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Thread: The Economy - A Perfect Storm

  1. #1
    Cyburbian Cardinal's avatar
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    The Economy - A Perfect Storm

    The last few days have been filled with news that brings up dread in the gut of anyone who thinks about our economy. Let's start with a small piece of news from teh Great Lakes. The Port of Duluth may close early this year because demand for iron has dropped sharply. The immediate concern is for the jobs in shipping, followed by the mines in Minnesota and Michigan. It calls into question recent moves to open three mines in the area - an economic boom for the region. But the fact that demand for steel is dropping sharply also raises questions about the direction of US manufacturing - mining machinery, the auto sector, industrial machinery, and many other sectors. The housing market dropped off beginning in late 2005. Retail expansion came to an abrupt halt late in 2007. Now it appears that manufacturing is falling.

    Of course, there is other news from the business world. Auto sales have plummeted and GM may run out of cash by the end of the year. Its shares are trading at a 65-year low and it may have to file for bankruptcy. AIG needs twice as much cash as we were originally told, if it is to stay afloat. Retailers continue to struggle as they look at one of the bleakest Christmas seasons. Circuit City has declared bankrupty after closing 20 percent of its stores. It is the latest in a long list, and 2009 is likely to add companies like The Gap and Pier 1 to that list.

    At least this time around it appears that rural areas may not be so badly affected. With high prices for corn and soybeans, and a boom in oil and gas, these parts of the country are riding high. Or are they? VeraSun Energy was one of the bright stars of the ethanol industry; a leader in innovation with one of the largest production capacities. Last week they filed for bankruptcy.Ethanol is not profitable with high commodity prices and demand for fuel is down. The worst to be hit are the small ethanol plants, often owned by local cooperatives, nad not enjoying the economies of scale found in the newest, largest plants owned by companies like Cargill.

    Of course, the price of oil is down to its lowest level in nearly two years, after spiking earlier this year. In retrospect, that spike appears to be the result of speculation, rather than rising demand or lowered supply. Of course, at low prices, it does not pay to extract some of the more difficult to reach, or lower quality resources that have fueled the west's latest energy boom. Bust.

    I tend to be bearish, although I can recognize opportunities when I see them. Right now, I am not seeing them. I am not even seeing where the downward trend will start to level off. Foreclosure and mortgage aid is not going to help when housing prices continue to slide or people do not have jobs to pay their monthly installments. The money we are putting into financial institutions is only stalling a realization of the full scope of the financial crisis. Bailing out auto companies does not address the problem that people are not buying cars, or for that matter, much of anything else. It all makes me think that we are in for a few years of true hardship, unlike anything we have seen for a long, long time.
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  2. #2
    Cyburbian imaplanner's avatar
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    Quote Originally posted by Cardinal View post
    The last few days have been filled with news that brings up dread in the gut of anyone who thinks about our economy. Let's start with a small piece of news from teh Great Lakes. The Port of Duluth may close early this year because demand for iron has dropped sharply. The immediate concern is for the jobs in shipping, followed by the mines in Minnesota and Michigan. It calls into question recent moves to open three mines in the area - an economic boom for the region. But the fact that demand for steel is dropping sharply also raises questions about the direction of US manufacturing - mining machinery, the auto sector, industrial machinery, and many other sectors. The housing market dropped off beginning in late 2005. Retail expansion came to an abrupt halt late in 2007. Now it appears that manufacturing is falling.

    Of course, there is other news from the business world. Auto sales have plummeted and GM may run out of cash by the end of the year. Its shares are trading at a 65-year low and it may have to file for bankruptcy. AIG needs twice as much cash as we were originally told, if it is to stay afloat. Retailers continue to struggle as they look at one of the bleakest Christmas seasons. Circuit City has declared bankrupty after closing 20 percent of its stores. It is the latest in a long list, and 2009 is likely to add companies like The Gap and Pier 1 to that list.

