Economists Can Only Answer How, Not the Why

It is going to be a two topic post tonight, as I found two items that require attention. Neither will be very market related, and I feel I have nothing to add on that front anyways. There was at least 5 stories today that highlighted baloney coverage of junk statistics that were pumped by the media. There were several hard hitting items concerning some very suspect games being played by Wells Fargo.

Please note that I will be attending a dinner function tomorrow night, and am not sure that I will be able to post the usual Friday night festivities. Perhaps a Sunday post to make up for it, but no guarantees, the NFL has several huge games this weekend!

In Communist Russia, Government Educates YOU!
Economic Disconnect has spilled enough pixels detailing how the US government is now responsible for 80% of all home sales via mortgage guarantees, and really 100% by keeping rates artificially down in the mortgage market. Maybe an entire generation of home owners will owe their payments towards a government backed entity, and another whole generation will rely on the government to supply loans for a home purchase. If your primary place of residence, and your ability to access one is not too much authority to place in the government, how about the higher education of your young adults?

In a process that started in earnest quite a long time ago (and covered here) the US government is ready to make their next step (via Clusterstock):
Congress Ready To Make Student Loan Industry 100% Government Controlled

As with housing, funding education is one area where the government has never wanted to let the market set prices.
Is it any shock, then, that at the college level, with the federally-backed student lending machine, that inflation has outstripped that of the general economy?
Now the government looks set to make this problem worse, as the House is prepared to vote on a bill that would eliminate the role of private student lenders altogether, bringing all funding under government control, where it can be expanded with ease and targeted politically. There's already lots of "No child should ever be denied..." rhetoric.
Is this more evidence that the government is eager to keep expanding the bubble in student loan debt? You bet.

What I find to be the most galling, the most annoying, the most bang your head against a wall until the wall itself collapses stupefying is the belief that by offering lower finance charges, thus making something "cheaper", the thing gets cheaper. Like most strongly held economic beliefs, very little hard evidence backs it up, and most real world examples refute it entirely.

Perhaps in older times business was not as savvy as they are today, or maybe they were just not as greedy. If a supplier of an item knows you are getting a deal on financing, they just jack up the price.

I should have warned on the outset that this post is going to get very nasty, well, too late!

Get a load of the mess of ideas and total incoherence of policy in this Yahoo Finance piece:
House college aid bill would boost Pell Grants, kill subsidized student loans

WASHINGTON (AP) -- The House voted Thursday in favor of the biggest overhaul of college aid programs since their creation in the 1960s -- a bill to oust private lenders from the student loan business and put the government in charge.

I already feel sick. Moving on:

...The measure ends subsidies for private lenders, boosts Pell Grants for needy students and creates a grant program to improve community colleges, among other things...
...Ending loan subsidies and turning control over to the government would save taxpayers an estimated $87 billion, according to the Congressional Budget Office. Lawmakers would use that money to help make college more affordable, increasing the maximum Pell Grant by $1,400 to $6,900 over the next decade.

Whatever the increase in the grant amount, I hereby guarantee college tuition will eclipse said increase by over 30% in the same time frame. Any takers?. Moving on:

"The choice before us is clear. We can either keep sending these subsidies to banks or we can start sending them directly to students," said the bill's sponsor

I really had to stop laughing on this one. Now the US congress is ready, willing, and able to say no to padding bank pockets at the expense of the public!? This is almost comedy that cannot be topped.

To end this segment, I will just say when you relinquish access to the government for anything of vital need, you are making a mistake. How long until political influences start to affect who gets what loan? You may think this no big deal, but imagine if a very liberal president and congress filter funding to favor crappy liberal arts program students. What if a crazy righty gets the top office and wants to subsidise evangelical schools only? I think you get my point. This move is wrong, and there is no real defense of it on economic or philosophical grounds. I am ashamed there is not any opposition to this at all. As I have said many times, you get what you deserve, and we shall, exactly.

Economists Can Only Answer How, Not the Why
I warned you above this post would be snarky, if you are ready for more, then read on by all means!

My own parable:

A man sits at a bar, and strikes up a conversation with the fellow next to him. He discovers the stranger is an economist, which delights the man, as he has a business quandary he needs help with. The man offers the economist a beer in exchange for advice on his current endeavor. The man asks "I am thinking about building this huge mall, that will sit vacant because business is so bad, but I just thought why not? Do you think this makes sense?. What do you think?"
To this the economist answers "I really cannot advise you on that at all, I have no opinion."
The man, a little put off, asks the economist "How can you have no opinion! I need to do this to save my company! How can it be done?"
At this the economist perks up and answers "My dear sir, you did not ask my why at first, but now you are asking me how, and on that I can greatly advise!".

