Stupid Jokes

They say that those who approach life with humor live happier, healthier, longer lives. Does that apply to those who have a jovial demeanor but whose jokes have a...shall we say inconsistent...quality?

The time when my lovely wife Linda was most worried about my well-being was when I stopped telling jokes. We were living among the poor overseas, the challenges were unbelievably difficult, and I got so focused on just trying to suvive that the puns, word plays, and self-deprecation ground to a halt. My teenagers would say that everyone must have rejoiced! But in fact Linda was deeply worried. Perhaps more so than when I got malaria...twice. More than when I got typhoid. More than when I suffered unemployment for a year.

But now I'm making it up as I go along, and Linda is happy, most of the time. The teenagers less so, but I'm not sure what to do about that. Your own kids are a tough crowd, to be sure. A 10 year-old girl in White Plains was overheard scolding her dad for singing out loud. The father? Billy Joel. If the guy who commands $100 per ticket in sold-out stadiums can't please his progeny, what hope do I have? Of course, I love my kids so much that it doesn't matter anyway. And that's no joke!

Congratulations to Daniel and Mary

My eldest son Daniel has been a constant source of pride and joy for us. This past August he moved to Louisville to pursue a masters degree in music performance (jazz percussion), and the wonderful surprises have not ceased. He met a wonderful young lady, a fellow grad student named Mary Goff, and they fell in love. She is a delightful, creative, godly future daughter-in-law. You are reading that correctly; Daniel proposed on Valentine's Day, and she said yes.

We have great confidence that their relationship will go the distance. They encourage one another in faith, they have fun together, they strengthen one another. So why does my heart harbor a mild sensation of misgiving?

It's not about them, it's about me. Can I really be ready to be a grandfather?

I'm not old enough yet! (I might not feel old enough in another decade, either, but that's not relevant.)

Stop laughing at me, kids. I'm too weak to fight back and too senile to think up a clever riposte. Sigh.

But it's beautiful. As long as I focus on the wonderful things I see God doing in Daniel and Mary, I think I'll be okay.

Congratulations to Melody!

My wonderful daughter just turned 16, and she is sweet. She also works very diligently in her studies, and practices music all the time. (It is a great pleasure to hear the wonderful tones waft through the house from her french horn or piano.) So it is not surprising at all that Melody is in the top 10 out of roughly 700 students in her class...or that she was invited to perform with the Governor's All-Star Band at this year's Carolighting. Unfortunately, the event was rained out...but the honor remains. Yeah, Mel!

Congratulations to Benjamin and Archelle!

I have been blessed to stay in touch with my dear friend Benjamin Lincoln, even though he moved to Atlanta almost 10 years ago. He has had great success as a software developer, which surprises no one who is familiar with his smarts, friendliness, and integrity.

A young woman named Archelle has also noticed his admirable qualities--and he, hers--so they will be tying the knot at their A.M.E. church in March. A round of applause!

Congratulations to Benjamin!

My hulk of a 12-year-old, Benjamin Falter, recently earned a green belt in karate. He has manifested enterprise, persistence and humility in his approach to karate, so you can rest assured that I will be making plenty of posts about his success in many other endeavors.

The Inevitability of Booms and Busts

It seems that the Mises Institute is tilting at windmills in its hope to end economic booms and busts by reenacting the gold standard and outlawing fractional reserve banking. As long as human beings are making decisions about the prices of goods and services--i.e., as long as you and I, dear readers, are investing and consuming--we will be experiencing the crazy ups and downs. We can turn back the repeal of the Glass-Stegall Act, but we can't outlaw human nature.

This month's Atlantic Monthly published a couple of very impressive articles about how our wonderful, wacky humanity is the root of the problem. "Pop Psychology" describes experiments done by economists where a dozen participants are each given a certain amount of "securities" (for example, a certificate that yields a 24-cent dividend every 4 minutes) and cash (the real stuff, negotiable instruments). The experiment is limited to 15 rounds of dividends, so after an hour of trading the participants get to keep whatever money remains from their trading activity and dividends.

