Economic oversteering

Wednesday, January 23rd, 2008

Yesterday, we saw the most extraordinary failure of economic leadership in recent years, when the US Federal Reserve pressed the “emergency morphine” button and cut Federal Reserve rates by 0.75%. It will not help.

These are extremely testing times, and thus far, the US Fed under Bernanke has been found wanting. Historians may well lay the real blame for current distress at the door of Alan Greenspan, who pioneered the use of morphine to dull economic pain, but they will probably also credit him with a certain level of discretion in its prescription. During Greenspan’s tenure at the Fed, economic leaders became convinced that the solution to market distress was to ensure that the financial system had access to easy money.

This proved effective in the short term. When LTCM looked set to explode (private investments, leveraged up dramatically, managed by Nobel prize-winning financial theorists, placed a bet on a sure thing which didn’t pan out quite as expected) Greenspan engineered an orderly unwinding of its affairs. When the dot com bubble burst, Greenspan kept the financial system energised by lowering rates so far that they were, for a substantial period, at negative levels.

A negative real interest rate means we are effectively paid to take out loans. That might sound good, but how would you feel if I used the words “paid to take a few more hits of crack cocaine”? The underlying problem was that people had become accustomed to high rates of return and did not want to accept that real rates of return in the US were moving down. They had become accustomed to easy money, and Greenspan’s policy ensured that money remained accessible at a time when people had demonstrated a low ability to invest that easy money well.

Low rates give people an incentive to invest in stocks, even if those stocks are not earning very much. This meant stock prices recovered quickly, and the effect was amplified by the fact that low rates increased corporate earnings. This was a so-called “soft landing” – disaster averted. He must have known the risks, but the one big warning sign that would likely have convinced Greenspan to return to normal rates was missing: inflation. Low rates, and especially negative rates, have historically always resulted in inflation. Greenspan kept rates low because there were no signs of inflation. It seemed as if the US had entered a new era where the correlation of rates and inflation no long held true. People explained it by saying that the US was increasing its productivity dramatically (productivity increases are like anti-inflation medicine). Now, with hindsight, it appears that the real reason for the absence of inflation was that the Chinese were increasing their productivity dramatically, and that US consumers were spending so much on Chinese goods that Chinese productivity growth, not US productivity growth, was keeping US prices low.

When tech came off the boil and people should have been using the pause to clean up their affairs, Greenspan made it easy for people to get themselves into a worse position. Easy money made stock market prices artificially high, so stock market investors felt rich. Worse, easy money made house prices artificially high (by about 45%), so everybody felt wealthier than they had planned or expected to.

To make matters worse, a series of financial innovations created a whole industry designed to help people go back into debt on their houses. I remember trying to watch TV in the US and being amazed at the number of advertisements for “home equity withdrawals”. They made it sound like turning your major personal financial asset – your paid-off house – into an ATM machine was a good thing. In fact, it was a means to spend all of your primary store of wealth. And with inflated house prices, it was a way to spend money that you did not really have. A convenient way to get into a deep, dark hole of family debt. The result? The average American owns less of her home today than  she did 30 years ago – 55% as opposed to 68%. Easy money makes people poorer.The company with the most irritating ads, Ditech (and I feel ashamed to be contributing to their website search ranking with the mention, perhaps it will help instead to link to their customer feedback), has a tagline “People are smart” and a business model built on the idea that “People are dumb”. Their “most popular” product strikes me as being tailor-made to make it easy to turn home equity – an asset – into new debt.

Why did Greenspan do it? I think he genuinely believed that there was something different about the modern world that had altered the laws of economic gravity. I suspect he no longer feels that way.

But Greenspan is no longer Chairman of the Fed. Ben Bernanke blinked, yesterday, and in that blink we have the measure of the man.

Greenspan acted carefully, logically, and basically prudently. Several years of anomalous economic data are a reasonable basis to think that the rules have evolved. You would have to have a Swiss (700 years of stability) or Chinese (“we think it’s too early to tell if the French Revolution was a good idea”) approach to stick with economic theories that are at odds with the facts for very long. Greenspan made a mistake, and it will have huge consequences for the US for a generation, but he had reasons for that mistake. Bernanke just blinked, he panicked, despite knowing better.

We now have rigorous economic explanations for all that is happening. We have come to understand, quite clearly, what is going on in the world. The deflationary Eastern wind has been identified. We know there is no productivity miracle in the US, no change in the laws of physics or economics. So we know that the US patient is addicted to easy money morphine, medicine that was prescribed with good intentions by Dr Greenspan, medicine that has in the last 7 years made the patient more ill and not less. More morphine today constitutes malpractice, not economic innovation. We know the consequences of more morphine – stock prices will rise artificially (4% yesterday, on the news of the shot), house prices will stumble along, companies will take longer to default on their loans.

Bernanke might be hoping to do what Greenspan did – retire before the addiction becomes entirely obvious. Too late. While the Fed is clearly not willing to admit it, the markets have just as clearly taken their own view, that the prognosis is not good. They are smart enough to see that all Bernanke has done is cover up the symptoms of malaise, and many are using the temporary pain relief to head for safer territory. I expect that any relief will be brief, market recoveries will  fade, the rout has been deferred but not averted.

