Harry Newton's In Search of The Perfect Investment
Technology Investor. Harry Newton
9:00 AM EST, Monday, February 2, 2009: Is
our present recession the cure or the problem? Ponder that one.
it's the cure, we should not muck with it. Let it run its course. Otherwise,
our meddling will lengthen or worsen the cure.
it's the problem, we should muck with it. But how?
has some ideas. There are two schools. The first says meddle with interest
rates (also called monetary policy). We tried that in recent months. We got
interest rates down to nothing. And still growth contracted, unemployment
went up and the stockmarket went down. January was the worst January in eons
in the market.
The second school
is fiscal policy. The government spends oodles of money. That is called Keynesian
economics. It's based on a book John Maynard Keynes wrote in 1936. His theory
had two charms: First, it argued that government spending could replace drooping
consumer spending (the magic cure). Second, spending appealed enormously to
politicians who no longer felt guilty about pork. (Like crack to a crack addict.)
problem with economics as a "science" is that you can't do controlled
experiments. We don't have that many financial crises. And every one is different.
The best you can have in Economics is a good theory. Some economists believe
Keynes. Some think he's total BS.
As we are about
to embark on the biggest stimulus program in the history of the world, remember
1. It's based
on unproven theory.
2. If it doesn't
get us out of the recession, it may give us vicious inflation, bloated government,
and $1 trillion more in national debt.
3. Keynes said
"The stockmarket can stay irrational longer than you can stay solvent."
4. Harry (that's
me) and Todd (my friend) said, "When in doubt, stay out and solvent."
I continue to
My first degree
was in Economics. In my dictionary, I define economics as:
is called the dismal science. The standing joke is that an economist is
someone who didn't have the personality to become an accountant. There is
also a theory that God invented economists to make weather forecasters and
astrologers look good. Economists are incredibly good at predicting the
past. People claim "If you laid every economist end to end, it would
not be a bad thing." Another variation, "If all the economists
in the world were laid end to end, they still wouldn't reach a conclusion.
three types of economists: Those who can count, and those who can't. On
the first day God created the sun; the Devil countered and created sunburn.
On the second day God created sex; the Devil countered with marriage. On
the third day God created an economist. This was a tough one for the Devil,
but in the end, and after much thought, he created a second economist.
As we attempt
to figure what we personally should be doing with our money, there is another
complicating problem. The present administration has two goals for its stimulus
1. Fix the recession.
2. Fix (i.e.
remake) the economy.
These two goals
make predicting the outcome even more difficult.
The New York
Times ran a cover piece on its magazine, The
Big Fix. In it was:
AFTER THE ELECTION, Rahm Emanuel, Obamas chief of staff, appeared
before an audience of business executives and laid out an idea that Lawrence
H. Summers, Obamas top economic adviser, later described to me as
Rahms Doctrine. You never want a serious crisis to go to waste,
Emanuel said. What I mean by that is that its an opportunity
to do things you could not do before.
In part, the
idea is standard political maneuvering. Obama had an ambitious agenda
on health care, energy and taxes before the economy took a turn for
the worse in the fall, and he has an interest in connecting the financial
crisis to his pre-existing plans. Things we had postponed for too
long, that were long term, are now immediate and must be dealt with,
Emanuel said in November. Of course, the existence of the crisis doesnt
force the Obama administration to deal with education or health care. But
the fact that the economy appears to be mired in its worst recession in
a generation may well allow the administration to confront problems that
have festered for years. Thats the crux of the doctrine.
is hardly trivial namely, that the financial crisis is so serious
that the administration shouldnt distract itself with other matters.
That is a risk, as is the additional piling on of debt for investments that
might not bear fruit for a long while. But Obama may not have the luxury
of trying to deal with the problems separately. This crisis may be his one
chance to begin transforming the economy and avoid future crises.
In the early
1980s, an economist named Mancur Olson developed a theory that could fairly
be called the academic version of Rahms Doctrine. Olson, a University
of Maryland professor who died in 1998, is one of those academics little
known to the public but famous among his peers. His seminal work, The
Rise and Decline of Nations, published in 1982, helped explain how
stable, affluent societies tend to get in trouble. The book turns out to
be a surprisingly useful guide to the current crisis.
telling, successful countries give rise to interest groups that accumulate
more and more influence over time. Eventually, the groups become powerful
enough to win government favors, in the form of new laws or friendly regulators.
