Some Thoughts on Trump, Free Trade, and Horses

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A friend sent a link to a leaked, recorded conversation between Trump and Wilbur Ross, his nominee for Commerce Secretary. There is nothing particularly troubling in the conversation. Trump is talking like Trump. He is the same person in public and in private, which is nice.

I responded:

Sounds good to me.   A tariff is a consumption tax collected at the port of entry.   The American founders expected to fund the operations of the national government with revenue from a tariff, and it worked.   He is also right that the Japanese and other countries use safety regulations as non-tariff import barriers.   There is nothing bad on here at all.  

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The Boom/Bust Cycle Isn’t about Emotion

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My first experience with manias was in the 1950’s. As a pre-schooler, I was dragged along to the Filene’s Basement annual designer dress sale. Thousands of women of all types and sizes pressed against the glass doors opening into the subway station. Within minutes of the doors opening, these “maniacs” cleared all the racks and, holding armfuls of dresses, began stripping to their slips. That’s when I panicked.

Looking back, those women acted rationally. There was a limited supply of deeply discounted dresses available on a first come basis. They traded among themselves to get the right size and their most desired dress. Buyer’s remorse was cushioned by Filene’s liberal return policy.

The premise of U.S. financial regulation is that actors within private markets are irrational, but the evidence shows that it’s not maniacal, illogical behavior that sends markets into freefall.

Great Depression and Recession

Now in its seventh edition, Manias, Panics and Crashes: A History of Financial Crises, Charles Kindleberger’s seminal work provides the narrative that underlies virtually all public financial protection and regulation: First, the irrational exuberance of individuals transforms into “mob psychology” and fuels an asset bubble. Then, when the exuberance of a few turns to fear, the mob panics and overreacts, causing a crash that brings down both solvent and insolvent financial institutions.

In his memoir, the former Federal Reserve Bank President and Treasury Secretary Timothy Geithner, who was at the epicenter of the last crisis, concluded, “It began with a mania — the widespread belief that devastating financial crises were a thing of the past, that future recessions would be mild, that gravity-defying home prices would never crash to earth.”  

Most U.S. federal financial regulation originates from the Great Depression and the subsequent introduction of federal deposit insurance provided by the Federal Deposit Insurance Corporation (FDIC), which was established in 1933 to protect “small” savers. All prior state attempts to provide insurance failed. Because there were no effective, non-politicized regulations that could prevent the moral hazard of insured banks and savings institutions taking on excessive risks, an extensive regulatory infrastructure was put in place.

Rational Actors

Now, the U.S. has about 100 financial regulators, including those in the U.S. Treasury and the Securities and Exchange Commission (SEC), the FDIC, and the Fed. With near-universal deposit insurance, bank runs have become a rarity, but systemic crises have occurred more frequently. It is incontestable that big bubbles eventually burst, asset prices crash, and financial crises ensue. What causes the bubbles to inflate to systemic proportions, and to ultimately burst, is more contentious.

At the time of Kindleberger’s analysis, individuals were assumed to be rational. The latest edition of his book, written after the 2008 financial crisis, postulates numerous theories about mob psychology (mania) that could lead rational individuals to produce irrational markets, but these ideas are all rather lame.

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The Crazy Years 21st Century Style

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I honestly thought that once the election was done and Donald Trump duly sworn into the highest office in the land that those whose favored candidate lost would calm the heck down. You know, sort of the way that those of us whose chosen candidate lost in 2012… you know, disappointed but sporting about it. We went home, sniffled a little as we communed via the internet with equally disappointed friends, assumed the fetal position and turned the electric blanket onto “high” and got over it in a week or so. That’s the way the constitutionally-mandated cookie crumbles. The day after the election, I assumed that Hillary and Bernie voters would have had the maturity to do the same; morn a little, snivel a little, write editorials in the national media-of-record rationalizing their unfortunate reversals, perhaps throwing a little blame against whomever, and then pull themselves together and put as good a face on it as they could muster, promising to do better in 2020.