I started out by describing the Fed’s actions as a failure of economic leadership. Some folks are lucky enough to lead from the bottom of the cycle, up – they take over when things are miserable and can only really get better. They look like heroes even if their voodoo has no mojo, so to speak. Others are less lucky, they get handed custodianship of an asset that is at the peak. As for Bernanke, he’s in that latter category. He needs to be able to speak clearly and frankly about the hard work that lies ahead in the US. He needs to appeal to the very best of American industriousness – a traditional willingness to work hard, be smart, and accept the consequences of refusing to do so. He needs to lead under the most difficult circumstances. But that’s what leadership is about.

Fortunately for Bernanke, central bank independence is widely believed to be the only credible approach to economic governance. That independence gives Bernanke the right to stand at odds with political leaders if needed. Given the recent White House announcements – more morphine, further indebtedness for the worlds most indebted country – there’s no stomache for a real program of rehabilitation in the Bush Administration. Bernanke will have to lead without political support, a very difficult task indeed. Our greatest and most memorable leaders are those who lead through difficult times. The same is true of failures of leadership. Appeasement, or rehabilitation. Chamberlain, or Churchill. Thus far, Chamberlain.

68 comments:

  1. Jose Hevia says: (permalink)
    January 23rd, 2008 at 2:04 pm

    Thanks for your thoughts, I agree with you.

  2. Terry Phillips says: (permalink)
    January 23rd, 2008 at 2:28 pm

    It is good to see someone in the US saying what needs to be said. Hopefully, here in the UK the Bank of England will resist the urge to recklessly reduce interest rates.

    Mark Shuttleworth says: I’m in the UK at present ;-)

  3. Berto says: (permalink)
    January 23rd, 2008 at 2:44 pm

    Mark, this is an incredible write-up, the best I’ve seen on the subject so far this week.

    What’s even scarier is the fact that many do no believe that the rest of the world will decouple from America’s mess. Nouriel Roubini has been saying this for well over a year and a half, and it’s all coming true. Scroll down to the “12 Reasons Why the World Will not Decouple….” article and take a look:
    http://www.rgemonitor.com/blog/roubini/archive/2006-06/

    Last night, in my blog, I decided to take a more satirical view of the situation. Some might find it funny, others certainly won’t. It’s based in the future (August 2008), and is titled “Fed Cuts Interest Rate to 0% in Emergency Effort”

    http://www.mikeroberto.com/2008/01/22/fed-cuts-interest-rate-to-0-in-emergency-effort/

    Keep up the good work

  4. Anzan says: (permalink)
    January 23rd, 2008 at 2:53 pm

    I hope that you continue to comment on this sitation as it unfolds, Mark.

  5. Axel Winter says: (permalink)
    January 23rd, 2008 at 3:17 pm

    Hmmm … I guess both might be needed, Churchill and Chamberlain for now. Blood & Iron is not enough to give people food – consider the impact of a US demise in South Africa or Asia, where I am living.

    How does one address irrational behavior? Would you not agree, that the Greenspan way can manage that well? Its another thing to say, whether this is a sufficient as the medicine. Here obviously foundamentals need to change …

  6. David Holden says: (permalink)
    January 23rd, 2008 at 3:31 pm

    Spot on. We’ve come to expect equity markets to overreact, they are in effect gamblers who alternate between greed and fear whose game of choice over the short term are effectively random fluctuations. When the worlds largest economy’s central bank starts reacting to this by large and panicked cuts in interest rates their credibility has to be up for question.

    Their seems to be a complete lack of symmetry to how the US and UK economies have been managed over the last 5 years, put simply saving bad, borrowing good.

  7. Jason Crow says: (permalink)
    January 23rd, 2008 at 4:10 pm

    Mark,
    I think you hit it on the head. It doesn’t seem like people here in the US get it. We are too interested in driving our monster SUV’s and buying cheap Chinese crap on our credit cards and with what the celebrities are doing. Since the world economy is tied to the USA’s economy, I think the world is in for a bumpy ride.

  8. Jonathan Carter says: (permalink)
    January 23rd, 2008 at 4:36 pm

    I’m not as educated as you when it comes to economics, but even I was shocked when I heard that they were dropping the interest rates in the US. Usually, when anything mildly goes wrong here in South Africa, the interest rates go up (we’ve had 3 hikes last year, and I feel that was excessive). I think that they don’t always give enough chance for the markets to react before making changes, and in overcorrecting they are doing more damage than repair. Sorry, I’m going a bit off-topic from your post, but what it comes down to, is that the bodies in control generally seem to panic and make non-optimal, hasty decisions.

    On leadership, I think someone can display good leadership even when they enter as something drops from its peak. I believe that how they handle the situation is where the leadership comes in, not only the results of it, and so I tend to agree more with what you said in the first paragraph.

  9. Armand CORBEAUX says: (permalink)
    January 23rd, 2008 at 5:51 pm

    I’m agree qith you Mark.

    Since the subprimes crisis has appended this summer, we have not seen major impacts on global economy, until that day.
    In France they say that was a reaction against the Bush’s Plan.
    But European Central Bank, this summer, has also used Morphine treatment to reduce the impact of Subprimes crisis.

    Another point, also, in the worth evaluation of China’s economy.

    In the past we have already see that, with the net economy, and the infration around startup companies, which has falled down.

    It’s clear that this situation will happen again. But without investments and innovations, economy and productivity cannot evolved in the right way.

  10. Jim says: (permalink)
    January 23rd, 2008 at 6:39 pm

    For all those wondering, the Federal Reserve is no more Federal than Federal Express. When we have all monetary policy in this country handled by one company, and ultimately one man, it’s obvious the system is broken.

