Popular thinking about economic growth is still strongly influenced by the productivity theory of capital, which presumes that capital engenders a yield like the fruits from a tree, writes Antony P. Mueller. If it were merely aggregate investment that mattered, economic development and continuous wealth creation would be child's play.
The quirky nature of credit is that it is not necessarily better in abundance, writes Christopher Mayer. It's not like beer, butter, and bananas--where more means cheaper and cheaper is good. Credit is like money; it represents buying power. More credit means more buying power, which means a bidding up of assets and a spark for an unsustainable boom.
What may be the more important factor in manufacturing future Enrons is the role of government in fostering the boom-bust cycle. Enron, then, is just one casualty of many--albeit the largest so far--of massive credit expansion and of manipulation of interest rates by the central bank.
It has been said that the stock market is not an actuarial table. The same can be said of the bond market. Rather than an infallible guide to the future, the bond market embodies the best guesses, hopes, dreams, and fears of many investors. Hence, the bond market can be fallible and, in fact, has been so—in spectacular fashion—in the past.
While it is perfectly clear that an individual capitalist or speculator may make losses on the stock exchange, it is very doubtful whether "society" can make such losses. The question with which we are concerned here is whether an individual's losses from domestic stock exchange transactions represent a loss to the society to which that individual belongs.
The mortgage markets of America are on the verge of nationalization. Fannie Mae, Freddie Mac, and the Federal Home Loan Bank System (all government-sponsored enterprises, or GSEs) have become giants in the mortgage markets. The Big Three have grown at such a rapid rate over recent years that at the end of 2000, they collectively held $2.9 trillion of mortgage debt, which was equivalent to nearly 56 percent of all US household mortgage debt. Combined, they account for 90 percent of the total federal agency debt, and federally sponsored agency debt outstanding at the end of 2000. In 2001, the growth of GSEs did not abate.
The prolonged Japanese economic slump is not due to price deflation but is the product of aggressive fiscal and monetary policies aimed at arresting the general fall in prices of goods and services. Contrary to the popular view, as a rule, price deflation is always good news for the economy. Thus, when prices are falling in response to the expansion of real wealth, this means that people's living standards are rising.
While assorted financial journalists, market pundits, policy wonks, Fed governors and even mainstream macroeconomists have been thrown into a panic by the slight whiff of price deflation they detected in the last few months in the U.S. economy, they have almost completely ignored the wrenching confiscatory deflation that is now going on in Argentina
As the history of America's Great Depression is one long regret of political follies and blunders that aggravated the suffering, so is the story of the Japanese recession from the 1990s to the present. The Japanese government tried to spend its way out of the recession, but instead merely prolonged it and created a mountain of debt.
Far from an example of a market failure, Enron's saga shows that firms that invest too much in politics can easily become complacent in the face of changing market conditions. In economics, this is called government failure, and we can blame the growing requirement for firms to divert resources to grease palms in Washington as a necessary business investment for its occurrence.