These favors allow the groups to benefit at the expense of everyone else;
not only do they end up with a larger piece of the economys pie, but
they do so in a way that keeps the pie from growing as much as it otherwise
would. Trade barriers and tariffs are the classic example. They help the
domestic manufacturer of a product at the expense of millions of consumers,
who must pay high prices and choose from a limited selection of goods.
book was short but sprawling, touching on everything from the Great Depression
to the caste system in India. His primary case study was Great Britain in
the decades after World War II. As an economic and military giant for more
than two centuries, it had accumulated one of historys great collections
of interest groups miners, financial traders and farmers, among others.
These interest groups had so shackled Great Britains economy by the
1970s that its high unemployment and slow growth came to be known as British
Japan, on the other hand, were forced to rebuild their economies and political
systems after the war. Their interest groups were wiped away by the defeat.
In a crisis, there is an opportunity to rearrange things, because
the status quo is blown up, Frank Levy, an M.I.T. economist and an
Olson admirer, told me recently. If a country slowly glides down toward
irrelevance, he said, the constituency for reform wont take shape.
Olsons insight was that the defeated countries of World War II didnt
rise in spite of crisis. They rose because of it.
to the modern-day United States, though not exact, are plain enough. This
countrys long period of economic preeminence has produced a set of
interest groups that, in Olsons words, reduce efficiency and
aggregate income. Home builders and real estate agents pushed for
housing subsidies, which made many of them rich but made the real estate
bubble possible. Doctors, drug makers and other medical companies persuaded
the federal government to pay for expensive treatments that have scant evidence
of being effective. Those treatments are the primary reason this country
spends so much more than any other on medicine. In these cases, and in others,
interest groups successfully lobbied for actions that benefited them and
hurt the larger economy.
interest group fits Olsons thesis as well as Wall Street. It used
an enormous amount of leverage debt to grow to unprecedented
size. At times Wall Street seemed ubiquitous. Eight Major League ballparks
are named for financial-services companies, as are the theater for the Alvin
Ailey dance company, a top childrens hospital in New York and even
a planned entrance of the St. Louis Zoo. At Princeton, the financial-engineering
program, meant to educate future titans of finance, enrolled more undergraduates
than any of the traditional engineering programs. Before the stock market
crashed last year, finance companies earned 27 percent of the nations
corporate profits, up from about 15 percent in the 1970s and 80s.
These profits bought political influence. Congress taxed the income of hedge-fund
managers at a lower rate than most everyone elses. Regulators didnt
ask too many hard questions and then often moved on to a Wall Street job
of their own.
In good times
or good-enough times the political will to beat back such
policies simply doesnt exist. Their costs are too diffuse, and their
benefits too concentrated. A crisis changes the dynamic. Its an opportunity
to do things you could not do before.
crisis was the Winter of Discontent, in 1978-79, when strikes paralyzed
the country and many public services shut down. The resulting furor helped
elect Margaret Thatcher as prime minister and allowed her to sweep away
some of the old economic order. Her laissez-faire reforms were flawed in
some important ways taken to an extreme, they helped create the current
financial crisis and they werent the only reason for Englands
turnaround. But they made a difference. In the 30 years since her election,
England has grown faster than Germany or Japan.
You may also
enjoy an NPR Planet Money podcast on Obama Tests Keynes. Planet
Money January 30.,
saga of the overweight Irishman
An Irishman was terribly overweight, so his doctor put him on a diet.
you to eat regularly for two days, then skip a day, and repeat this procedure
for two weeks. The next time I see you, you should have lost at least five
When the Irishman
returned, he shocked the doctor by having lost 60 lbs.
amazing!' the doctor said, 'Did you follow my instructions?'
nodded...'I'll tell you though, by jaesuz, I t'aut I were going to drop dead
on dat 3rd day.'
hunger?" asked the doctor.
the friggin' skippin."
This column is about my personal search for the perfect
investment. I don't give investment advice. For that you have to be registered
with regulatory authorities, which I am not. I am a reporter and an investor.
I make my daily column -- Monday through Friday -- freely available for three
reasons: Writing is good for sorting things out in my brain. Second, the column
is research for a book I'm writing called "In Search of the Perfect
Investment." Third, I encourage my readers to send me their ideas,
concerns and experiences. That way we can all learn together. My email address
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