One of my first eye opening experiences as a student at the University of Iowa was the affluence of farmers.  So many of the farm kids that I met had already travelled the world.  Most were studying finance to get a better understanding of how to use commodity options to protect their profits. At the time, I viewed family farming as a virtuous calling...much like a firefighter or a teacher.  I thought they didn't make much money, but were putting profit aside to do good for others.  Today, the average farmer makes twice the average worker salary.  The "buy local" movement has mislead environmentally sensitive consumers to believe that small farms are more "earth friendly."

Farming is the ultimate form of Crony Capitalism.  Due in large part to the Iowa Caucus leading off the presidential election season, politicians cater to the farm lobby, selling the myth that without farm subsidies, food prices would soar and people would starve.  Every year, billions of US tax dollars are sent to farmers.  Many receive money to not farm a piece of properties.  Some land owners, who don't farm at all, also get government subsidies.

Farming is no different than other business.  Some should succeed and some should fail. That is is the job of the free market...not the US government.

America's top journalist, who I will get to meet next month, explains:

It has been three decades since Business Week proclaimed “The Death of Equities” on its cover. That 1979 obituary for the stock market, published when the Dow Jones industrial average languished at a mere 875, became a symbol of an age of doubt. So shattered were ordinary Americans by gas lines, recessions and double-digit inflation that they resorted to pulling cash out of equity mutual funds — for eight straight years.

Investors in the ’70s were stunned by an alarming rise in volatility. The comfortable, ordered system of international exchange, in place since the Bretton Woods accord at the end of World War II, had come apart, leading to violent fluctuations in currency values. Grain shortages sent food prices soaring, and memorably, OPEC put the squeeze on oil. The cumulative effect was a loss of faith in money itself. (Doomsayers urged redeploying assets into metals, oils — anything other than paper.) Inflation, a virulent form of instability, terrified investors, who duly stayed on the sidelines.

It may seem strange to be drawing parallels to the ’70s now — prices are so stable that the fear is of deflation. Yet there is no mistaking the ’70s-ish gloom that has overtaken Wall Street. The trauma of the financial crisis has yet to be dispelled. It is not just Lehman Brothers and Bear Stearns that have disappeared but an ethos of confidence in long-term investing.

Though stocks remain well above 2009 lows, investors are withdrawing money from U.S. equity funds for the third straight year. Dispiritingly, investors are shunning attractively priced stocks in favor of bonds (both government and corporate) on which the returns are anemic.

The current crisis was inspired by financial shocks rather than commodity disruptions. But the result is a familiar malaise. The international monetary system, hobbled by imbalances and deficits, seems broken. Another echo is the sense that the sheer number of economic problems precludes a solution to any one of them. In 1979, an investment analyst was heard to despair, “The future is clouded by many ugly questions.” Today analysts despair over high unemployment, failing mortgages, government deficits, impotent political responses, a weakening economy and a similar litany abroad. In another echo, Chicken Little has staged a comeback. In the early ’80s, an energy consultant forecast — in this magazine — a “high probability” of an oil shock in which “the basic legitimacy of our political system might be called into question.” Today’s version is hyping the possibility of a stock-market crash. Albert Edwards, an investment strategist for the French bank Société Générale, has said he expects a “bloody, deep recession” that produces a stock-market collapse of at least 60 percent. He recently drew a crowd of 600.

Of course, any such forecast could prove right. But it is generally more lucrative to sell prophecies of doom than to act on them. What the herd tends to overlook is that stocks are not — except perhaps in the very short term — a bet on the odds of an apocalypse, nor are investors in securities rewarded for their prowess as macroeconomists. The real challenge of investing is so prosaic it is often forgot. Stocks are simply a claim on future corporate earnings: if you can buy those claims at a discount, you should do well.

Wise men will disagree on the meaning of “at a discount.” But American business is profitable even today. And the Standard & Poor’s 500 stock index is trading at only 12 times the expected earnings of the underlying stocks over the next year. Inverting that ratio, stocks have an earnings yield of 8.5 percent. (Each $100 of stocks is backed by $8.50 of expected earnings.)