    At least this time around it appears that rural areas may not be so badly affected. With high prices for corn and soybeans, and a boom in oil and gas, these parts of the country are riding high. Or are they? VeraSun Energy was one of the bright stars of the ethanol industry; a leader in innovation with one of the largest production capacities. Last week they filed for bankruptcy.Ethanol is not profitable with high commodity prices and demand for fuel is down. The worst to be hit are the small ethanol plants, often owned by local cooperatives, nad not enjoying the economies of scale found in the newest, largest plants owned by companies like Cargill.

    Of course, the price of oil is down to its lowest level in nearly two years, after spiking earlier this year. In retrospect, that spike appears to be the result of speculation, rather than rising demand or lowered supply. Of course, at low prices, it does not pay to extract some of the more difficult to reach, or lower quality resources that have fueled the west's latest energy boom. Bust.

    I tend to be bearish, although I can recognize opportunities when I see them. Right now, I am not seeing them. I am not even seeing where the downward trend will start to level off. Foreclosure and mortgage aid is not going to help when housing prices continue to slide or people do not have jobs to pay their monthly installments. The money we are putting into financial institutions is only stalling a realization of the full scope of the financial crisis. Bailing out auto companies does not address the problem that people are not buying cars, or for that matter, much of anything else. It all makes me think that we are in for a few years of true hardship, unlike anything we have seen for a long, long time.

    I believe that the stupid government needs to stop trying to save all these mega-companies. The sooner they fail or solve their own problems the sooner we actually reach bottom and start heading back up.

  3. #3
    Cyburbian
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    There was an article in NYT today about the long lines of various businesses lobbying for their share of the federal bailout (including plumbers unions? boat businesses, etc.).

    I thought the original purpose of the legislation was to provide federal assistance to INVESTMENT banks to maintain their solvency. Emphasis was placed on bailing out large inverstment firms and insurance companies because failures at these banks could trigger subsequent failures at other similar companies, because these banks were interwined. Subsequent failures at other investment banks could scare off investors thus lowering consume confidence, which would then impact other businesses (retail, commercial banks, etc.).

    The bailout program was not just a hand-out. Over time, the federal government would recoup any profits made from these businesses. I don't think the success or failure of a boating company would make as much of an impact on the NATIONAL economy as success or failure of investment firm(s), brokerages(s), etc. Paulson orginally predicted that the bailout would not necessarily total the orignal 700 billion requested, as experienced firms would be able to pull themselves out of this mess within a few years and start turning a profit. Now, the bailout program is turning into a federal soup kitchen.

    I don't excuse Wall Street for contributing to this mess. However, I think there is too much at stake to let these banks fail. I have ZERO sympathy for auto makers. Since the 1990s foreign car makers have been turning out more efficient cars and the Big Three were still cranking out the same ugly junk. Many autoworkers refused to leave their comfy union jobs, get a college education, and do something else. As a result, the Big Three laid off tens of thousands if not more workers within the past 2 years. They have no one to blame but themselves.

    As more and more businesses go under (which probably will reach rock bottom sometime in the 3-4th quarter of next year), I predict more homeowners will seek financial assistance from the federal government at an unprecedented scale (maybe even sooner than that). I blame the republicans and democrats (both under Bush and Clinton) for loosening regulations on businesss, and I blame the democrats for loosening mortgage requirements to families with questionable credit.

  4. #4
    Cyburbian wahday's avatar
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    Wow. Do you write for the Wall Street Journal or what? That was a very salient and well written examination of the mess we are in. Kudos.

    Yes, I think we are in for something more difficult than I have certainly ever seen in my lifetime. I did not get a raise this year (even cost of living) and now other costs have risen, meaning I have to do more with less. Trying to expend a lot of manual effort on the areas I can control expenditures: energy usage (driving and household use), food (planning an intensive growing schedule for next season using relay and sequential planting techniques), and water use (expanding the catchment system - my only investment of consequence).

