Sunday, January 31, 2010

Obama's inexperience, arrogance endanger country

Published in The Tennessean, January 31, 2010

Obama's inexperience, arrogance endanger country

by Richard J. Grant

In the early 1990s, while working in South Africa, I met Nelson Mandela for the first time. He was gray and wizened, but distinguished, bright-eyed, and energetic. I liked him.

But then he went on stage and gave a speech. Whatever hope I had been given by the solid nature of the man that I had just met soon evaporated. His words betrayed the fact that he still lacked the understanding needed to be leader of a prosperous country. He spoke of nationalization and redistribution as if they were natural and to be expected.

Everyone knew that Mandela had been a socialist and that many of his colleagues and supporters were still card-carrying Communists. But it had been barely two years since the Berlin Wall had come down, and the faith of most socialists had been severely shaken. It was that event that had opened the way to the unbanning of the ANC and to Mandela's release in February 1990.

The world had just witnessed a decade of renewal in the West under the leadership of Margaret Thatcher and Ronald Reagan; and the Soviet empire was in its last days. Freedom and confidence were spreading around the world.

When Mandela later spoke to the World Economic Forum in Davos, his speech was little changed from the one that I had witnessed. But his audience was very different and uninhibited in its derisive reaction to his naïve socialistic pronouncements.

There is no doubt that Mandela got the message. I suspect that his advisers were told in no uncertain terms that such a reaction must never again occur. From that point onward, Mandela's public words more closely matched the thinking needed for national reconciliation and the leadership role that he was destined to fulfill.

In that respect, Mandela found himself at a crossroad in history and chose his direction. Had he gone in another direction, the consequences would have been far less peaceful and far less prosperous. With the examples of Thatcher and Reagan before him, he made the connection between his responsibility and the realities that he faced. He chose to become the president of South Africa, not the president of a soon-to-fail state.

Almost 20 years later, President Barack Obama was sworn into office with comforts and advantages that Mandela had never known. But clearly Mandela had something that Obama lacks. Perhaps it was 30 more years of life experience. The important thing was that Mandela had it before he became president.

President Obama likes to remind everyone that he inherited his troubles. Presidents Mandela and Reagan could each make the same claim. But beyond this point the stories become very different. Whereas Mandela and Reagan chose policies that promoted cooperation between people, the first year of the Obama administration has been one of arrogance, division, and polarization. Obama's approach to economic policy has resulted in nationalization and redistribution, the ultimate consequence of which is economic stagnation and social friction.

President Obama seems determined to retrieve socialism from the ash heap of history. He apparently lacks the economic education to see that his policies have caused the worst of his inheritance to persist. Instead of learning from President Reagan and leading us out of recession by reducing the burden of government upon us, he has done the opposite.

It is no accident that he is falling in the polls and that his party has suffered an embarrassing reversal in Massachusetts. In his recent State of the Union address, President Obama showed no sign of having learned anything about either economics or leadership. As if oblivious to the flaws in his plan, he seemed to be saying, "Damn the realities, full speed ahead."

If his first year in office is indicative of what is to come, then a second term would be more than Americans could bear. Perhaps he should go get some experience first – and come back in 30 years.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail:

Copyright © Richard J Grant 2010

Sunday, January 24, 2010

The Fed's philosophy creates financial dragons

Published in The Tennessean, January 24, 2010

The Fed's philosophy creates financial dragons

by Richard J. Grant

George Santayana's admonition, "Those who cannot remember the past are condemned to repeat it," is much-quoted and sometimes taken to heart. But it does not imply its often-assumed corollary, "Those who remember the past are guaranteed not to repeat it."

The trouble with experience and the study of history is that neither presents us with self-evident life lessons. The lessons learned depend on the intellectual makeup of the observer. It depends on what we have within us to interpret the workings of the world.

Although history never repeats exactly, we do see the same kinds of mistakes recur. Despite having a "student of the Great Depression" on the Federal Reserve Board during the past 10 years, we still found ourselves being threatened with economic depression.

In his writings and speeches, we see that Ben Bernanke, now Fed chairman, believes the Fed "caused" the Great Depression by failing to stop the credit contraction in the banking system. This was consistent with his actions when he reacted to the recent financial crisis by injecting reserves into the banks to offset the contraction. This is what we expected the Fed to do, though the magnitude was unprecedented.

