A great article on the failure of Keynesian Economic Theory which never has and never will succeed!
On a personal story, it was sad to hear yesterday that Borders will be going out of business. With all the hours spent there, including the one in the World Trade Center before it was destroyed on 9/11, I will always cherish the memories. I made a point to go with my wife to the one near us this past Sunday for one last time of reminiscing. My thoughts go out to the 10,700 Borders employees who will be affected by this.
The financial headlines for today are:
1) Stocks rebound on earnings, debt-limit proposal-From the AP
Strong profits and a bipartisan plan to lift the U.S. debt limit drove a stock market rebound Tuesday.
Stock indexes rose after Coca-Cola, IBM and other companies reported better second-quarter earnings.
The indexes added to their gains in the afternoon after President Barack Obama backed a proposal by six senators that would cut debt by $3.7 trillion over the next decade and raise the country's $14.3 trillion debt ceiling.
The Dow Jones industrial average gained 202.26 points, or 1.6 percent, to close at 12,587.42. That's the Dow's largest one-day jump this year.
"It looks like there's bipartisan support for a robust plan," said Burt White, chief investment officer at LPL Financial in Boston. "The stock market had been looking for a reason to have a relief rally. And it looks like they got the start of one today. "
The ongoing deadlock in Washington over raising the country's borrowing limit and Europe's debt crisis have been weighing on markets this month. The Dow slid five of the previous seven days.
The S&P 500 index rose 21.29 points, or 1.6 percent, to 1,326.73. That's the broader index's best day since March 3. The Nasdaq gained 61.41 points, or 2.2 percent, to 2,826.52.
Tuesday's gains turned the three major indexes positive for the month. The Dow and Nasdaq are now up more than 1 percent in July. The S&P 500 is up 0.5 percent.
Information technology stocks led industry groups higher after IBM Corp.'s results beat analysts' estimates. Corporate software spending held steady during the quarter. IBM's stock rose 5.7 percent.
The tech gains could continue Wednesday. Apple Inc. reported another surge in earnings after the stock market closed as sales of iPhones and iPads again set records. The stock rose 6 percent to $399.53 in after-hours trading.
Coca-Cola Co.'s income increased 18 percent in the second quarter on stronger sales overseas. The world's largest beverage maker raised some prices to offset higher ingredient costs. Coca-Cola's stock was up 3.3 percent.
KeyCorp rose 4.3 percent after the Cleveland-based banking company reported a jump in earnings thanks to a drop in loan losses. The bank reported income of 25 cents a share, up from 3 cents a share a year ago.
Harley-Davidson Inc. rose 8.9 percent, making it the top performing stock in the S&P 500 index. The motorcycle maker reported its first increase in U.S. sales since the final quarter of 2006. Sales of its motorcycles, some of which sell for more than $30,000, had languished throughout the economic slump.
A jump in housing construction lifted the stocks of Lennar Corp. and D.R. Horton Inc. The Commerce Department said building of new houses and apartments increased 14.6 percent in June from the previous month. Single-family house construction rose 9.4 percent, the largest increase since June 2009, the month that marked the end of the recession. Much of the monthly increase, however, came from new apartment buildings.
2) The dangers of being wrong on Keynes- The Washington Post
If you ask economists what went wrong during the Great Depression, you’ll often hear: “We hadn’t read Keynes yet.” That’s John Maynard Keynes, author of the “The General Theory of Employment, Interest and Money.” After the crash, his description of economic crises — and how to get out of them — became so widely accepted that, in the 1960s, President Richard Nixon said, “We’re all Keynesians now.”
Well, we’re not all Keynesians now. When you hear “Keynesian” today, it’s usually with “Obamacare” and “socialists.” It’s Republican shorthand not only for the economic theory that governed the Obama administration’s response to the crisis, but also for the general Democratic outlook. And it’s not a compliment.
The president’s team were fervent believers in the theories of a British economist called John Maynard Keynes,” wrote Majority Leader Eric Cantor (R-Va.) in his election-year manifesto, “Young Guns.” He’s right about that. Lawrence Summers, the former director of the National Economic Council, and Christina Romer, the former head of the Council of Economic Advisers, were two of the most influential Keynesian economists in the country. Obama didn’t just have a team of Keynesians. He had the Keynesian all-star team.
Perhaps the president’s team should have better explained their theories to Cantor. In his book, Cantor goes on to describe Keynesianism as the theory “that government can be counted on to spend more wisely than the people.” He’s wrong — and wrong in a way that’s making it harder to recover from this crisis, and could make it harder to respond to the next one.
“I think Keynes mistitled his book,” Summers says. “The correct title would have been ‘A Specific Theory of Collapsing Employment, Interest and Money’. What his book really was about was the proper understanding of the convulsive downturns to which a free-market economy is intermittently prone.”
The idea, in other words, is not about whether the government spends money better than individuals. After all, a lot of the policies advocated by the Keynesians, like the Making Work Pay tax cut, put money into the hands of individuals so that they can spend it. The idea is that the government has a role to play when, because of a “convulsive downturn,” a crisis begins feeding on itself.
Keynes — and others who later elaborated on his work, like Hyman Minsky — taught us that although markets are usually self-correcting, they occasionally enter destructive feedback loops in which a shock to, say, the financial system scares business and consumers so badly that they hoard money, which worsens the damage to the system, which further persuades other economic players to hoard, and so on and so forth.
In that situation, the role of the government is to break the cycle. Because businesses and consumers have stopped spending, the government breaks the cycle by spending. As clean as that theory is, it turned out to be a hard sell.
The first problem was conceptual. What Keynes told us to do simply feels wrong to people. “The central irony of financial crises is that they’re caused by too much borrowing, too much confidence and too much spending, and they’re solved by more confidence, more borrowing and more spending,” Summers says.
3) Borders Forced to Liquidate, Close All Stores-From The Wall Street Journal
Borders Group Inc. said it would liquidate after the second-largest U.S. bookstore chain failed to receive any offers to save it.
Borders, which employs about 10,700 people, scrapped a bankruptcy-court auction scheduled for Tuesday amid the dearth of bids. It said it would ask a judge Thursday to approve a sale to liquidators led by Hilco Merchant Resources and Gordon Brothers Group.
The company said liquidation of its remaining 399 stores could start as soon as Friday, and it is expected to go out of business for good by the end of September.
Borders filed for bankruptcy-court protection in February. It has since continued to bleed cash and has had trouble persuading publishers to ship merchandise to it on normal terms that allowed the chain to pay bills later, instead of right away.
"Following the best efforts of all parties, we are saddened by this development," said Borders President Mike Edwards. "We were all working hard toward a different outcome, but the head winds we have been facing for quite some time, including the rapidly changing book industry, [electronic reader] revolution and turbulent economy, have brought us to where we are now."
Borders's best chance for survival fell apart last week when talks with private-equity investor Jahm Najafi to buy the company collapsed. Borders scrambled unsuccessfully over the weekend to find other potential buyers who would keep the chain alive.
The chain's demise could speed the decline in sales of hardcover and paperback books as consumers increasingly turn to downloading electronic books or having physical books mailed to their doorsteps.
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