It is a trivial exercise to calculate the economic value of the security: during the first round it is $3.60 (15 times $.24), in the second round it is $3.36, etc. Anyone who believes that the trading price of the securities for these 60-minute securities in the 12-person market will largely reflect their apparent economic value, though, does not understand human behavior. (And truth be told, I must count myself among the misinformed/astonished.) What drives the market price of the securities is not their apparent economic value, but the desire of the participants to buy low and sell high. So what happens 90% of the time in these experiments is that the profit-seekers drive the price of the securities skyward--until the 15th round, at which point the market crashes.

Sound familiar?

So now you know why reverting to the gold standard will never end the cycle of booms and busts; we can change the banking system, but we are powerless to stop the tide of human behavior. I pointed out in a previous post that the cycle of expansion and contraction has occurred both when currency has been pegged to the gold standard and when it hasn't. I would be overstating the case to see that good banking policy is inconsequential; good policy might reduce the amplitude of the swings. At the same time, we do need to recognize that there is no policy that can relegate booms and busts to the dustbin of history.

In the second article, Henry Blodget (of Wall Street notoriety) examines the conduct of participants in the recent real estate and credit bubble, and finds it to be completely unremarkable. Of course home purchasers kept bidding up the price of real estate; they wanted to keep making profits. Investment bankers wanted to keep earning their bonuses. Politicians wanted the good times to keep rolling. Mortgage lenders wanted to keep earning origination fees. It takes a village to raise a child, and I guess it takes a village to cause a stampede in the real estate market.

In the wake of the inevitable bust, there has been much finger-pointing, but far too little self-examination. Perhaps we will learn our lesson for a generation, but eventually people will start saying "It's different this time, prices really can keep spiraling upward" and the next boom and crash will happen.

"Money, Banking and the Federal Reserve"

I just finished viewing a youtube video produced by the Mises Institute that gives an interesting explanation of how money and banking works. Every freshman in Econ 101 needs to watch this video to learn why berries or wampum could be the currency of choice, rather than reserve notes, and what fractional reserve banking is all about. It also covers a good bit of banking history, although as I will discuss in a bit, it is highly selective in its coverage of the subject.

Then the video engages in a long rejection of central banking, and calls for a return to the gold standard. There are several related themes that the Mises Institute cites:

1. The Federal Reserve Board of Governors (FRB) is not accountable to anyone. No one audits their operations; they can buy and sell assets as they please. You cannot obtain a transcript of their deliberations; they only publish a brief summary.
   
2. Inflation is baked in to the current banking system--300% in the 25 years after Nixon ended Bretton Woods! But you don't want a low inflation environment; you want the currency you own to gain value over time. Only a deflationary environment can provide the confidence that investors and entrepreneurs need to do their part for economic growth.
3. Central banking is the cause of all economic booms and busts. It leads to booms and busts because the presence of a "lender of last resort" removes the need for banks to lend prudently during the good years.
   
4. History shows that a return to the gold standard will stabilize the economy; for example, sound money was the impetus for a pleasant 18-year expansion from 1879 to 1896. On the other hand, the video implicates central banking as the ultimate cause of the Great Depression.

The video's analysis ignores so much history, so much about how banking operates, and so many serious pragmatic issues, that I scarcely know where to begin my critique. For now, since my time is limited, I'll just list some semi-random thoughts:

1. The members of the Federal Reserve Board are appointed by the President and confirmed by the Senate. Opinions vary as to whether this provides enough accountability for the Board, but the appointment/confirmation process certainly mitigates the problem. In addition, the video is dramatically wrong about the availability of transcripts for the FRB's meetings; they have been available since 1994. The video was produced in 1996, so there is no excuse for this misleading argument.
2. Central banking's promotion of monetary inflation is not the only cause of the boom/bust cycle. Any time investors believe that outsized profits can be gained from some new resource, technology or business practice, they stampede into the capital market and produce a rush of new lending. This is a boom cycle, and it doesn't need the assistance of central banking. The Holland tulip craze, the 19th century railroad boom, and the 21st century housing boom were driven primarily by investors' appetites for enormous and easy returns. The video praises the reliability of a market-regulated currency, but in point of fact the rush into the housing market by Wall Street lenders and Main Street borrowers that we saw during W's early years is but the latest example of how the market can drive a currency boom. An earlier example, provided by the video itself, is how the long expansion after the Civil War was followed by a decade's worth of instability that culminated in the Crash of 1907. That crash in turn led to the birth to the Federal Reserve during a 1910 meeting of Wall Street titans on Jekyll Island. Of course, the fact that 18 years of boom followed by a decade of instability and bust occurred when the Fed did not yet exist is an extremely strong refutation of the video's argument, but the producers rise to the challenge of completely overlooking this inconvenient fact.
   