    All the politicians hope we can keep putting off the huge upset that’s coming, at least until their term is up, but the longer we wait to correct the problem, the worse the crash is going to be.
    People like to poke fun at gold, but usually they don’t understand monetary policy at all and how it effects our overall lives. Think about it this way, is it a good idea to give an unlimited line of credit to the Federal Government (politicians love free money, makes wars appear to be free). Gold isn’t a perfect system, but anything is better than our current situation with the existence of the Fed.

    This problem has to be addressed, sooner rather than later. The Keynesian economic Ponzi scheme we have is doomed to failure. We need to stop putting off the inevitable and fix the problem. But economics and monetary policy rarely get people elected.

  11. Alessandro says: (permalink)
    January 23rd, 2008 at 6:41 pm

    Mark, I’m really happy to see you also concerned about the big picture.

    In case you don’t already know them I suggest you a couple of blogs on finace and macro-economics:

    Mike Mish Shedlock – http://globaleconomicanalysis.blogspot.com/
    Prof. Nouriel Roubini – http://www.rgemonitor.com/blog/roubini/ (free registration until the gen. the 31st, then it should go back to free access)
    Prof. Paul Krugman – http://krugman.blogs.nytimes.com/

    Most probably than not we are in for real tough times ahead. This emergency rate cut is just “… a shot of penicillin to a cancer patient.” (http://bigpicture.typepad.com/comments/2008/01/a-whiff-of-pani.html)

  12. Bill Childers says: (permalink)
    January 23rd, 2008 at 6:45 pm

    Mark;
    Great post, on a lot of levels. I think you hit the nail on the head – and this is why my wife and I haven’t refinanced our home that we bought in ’97. The temptation to do so is *very* great, however, and I know of many people who are cashing in on their hard-won stash of equity. Our lifestyle here in the US tends to encourage that though – why bother saving for the future when you can have your SUV/pool/bigger house/more bling now?

    Unfortunately, only time will tell how this economic game plays out.

    I also thought it’d be fun to note that my father-in-law wrote and produced most of those DiTech commercials you just commented so eloquently on. For people reading this comment, flames on that bit of trivia will be cheerfully ignored, :)

    Hope to see you at the next UDS, Mark!

  13. Mark Buckley says: (permalink)
    January 23rd, 2008 at 7:15 pm

    Its ok for us that aren’t affected as much as those about to loose there homes to play arm chair quarterbacks with the economy, but I think it was the right thing to do. Would you have all the world markets be in worse shape today? Obviously the whole world is dependent on our well being and the prudent thing to do is try and bolster against a severe crash. It beats freezing stock prices or Mortgage loan interest rates like Hillary has proposed… thats insane.

    People also need to take responsibility. Mortgage lending companies and realtors are somewhat to blame for the Prime Loan crisis in the country, but Americans are very ignorant when it comes to reading their contracts. They don’t even know what percentage they are paying when signing the loan? If they all really understood what they were signing, they may have thought twice. We live beyond our means in everyway, this is just a correction for that reality. Get used to being more frugal. Or should we spend more on our credit cards to prop up the stock market? Yahoo is really what we need to take note of. Internet stocks are about to be battered. Hold on, the ride is not over yet.

    Oh BTW, I love Ubuntu… But wish you would stick to keeping that great and not worry so much about how the government is fucking up your money. It won’t change, no matter who is in the whitehouse!

  14. Jason Pratt says: (permalink)
    January 23rd, 2008 at 7:15 pm

    Mark Shuttleworth for U.S. President 2008!

    Seriously, this is an amazingly cogent analysis of America’s monetary crisis. Our only way out is what von Mises called a ‘crack-up boom’, which looks closer and closer every day. We’ve indebted and inflated our way into a ‘no way out’ situation. U.S. total liabilities now exceed $70 trillion (including unfunded liabilities of healthcare and retirement, plus state/local/personal debt). This is more than the entire net worth of U.S. assets!

    Check out Ron Paul, people – he’s the only one talking about this (and has been for 30 years, when this mess started he saw where it was going to go)

    Also http://www.grandfatherreport.com

    You’ve made me more likely to be a Ubuntu user! Thanks again!

  15. Mark Buckley says: (permalink)
    January 23rd, 2008 at 7:22 pm

    Hope you don’t not post due to my use of the Fword…? I will repost without if needed.
    thanks

  16. Current economic crisis: A neat analysis « Jagadguru on Politics says: (permalink)
    January 23rd, 2008 at 7:29 pm

    [...] economic crisis: A neat analysis Mark Shuttleworth, founder of Ubuntu OS, has this neat take on the current economic crisis. It is a very good read even if you are not gaga about [...]

  17. F. Heinsen says: (permalink)
    January 23rd, 2008 at 8:25 pm

    Wow. I’m impressed — at your ability to grasp and synthesize complex matters — ranging from the tectonic shifts taking place in the world of software to the underlying economic problems at the root of the recent meltdown in credit and stock markets worldwide.

    - A professional investor who also happens to be a fan and full-time user of Ubuntu

    P.S. You may enjoy reading this classic account of a past property boom in the U.S.: http://xroads.virginia.edu/~HYPER/ALLEN/ch11.html (from Frederick L. Allen’s classic book: “Only Yesterday: An Informal History of the 1920′s”).