    But the bigger picture you paint is even more frightening. I read yesterday that the mortgage assistance plan being put forward by the White house will help, maybe, several hundred thousand people. But the number of folks in danger of foreclosing over the next few years in upwards of 5-6 million (they may have said 8, but I can't quite remember). Plus, the option only applies to loans from Freddie and Fannie which, according to the NYTimes:

    "The foreclosure rate on loans owned by Fannie Mae is about 1.72 percent. By contrast, the foreclosure rate on adjustable-rate subprime loans is nearly 20 percent, according to the Mortgage Bankers Association."
    Yikes! This is going to get ugly. Its not just about people losing their homes. Its about those homes plummeting in value while the banks hold onto to real estate they can't move and which has a fraction of its original value. No bank equity means no loans, means more businesses going under, means more job losses, means more foreclosures, and round and round it goes.

    Also, over 4 million US jobs have been lost in the manufacturing sector since 1999! 4 million. And that's just one sector. All the sectors of our economy are losing jobs and colleges have been swamped with applicants seeking new skills training. Bleak, bleak, bleak.

    I agree that I don't see a lot of opportunity in the current situation. I'm glad I live where I do at the moment. New Mexico has never really boomed, so we typically have not bombed very hard during recessions. Plus, we are among the better off in terms of percentage of homeowners who owe more on their house than the home is worth (8%). As one of the poorest states in the union, I am hoping we can stay level and weather this one without too much turmoil. Anything else could be devastating for people already living so close to the edge. but its a global crisis, not just a state or national one. Things like low foreclosure rates may not mean much when the banks lending here have assets throughout the country. If they have little money to lend, it hurts everyone.
    The purpose of life is a life of purpose

  5. #5
    Cyburbian Planit's avatar
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    personal layoffs within 2 months

    Our county had to layoff 3 building inspectors, 1 code enforcement and 1 admin assistant and looking at round two to include another 2 building inspectors plus 1 or 2 for other departments (except DSS & EMS, Sherriff).

    Brother is an architect and his company went to 4 day weeks until the end of the year and will then be re-evaluated.

    Brother-in-law was laid off today from fiber-optic/cable business.

    A good friend (a civil engineer) was laid off last month.





    As for the auto industry, any funds should be directly targeted for retooling plants and r&d for less fuel dependent vehicles AND maintain the minimum fuel standards without letting them be reduced (as has been common practice).
    "Whatever beer I'm drinking, is better than the one I'm not." DMLW
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  6. #6
    Cyburbian wahday's avatar
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    Quote Originally posted by imaplanner View post
    I believe that the stupid government needs to stop trying to save all these mega-companies. The sooner they fail or solve their own problems the sooner we actually reach bottom and start heading back up.
    I agree with this on one level. If only the people that had to take the hit were the ones that got us into this mess instead of the factory floor folks, for instance, who are really just doing their job and have no say in the way the company is run. The reality, I think, is that the damage will be so widespread that it may leave many destitute and could trigger some big population movements around the country as people seek new work.

    If GM went under for example, think of all the job losses. Those that work at the plants, those that work in corporate administration, those other companies that supply the countless parts that go into making cars (tires, radios, batteries, etc) not to mention the machinery to build the cars themselves. Those that make the uniforms for workers, those hired to clean the buildings, those that own the food trucks that sell to the workers. Car dealerships. You get the picture. Then there is the question of what happens to the land they own. What about those abandoned factories sitting vacant?

    That's just one company. The fallout would be just tremendous.

    I'm not very fond of the alternative, either, though. The automakers ignored and even actively lobbied against the kind of changes that would have made them more competitive, so I have little sympathy for the position they are in. But I suppose controlling the kind of damage sooner and minimizing job losses is preferable as it will ultimately still come down to tax money to fix (in the form of welfare, works-progress-administration type programs, etc.). But how to do it? Can the government not lend the auto makers money with conditions attached? Like dramatically increased fuel economies, mixed fuel fleets and the like?

    The purpose of life is a life of purpose

  7. #7
    Cyburbian CJC's avatar
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    The TARP program in a nutshell:

    Bait and Switch

    Paulson's talk this morning was pretty depressing. I was originally very much in favor of the TARP program, but the use of the money has turned into something completely different.
    Two wrongs don't necessarily make a right, but three lefts do.

