Page 2 of
2 THE BEAR'S
LAIR Empowering the
fruitcakes By Martin Hutchinson
after 2002 the rise in oil prices
allowed him to pursue a foreign and domestic
policy that won adequate support from his
electorate, even though the generation-long
decline in Venezuelan productivity only
accelerated. Now that he has control of the
Orinoco tar sands, the United States has suffered
severe strategic damage from his rule, at least
while oil supplies remain tight.
Similar
examples exist outside Latin America. The reformist
Iranian government of Mohammad
Khatami in 1997-2005 probably had little chance in
any case against foolish US intransigence, but the
anti-reformist and belligerent Mahmud Ahmadinejad,
in power since 2005, has benefited immensely from
the flow of oil money under his rule. High
commodity prices have also helped in propping up
tottering corrupt autocracies in Myanmar, Chad and
the Congo, and did so in South Africa in the
1970s.
The most politically important
example of an economically counterproductive
regime cemented in power by high oil prices is
Vladimir Putin's government in Russia. Putin in
his early years was economically reformist,
instituting a 13% flat tax that brought massive
economic growth. However his seizure of oil assets
and harassment of foreign investors since 2003
must by now have had a major negative effect, had
it not been for the continually soaring oil price.
With high oil and gas prices, Putin can keep
Russian business under political control, and can
use Gazprom's supply capabilities to harass both
his "near abroad" in the former Soviet Union and
the more distant but more economically powerful
countries of western Europe.
Once oil
prices drop, it will be very interesting to see
what happens to the Putin regime. My guess is that
it will descend into pure autocracy, as it will no
longer be able to win elections or pursue an
activist foreign policy through building up its
military power. But as the old Soviet Union
showed, economically sclerotic autocracies can
last a remarkably long time.
The political
consequences of low interest rates and high
commodity prices have been seen within the US as
well as overseas. The subsidies for producing
ethanol from corn, an environmentally damaging and
entropically futile effort, are encouraged by the
high price and scarcity of petroleum. The house
price boom of 2002-05 was entirely caused by low
interest rates; it is now having its inevitable
effect in producing calls for bailouts of foolish
subprime homebuyers. Most damaging and subtle of
all, the continual rise of asset prices has
convinced middle-class Americans both that they
don’t need to save and that the old paradigm of
near-lifetime employment, good pensions and
subsidized health care was in some way inefficient
and can be replaced by workforce turnover and
stock option grants.
In the private
sector, bull markets always encourage speculators
and this has happened with additional force in
this cycle. In the late 1990s, analysts who didn’t
analyze combined with accountants who didn’t audit
and day traders who knew nothing about
fundamentals to produce short term profits for
some and long term costs for the economy. Since
2002, the mortgage banking industry has been built
up on a series of intellectually untenable
theories:
Risk in a mortgage transaction can be removed
and cost lessened by selling it, slicing it up and
selling it in tranches to German and Chinese
investors;
Financing long-term assets through short-term
paper is financially sound, provided that the
short-term paper is issued by "conduits" so
everyone can pretend it's off their balance
sheets;
In order to buy a house it is not necessary to
have a steady income large enough to meet the
mortgage payments; creative mortgage brokers
remove this requirement;
House prices will continue rising forever,
with an eternally active buyer market, even if you
go on building houses like madmen;
If as a local government you encourage massive
amounts of house-building using illegal immigrant
labor, you need not worry about the difficult
future social problem of unemployed illegal
immigrants, nor about future water shortages and
overcrowded schools and roads, as your
infrastructure fails to keep up with the
overdevelopment.
A decade of loose money
and rising asset prices has also made the
financial services industry economically
illiterate, at least at its margins. Hedge funds
in particular have engaged in a wide variety of
short-term games that must consume them in the
long run. The "carry trade" - borrowing yen and
lending other currencies, for example - is not a
viable long-term business strategy. The assumption
that value-at-risk models manage risk adequately,
and remain equally adequate however arcane the
derivatives being managed, is also a nonsense that
would have been quickly quashed in a normal
market.
The private equity business, which
has landed the banking sector with $200 billion of
"bridge financing" with no opposite pier of the
bridge in sight, would also have been brought back
to earth quickly with tight money, as it was after
the RJR Nabisco debacle in 1988. In the 1980s,
Mike Milken's creative usage of junk bonds to
finance ever more speculative transactions lasted
less than a decade before producing bankruptcy for
his firm and imprisonment for him. Equivalent
follies have lasted far longer this time around;
it is not a good thing.
Bear markets and
recessions are unpleasant. However, a period of
loose money lasting over a decade, with
accompanying bull market, rising commodity prices
and apparently easy roads to wealth, lowers the
world's collective IQ by a substantial percentage.
Martin Hutchinson is the author
of Great Conservatives (Academica Press,
2005) - details can be found at
www.greatconservatives.com.
(Republished with permission from PrudentBear.com.
Copyright 2005-07 David W Tice &
Associates.)
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