Compare that with Treasury bonds, on which the yield is a dismal 2.58 percent. Short-term bond rates are well under 1 percent. The gap between 8.5 percent and 2.58 percent represents a striking reversal. For most of the past generation, bonds yielded more, sometimes much more, than stocks. The theory was that since earnings would grow over time, investors in stocks would accept a lesser return at the outset. They would pay for growth.

Now investors are flocking to bond funds; they are paying to avoid uncertainty — to avoid the prospect of financial Armageddon. Americans whose attitudes toward investing were shaped by bibles like “Stocks for the Long Run” seem to have undergone a fundamental rewiring. Perhaps when you are out of a job, the long run doesn’t matter. “People would rather overpay for bonds than underpay for stocks,” says David Kelly, a strategist for J. P. Morgan Funds. “It’s a function of years of very miserable stock returns. And just a general fog of gloom over the country right now.”

In markets, of course, gloom is no more permanent than boundless optimism. For the previous generation, the turn arrived in 1982 — three years after “The Death of Equities.” It was fueled by corporate raiders, who could not resist seeming bargains on Wall Street and whose takeover bids sent share prices soaring.

There is no telling how long the present funk will last, but there are signs it could end in similar fashion. Corporations in droves have been exploiting low interest rates by borrowing. I.B.M. raised $1.5 billion at a record-low interest rate of 1 percent. It used a chunk of its haul to acquire a software vendor. Borrow cheap and buy low.

So far, ordinary consumers remain too in hock or too frightened to do either. What money they have is going into bond funds. “The individual investor is saying no más to equities,” notes Robert Barbera, the chief economist for Mount Lucas, a private investment firm. It is hardly a stretch to say that the recovery of companies like I.B.M. is being fueled by the willingness of small investors to lend to them on the cheap.

Most of the people buying bond funds do not use a calculator in making investment decisions. They are captives, understandably, of their experience. But gloom and doom also has its price. It would be a sad twist if people were to mirror their recent excessive risk-taking with excessive caution now.

Roger Lowenstein, an outside director of the Sequoia Fund, is a contributing writer and the author of “The End of Wall Street.”

Since I'm no longer considered a young adult (and thank goodness for that.  I never liked being asked for my ID), I am now in a position to offer advice to those who are.  Specifically, those under the age of 35.  If I haven't lived it, I've seen those who have.  Here' goes:

1.  Don't Buy a House:  Or if you do, don't for one second think it's a good investment.  Home ownership is a luxury, much like a boat or a sports car.  After interest, taxes, and upkeep, you will not get wealthy by owning a house.  That's not to say that home ownership doesn't have some advantages, but increasing your net worth is not one of them.  I strongly recommend renting for as long as you can find an adequate home.  You'll save more money than you can imagine.

2.  Dump Your Friends:  Okay, maybe dump is the wrong word.  But too often the friends we grew up with are not always the best of influences.  Desire to keep up with them financially can lead to some bad decisions.  If your best friend's family is better off financially than yours, don't try to compete.  You can't win...at least not in the short run.  Be glad they have a nicer car or home.  It just shows what is possible in this country.  But you won't out do them overnight.  It's like trying to play one on one vs. Shaq.  Why bother?  If that causes you stress, find friends who have less.  You will learn in time that nothing is more meaningless than possessions.

3.  Pay Cash for Everything:  If you can get through your 20's without debt, you have succeeded far beyond the guy who makes $200K a year and owes $300K.  Life is a marathon.  The one who learns early to live within his means ALWAYS wins the race.

4.  Save 10% of what you earn:  Do the math they taught you in high school.  At 6% over 30 years, you will amass a lot of money.

5.  Learn to Hate Cars:  Cars are worse than homes.  They depreciate quickly and have a limited shelf life.  Never fall in love with a car.  It will break your heart.  Buy cars of good quality, modest cost, and drive them into the ground.  At 15,000 miles a year, that means you should own a car for at least 10 years...probably longer.

