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Wait, aren't the markets supposed to be rational?

December 5th, 2008 (05:42 pm)

current mood: confused

Call me confused. Today saw a range of bad economic news, starting with the jobs report from the Labor Department, which showed employers shed 533,000 jobs in November--the worst monthly performance in 34 years. The unemployment rate rose to 6.7%, and keep in mind that this is defined as those who are out of work and still looking, so this is probably well below the true number. It does not include people who are working part time, seasonal, or temporary positions, people who've taken part-time jobs when they'd rather have full-time jobs, people who have taken jobs earning considerably less than they were earning at their old jobs, or people who have become so discouraged that they've given up even looking for work.

And yet...stocks were way up. The well-known Dow Jones Industrial Average (which is only an average of the 30 largest companies) was up 3.1%, and the broader S&P 500 index was up 3.7%. NASDAQ, which is heavily laden with technology stocks, was up 4.4%. Meanwhile, oil prices continue their historic slide, falling 6.5% (the sixth straight day of declines) to $40.81 per barrel. Compare this to early July, when oil was around $145 a barrel.

Most people consider the drop in gas prices a good thing and in some ways, it is, as it provides some immediate relief to a lot of struggling people. The sharp fall in mortgage rates is also allowing some people to refinance, thus they save money that they can then spend on other things. Theoretically. There are two big elephants in the room, however.

First of all, America's oil addiction is one that we really need to kick in the interest of long-term economic health. The collapse of oil prices leads to both less investment money and less political support for alternative energy development. Second, the fall in mortgage rates doesn't solve the fundamental problem of a glut of unsold homes on the market that is depressing housing prices and killing the economy. What we really need is for home builders to stop building.

Nor does any of this address the freeze in the credit markets or the troubles of the Big Three auto makers. As for the auto makers, it's very tempting to say to hell with them because they have made so many idiotic business decisions over the years. But is allowing the American auto industry to collapse really the right answer? I would say absolutely not and we really need a third option here because the two we've been given (bailouts or collapse) are rotten.

Sure, you can argue that there will still be an auto industry, albeit one run by the Japanese. We've seen this sort of thing before with the complete collapse of the American consumer electronics industry. Yes, this too was caused by a lot of bad business decisions and these companies likely deserved to fail, but no one looked at the larger issues involved. Namely, do we really want to keep losing manufacturing industries to the Japanese?

There's a myth in this country that manufacturing is something we can afford to lose because we are in the process of shifting to a service and information economy. This logic defies history. When the Industrial Revolution came into its own in the United States and we shifted from agriculture to manufacturing, this did not mean that the U.S. ceased to be an agricultural power. Quite the opposite, in fact, as even today, the U.S. is one of the world leaders in agriculture, even though the number of people working in agriculture is far fewer than it once was.

I find the idea of bailing out Detroit and rewarding the appalling incompetence of the auto executives extremely distasteful. But I find the idea of losing yet another American industry (one that, like consumer electronics, we invented) to the Japanese and the Pacific rim to be just as distasteful. I'm not quite sure what the solution might be, but we need something creative and probably drastic. Nationalize the car companies if we have to, come to think of it.

Much of Paul Kennedy's reasoning in his classic work "The Rise and Fall of the Great Powers" was flawed. But his underlying idea that nations cannot maintain their power without a strong economic foundation is as true today as it ever was--if not more so.


Posted by: James (jajy1979)
Posted at: December 6th, 2008 08:29 am (UTC)

It occurs to me that while we can clearly blame much of the problems on the subprime housing mess, the intial catalyst to cause people's budgets to shrink started in the inflationary energy sector, which then affected food and durable goods including cars and transportation.

We really do need to change our habits drastically as a society including continuing to curb our appatite to drive everywhere at the drop of a hat.

As for manufacturing I've been saying for years that a purely service economy isn't sustainable.

Posted by: Mike (idealistagain)
Posted at: December 6th, 2008 02:27 pm (UTC)

As for manufacturing I've been saying for years that a purely service economy isn't sustainable.

But then you seem skeptical of helping Detroit. As am I, but we have to do something. But what?

Posted by: James (jajy1979)
Posted at: December 6th, 2008 04:05 pm (UTC)

I am willing (begrudingly) to loan the public companies money in exchange for either prefered stock (direct equity) or set interest.

I'll bail both GM and Ford with conditions. Though one of those would likely be to split GM in half. I have no interest in bailing out Crystler and by proxy Cerberus.

I would also be interested in some of the "infrastructure" building that they're planning on doing be for plant modernization for several industries, similar to what we did in the 1940's and 1950's for both Japan and Germany. Not a large percentage, and not in every industry, but some.

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