Wednesday, May 8, 2013

Wealth-redistributionists shiver - groundbreaking ideas

Launch New York Times
A problem I have with many economists, including the Nobel kind, is that they seem to be more interested in religious consensus rather than scientific learning. They seem to peddle their ideas with such drive that they obviously think that consensus will suffice to validate them. Much of the bases for their logic is intuitive, which would normally seem to be a good thing. But we live in a world where many great concepts defy common sense and pop-logic. Einstein's Theory of Relativity baffled the world's scientists because it did not follow common sense. People who forge innovative ideas must start not viewing problems through culturally colored glasses but through clear ones. Edward Conard, author of Unintended Consequences, certainly comes across as someone who did not start trying to prove his expected answer but with curious exploration over a blank canvas.
Unintended Consequences
Unintended Consequences is the BEST economics book I have ever read; and I have read many. Although it is certainly not a beginners' read, the book is easy to follow thanks to Mr. Conard's well structured and detailed case buildup. There are two main ideas within this spectacular book. First is the idea that risk taking must be nourished. Mr. Conard argues that wealth redistribution ideologists take wealth from investors while reducing payoff incentives for risk takers, which then results in lower risk taking and a slower economy. The second idea is about the characteristics of capital. He explains how all capital is not equal. There is short-term-biased capital that's  very risk-adverse. When it's deployed on riskier ventures, it shortens its time bias; getting very jumpy at the first sign of volatility. At the other end, there is patient capital, which is ideal as the equity needed to underwrite business. Unfortunately we do not have enough of this capital and the present administration seems to like depleting it.
Launch Fed - Ben Bernanke
Mr. Conard argues that it was the misallocation of risk-adverse capital in the form of down payment collateral for real state loans that caused the economic collapse. Although patient capital would have done a much better job, it seems that it was the abundance of risk-adverse capital that pushed its way to riskier uses after it run out of safer investments to fund. This reminds me that Bernanke and the Fed are pushing money away from treasuries and into equities as a result of their quantitative easing program. If Mr. Conard is right, watch out below. Any sign of volatility in the equity markets may send capital rushing out of bonds and equities and back to Asia. Wait, it already happened during the recent Fake-Tweet Crash. God help us!
As I previously warned, it is not intuitive. I can't say enough good things about this book and its author.

Book Title: Unintended consequences
Book Subtitle: Why everything you've been told about the economy is wrong
Author: Edward Conard
Publisher: Portfolio Hardcover
ISBN: 978-1591845508

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