6.  Exercise:  Gym memberships are acceptable.  But use them.  At the very least, they can be great places to find your future spouse.  In the end, good health will save you money and help you to earn more.

7.  Find your faith:  Judaism and Christianity are full of great lessons about using money wisely.  The Man upstairs knows what He's talking about. 

8.  Skip the 10 Year High School Reunion:  The 10 year reunion is all about being shallow:  Your job, your car, your house.  You'll leave it convinced you are a failure.  The 30 year is all about what really matters in life.   And sadly, not all of your classmates will be alive at that reunion.  That is the one to attend.

9.  Find a job you love, regardless of what it pays:  If you hate it now, imagine how you'll feel at 50.  Money is not a good reason to hate getting up every morning.

10.  Read:  A smarter brain makes better decisions.  Two books a month.  If you hate to read, you won't after you do it a while.  It's addictive. 

Regardless of your religoius affiliation, I think you'll find this message to be extremely powerful.  I hope it moves you as much as it did me.

It's all the current fashion to dump on "capitalism."

It was the greedy free market, supposedly, that created both the housing bubble and the housing bust and led, inevitably, to the "great recession." Capitalism, according to most liberal pundits (and even Alan Greenspan in a bad mood), is an inherently risky and unstable system that requires government regulation to correct its flaws and moderate its excesses.

Let me dissent sharply from that conventional wisdom and argue that what talking heads are calling "capitalism" is actually "crony capitalism" and that it is crony capitalism that is responsible for most of our current economic difficulties.

A genuine capitalist economy assumes that each adult individual and business is free to buy and sell anything that they own and then keep the rewards (or suffer the losses) of enterprise. The only legitimate role for government (the political system) is to protect property rights, that is, to enforce contracts and prohibit theft and fraud.

So under capitalism, there would be no price controls on milk or mandates to purchase health insurance; BUT polluters who spill crude oil or corporate bandits like Bernie Madoff who commit blatant frauds would be prosecuted to the full extent of the law.

Crony capitalism, by contrast, assumes a far, far larger role for government in the economy. In this system, government employs various regulations, taxes, and subsidies to encourage or discourage specific economic activity that the political system considers desirable. For example, in crony capitalism, farm prices and outputs could be regulated; selected companies could get TARP money for commercial research projects; states could regulate liability and health insurance companies; and Freddy Mac and Fannie Mae could both exist to subsidize the real estate market.

And most importantly, in crony capitalism private firms that are considered "too big to fail" could be bailed out by government; and a central bank (the Federal Reserve) would exist to "print money" (unrelated to any gold reserve) and regulate the supply of credit in the economy.

It is hard to argue that the current economic malaise was in any way produced by anything resembling pure capitalism. But it is fairly easy to conclude that interventionism, i.e., private markets that were propped up with fraud and funny money was, in fact, the culprit.

First, the Federal Reserve kept interest rates too low for too long (2001–2006) and pumped excess money and credit into the economy. Second, numerous quasi-governmental agencies (Freddie and Fanny) encouraged excessive mortgage lending and home ownership out of all relationship to sound financial practices.

Third, much of the under-capitalized and over-leveraged banking industry collapsed when (federal) credit dried up and housing prices turned downward. And fourth, the federal government taxpayer and international lenders (mostly China) funded the trillion-dollar government "stimulus" plan and the bailout of inefficient business organizations (Chrysler, GM, AIG, etc.) that should have been allowed to go belly-up.

This is free market capitalism? Hardly.

Yet the political class, always absolving itself of all blame, would have you believe that capitalist greed caused the recession and that political regulators need more power. Not so. What we actually require are constraints on monetary growth, more competitive markets, balanced budgets and less output-restricting regulation. But first and foremost, before we spend and regulate further, we require an informed media and an enlightened public that can distinguish real capitalism from phony, crony capitalism.