The blind spot in Federal Reserve philosophy is the failure to recognize the Fed's role in creating the problem in the first place. It is the habit of the Fed to see phenomena such as inflation and recession as if they are beasts of nature that suddenly leap out at us like dragons. The Fed sees itself as a knight standing ready to defend us from these beasts.

In a recent speech, Chairman Bernanke attempted to defend the Fed from accusations that the Fed itself had created the dragons. But he couldn't explain away the Fed's pushing down of interest rates in 2001, with the targeted federal-funds rate dropping from over 5 percent to less than 2 percent. From mid-2003 to mid-2004, the Fed held the federal-funds rate at a record low of 1 percent.

This also pushed down mortgage rates. The Fed does not reduce rates by decree. It does so by increasing the growth rate of the quantity of money. The Fed has a statutory monopoly in the creation of U.S. currency. It creates dollars out of nothing.

Creating new dollars by fiat does not create new wealth. But the new dollars are as good as any other dollars; and with more dollars in circulation, there are more available for loans even though people are not saving more. This is why interest rates fell.

But the situation doesn't last. As new dollars come into existence and are used for purchases, there is a tendency for the prices of all goods to be bid higher than they would have been. This is the source of price inflation, which means that the purchasing power of each dollar goes down.

When the value of each dollar falls, the total value of loanable funds also falls. This coincides with interest rates rising again, which is what happened from late-2004 through 2006.

Not all prices rise at the same time or at the same rate. Government incentives channeled money toward the purchase of homes. That is why house prices rose faster than most other prices. Many financial assets also became over-inflated.

Artificially low interest rates also made business projects to appear more profitable than they would have otherwise. This encouraged many businesses to expand their operations and to use more capital (and labor) than they would have.

The trouble with creating money to encourage loans is that it does not create new savings. Borrowers act as though capital is plentiful when it is not. They are still bidding for the same resources, which is why prices and interest rates must eventually be bid up. So ends the boom; and so begins the recession.

Excessive regulation reduces our adaptability. The Fed is currently holding the federal-funds rate near zero. Here we go again.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail:

Copyright © Richard J Grant 2010

Sunday, January 17, 2010

People still believe 'no cost' actually means free

Published in The Tennessean, January 17, 2010

People still believe 'no cost' actually means free

by Richard J. Grant

Sign in a French hotel: "Breakfast is free." Sign in a German hotel: "You will pay for breakfast whether you eat it or not."

Regional differences in breakfast habits aside, both signs say the same thing. In both hotels the same person pays for breakfast: you, the customer.

That is what we must remember whenever the government offers us something "free." We must also be wary of promised cost savings. There are very few services that any government is able to offer more cheaply than could be done in the private market. In fact, we are lucky when a government can provide a service at only double the cost found in the private market.

Many voters still believe they're getting something for nothing — and for some this could be true. But it can never be true for everyone in total. The "something-for-nothing" mentality, especially when exhibited by voters, results in slower economic growth, fewer opportunities and less total wealth.

This will be the legacy of the current version of "health-care reform" if it passes Congress. The "price" of care might go down, but the real cost will not. Congress has never been able to impose efficiency by decree.

In this case, it will almost certainly have the opposite effect. Demand for medical services will rise, and so will the real costs, the resources that must be drawn into the provision of these services.

This is what happens to everything that the government subsidizes. It encourages the consumption of politically favored products by making them appear to be cheaper. In other words, it hides the costs.

Many people believe that solar panels and wind turbines are efficient generators of electrical energy. This illusion is maintained only with the help of government subsidies that cover large portions of the capital costs, and pay above-market rates for electricity directed into the grid.

The truth is that, with existing technology, these sources cost more than they produce in terms of both dollars and energy. They might be enjoyable for hobbyists, but they are not yet viable mass producers of energy.

The same is true with so-called "green jobs." Such jobs are found in companies that would almost certainly not exist, or would be much smaller, without significant subsidies from taxpayers. This means that each job "created" uses up more resources than it produces.

This is the effect we get from any such program whether we call it a "jobs bill" or a "stimulus package." The recent stimulus package is notorious for having spent more for each job supposedly saved than those jobs were worth. In economic terms, we all would have been better off if the government had simply handed out the cash to selected individuals. It would have caused less disruption to the economy.