  8. #8
    Cyburbian btrage's avatar
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    Living in the state of Michigan, the wife and I were just discussing last night how thankful we are that neither of us has a job that is in any way related to the auto or banking industries........because I'm convinced things are going to be really ugly in Michigan for at least the next year, perhaps even longer.

  9. #9
    Cyburbian The One's avatar
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    Umm.....

    Quote Originally posted by nrschmid View post
    and I blame the democrats for loosening mortgage requirements to families with questionable credit.
    You got any proof at all to support this statement? At least something that shows it was just Democrats that did this and not the Bush Administration who actually implemented the change in mortgage policy or at least supported it by removing most of the important regulatory requirements on the Mortgage industry??

    I'm waiting......

    My guess is that I'll be waiting a long time for any legitimate proof.....

    Emperical Proof that you are wrong:

    The first home I purchased in 1996 had massive requirements to qualify for a loan even with nearly perfect credit and nearly zero debt at the time

    My second home purchase in 2000 had slightly less requirements, mainly due to the fact that we were now allowed to take out a first and second on a much more expensive home. The other requirements were just as onerous as 1996.

    My third home purchase in 2004 required almost none of the extensive reviews required of the first two. I didn't have to sign numerous forms that were required in previous purchases
    "The modern conservative is engaged in one of man's oldest exercises in moral philosophy; that is, the search for a superior moral justification for selfishness."
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    Super Moderator kjel's avatar
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    It's a bipartisan failure.

    Regulation of Subprime, Fannie Mae, Freddie Mac.

    In 2004, President Bush and the GOP campaigned on lowering barriers to home ownership as part of his agenda. The lack of a down payment was singled out as the most significant barrier. WSJ Article

    Another issue IMHO (and based off of ongoing research on the foreclosure crisis in NJ) is that of MERS-Mortgage Electronic Registration System. This system has allowed for the mass buying, selling, and trading of mortgages between entities by giving a loan a unique identifier that it keeps all of its life. What has happened in the securitization process is that MERS has effectively masked from public record the originator of the loan. Detail and Summary
    "He defended the cause of the poor and needy, and so all went well. Is that not what it means to know me?" Jeremiah 22:16

  11. #11
    Cyburbian imaplanner's avatar
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    Quote Originally posted by wahday View post
    I agree with this on one level. If only the people that had to take the hit were the ones that got us into this mess instead of the factory floor folks, for instance, who are really just doing their job and have no say in the way the company is run. The reality, I think, is that the damage will be so widespread that it may leave many destitute and could trigger some big population movements around the country as people seek new work.

    If GM went under for example, think of all the job losses. Those that work at the plants, those that work in corporate administration, those other companies that supply the countless parts that go into making cars (tires, radios, batteries, etc) not to mention the machinery to build the cars themselves. Those that make the uniforms for workers, those hired to clean the buildings, those that own the food trucks that sell to the workers. Car dealerships. You get the picture. Then there is the question of what happens to the land they own. What about those abandoned factories sitting vacant?

    That's just one company. The fallout would be just tremendous.




    It's going to happen anyways. I think giving these companies the idea that the government will save them is just going to either delay the inevitable or make them less tempted to make the drastic changes they need to do to actually have long term stability.

    Yeah I understand the whole "think of the ripple effect" argument. I just think that it's better to hit bottom sooner while still retaining our American ideals, than to just delay the bottom and eventual recovery while at the same time setting a terrible terrible precedent. If we bail out the auto companies for example- what are they going to do to make sure they don't have the same problem in two years? If we let them fail other things will take their place- maybe new and better companies.
    If we just keep them on life support for a year or two everybody loses.

  12. #12
    Cyburbian Duke Of Dystopia's avatar
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    ANY company that takes a single cent for a bailout, should not be allowed to spend a single cent on lobbyists, by law, until the money is completely repaid.

    Seriously, the auto industry lobbied their way INTO this mess by blocking politicians from implementing greater fuel efficiency standards. That is called MARKET FAILURE!