Yes, very simplified, but still true to the core.

Ask an economist today about the "output gap" or the unemployment rate, and they will effuse mountains of words describing how to restore the old "normal". Ask them if the old normal is sustainable, or if it was a gross application of capital, and all you get is a shrug. Some science.

I bring this up in light of an article by my second favorite Keynesian Mark Thoma of Economists View. Today the blog had a very special piece of absolute garbage up, and it even referenced a more useless piece of work as well. Lets dig in.

In Mr. Thoma's post he seems confused as to why this recession does not look like all those in his textbooks, and why policy to this point is not making the difference he would expect:

As this picture (see link) from the SF Fed shows, the employment series does not yet display the "fishhook" shape shown in other series that are the source of the declarations that the worst is behind us. And as the experience of the last recession in the graph below shows, the trough in employment can be far behind the trough in output.

So this economist admits himself the current atmosphere does not match the textbook case. I agree. Sadly, the writer lashes out and uses a textbook piece to try and reconcile all of his beliefs in Keynes:

Will Obama, Fed tolerate another jobless recovery?
-GYSC, with this title, you know this will be bad. As if the FED or Obama can really influence real job creation, but anyways, moving on:

NEW YORK — Politicians, pundits and even the Federal Reserve chairman have declared the recession over, but what's coming next is likely to prove as vexing as the deep economic crisis that Americans hope to leave behind.

I interrupt here because this intro is actually pretty neutral and leads you to believe the piece will tackle some real issues. We shall see:

As the economy begins to grow again, the nation faces a huge challenge: Consumers drive roughly 70 percent of U.S. economic activity, but job growth is expected to be quite slow even as the recovery gains steam. Without a rebounding job market, consumer spending is unlikely to return to robust levels, slowing a return to full employment.
Think of it as America's chicken-and-egg dilemma: The economy needs a big jump in consumer spending to spur exceptional growth, but that won't happen as long as unemployment remains high.

This section sounds harmless, but here we already see no discussion of the fact that a credit fueled real estate bubble binge of consumption may not be easily replicated. And so:

"Unless the economy grows significantly faster than its longer-term growth rate," which economists peg at about 3 percent annually, "it will be relatively slow in creating jobs over and above people coming into the labor force," Bernanke said. "And therefore the unemployment rate would tend to come down quite slowly. That's a risk, a possibility."

Even PIMCO is looking at less than 3% annually, but whatever here we have a rainbow watcher:

Not all analysts are glum. James Glassman, senior economist and managing director at JP Morgan Chase, the nation's strongest large bank, thinks that the Federal Reserve and the Obama administration will do what it takes to improve the jobs outlook.
"We're going to have to grow faster than trend to get unemployment to come down, which means that it is going to happen — unless you believe zero (percent) interest rates don't matter," Glassman said in an interview at bank headquarters.

Three things, 1.)zero rates have not helped yet 2.)this is a director at JP Morgan saying this junk and 3.) still think metals are stupid? See the phrase "which means its going to happen" which translates "anything is on the table to improve statistics". As if you need more:

His logic goes like this: Because the Fed has held its benchmark interest rate near zero since last December and is expected to leave it there for quite a while longer, lending rates across the economy will remain unusually low as the Fed tries to engineer full employment, which economists consider to be when the jobless rate is around 5 percent.
"The economy is not going to have the same robustness that it normally has. Returning to 5 percent (unemployment) is a national goal. That means they are not going to take their foot off of the gas until they can see that coming into view," Glassman said.
"It doesn't take a brain surgeon to figure out that you should gun it to get the economy to full employment. And it's not a Republican idea or Democrat idea, because we've seen both the Bush and Obama administrations do it," he said.

Thanks be to all the gods being an economist is not brain surgery.

I highlight these items tonight so that you can see where we are headed. The so called best minds all see things the same way. In their world there are no bond revolts, bad allocations of wealth, nor rabbit holes with no end. They only see the HOW and never ask WHY or SHOULD.

Stock toilet paper, soup, or BBY preferred shares, but I would think Au and Ag would be a better idea when all the pretending stops.

Have a good night.