  18. wolli: juhuslikud mõtted » Blog Archive » Shuttleworth: odav raha teeb vaesemaks says: (permalink)
    January 23rd, 2008 at 9:49 pm

    [...] Mark Shuttleworth avaldas oma blogis mõtlemapaneva artikli maailmamajanduses ja finantsturgudel praegu aset leidvate sündmuste kohta. Paralleelid Eestis [...]

  19. Stacey Schneider says: (permalink)
    January 23rd, 2008 at 10:02 pm

    Greenspan had one extraordinary thing going for him – as you say, he was methodical, prudent and pensive, but he also had a degree of respect which afforded him to speak his mind and stay true to his beliefs. Bernanke is new at this and I suspect he is being lobbied/bullied by Bush, who has shown little genius in any decision he’s made thus far in running a country, but impressive conviction.

    As an american, I find watching our government sort of like watching a horror movie. You know, where they play the scary music when the girl hears an ominous noise at the end of a dark hallway… and you just want to scream “Don’t go in there”. And then she does, and gets killed. Its sorta like that, just a new show every week.

  20. Stranger says: (permalink)
    January 23rd, 2008 at 10:38 pm

    Couple this stupidity with the absolute insanity of increasing the national debt to finance a tax rebate and you truly have a recipe for financial disaster.

    The problems we face cannot be answered by ruining the finances of nation as a whole by putting it even further in debt. Unfortunately, there are not enough forward thinkers among our elected representatives.

  21. Kazriko says: (permalink)
    January 24th, 2008 at 1:25 am

    There are people in the US as well talking about this as loudly as they can, but they’re being drown out by the optimists saying that it’s just fine, no need to worry. Glenn Beck has been one of the loudest on this issue, and is one I believe on many such issues, and he’s used the Chamberlin/Churchill analogy many times as well.

    There’s a natural cycle to business, and we’ve been postponing and postponing the downturns since the middle of Clinton’s reign. The longer you keep the whole thing propped up, the harder the whole thing falls in the end after being piled higher and higher with bad investments that you’re not allowing the free market to correct.

  22. Great Post on Economic Meltdown: “Economic Oversteering” « The Trickle-Down says: (permalink)
    January 24th, 2008 at 2:03 am

    [...] Great Post on Economic Meltdown: “Economic Oversteering” Posted on January 23, 2008 by trickledown Economic Oversteering [...]

  23. Sean’s Mental Walkabout » Blog Archive » links for 2008-01-24 says: (permalink)
    January 24th, 2008 at 4:26 am

    [...] Mark Shuttleworth » Blog Archive » Economic oversteering Worth a read (tags: economics) [...]

  24. Andrew Dicks says: (permalink)
    January 24th, 2008 at 5:31 am

    I think that you are giving Alan Greenspan far too much credit!
    It is the job of the Fed to 1) keep prices stable (or achieve some target inflation range) and 2) keep GDP growth on a stable path. Alan Greenspan started the rot – he allowed rates to fall far too low and so encourage excessive borrowing in order to shore up consumer demand. (Dont forget the politics involved in pushing these decisions especially around election times). Secondly, the FED has oversight over the SEC which allowed all these ‘products’ and SIV’s to be created which geared the low credit into investment grade products. I belive it is that process that is more to blame than overreacting (maybe?) to a world crisis that has its origins in the US housing market.

  25. John Crawford says: (permalink)
    January 24th, 2008 at 7:27 am

    As an American, I agree with the majority of the points you make here. I have thought at length about what I would say in reply to this editorial on America, and it’s economic shortfalls and problems.

    I may, as an American, be taking this post to personally. I, as most Americans, know that our system is flawed. I will not try to minimize our culpability. I will not offer excuses.

    I am 54 years old and have not agreed with our government on more things I care to admit. I do love my country though, and I take exception to you lumping all Americans into the “accustomed to easy money” catagory.

    I, along with a great many of my fellow Americans, are hard workers, own their own homes, have savings put aside, have no credit card debt, and work hard to provide for our families. We take care of our parents in their old age if needed, and do the best we can with what we have, living within our means.

    We see ads like the one for Ditech everyday, but we see them for what they are, come ons to fleece the American public. However, we can’t stop them, any more than you could stop the British tabloids form printing the stories they do.

    Again, your analysis is one of the best I’ve seen, and I hope the American government will amend it’s policy to insure a more stable American economy. I would not count on it though.

  26. Simone Brunozzi says: (permalink)
    January 24th, 2008 at 9:20 am

    Well, Mark, after solving bug #1, you’ll certainly can move to economic topics, and place your “Mark” there as well (Ecobuntu? hmm, sounds ecological… moneybuntu? Just kidding of course).
    Bad thing is that almost nobody understands at least a little about economics. We’d have to. (I’m slowly trying, by the way).

    Best,

  27. David Mills says: (permalink)
    January 24th, 2008 at 9:46 am

    Thank goodness someone outside of the so called ‘Doomer’ circles is latching on to what is going on economically.

    Keep up the good work.

    David

  28. Mark Shuttleworth scrive di economia « www.ubuntista.it says: (permalink)
    January 24th, 2008 at 10:03 am

    [...] fondatore di Canonical e quindi di Ubuntu, è laureato in Finanza e Sistemi Informativi… Oggi nel suo blog scrive di economia, e merita una lettura attenta. Posted by ubuntista Filed in Mark Shuttleworth Tags: Mark [...]