    Yes, save the auto industry, but take away their power to sway politicians.
    I can't deliver UTOPIA, but I can create a HELL for you to LIVE in :)DoD:(

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    Super Moderator kjel's avatar
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    Quote Originally posted by Duke Of Dystopia View post
    ANY company that takes a single cent for a bailout, should not be allowed to spend a single cent on lobbyists, by law, until the money is completely repaid.

    Seriously, the auto industry lobbied their way INTO this mess by blocking politicians from implementing greater fuel efficiency standards. That is called MARKET FAILURE!

    Yes, save the auto industry, but take away their power to sway politicians.
    A "Domestic Fair Trade Agreement"!
    "He defended the cause of the poor and needy, and so all went well. Is that not what it means to know me?" Jeremiah 22:16

  14. #14
    Cyburbian DetroitPlanner's avatar
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    Quote Originally posted by Duke Of Dystopia View post
    Seriously, the auto industry lobbied their way INTO this mess by blocking politicians from implementing greater fuel efficiency standards. That is called MARKET FAILURE!

    Yes, save the auto industry, but take away their power to sway politicians.
    I seem to remember the auto companies lobbying against increases in CAFE because they wanted to produce the types of vehicles people wanted to buy but they lost that. At the time of the last enegry bills approval gas was about $2 a gallon and folks were still leaving high MPG cars on the lot and buying stupid things like Hummers. Stupidity is due to desire or market conditions, not technology. In the 80's cars were much more fuel efficient than they were in the early 2000's; what had changed were people's expectations and desires. Don't believe me? Compare the 1980 Honda Civic with the 2008 model. Which is bigger? Which has worse fuel economy?

    I seem to remember the automobile industries having and still being the scorn of air quality legislation that they lost even though in most regions things such as lawn mowers, chain saws, snow blowers, boats, personal watercraft and ORV's produce more pollutants than automobiles do mostly because these are unregulated.

    If automobile companies had such powerful federal lobbies, how come each must continue to spend tens of millions to make cars only marginally safer? The auto industry has lost this fight too.

    It can be argued that the automobile industry is the most picked on by the federal government. Just imagine how safe our medicine or affordable it would be if it was controlled by the feds as much as the automobile industry is. The feds look away as a patent is tweaked or extended then marketed like hell. You get men walking into docotrs offices asking for ladies birth control pills because the ads tell them they are new and improved, clear acne and cure cancer!
    We hope for better things; it will arise from the ashes - Fr Gabriel Richard 1805

  15. #15
    Cyburbian ofos's avatar
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    Much of the post-WWII prosperity came about because industry retooled to meet wartime needs and then was convertible to post-war needs. That especially was true of the automobile industry. Maybe this is simplistic, but it seems obvious that the automobile age as we knew it is rapidly coming to an end and that our dependence on oil has to end for both supply and environmental reasons. Rather than bailing out failing industries, why not help those industries to invest in massive retooling to produce alternative energy products and employ workers who otherwise will be on the public dole.

    On another note, I'd rather see WPA-like employment to provide meaningful/useful employment opportunities than just issuing checks to people and letting them sit on their increasingly ample American duffs
    “Death comes when memories of the past exceed the vision for the future.”

  16. #16
    Cyburbian zman's avatar
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    Quote Originally posted by ofos View post
    On another note, I'd rather see WPA-like employment to provide meaningful/useful employment opportunities than just issuing checks to people and letting them sit on their increasingly ample American duffs
    I was telling my wife this last night, especially since there have been daily layoffs of capable labor, engineers, drafters, etc from the construction company she works for. We've a lot of bridges and roads that could be worked on... as well as govt. buildings and installations.
    You get all squeezed up inside/Like the days were carved in stone/You get all wired up inside/And it's bad to be alone

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  17. #17
    Cyburbian TexanOkie's avatar
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    Quote Originally posted by Duke Of Dystopia View post
    ANY company that takes a single cent for a bailout, should not be allowed to spend a single cent on lobbyists, by law, until the money is completely repaid.

