Tuesday, July 13, 2010

More Reflections on This Morning's CNBC Travesty

I wrote earlier today about an appalling hour of liberal excess on CNBC this morning.

Congressman Paul Ryan was assailed by two CNBC co-anchors and a Democratic House member from Illinois, all, I suppose, part of an attempt to either portray Ryan as detached, cold-hearted and naive, or change his mind. Neither occurred.

But as I replayed some of the exchanges in my mind later this morning, while swimming, another revelation came to me.

Having been educated in both classical and Keynesian economics, I am aware that, even in the latter system, investment decisions are allegedly a function of supply and demand for capital interacting in the form of interest rates.

Since even Keynes believed that no single person knew the correct amount of investment for an economy, he, too, relied on interest rates, set in a free market, to attract sufficient capital for available projects. Less investment would leave some desirable projects unfunded, while more investment would waste capital on projects which wouldn't return sufficient profits to justify their risk.

What isn't invested by consumers, i.e., saved, is spent.

Thus, in an economy in which, hypothetically, there was no government spending, consumers would invest what they don't spend, and spend what they don't invest.

Funny, then, isn't it, how the two CNBC co-anchors and the Illinois Democrat kept harping that the government had to provide the 'necessary spending' in the economy?

If even Keynes believed that markets had to allocate savings among investments, then it follows that he, conversely, believed that consumers, individually, decided on spending levels. Cumulatively, that provided a total spending level.

How is it that our modern day economic savants, who happen to moonlight as CNBC co-anchors, plus the Democratic Congress, believe they can do what even their economic patron saint, Keynes, never contended, i.e., that government knows what is the 'right' level of aggregate economic spending?

Here's another insight from my morning swim.

Ryan contended that consumers and investors are scared by so much heavy-handed government intervention in various economic sectors, so they refrain from investing. Savings, in the form of bank deposits or mutual funds, may be invested by professionals in Treasuries, since risk assets are now, well, so risky, due to the potential for government intervention affecting investment results.

But it may go further than that. Perhaps consumers are very aware of Congress' decade-long love affair with Fannie and Freddie, and their direction of those GSEs to back bad mortgages to less well-off borrowers who couldn't actually afford the homes they bought. Maybe those consumers have concluded that, with Congress willing to behave so recklessly with taxpayer dollars, taking actions which led to a financial sector crisis that amplified the effects of an already-occurring economic slowdown, it's wiser to just sit tight and try to save and avoid losing more money, either directly or through wasted tax dollars.

Then there's the leverage issue. Congress, in the wake of the financial crisis it brought about through lax supervision of Fannie and Freddie, when it wasn't forcing them into buying questionable mortgages, decried excessive leverage in the financial sector.

Now, though, the federal government is borrowing, printing money and spending it at rates far in excess of what the private sector was doing before that crisis.

If private leverage was a bad thing, why is government leverage a good thing? Further, why is it better for government to choose how much to spend, which is really all that government can do with money, rather than let people make their own spending choices?

It makes no sense.

Rather than allow for savers, investors and entrepreneurs to find the right level of investment and, as a result, spending, for the economy, we have a federal government determined to choose investment and spending levels all on its own, employing terrifying levels of leverage in the process.

I have read Keynes' original work, and I seriously doubt even he would approve of the current US federal government fiscal policies.

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