  29. Misadventures of a Celtic Geek » Blog Archive » Rate cuts and what they mean to the rest of us says: (permalink)
    January 24th, 2008 at 10:10 am

    [...] I haven’t got a multi paged analyses lined up, I’ll leave that to Mark and others like him who can put it much much better than I [...]

  30. james hoskins says: (permalink)
    January 24th, 2008 at 10:30 am

    Hello Mark, You are probably right about America’s addiction to cheap credit and certainly the cure is likely to be uncomfortable for lots of ordinary people. I would be interested to know how unpleasant you think the medicine needs to be.

    On reading your arguments, I immediately thought of Margaret Thatcher’s brutal restriction of credit in the early 1980′s. Looking back, we can see that those policies succeeded in squashing inflation, but the costs – in terms of businesses going under, unemployment and personal hardship – were immense.

    Perhaps the best advice to offer Ben Bernanke and central bankers like him comes from the virgin queen – video et taceo – “I see but say nothing.”

  31. Kevin Mark says: (permalink)
    January 24th, 2008 at 12:07 pm

    Hi Mark,
    it takes someone who’s seem the earth from a wider perspective to make good comments. I enjoy reading the non-tech posts. One of the things that always gets me in this global world is the idea of where a company is based. There are lots of companies, like you mention, that are ‘US companies’ that have all their goods or services done elsewhere (like China) and are still considered ‘US companies’, which is how I would interpret your comment about how its China who had a productivity increase because of the ‘US companies’ employing Chinese labor. I think of Wal-mart as Chinese-products-mart because the only US part of the operation is the low-wage people selling stuff which are all the products from ultra-low-wage folks in China.
    Cheers,
    Kev

  32. reuben says: (permalink)
    January 24th, 2008 at 1:05 pm

    Nice one, especially “we think it’s too early to tell if the French Revolution was a good idea” – lols . Though, I’m not so sure about putting the federal reserve system in the center of the recent economical issues. Sure, they play a influential role in the US economy and therefore also world economy. But hyping chairmen to an extent of this political impact is probably rather the business of weirdos like Maria Bartiromo or so. This (IMHO) common misconception is presumably their responsibility and due to financial “experts” and gamblers. To make a long story short: I believe the Warren Buffett-style of personifying large scale economical phenomena isn’t quite correct.

  33. Roy Schestowitz says: (permalink)
    January 24th, 2008 at 1:25 pm

    Mark,

    Keep South Africa and other places as ‘purified’ of this mess as you have done so far. Your insights are commendable.

  34. Mike Holmes says: (permalink)
    January 24th, 2008 at 1:25 pm

    I’ve said for years that Alan Greenspan will go down in history as the man who saved a recession at the cost of a depression. It looks like this is now being confirmed.

  35. Craig A. Eddy says: (permalink)
    January 24th, 2008 at 1:53 pm

    You have written an interesting analysis of the economic situation. I will not pretend to be competent to determine whether it is good or bad. Certainly it is well written and well thought out. However, as one “at the bottom of the pool looking up”, I appear to see a connectedness between the economic situation and the attitudes and behavior of corporate and political leaders. One blatant example would be the situation surrounding the lawsuits of The SCO Group against IBM and Novell, and the way that The SCO Group’s stock reacted to it. Also the way that public media reacted to it, and the backlash to Linux that resulted.

    From that mess, I turn and look a the industries of oil, housing, automotive, and IP Litigation and see what appear to be similar actions going on. Though not as pronounced, they still appear to indicate a general expression of greed versus the “what is best for all of us” approach. This causes me some concern, particularly since, having seen this I am unable to do anything about it due to lack of knowledge, experience, training or connections to the “proper people”.

    I would hope that your statements would cause some people in the right positions in society to take a hard look at what is happening. But I greatly fear that this will not happen. The status quo may be too deeply entrenched. In any case, all any of us can do is try to the best of our ability, as you have demonstrated here and with the Ubuntu/Canonical approach to good computing.

    Thanks for writing the article,
    Craig
    Tyche

  36. llanitedave says: (permalink)
    January 24th, 2008 at 9:09 pm

    The morphine analogy is a good one, unfortunately the addiction is too long-term for any one “doctor” to be able to cure it. The next president of the U.S. will find herself in an impossible situation: If she has the courage to take the necessary action, she’ll lose the next election, and control will pass to those who shout for more addiction.

    A fatal overdose is inevitable, and probably not too far away.

    A democracy is, in this case, like giving the alcoholic the keys to the liquor store.

  37. Mark Buckley says: (permalink)
    January 24th, 2008 at 9:15 pm

    ts ok for us that aren’t affected as much as those about to loose there homes to play arm chair quarterbacks with the economy, but I think it was the right thing to do. Would you have all the world markets be in worse shape today? Obviously the whole world is dependent on our well being and the prudent thing to do is try and bolster against a severe crash. It beats freezing stock prices or Mortgage loan interest rates like Hillary has proposed… thats insane.

    People also need to take responsibility. Mortgage lending companies and realtors are somewhat to blame for the Prime Loan crisis in the country, but Americans are very ignorant when it comes to reading their contracts. They don’t even know what percentage they are paying when signing the loan? If they all really understood what they were signing, they may have thought twice. We live beyond our means in everyway, this is just a correction for that reality. Get used to being more frugal. Or should we spend more on our credit cards to prop up the stock market? Yahoo is really what we need to take note of. Internet stocks are about to be battered. Hold on, the ride is not over yet.