    Seriously, the auto industry lobbied their way INTO this mess by blocking politicians from implementing greater fuel efficiency standards. That is called MARKET FAILURE!
    The market, by definition, does not fail. It reacts. This is a reaction to poor attempts to manipulate the market.

  18. #18
    Cyburbian boiker's avatar
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    Quote Originally posted by TexanOkie View post
    The market, by definition, does not fail. It reacts. This is a reaction to poor attempts to manipulate the market.
    manipulate = government introduced actions including but not limited to: tax breaks, tax incentives, grants, loans, regulation adjustments (increased and decreased), elections, energy policies, transportation policies, foriegn policies.


    manipulate = market entities exploiting tax breaks, tax incentives, grants, loans, regulation adjustments (increased and decreased), elections, energy policies, transportation policies, foriegn policies.

    The failure here isn't the hypothetical, pure, insular market. The failure is the application of a hypothetical and impossible concept of a free, pure, insular market.
    Dude, I'm cheesing so hard right now.

  19. #19
    Cyburbian Cardinal's avatar
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    Walmart has revised its full-year outlook downward. Did anybody feel a shiver down the spine?
    Anyone want to adopt a dog?

  20. #20
    Cyburbian CJC's avatar
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    Quote Originally posted by Cardinal View post
    Walmart has revised its full-year outlook downward. Did anybody feel a shiver down the spine?
    The Intel revision scared me more. The fact that a company that makes most of their money overseas and in large part from large companies/governments/etc had to revise their numbers from just five weeks ago (!!!!) by more than 15% (!!!!) is very scary. At least it was just one quarter worth of numbers.
    Two wrongs don't necessarily make a right, but three lefts do.

  21. #21
    Cyburbian TexanOkie's avatar
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    Quote Originally posted by boiker View post
    manipulate = government introduced actions including but not limited to: tax breaks, tax incentives, grants, loans, regulation adjustments (increased and decreased), elections, energy policies, transportation policies, foriegn policies.


    manipulate = market entities exploiting tax breaks, tax incentives, grants, loans, regulation adjustments (increased and decreased), elections, energy policies, transportation policies, foriegn policies.

    The failure here isn't the hypothetical, pure, insular market. The failure is the application of a hypothetical and impossible concept of a free, pure, insular market.
    I admit that a free market does not address every issue or always function smoothly. However, I fail to see any alternatives, even when wrapped in a market context, that adequately alleviates the same problems that the market supposedly fails.

  22. #22
    Cyburbian Duke Of Dystopia's avatar
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    Quote Originally posted by TexanOkie View post
    The market, by definition, does not fail. It reacts. This is a reaction to poor attempts to manipulate the market.
    You need to take some economics classes.
    I can't deliver UTOPIA, but I can create a HELL for you to LIVE in :)DoD:(

  23. #23
    Cyburbian CJC's avatar
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    Quote Originally posted by TexanOkie View post
    I admit that a free market does not address every issue or always function smoothly. However, I fail to see any alternatives, even when wrapped in a market context, that adequately alleviates the same problems that the market supposedly fails.
    The problem with a free market is the same as the problem with a command economy. Neither can exist in a world with political boundaries.
    Two wrongs don't necessarily make a right, but three lefts do.

  24. #24
    Cyburbian boiker's avatar
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    Quote Originally posted by TexanOkie View post
    I admit that a free market does not address every issue or always function smoothly. However, I fail to see any alternatives, even when wrapped in a market context, that adequately alleviates the same problems that the market supposedly fails.
    There is no right answer. The market is a human construct-- a philosophical entity. If economics was a hard science there would be an absolute answer. The best we can do as humans is attempt, fail, and repeat. Even a rousing success comes with a certain percentage of failure. The results of that failure set the groundwork for a new philosophical test which could be the antithesis of the previous or some other amalgam.
    Dude, I'm cheesing so hard right now.

  25. #25
    Cyburbian Emeritus Chet's avatar
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    Off-topic:
    I did my part for the economy. I spent $1000 at OfficeMax yesterday.


    Duke Thanks for saving me some time.

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