During the latest financial crisis, the previous and current administrations believed that they could make it all go away by treating the symptoms. The Troubled Asset Relief Program (TARP) was touted as such a solution that would also make a profit. So far, it has lost taxpayers at least $70 billion.

Those who are fooled by the "stimulus" fallacy fail to ask the obvious: From where did the money come? It came from taxpayers and from lenders. More importantly, it came from people who would have used the money more productively had the government not pushed its way onto the scene.

In the past year, the U.S. government spent more than $3.5 trillion. That's over $400 million per hour.

For all this the Democratic vision for health-care reform is unpopular. The message from the people is blunt, but the recipients are obtuse. They push ahead behind closed doors in pursuit of this object of their obsession. Taxpayer-funded temptations are dangled before any susceptible congressman.

We all understand the electoral realities faced by our politicians. But must they run the Capitol like a French hotel that charges by the hour?

Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail:

Copyright © Richard J Grant 2010

Friday, January 15, 2010

Why SA would find weak rand more of a burden than a boon

Published in Business Day, Thursday, January 14, 2010

Why SA would find weak rand more of a burden than a boon

by Richard Grant

THERE is an unfortunate tendency to blame currency strength for the relative slowness of SA’s recovery from economic recession. This assignment of blame is unjustified, but it is the mantra of the perpetual lobby for a weaker rand.

During the past year, the rand has risen against the dollar, the euro, and a trade-weighted basket of currencies. But the exchange rate with gold remains volatile and, though the five-year uptrend in the rand-gold price seems to be slowing, it is too soon to declare the rand “strong” by that measure.

The dollar, the euro, and all the other fiat currencies are, by definition, man-made currencies. This characteristic, which they share with the rand, makes them all susceptible to inflationary bias, especially during a recession.

As a standard by which to judge the rand’s performance, they are a slow heat. The commodity money — gold — shows them up.

Part of the volatility ... continue reading

Grant is professor of finance and economics at Lipscomb University in Nashville, Tennessee. He formerly taught at the University of the Witwatersrand, was chief economist at the Chamber of Mines and was a contributing editor at the Financial Mail.

Copyright © Richard J Grant 2010

Sunday, January 10, 2010

Government interference led to financial crisis

Published in The Tennessean, January 10, 2010

Government interference led to financial crisis

by Richard J. Grant

What is the purpose of most government regulations? Answer: To correct the problems created by previous government regulations.

This should be a big lesson of the recent financial crisis. Government regulations, like drugs, have side effects that can accumulate and overshadow the benefits. Also, it is not mere cynicism to note that there are interest groups that support particular regulations precisely because of the side effects.

In politics, there are goals that are publicly stated and that appear, on the surface, to be desirable. There might also be effects that would be extremely unpopular if voters knew about them. From the perspective of stated public policy, these undesirable effects would be seen as “unintended consequences.”

A familiar example is minimum wage laws. The publicly stated, and publicly acceptable, motivation for such laws is to help low income earners by requiring employers to pay them no less than some arbitrarily determined "living wage." Many supporters of such laws have good intentions but do not appreciate the need for productivity. The important thing politically is that they mean well.

Minimum wage laws are also supported by groups whose leaders are not fooled at all. Trade union members generally receive wages that are above minimum wage, so they are not directly affected by the law. But higher-wage workers do compete with lower-wage workers. A sufficiently low wage for any given level of productivity would enable any worker to compete and to find a place in a business that is organized accordingly.

Trade unions can claim to be "helping our lower-paid brethren" by supporting the minimum wage. How nice of them. But at the same time they are ensuring that these lower-paid “brethren,” their competitors, are also priced out of the market. Many of these lower-paid brethren become unemployed brethren.

Why, in the midst of a recession, was the Obama administration so keen to raise the minimum wage? The additional unemployment that resulted from this cannot be blamed on previous administrations.

A government regulatory action that directly contributed to the recent financial crisis was the Community Reinvestment Act. This act created an arbitrary, race-based standard for judging banks’ lending practices. As a result, banks could be sued for discrimination if they did not lend to minorities in numbers that the regulatory authorities determined to be sufficient.