Nope; the march of the disappointed pussy-hatters the very next day, riots and protests in deep blue cities, the absolute frothing at the mouth Trump-hate at the Oscars and on the national news broadcasts, the impassioned print editorials, the ranting, raving, stompy-footing, the mass-defriending and insanely hateful rants on Facebook: Trump is a Nazi-fascist-anti-Semitic-racist-who-pulls-tags-off-mattresses and trips old ladies hobbling along on canes, and so is everyone who voted for him. Yes, over the last few years, we have kind of gotten the idea that the Ruling Class; the bi-coastal comfortable and well-connected (including the intelligentsia, the national media and bureaucracy) were contemptuous of the ordinary working and middle class residents of Flyoverlandia. Now we know for a certainty that those who form the coalition of the Ruling Class and many who aspire to be a member of that Class in good standing despise us. They despise us with a passion and fury that renders them incoherent, and unashamed of displaying that hatred.

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Ethan Russell and Iconic Rock Photos

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Growing up I was a big fan of The Who. Since I didn’t always have a lot of money for records I tried to “stretch” my budget often times by buying “greatest hits” albums. Initially I thought that “Who’s Next” by The Who with the iconic photo of them pissing on some sort of concrete slab WAS a “best of” album simply because almost every track had been played to death on the radio with the exception of “My Wife” by Entwistle (which was a song I liked a lot) and “Love Ain’t for Keeping”.

Recently I saw a presentation by the photographer Ethan Russell who took that classic cover photo along with an amazing amount of other images you’d recognize instantly, from the pictures of the Beatles on the “Let It Be” album to some great Rolling Stones’ photos from their classic late 1960’s – early 1970’s era. If he comes to your town I would highly recommend that you go out and hear him talk.

I bought a signed print of that Who’s Next cover and sent it on to a friend of mine who also was a big fan of The Who growing up. I’m sure he’ll like it.

Cross posted at LITGM

Why does Germany do such monumentally stupid things?

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I was reading Arthur Herman’s column in the WSJ Decoding the Zimmerman Telegram, 100 Years Later and I began to think about all the really, really dumb things Germany has done. And it’s not as if the Germans are dumb. A look at the Nobel prize list makes it clear that there are many brilliant Germans. But if we go back in history and look at the political decisions Germany has made, it is a cavalcade of catastrophe. In the 19th century, Germany was the cradle of socialism, not all the ideas, but certainly the movement. Then it decided to unite Germany, not a bad idea in and of itself; but it then led to the idea that it should conquer Europe. In the process, it threatened the US with invasion by Mexico, bringing the US into the war and onto the world stage. And to top it, they put Lenin in a rail car and sent him to St. Petersburg launching the Soviet Union. Hitler then rekindled the idea of conquering Europe, including the incredible decision to invade Russia and then declaring war on the United States directly, creating an enemy that might have sat out the European war.

After suffering a defeat as devastating to Germany’s people as the Thirty Years War, Nato was created to keep the Americans in, the Russians out and the Germans down. And for 70 years it was a success. Germany started well by establishing an economic powerhouse. It succeeded in reuniting Germany after the cold war was won by the US in spite of German handicapping. But since then it has made decisions with terrible consequences, not only for Germany, but for much of Europe. It has used the EU and the Euro to peacefully achieve, with American connivance, what it twice failed to do by violence. And the consequences have become deleterious at best for the rest of Europe. The Energiewende has been a catastrophe, leading to more pollution by increasing the coal and biomass burned to create energy and the highest electricity costs in Europe. Germany’s refugee policy has invited invasion by unassimilabe masses inimical to European culture and values. And a policy of minimal defense expenditures has led the Americans to consider getting out and the Russians getting back in. And now China has become Germany’s largest trading partner.

I have long felt that the EUropeans were more than capable of defending themselves and we should pull out of Nato to force them to do so and to save money. Why should we allow them to freeload? But now with the Americans leaving, the Russians returning, and the Germans rising, I am having second thoughts as I consider the possible consequences.