    Oh BTW, I love Ubuntu… But wish you would stick to keeping that great and not worry so much about how the government is wasting our money. It won’t change, no matter who is in the whitehouse!

  38. Mark Buckley says: (permalink)
    January 24th, 2008 at 9:15 pm

    I guess if I don’t agree with your point of view my comment doesn’t get posted? Hope that’s not the case. Free speech for some?

    Mark Shuttleworth says: Dear Mark, just above the comment box you’ll see this text:

    Comments are moderated by me for spam filtering, and it might take me up to a month to get to them so please be patient!

  39. markur says: (permalink)
    January 24th, 2008 at 9:23 pm

    How come my posts never showed up? Censorship?

    Mark Shuttleworth says: I use Akismet for automatic spam filtering of comments. If it’s sure a comment is not spam, it gets published immediately. If it’s sure it is spam, it is sent to heaven. And if it’s not certain, then it gets put in a queue for moderation. As it says JUST ABOVE THE COMMENT BOX, I only check it occasionally. Really, I don’t check my blog every five minutes to see if there are new comments, it can take up to a month for me between checks. As for censorship, I generally publish most comments, even the very critical ones. You can scan comments on other blogs to verify that yourself, if you are patient. Though, if you were patient, you wouldn’t have put so many comments here asking about censorship, and you would probably have seen the message JUST ABOVE THE COMMENT BOX explaining that it can take some time. I really do publish most comments, though there are a few folks out there that probably don’t want their own drooling idiocy part of the record forever.

  40. markur says: (permalink)
    January 24th, 2008 at 9:25 pm

    I posted to comments yesterday (early) and still not posted. My opinion is the wrong one? Come on man. Either allow free speech or take down your blog!
    Mark Buckley

    Mark Shuttleworth says: It’s a delight for me to be able to restate the message which is JUST.ABOVE.THE.COMMENT.BOX, that it may take up to a month for me to get to comments. Also, thanks very much for your email to my office today about this. I’m as excited as you are to publish your comments.

  41. michael says: (permalink)
    January 24th, 2008 at 10:11 pm

    Mark Shuttleworth about US economy…

    I subscribed to Mark Shuttleworth’s blog, because I appreciate his pointed views on open source and IT market and economics. I am pleased to read his thorough and pointed article "Economic oversteering" about the US economy malaise. So much …

  42. apol says: (permalink)
    January 25th, 2008 at 1:14 pm

    Hi Mark,
    Nice thoughts, but the style of the text frightens me a bit, you write as someone who has seen something that nobody is fully aware of, manifesting perhaps a urgent need to act to save US and the world from a catastrophe… Mark, there are hundreds of bright economic analysts sharing with you the responsibility to save America, but there is only one Mark Shuttleworth who can have the leadership to solve bug #1… Best wishes.

  43. Bob says: (permalink)
    January 25th, 2008 at 3:05 pm

    So you would just ignore recessions?

    The fact that others have messed things up seriously is no excuse for not acting to solve a new problem (of course, you apparently don’t seem to view it as a problem, but many of us in the US view recessions and unemployment as a bad thing).

    Also – central bank independence in the US is not much different from a proprietary software license. The Fed has complete freedom to do anything it wants. Unless, of course, Congress disapproves.

    The Fed was established by the US Congress, and the Fed has to carry out the wishes of Congress. The Fed has a mandate of both low and stable inflation and full employment. They cannot pick and choose.

    In addition, Bernanke will be up for reappointment soon. If he were to ignore politics completely, he would be heading back to Princeton.

    Mark Shuttleworth says: One of the commenters on this post used a great expression, which is to “avoid recession in favour of depression”. When markets have expanded too quickly, they are distorted. A recession and a market correction are healthy, they focus attention on the most productive and healthy assets. If you don’t allow for that healthy cleaning up, you can end up getting the economy into a position that is so precarious, so distorted, that it implodes – and you get a depression. If you take the hit earlier, it’s still a hit, but it makes you stronger. If you don’t, you may defer it, but the consequences are worse for everybody.

  44. James Susanka says: (permalink)
    January 25th, 2008 at 3:43 pm

    couldn’t agree more.

    but wait don’t worry the fed will just print more money and we will just continue down our happy little highway.

  45. brian says: (permalink)
    January 25th, 2008 at 3:52 pm

    The government always believes that more of the poison must be the cure. The FED should let the market be a market. It will correct itself and the interet rate that is set naturally will not lead to a boom/bubble/bust situation. The FED encouraged bad lending with artifically low rates and then decries lenders who over extended the sub-prime market.

    This has been very predictable and this rate cut treats the symptoms and not the disease. Mark’s comments are right on the money.

    I emplore any American who can see this truth to support Ron Paul for president. He has been saying this for 30 years.

  46. Neal Harmon says: (permalink)
    January 25th, 2008 at 7:45 pm

    It’s a time when America needs to face reality. Here’s a piece by Glenn Beck and the Comptroller of the United States on this very issue…

    http://www.youtube.com/watch?v=I-16u9x3tfE

    We owe $400k each right now for promises the U.S. government has made to us…just like having a mortgage with nothing to back it.

  47. Paul Kishimoto says: (permalink)
    January 26th, 2008 at 12:57 am

    There’s an excellent article in the February issue of Harper’s Magazine on the housing bubble or hyperinflation and how it came to follow so close on the heels of the dot-com bubble: http://harpers.org/archive/2008/02/0081908

    The focus on factors and conditions without reference to individuals spares no party its share of the blame, and gives the author’s prediction of the next cycle the unnerving ring of prophecy.