Many banks went with the flow and lowered their lending standards for minority groups. Such breaches of integrity have a way of leading to further breaches, in this case to a lowering of lending standards to everyone. The "subprime" market grew, as did the risk of default.

Did bankers know this could bring trouble? Yes, but their concerns were assuaged by another factor. Decades earlier, the government had created agencies, such as Fannie Mae and Freddie Mac, the explicit purpose of which was to promote home ownership by financing and guaranteeing mortgages. These agencies, even when ostensibly privatized, were always assumed to have the full backing of the US government, i.e., taxpayers.

A government guarantee implies that the mortgages are risk-free to those who finance them. With unburdened consciences, bankers could sell to investors mortgages that they would never have originated in the absence of the regulatory pressures and guarantees.

The whole financial regulatory structure creates a false sense of security, and thereby reduces incentives to innovate and improve real safety. The existence of the FDIC, for example, encourages bank customers to be unconcerned about the managerial prudence of their banks. This reduces the banks' need to compete on the basis of safety. Risk-taking in the banking system as a whole is therefore higher.

These examples do not give a complete explanation of how the recent financial crisis and recession came to pass. But they do warn us not to assume that we need more or "better" financial regulations. Throughout history, financial crises of this magnitude have always had their roots in government interference.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail:

Copyright © Richard J Grant 2010

Sunday, January 03, 2010

Health-care debate shows liberalism has lost way

Published in The Tennessean, January 3, 2010

Health-care debate shows liberalism has lost way

by Richard J. Grant

If you could choose the country of your birth, would you choose a free and prosperous republic where your neighbors would respect your right to life, liberty and property, or would you choose a socialistic country where none of these rights is truly respected and life is very different?

If you were to be born with a congenital ailment, say a heart defect, which country would you choose? Would your answer change in any way?

In the free republic, no one would speak of your "right to health care." But in the socialist, workers' paradise, the right to health care would be an article of faith. So which would you choose?

Whatever your condition at birth, your location will affect your life expectancy and quality of life. People like to imagine that proclaiming a "right to health care" will guarantee everyone a longer and better quality of life. But this assumes that the necessary know-how and resources will be available. The choice you make between freedom and socialism will have a huge impact on what is available to you and your family.

There is a reason why so many people risked their lives to escape from the various socialist republics that rose and fell during the 20th century. The socialist promise was a lie. They were promised prosperity, but what they got was mass poverty. They were promised equality, but party members were far "more equal" than others. They were promised brotherhood, but what they got was serfdom. They were promised moral purity, but what they got was a daily struggle for survival against oppressive rules where corruption became an essential tool in making ends meet.

Can we protect ourselves from all this by never using the word "socialism" in America? Actually, it is not the word but the type of policies that makes the poison. Most American politicians hate it when someone refers to their policies as "socialistic." It is unfortunate, however, that over the past few decades that word has become increasingly appropriate in describing our policies. They don't cease to be socialistic just because we call them "liberal."

"Liberalism" is another one of those words that has become an antonym of its former self. Instead of representing a love of freedom, it now stands for wishful thinking as a substitute for facing reality. Modern liberals hate it when someone points out that health insurance exists to deal with life's risks, not its certainties. But pointing out this truth is a step toward understanding how to provide effective solutions to real problems.

When liberals claim that no one else has a plan to reform health care, it is a testament to the narrowness of their own worldview. They seem hopelessly unaware that the problems they deplore in our medical system were of their own making. They who have molested us with their heavy-handed and self-serving regulations now propose to come to our rescue.

Better leaders would understand that unregulated medical insurance, especially with deregulated medical care provisions, would be one of the most reliable and powerful tools that we can bring to the management of our health risks. At present, such innovation is not allowed. Similarly, due to excessive taxation, we are limited in our abilities to help the uninsurable.

In the future, let us vote for leaders who are honest and know how the real world works. Give us leaders who understand that "the best health-care system in the world" will be that which is least regulated and has the smallest government participation.

Only those who choose a land of freedom will find themselves in fellowship with creators, builders, innovators and good stewards. A child born in a free republic will have not only the greatest chance of surviving and enjoying good health, but also the greatest chance to expand the limits of human achievement and, with this, the ability to extend a helping hand to his fellow man.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail:

Copyright © Richard J Grant 2010