financial crisis appeared to be easing, Buffett turned his attention to championing the Obama administration’s stimulus program. When he went on television to hawk the stimulus, he was never asked what he might personally be getting out of the deal. A candid answer would have taken up many valuable minutes of airtime. Railroad Job - In late 2009, Buffett made his largest investment ever when he decided to buy Burlington Northern Santa Fe Railway (BNSF). It was not just an endorsement of the railroad industry’s financials; it was also a huge bet on the budget priorities of his friend Barack Obama. As The Wall Street Journal reported, ‘Berkshire Hathaway Inc.’s planned purchase of Burlington Northern Santa Fe Corp. represents a bet that upcoming Washington policies to improve infrastructure and combat climate change will be a boon to the freight-railroad industry. President Barack Obama has said railroad investment will be a cornerstone of his transportation policies, given the environmental benefits and improved mobility that come with taking cars and trucks off roads.’ Others in the railroad industry saw Buffett’s involvement as very helpful, precisely because he was so politically connected. ‘It’s a positive for the rail industry because of Buffett’s influence in Washington,’ Henry Lampe, president of the short-haul railroad Chicago South Shore & South Bend, told the Journal. Buffett bought BNSF just as the Obama administration was beginning a series of initiatives to rapidly expand the government’s spending on railroads. After Buffett took over the railroad company, he dramatically increased spending on lobbyists. Berkshire spent $1.2 million on lobbyists in 2008, but by 2009 its budget had jumped to $9.8 million, where it more or less remained. Pouring money into lobbying is perhaps the best investment that Buffett could make. Obama’s plans to invest heavily in railroads, including a commitment to high-speed rail, put BNSF in a position to benefit handsomely. BNSF already has talked to Seattle officials about leasing or selling its rail lines for an intercity project, and that’s just a start. A map of BNSF lines around the country overlaps nicely with the government’s proposed high-speed rail lines, from Seattle to Florida, California to the Northeast. Buffett is geographically and strategically positioned to profit from those government-funded rail systems, should they be built. The 2009 stimulus package includes $48 billion (of the total $787 billion) for infrastructure improvement, a chunk of which is headed for railroads. How much will BNSF benefit? It’s hard to calculate. Type ‘BNSF’ on the Recovery.gov website, which tracks grants, subsidized loans, and contracts signed under the stimulus, and you find 1,800 entries, including everything from a $36 million grant from the Department of Homeland Security to money from the Environmental Protection Agency. Buffett also owns MidAmerican Energy Holdings, which received $93.4 million in stimulus money. General Electric, in which he owns a $5 billion stake, was one of the largest recipients of stimulus money in the country. Buffett famously puts his folksy investment ideas in an annual letter to Berkshire investors. He rarely mentions the bootlegger stuff involving lobbyists, government funds, bailouts, and stimulus grants, preferring the Baptist language of social good. ‘We see a ‘social compact’ existing between the public and our railroad business, just as it is the case with our utilities,’ he said in his 2010 letter to shareholders. ‘If either side shirks its obligations, both sides will inevitably suffer. Therefore, both parties to the compact should—and we believe will—understand the benefit of behaving in a way that encourages good behavior by the other. It is inconceivable that our country will realize anything close to its full economic potential without it possessing first-class electricity and railroad systems.’ He added that both businesses ‘require wise regulators who will provide certainty about allowable returns so that we can confidently make the huge investments required to maintain, replace, and expand the plant.’ The term social compact sounds benign. But when did American voters agree to turn one of the richest men in America into one of the biggest recipients of taxpayer subsidies? In August 2011, Buffett vacationed with President Obama on Martha’s Vineyard, and they discussed the economy. Shortly after that, he agreed to host an Obama re-election fundraiser in New York City where contributors could buy $35,800 VIP tickets to meet Buffett and talk about the economy. As fellow investor Steven Rattner pointed out in his 2010 book Overhaul: An Insider’s Account of the Obama Administration’s Emergency Rescue of the Auto Industry, ‘Warren Buffett has shown that superb investing need not entail the months of due diligence and deliberation that private equity firms typically apply to a deal. Buffett has been known to make successful multibillion-dollar bets on the basis of a few meetings or phone calls.’ That is particularly true if he calls Washington. Warren Buffett is a financial genius. But even better for his portfolio, though worse for the rest of us, he is a political genius." - Peter Schweizer
Peter Schweizer is a research fellow at the Hoover Institution. The article is adapted from his book 'Throw Them All Out', which looks at crony capitalism in government and business, by permission of Houghton Mifflin Harcourt Publishing Company. Reprinted from the March 2012 issue of Reason magazine. [http://reason.com/archives/2012/02/09/warren-buffett-baptist-and-bootlegger ]
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[Quote No.38489] Need Area: Money > Invest
"[Friedrich August von Hayek was of the opposite opinion to Keynes in regard to big government intervention in the business cycle, suggesting that stimulating private debt during booms and public debt in busts was counter-productive and likely to ultimately produce debt deflation depressions and then sovereign debt collapses and hyper-inflations if debt levels were not allowed to return to and then maintained at sustainable levels. When the Royal Swedish Academy of Sciences awarded von Hayek the 1974 Nobel Memorial Prize in Economic Sciences, it described his contributions this way:] His theory of business cycles and his conception of the effects of monetary and credit policies attracted attention and evoked animated discussion. He tried to penetrate more deeply into the business cycle mechanism than was usual at that time. Perhaps, partly due to this more profound analysis, he was one of the few economists who gave warning of the possibility of a major economic crisis before the great crash came in the autumn of 1929. Von Hayek showed how monetary expansion, accompanied by lending which exceeded the rate of voluntary saving, could lead to a misallocation of resources, particularly affecting the structure of capital." - Royal Swedish Academy of Sciences [Nobel Prize Committee]