  48. Dan Libby says: (permalink)
    January 26th, 2008 at 1:01 am

    Hi Mark, as an Ubuntu user, geek, programmer, freedom lover, patriot, and armchair economist, I implore you to publically support Ron Paul for president.

    If you are not already familiar with his positions, read up on them here:
    http://ronpaullibrary.org. Don’t worry if some articles are old… he’s been agreeing with your for 30 years now.

    Vote Ron Paul – For Genuine Freedom in our Lifetime.

  49. Dan Libby says: (permalink)
    January 26th, 2008 at 1:04 am

    I might just add that Ron Paul has recently named as his economics advisors (as if he needs advisors) two very prominent names in the financial world: Peter Schiff and Don Luskin.

    Dr. Paul’s prescription for our economic woes is here:

    http://www.ronpaul2008.com/Prosperity

  50. Boycott Novell » Microsoft Conceals Financial Pains Using Money Games says: (permalink)
    January 26th, 2008 at 3:07 am

    [...] Economic oversteering Yesterday, we saw the most extraordinary failure of economic leadership in recent years, when the [...]

  51. Larry Tullos says: (permalink)
    January 26th, 2008 at 7:24 am

    Excellent blog that is sorely needed. For certain there is panic in the markets that needs to be calmed; but this (nor the next round of handouts) are not going to provide any long term help and only serves to make the inevitable day of reckoning that much uglier. A very sad day for our country, and as you say a huge failure or leadership all around.

    On a positive note, I’m buiding my first HTPC as I write this around MythBuntu and am impressed beyond words. I’m still trying to cut loose of Windows; but am finding it much easier than I expected. This is by far the easiest new PC installation I’ve done, and capabilites appear to be outstanding too. Thanks for your quality work and ideas!

  52. Rob Stokes says: (permalink)
    January 26th, 2008 at 8:45 am

    Awesome article Mark, your insights are really thought provoking.
    The one thing that has always bothered me though is the fact that the Fed is privately owned… at the end of the day their moves may be seen as in the public interest but at the end of the day they are seeking profits just like any institution.

  53. faustianbargain says: (permalink)
    January 26th, 2008 at 4:44 pm

    bernanke did not just ‘blink’..he FOLDED to wall street pressure. what a puppet!

  54. Weeber says: (permalink)
    January 26th, 2008 at 5:02 pm

    “People explained it by saying that the US was increasing its productivity dramatically (productivity increases are like anti-inflation medicine). Now, with hindsight, it appears that the real reason for the absence of inflation was that the Chinese were increasing their productivity dramatically, and that US consumers were spending so much on Chinese goods that Chinese productivity growth, not US productivity growth, was keeping US prices low.”

    I’m sure that most Spanish and British people can see a similarity between what’s happening between the US and China now and what happened between Spain and England back in history when Spain was the biggest empire in the world and had the biggest stake in American Gold.

  55. buzz says: (permalink)
    January 27th, 2008 at 8:59 am

    Economic Oversteering…

    Κάποιες σκέψεις για την πρόσφατη ανησυχία για την αμερικάνικη οικονομία….

  56. EduardoWillians says: (permalink)
    January 28th, 2008 at 6:23 am

    With(out) your permission, I translated your post to brazilian portuguese. Thanks.

  57. Kevin says: (permalink)
    January 30th, 2008 at 11:08 am

    I’m glad that I’m not the only one who thinks his country has lost its damned mind. I’m living here among it, and spent the first part of my life among the crazy, spending what wasn’t mine. Now, I’m sleeping off my debt hangover, and although I have a safer job than most, and relatively little money tied to the stock market, I watch with anxiety at the world financial news. I am glad to see that there are some among us who have roused enough to see the approaching train, even if my own country’s leadership is sleeping through the alarm.

    Mark, I have highest respect for you, and thank you for your contributions to the world (I am posting from a Thinkpad which happily runs one of them). Linux is a good part of my job, and so I have directly benefited from your insight thus far. I just hope the next person in the White House, if they won’t subscribe to such a level mindset, will at least have open ears to those who do.

  58. Nathan Dbb says: (permalink)
    January 30th, 2008 at 8:55 pm

    My brother and I commiserated about this while we were both recently house shopping in the USA.

    The value of a house should be the cost need to recreate the house (labor, wood, copper, etc.). Plus the value of the jobs that can be worked while living at the house, with land decreasing in value with distance from the jobs due to decreased scarcity of land and increased commute time/cost. Add/Subtract some for factors like parks, schools, roads, etc. (The agricultural opportunity cost is minor.)

    With the USA only having growth in the service (low value) jobs in recent years, it is only easy money policies that were pushing up prices.

    Older people who own homes got “free” money, while the younger generation will have to pay for the mess.

  59. EduardoWillians says: (permalink)
    January 30th, 2008 at 10:41 pm

    Shuttleworth, I liked your post so much that I translated it to brazilian portuguese. I reviewed the translation again and again to make sure I was doing it right.

    Tank you.

  60. Douglas Scott says: (permalink)
    February 1st, 2008 at 11:19 am

    You have written a good article Mark that presents a relatively robust theory on what has been driving the US’s recent, longer then normal, economic growth cycle but don’t think that you are entirely correct on some points. As I am sure you know, having made a respectable living from it, there have been substantial productivity increases in the US economy over the past 15 years due to the “information revolution” (to use an old term) and the subsequent advances that have risen out of this field since; the vast majority of these advances and developments coming out of the United States.