3. While few are happy during the bust after a boom, Daniel Gross argues that the boom/bust cycle is critical for a healthy economy. Booms often give us infrastructure (like telegraphs, railroads, and fiber-optic cable) that can boost production for decades. Of course, not all booms are of equal value (think tulip bulbs and vacant housing), but you've got to expect some chaff with the wheat. At the risk of redundancy, I again point out that booms are what happen when investors get excited about emerging opportunities; history has proven that you can't have marvelous new opportunities without a boom/bust cycle.
   
4. Do not believe the video when it states that you want your money to gain value over time. The years 1929 - 1940 saw the greatest increase in the value of money in American history; this period is also referred to as the Great Depression. The link between increasing money value and severe economic depression is quite obvious. If the value of goods I can buy with money will increase over time, I have no incentive at all to invest it; I can get a risk-free increase in value just by stuffing my money in a mattress. So from the viewpoint of society, when the value of money is increasing, investment naturally falls sharply. Furthermore, this fall in value can be a vicious circle: as the value of money increases, investment drops; as investment drops, economic activity drops; as economic activity drops, the value of money in hand goes up; as the value of money in hand goes up, investment drops more, etc. This, in a nutshell, is how the Great Depression happened.
5. The video attacks fractional reserve banking from pillar to post, but it is impossible for a conversion to the gold standard to eliminate fractional reserve banking. Here's why: the world's outstanding gold reserves are but a tiny fraction of the world's economic output. As long as the reserve assets on hand are but a fraction of the lending in the economy, there will be fractional reserve banking. It is mathematically impossible to have any form of banking other than fractional reserve banking when aggregate reserves are lower than aggregate deposits. "Well, we'll just revalue gold so that banking reserves and demand deposits are in equilibrium," Ron Paul might reply. While that is possible, I'm not sure I want to give a windfall profit of $15 trillion to a handful of mining companies.
6. The video proclaimed (in 1996) that the federal budget had been in deficit every year since Nixon ended Bretton Woods. Of course, just like it seems you have to wash your car to enjoy a rainfall, no sooner was this video released than our country enjoyed a string of impressive budget surpluses from 1996 to 2001. Of course, the Republican Congress and President put an end to that with a huge tax cut and out-of-control military spending in the years 2001 and following, but that's a different story.
7. The video proposes that investors will lend their gold to banks for (negotiated) fixed periods of time at a fixed interest rate, and the banks will in turn will lend to creditworthy borrowers. Congratulations, Mises Institute, you have just invented the Certificate of Deposit (CD).
8. The video proposes that banks will charge fees to depositors for holding their savings and demand deposits, instead of earning profits by lending a portion of the deposit money. In other words, the Mises Institute proposes to kill fractional reserve banking. Of course, this would decrease the availability of capital dramatically, which would starve our economy of the resources needed to pursue new investment opportunities. In other words, the Mises Institute's proposal would provoke a downturn so colossal that we would rename the 1930s as the "Mild Disappointment."
9. It is true that deposit insurance and the Fed's discount window serve as a "lender of last resort," which can encourage private lenders to take some imprudent risks. However, the alternative is not some nirvana where all investors and lenders are perfectly rational. Rather it's a system where you and I will be afraid to put our savings in a bank for fear that some crazy loan officer will lend it to his visionary cousin Marvin's real estate company, and we'll lose the capital we painfully gathered for decades as we raised our families. And if you and I are afraid of putting our money in savings accounts, it will be the 1930s all over again.

EDIT: I have corrected the inadvertant misspelling of the name of Mises Institute. Thanks, Thom!