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[Quote No.38511] Need Area: Money > Invest
"I sincerely believe that banking establishments are more dangerous than standing armies." - Thomas Jefferson
Quote from 1816.
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[Quote No.38512] Need Area: Money > Invest
"It is well that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning." - Henry Ford
Automaker. Quote from the early 1900’s.
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[Quote No.38517] Need Area: Money > Invest
"[Investing is about managing risk while seeking reward. In that context it is helpful to remember] ...there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns -- the ones we don't know we don't know." - Donald Rumsfeld

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[Quote No.38518] Need Area: Money > Invest
"Did you ever think that making a speech on economics is a lot like pissing down your leg? It seems hot to you, but it never does to anyone else." - Lyndon B. Johnson
(1908 - 1973), 36th US President (1963-69).
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[Quote No.38529] Need Area: Money > Invest
"[Stressed out from trying to understand a complex sharemarket, government intervention, company reports and Generally Accepted Accounting Principles, or continally opposing analyst and advisor views? You can forget all these as other individual investors have and just develop the best price following technical chart method you can from some respected practioner's books and accept the costs of trading more frequently, the annual capital gains and losses and the inevitable mistakes and drawdowns. Not everyone can be value investors because of time, interest or personality constraints. So just focus on price movement and] Forget Opinions - The Trend Is All that Matters... the bottom line is that I don't know and nor does anybody else. Anything could happen. Some kind of natural disaster could erupt, a war could break out, some insane new law or policy could be introduced - any of these could happen this afternoon... Trends can take a while to form, but when they do they are powerful things and the secret is to stay on, no matter whether it fits with your perception of the economy or not. My opinion does not matter at all. And nor does yours. What matters is the trend. This is a stock market trend [in 2012] that has ignored the Greek crisis, escalating tensions in Iran, the impending bust of China's property market, rising unemployment back home, the threat of a UK debt downgrade, excess debt worldwide and the inevitable end of our current monetary system. Heck, even Japan's Nikkei looks strong. This is a bull market that has ridden the proverbial wall of worry. Maybe the global economy isn't so bad after all. Maybe it's a consequence of quantitative easing. Maybe it's because there's a whiff of spring in the air and the winter hasn't been quite so cold after all. Maybe it's the alignment of the stars. I don't know why. I can pretend to. I can go on the BBC and pretend to be a jolly clever economist and demand hundreds of thousands per year in consultancy fees and then declare that the market is irrational or blame Bernanke-and-King-created inflation when it doesn't do what I want it to. But the reality is I just don't know why markets move as they do. The reasons get attached afterwards... So if the trend is ultimately what matters, how can you identify one when it forms? [Moving averages of varying time periods are useful in a trending market but]... This is not a fail-safe method. There is no such thing. And you tend to get caught out in a market that's trading in a range, such as in early 2010 [when other range bound rather than trending market techniques like stochastic oscillators can help]. This can be annoying. But it does make sure you catch the broader trends. And believe you me, being sat on the sidelines during a big move up, or being stuck in the market during a big move down ...are both far more painful. With this method, you caught the big move of 2009, and of 2010-2011 - and you sat out the big falls of 2008 and 2011. You couldn't ask for much more really." - Dominic Frisby
Frisby's Bulls And Bears - http://www.dominicfrisby.net [http://www.financialsense.com/node/7681?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+fso+%28Financial+Sense%29&utm_term=FSO ]
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[Quote No.38539] Need Area: Money > Invest
"[If a picture is worth a thousand words] A chart is worth a thousand earnings forecasts!" - Stan Weinstein
Technical chart investor from his best selling book 'Secrets for Profiting in Bull and Bear Markets'
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[Quote No.38540] Need Area: Money > Invest
"Patterns of behavior emerge - and patterns undoubtedly do emerge - from the statistical melée of many individuals doing their own idiosyncratic thing. [This can be seen in free markets and is the basis of trading and investing by technical chart analysis and the economic school of Behavioural Finance.]" - Philip Ball
(1962 - ), an English science writer, who holds a degree in chemistry from Oxford and a doctorate in physics from Bristol University. He was an editor for the journal 'Nature' for over 10 years. Quote from his most popular book and winner of the 2005 Aventis Prize for Science Books, 'Critical Mass: How One Thing Leads to Another'. It examines a wide range of topics including the business cycle, random walks, phase transitions, bifurcation theory, traffic flow, Zipf's law, Small world phenomenon, catastrophe theory, the Prisoner's dilemma. The overall theme is one of applying modern mathematical models to social and economic phenomena.
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[Quote No.38542] Need Area: Money > Invest
"There are as many ways to invest in shares as there are people. Which style a person chooses depends on their desires, beliefs, personalities, risk tolerances and the time they have available. The methods range from passive dollar cost averaging into index funds to long-term value investing to technical chart trading. Searching the internet using those terms will give a basic understanding of each and many further areas to follow up. I would however recommend investors start their life long education with a few books: for value investing with Benjamin Graham's 'The Intelligent Investor' and for technical chart trading with Stan Weinstein's 'Secrets For Profiting In Bull And Bear Markets', Dr Alexander Elder's 'Trading For A Living', Michael J. Parson's 'Channel Surfing', Martin J. Pring's 'Technician's Guide To Day And Swing Trading', John Murphy's 'Technical Analysis Of The Financial Markets' and 'Van Tharp's Definitive Guide To Position Sizing'." - Seymour@imagi-natives.com

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