    It is true that much of the productivity gains in global production output have come from China and India over this time period which accounts for much of the increase in relative wealth (such as purchasing power parity, ie you can buy relatively more with the same amount of money) in developed countries. However it has also not been the only one as the US (and OEDC countries in general) have also experienced genuine productivity gains of there own over this period. Having said that these productivity gains are nothing in comparison to the gain experienced in India and China, but then again India and China are both coming off a very low base and still remain a lot less productive then in OEDC countries.

    Having said all of that I think that the crux of your argument remains very valid. Perhaps cutting interest rates so aggressively over the past 15 years has indeed done more bad then good. Either way, only time will reveal that answer to us.

  61. marc says: (permalink)
    February 1st, 2008 at 10:54 pm

    http://marcf.blogspot.com/2008/02/economics-and-optimism.html

    Don’t blame bernanke, he is doing the right thing

  62. over the moon says: (permalink)
    February 3rd, 2008 at 5:29 pm

    doesn’t the U.S. Federal Government own most of the land in the United States? Wouldn’t it be a boost for the economy and better for humanity (oops we’re talking Federal Government here, I mean better for the Government since humanity never factors in) were they to free up some land for more Americans to own?

  63. Me on Marc Fleury on Mark Shuttleworth on the economy (and fed rate cuts) « Fiji Ecuador Seattle Greece Montana says: (permalink)
    February 4th, 2008 at 1:49 pm

    [...] Shuttleworth on the economy (and fed rate cuts) I enjoyed reading Marc’s comments on Mark Shuttleworth’s blog post about the fed [...]

  64. Economic 'voodoo has no mojo' « the spike says: (permalink)
    February 6th, 2008 at 10:13 am

    [...] is an essay written by South African tech entrepreneur, Mark Shuttleworth, a couple of weeks ago, in response [...]

  65. Embardée économique says: (permalink)
    February 7th, 2008 at 10:32 pm

    [...] française de l’article “Economic oversteering“. Auteur : Mark Shuttleworth – Traducteur : Bernard [...]

  66. Evangelina says: (permalink)
    February 21st, 2008 at 12:28 am

    Mark,

    I’ll dare abuse your blog a little and invite people to joing something that is of great not only American but international interest too, the 2008 US elections of course.

    “Hillary Clinton vs Obama (Global Discussion)”

    Description:
    The American Presidency affects everyone on Earth. Please have your say, and do something about it, so that American people can be more aware of the choice they are making.

    http://www.facebook.com/group.php?gid=12631245305&ref=share

    (And once you are done with that you might want to get a burning desire to go to

    http://www.facebook.com/inbox/readupdates.php?id=6662822757 )

    Best,

    Evangelina

  67. Ike Hall says: (permalink)
    February 25th, 2008 at 5:14 am

    Nice analysis, Mr. Shuttleworth, but you missed the mark. Not your fault, you merely followed conventional economic wisdom. As such, you were far too kind to Greenspan. His chairmanship is rapidly proving to be a disaster, because all of the things that are happening now were set up on his watch. “Helicopter Ben” Bernanke is merely the recipient of Greenspan’s aggressively inflationary policy which has already seen stock-market meltdowns, dot-com booms and busts, and now, housing booms and busts. Only by permitting the malinvestments to fail will we have any chance of recovery. As usual, the Austrians are the only ones who correctly forecast the current situation. I strongly recommend Murray Rothbard’s The Case Against the Fed, plus anything over at http://www.mises.org.

  68. Inez says: (permalink)
    March 13th, 2008 at 6:48 pm

    Mr Shuttleworth,

    you lost me at the schedule seven drug reference for economic pain and crack cocaine jab to the jaw, but thank you for the overview. It was enjoyable reading. I read this webpage in the hope of finding updates on software etc presented in a relevant and understandable format. I often sign off feeling a little stupid though. However, I hope to sound clever quoting and paraphrasing you in thishere article, one of these fine Cape evenings, chewing the fat over hopeless economics and faithless leaders.

    However, here in the deep south of Africa, we are experiencing an almighty credit crunch on the back end of crazy consumerism, insanely indulged property prices, often ineffectual leadership and all most of us have to show for it, is cheese cake going for 45ZAR per slice at The Waterfront. The effect of HIGH interest rates and inflation are battering our hearts and minds and wallets. Whether the intricacies can be translated into a corrolary of the US situation, I don’t feign to comprehend. But at the heart of economic crisis, is surely the same human condition, regardless of it’s cause. More than the Medicine analogy for US fiscal policy and central bank maneuvres, it is surely the health of a nation that is in jeopardy. The collective consciousness of a people. Without knowing the details of economic pain in the US, I can say from the content of their tabloids and media, that their foundation is not secure, that they strive in emptiness. But in such a perilous and vulnerable common state, how does one then combat hopelessness and lack of ownership in its pure sense.

    Addressing and improving a nation’s morale and morals, without resorting to the temporary high of a credit card transaction , an hour with a motivational speaker, beaching in the Bahamas or new Nike’s, seems an impossible task. Raising a people who have judgement and act autonomously, of independent thought and discernment is necessary to establish a “mature” nation, who won’t be led round by the nose.

    How do you heal a nation? How do you transform the untransformable?