Monday, October 27, 2008

The fallacy of the innovative free market

In my nearly six decades of life there have been many amazing changes but few have been more mind boggling and wrong than the shift in the 1980's to the idea that all Government intervention in economic matters were bad and that the free market was able to solve all problems with little or no regulation and guidance.

This myth was was put forth from the most unlikely of sources, a washed up B actor that was Governor of California (we know know that California has a tendency of electing unqualified people to that position, e.g. Brown, Schwarzenegger) and a quirky, incomprehensible Ayn Rand groupie, Alan Greenspan. They told us that individual people were better than groups of people, although Church and American History had taught us the exact opposite.

It was an attractive proposition, that was at the core of the blind evil to come, resulting in the situation of an unqualified, unregistered plumber who never has made $50k in one year becoming the symbol for the fight against even a small tax increase for the rich.

My own experiences in the work place also went against this idea, working for NASA in the 70's it was clear that the amazing accomplishments of that organization could never have been reached in private industry, just now nearly 40 years later companies are approaching that industry with private funds.

How could it be that we were being told that government inhibited innovation when almost every key development that drove out economy for the next 40 years came from this large government funded work program that would have had no chance of being implemented today without people screaming about Socialism and Marxism?

The reason of course is that it was a big lie, a Jim Jones kind of lie with this Kool Aid being forced down our throats with the celebrations of Rock Star CEO's and hyperbolic radio personalities.

As for innovation, let us look at the record, government funding gave us computer technology, material sciences advances like Teflon, communications technology to enable the Internet and sensor technology for advanced medical equipment. All of these have created millions of jobs in the private sectors.

Free Market innovation has given us Sub Prime mortgages, Hedge Funds, CDO's, HMO's, and the most painful economic failures since the great depression.

People compare Barack Obama to Jack Kennedy and I hope the comparison holds true, a person brave and smart enough to know that as a people together we can be great again, maybe through an energy initiative that is funded by the government, releasing the innovations to the market for it to do what it is really good at, developing and executing business plans around formed ideas.

Here is the big surprise to those who understand risk, the more diversified and shared it is the better the outcome, and that is a role for government, my hopes are with Obama to end the long mistake made by the fallacy of innovative markets and get back to what has always worked, WWI, WWII and NASA are all examples of innovative high risk endevours that spawned great technologies for our markets to do what they do best, execute.

Thursday, October 16, 2008

The ""New" New Deal"

It is interesting to see the theme of the "Great Depression" woven into so many of the news stories, blog posts and response posts. It is important to remember there are two parts of that story, what was lost that is the current focus (correctly and understandably) and another part that seems impossible to imagine, what will be gained by the transformation of our economy and naturally our society.

Currently we are at the part of the story that feels like the feeling you get when you are stuck in car after too much coffee looking for an exit or strip mall, you can't imagine the relief. But by the time that your hands are drying (hopefully) you will have moved on barely able to remember the discomfort.

So many posts and articles also talk about how the "wealth bubble" was built on an unsustainable model, where the selling of "packaged" money was worth more than "unpackaged" money, with the truth being that it is until someone has to open the package. We are currently opening these packages one by one and finding something very different than we has hoped (wished?) inside. It exposes the fallacy of the wealth created by home prices mainly, it turns out we were never that rich, we just went through another period where we pretended we were, like the bubble.

In many ways the housing bubble made much less sense, and that may be because it was intentional, where as the bubble was more irrational. While there were irrational decisions made in both cases but the difference is in you finding a piece of rock and thinking that you are rich, which was the case in the bubble, it is easy to see how people over-valued things like bandwidth, online commerce, and business efficiency gains. And there is some serious and persistent value in company's like Google, eBay and Amazon, there is still money being made and will be for a long time.

The Housing Bubble was more like running into a well dressed man (Blue Suit - Red Tie - Italian Loafers and a watch with a name you can't pronounce (he can't either), with a Rock in a very nice box labelled GOLD (or Platinum, which ever is higher that day) and being told that the price paid for these rocks are going up and have been going up since Moses came down with the tablets inscribed with the terms of the first CDO. Now you can't afford this really BUT, since it will go up in price forever you can pay us when it goes up. He goes on to say that they aren't making these fast enough for demand and buying a second one will make it twice as easy to pay for the first one. You can see the difference, in one case you make an optimistic appraisal of mankind ingenuity and you were a little wrong on scale and timing, it has happened over and over and will happen again. In the other case people were convinced that a house was more than a house, some how in a country with slowing population growth and stagnant middle class salaries houses were going to be worth more because when population was growing and wages were out pacing inflation they did go up.

The good news is that we were never that rich, so we lost nothing that we ever actually had except for our own misguided and often innocent expectations of ability to access and use that wealth to provide for our retirements, educations and health care.

Understanding this so quickly after the fall should help us to attack the root causes of the systems problems and redesign something that works better, not perfectly because that is impossible, but something that is measurably (by our current almost certain to be flawed but better than guessing methods).

On thing to consider is that the last recovery, the New Deal, was built on a set of firm principals that spread the opportunity, which spread the wealth through a more palatable manner than welfare payments. Jobs, training and yes, even loans were used to allow businesses to thrive.

Now that model would be hard to replicate, but not impossible, because new businesses that can support people need to look for new ways to create value to present to the market. Whereas corner stores and restaurants used to work at local ownerships level that is no longer true.

Regulations and restrictions could work but that would be the wrong application of Government, innovation into other things that people can do, maybe some based on the cheap communications and data portability enabled by the Internet.

What ever the case it will require an entire country (and world) of people that care enough about the future and other people else to think about the long view, if we get that right the old New Deal will pale in comparison to the New New Deal.