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Sunday, May 15, 2016

Why Is Time Magazine Pushing Ignorance about Economics?

Have you ever heard of Rana Faroohar?  I doubt it.  Faroohar is an assistant editor at Time.  She is also the author of this week's cover story:  "Saving Capitalism".  It's the typical long article in Time that is filled with propaganda but little else.  Faroohar supposedly is telling America what is wrong with capitalism these days when even a cursory review of the article reveals that she hasn't got a clue what she is talking about.  Indeed, I was curious to see who this woman is who is diagnosing the problems with capitalism.  What is her background?  Where did she get her Ph. D. in Economics?  The answer didn't exactly surprise me:  Faroohar has no degree in economics or finance of any sort.  She has no experience in business.  She has a bachelor's degree in English Literature and since her graduation she has worked as a journalist.  This is the so called "expert" that Time chose to tell America what the problems are with capitalism and how to cure those problems.

It was clear from the article that Faroohar knows next to nothing about economic history or even how capitalism actually works.  Here's an example; Faroohar actually says this:

[I]n the 1970s, the growth that America had enjoyed following World War II began to slow.  Rather than make tough decisions about how to bolster it (which would inevitably mean choosing among various interest groups), politicians decided to pass that responsibility to the financial markets.

So in Faroohar's capitalism, it's government that makes the decisions about economic activity and letting the market make the decision is a terrible mistake.  But governments don't run the economy in capitalist economies.  Government control is the hallmark of socialism, fascism, or communism (which themselves vary in part depending on the ownership of the economic assets.)  Indeed, most economists accept that the slow growth of the 1970s was the result of too much government involvement in the economy, not too little.  During the start of the 1970s the government even imposed price controls on the economy in a failed effort to stop inflation which itself was brought on by profligate government spending during the Johnson Administration and the Vietnam War. 

When the government picks winners and losers among various interest groups, we inevitably get chaos.  Just look at the efforts of Obama and the Obamacrats in that regard.  At the start of the Obama years, the Obamacrats passed the so called Stimulus package.  It included enormous expenditures on green energy which was to be the industry of the future.  Obama promised America that we would be number 1 in these green jobs and that this industry would lead us to big economic growth.  Washington spent hundreds of billions of dollars on solar and wind power companies.  The results were not just poor; they were a scandal and a disaster.  We all remember Solyndra, the solar power company funded by the government (and owned by friends of the Obamacrats) which used up its government funding and collapsed.  The owners got rich and the workers got nothing.  Solyndra, however, was not alone among collapsing solar and wind power companies.  In some place like California, the effort to promote this industry still continues.  As a result, the power costs in California are substantially higher than in most of the rest of America, but the economy is not doing that well.

Faroohar also laughably claims that the departure of banks from many lending activities is the result of the financial industry soaking up assets rather than the necessary result of government actions that made the old banking activities substantially more risky.  Consider this:  for most of the last century, banks were the principal source of home loans.  Banks developed methods to determine the creditworthiness of a potential borrower and only lent to those for whom the risk of non-payment was low.  Then, in the 1990s, the government decided that home ownership needed to be expanded.  There was a big push to get more and more Americans to own their own homes.  But to expand ownership, the government also had to expand access to credit for buyers.  Thus was born the effort by the government to pressure banks to make loans to less creditworthy borrowers.  As time went on, the government kept increasing this pressure on banks.  The result was so called subprime mortgages in which the borrower clearly was a risky bet with regard to repayment.  The government pushed the banks to lend, and they did.  The banks, however, knew that the level of risk was rising.  As a result, the banks did not want to hold the loans until the inevitable default.  Once again, the government stepped in.  We had Fanny Mae and Freddy Mac that bought large chunks of the loans from the banks.  We also had banks package the loans into securities and sell them into the market.  We all know what happened in 2008 when home prices crashed and huge numbers of mortgages went into default.  Many like to blame Wall Street for this, but the real culprit was the constant pressure from Washington to lend to those with poor credit.

Since 2008, the banks have been severely limited in regard to mortgages.  First, the Federal Reserve has kept interest rates extremely low.  Rates for home mortgages have been at their lowest since the Depression.  The government has also greatly limited the level of risk that the banks are allowed to take, that means that only those with the best credit could get home loans.  But even those with the best credit present risk.  The banks chose the path forced on them by the government's new regulatory scheme.  The banks initiated the mortgage loans to borrowers.  That got the banks all the up front fees that come with making the loan.  Once the loan was complete, however, the banks sold the loans to the government via Fanny or Freddie.  The bank gets the fees for the loan and possibly a profit on the sale to the government, but it keeps NO risk.

The banks have also pulled back from lending to smaller businesses, something that Faroohar points out.  She does not understand the reason for this pull back, however.  After the passage of the Dodd-Frank law by the Democrats in 2010, the banking industry was substantially changed.  For the fifty years prior to the passage of the law, America had seen the creation of roughly 100 new banks each year.  Some years saw many more, and some years saw less, but there were at least two new banks each week.  The small local banks focused their efforts on the market segment least well served by the big banks:  small businesses.  Indeed, small local banks were the source of a large chunk of the financing obtained by new businesses.  Dodd-Frank, however, put enormous restrictions on the creation of new banks.  It now cost so much just to meet the regulatory requirements set by Washington, that the creation of new banks dried up.  Instead of the 600 or so new banks that one would have expected to have been created since the passage of Dodd-Frank, there have been a grand total of ONE new bank in the USA since 2010.  Taking all these new banks out of the equation severely limited the availability of credit for small business.

It's not just the lack of new banks that prevents needed lending to small business.  The Dodd-Frank requirements on existing banks to limit risk also prevents lending to small businesses.  At the end of each quarter, the banks are required by federal law to report on their risk levels.  Certain levels are mandated by the post Dodd-Frank structure.  Loans to small business raise those risk levels while loans to big enterprises do not.  Many banks actually prefer to just deposit funds with the Federal Reserve (which is risk free according to the law) and to receive a small guaranteed profit from the interest earned rather than lending to any entity let alone risky small businesses.  It's another of those efforts by the government to pick winners and losers that Faroohar lauds but which, in actual fact, undermine the ability of the economy to grow.

So there's little doubt that Faroohar hasn't a clue about her subject matter.  She has the "popular press" viewpoint of the economy which is based mostly on ideology rather than any knowledge of the facts.  She's unimportant as an individual, but her article is very important.  The idea that Time would put this pile of garbage and misinformation on its cover as some sort of deep insightful piece shows just how little the mainstream media understands the economy.  The reality is that the government has been preventing economic growth.  The editors of Time and their colleagues in the mainstream media cannot accept that fact, however.  As a result, they look for something other than the government to blame.  Even worse, they still promote government as the answer, not the problem. 

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