May 10, 2010

Dom Armentano [send him mail] is Professor Emeritus at the University of Hartford (CT) and the author of Antitrust and Monopoly (Independent Institute, 1998) and Antitrust: The Case for Repeal (Mises Institute, 1999). He has published articles, op/eds and reviews in The New York Times, Wall Street Journal, London Financial Times, Financial Post, Hartford Courant, National Review, Antitrust Bulletin and many other journals.

Yes, money is speech

In Citizens United vs. FEC, the United States Supreme Court held that corporations (and - probably - unions) have a constitutional right to make independent expenditures advocating the election or defeat of political candidates. Much criticism of the decision turns on two assertions. "Money," the critics say, "is not speech," and "corporations are not people."

These are just sound bites. They are legally irrelevant and have been for a long time.

Money may not be speech, but a right to speak without the corresponding right to make one's voice heard would be an empty liberty. A genuine freedom to speak cannot be limited to the right to stand on the corner and holler at passersby. It takes money to use the Internet, print pamphlets, publish books or broadcast ads. Citizens United is an important case, but its recognition that prohibiting someone from spending money to disseminate a message can be the equivalent of suppressing that message is not novel. It's been settled constitutional law for almost 40 years.

Corporations are not people, but they are associations of people whose common endeavor is affected by government policy and election results. Like natural persons, some are wealthy and others are not. Some are formed to seek profit by providing goods and services, while others are nonprofit. Like natural persons, these associations have an interest in being heard on matters that affect them. Not surprisingly, courts have recognized that a corporation may have constitutional rights for well over 100 years.

What is new about Citizens United is its recognition that corporate free speech rights include not only the right to speak about issues but to engage in "express advocacy" for or against a particular candidate. Rather than limit themselves to gravely narrated ads asking you to call Sen. Foghorn and tell him to stop destroying the republic, corporations (and unions) can now simply ask you to vote for his opponent.

Corporations still may not contribute to candidates. Corporate speakers will have to identify themselves, and companies may be reluctant to become involved in public debate for fear of consumer or shareholder backlash. Contrary to the claims of President Barack Obama, foreign corporations are still prohibited from attempting to influence federal elections.

But, as a law professor who teaches election law, I do think that the ramifications of Citizens United are huge.

One of the motivations for campaign finance reform has been to reduce the amount of money spent on politics and to "equalize" political resources. This is not as noble as it sounds.

To restrict what can be spent on speech is to restrict speech itself. Restricting speech tends to favor incumbents - who generally hold an advantage in name recognition and fund raising. Allowing legislators to set the rules that govern the elections in which they seek to retain their jobs is a bit like asking a chronic gambler to manage your money.

For centuries, political thinkers ranging from James Madison to Alexis de Tocqueville have recognized that democracy - with its potential for unchecked majority rule - may lead to certain excesses. Madison, in particular, thought that one solution to this problem was to allow society's various "factions" - today we call them "special interests" - to offset one another.

That best happens when all are permitted to fully participate in the public debate.

"Corporations" and even "the wealthy" are not a monolithic interest. As we have seen in recent years, both Democrats and Republicans and both conservatives and liberals have successfully raised large sums of money. In addition, the Internet has increased the significance of small donors. No one faction is likely to dominate the political debate. No significant voice is unlikely to be heard.

As Justice Samuel Alito recently observed, candidates and factions all have different advantages. These might include wealth, incumbency, celebrity, intensity of interest and populist appeal. It is for voters - not the state - to decide which are and are not "legitimate."

In a recent article in an academic journal, I argued that campaign finance reform had turned into a never-ending game of Whack-A-Mole in which the moles always win. Efforts to stop spending "here" inevitably lead to more spending "there." Every "reform" is swamped by unintended consequences.

In the end, the only way to truly level the playing field is censorship managed by one side in the game. During oral argument in Citizens United, the government argued that - in the interests of "reform" - Congress could prohibit corporations from publishing books critical of candidates for federal office.

That scared me. That scared the court.

Citizens United is the result.

Rick Esenberg of Mequon, WI is a professor at Marquette University Law School. He will be one of the Journal Sentinel's new community columnists.

The Angry Capitalist admits when he is wrong...