I watched today Steve Ballmer’s (Microsoft CEO) remark to Microsoft partners at the World Partner Conference about the economy. Here is the quote:
"I’ve touched on it a little bit, and I’m just going to give you a little bit more of our context on the economy. As a number of folks now do, I refer to what we’re going through globally, frankly, as an economic reset – not a recession and not a depression. Literally, the world economy got overheated. People borrowed, businesses and consumers, borrowed too much money. That money fueled a lot of purchasing that in some senses was false because it really couldn’t be afforded. When the debt came out of the system, the level of economic activity has to come back down.
It doesn’t have to come down and go back up, it really needs to come back down – at least here in the United States. Debt as a percentage of GDP was almost 300 percent before this reset. And even before the depression in 1929, it was only 150 percent of GDP. So the economy is going to reset to a lower level. That’s going to happen, it’s inevitable, and we all have to – and I know we are all taking actions that are consistent with that kind of planning.
…
The key to renewing economic growth in the economy at large is actually going to be growth in productivity. Since debt is not going to fuel economic growth, it’s going to have to come from productivity, and the best form of productivity advance in society and the economy is innovation."
If only other influential people (especially politicians and of course the President) could see things so clearly…
I can’t disagree too much with what he said, but I notice what he didn’t say. I think anyone who thinks the economy simply “overheated” probably doesn’t really understand what happened. Too much borrowing sure, but he seems to blame it on the ones borrowing, entirely leaving out the ones responsible for encouraging and enabling the borrowing. (Kind of a big deal.)
I’m sure CEOs understand their job just fine, but it seems pretty obvious that they don’t have much time to study macroeconomics. Why do people give their opinions on such matters so much weight? Most of the people reading this probably have a better idea of what happened than he does, he’s too busy running a company, right?
Sure, he isn’t say everything, but I would like to see influential people to see at least half of this. I agree with you that “overheating” is not the right word, but I must disagree with you that borrowers are not to blame. As Mises told us many times, nothing in the world can’t happen without the consent of the majority. The majority of the people wanted to borrow, they vote, they elect people who does what they want. The real problem today is not that people want to get something, the real problem is that they want to get something not by economical means but by political means. You simply can’t borrow this much on the free market. People (borrowers) want easy money, easy credit, they elect irresponsible politicians who will make that happen, and… only we Austrians know what will be the consequences, but unfortunately nobody listening to us
If you read Hayek, you will also notice, that there is a difference between society and state/government, and when people who are elected to set laws and regulations in order to regulate the work of government also set laws and regulations in order to regulate/rule the life and work of private citizens and organizations, you will get a system where laws are not laws but temporary privileges for one group at the expense of some other group and commands to execute those privileges. We built this mess, together. Sure some of us are more to blame than others, but the fact that none of this would happen without the consent and the will of the majority is rock solid.
The symptom of the disease was miss-investment or with other words the direction of capital use to wrong places, which in turn results in higher levels of consumption (borrowing itself can’t drive consumption, you need to produce the goods and services before you can consume them). The problem is that most of those borrowing went to produce goods and services we can’t afford and then much of those borrowing goes to buy those products and services. There is nothing wrong with borrowing itself, the problem is excess borrowing, which can be done only if you get cheap credit (otherwise many people can’t afford borrowing and those who can, would do a much better job in using that funds than in a case of cheap credit). The question, how we get cheap credit and why? The answer is populist public policy, unlimited public power (usually goes like: Constitution? oh yeah some old paper from the past…who cares) which lead us to fiat money and central bank (FED) driven credit expansion (low interest rates = cheap credit, cheap credit).
Anyway the most important thing in Steve Ballmer’s remark is the part when he said that future growth must be based on improved productivity (Mises told us that many times), and that he recognizes that growth in the past years wasn’t actually growth by merit (or production), it was just a wild ride on the big wave made by the credit expansion (borrowing). He recognizes that there is finally a time arrived for everyone to produce something valuable to the market and not just to buy low and sell high, as it was the case during the last decade or so. That is important.
This is true. What I had specifically in mind is the Austrian Theory of the Trade/Business Cycle, although admittedly this specific “meltdown” is a little complicated.
I can’t blame the borrowers because if interest rates are kept artificially low, they are being sent incorrect signals that leads them to make unwise decisions. You can’t blame people reacting normally to market conditions, we should blame the ones responsible for manipulating market conditions which is the Federal Reserve and to a degree the Federal government.
Have you [the OP] read Meltdown by Thomas Woods (coincidentally, with the Mises Inst.)? He covers this whole topic of the “meltdown” from an Austrian perspective and I highly recommend it!
That is all correct, I just add to that the fact that the people in charge for public policies are elected by the people, so ultimately the people are those who wants cheap credit (low interest rate) and they elect those who promise them jobs and growth based on credit expansion. That is why I blame everyone, not just the FED and the politicians, the people elected them and the people ask them for most of the policies they put in force. So this is not a different cause of the meltdown, this is just an additional point to it. If the majority of people want to deal with reality, if they want a clear respect of property, if they want a system without so much entitlements, if they would want a system where sound money, free market and the opportunity to produce on real terms, with borrowing real funds and paying real interest rates… nothing of this would happen, no matter how strong those politicians and bankers wanted to give us cheap credit, they would be powerless to do that.
I see the point you’re making, and I agree that ignorance is to blame as well. It’s a difficult problem to deal with, it’s so deep rooted thanks to the crooks in charge..
Right. Instead of just blaming the ones who borrowed too much, he should blame the once who loaned too much money from the printing press. Inflation and low interest rates caused a negative savings rate, which causes excess borrowing.
CEOs, especially if they run well known corporations like Microsoft, have to be extremely careful when using words. I have the opinion that Ballmer is the kind of person who understand perfectly what’s going on but also knows perfectly well that a single word may be too much.
Remember that until recently MS had the US antitrust commission at its throat (they got out only by increasing its political contributions) and right now the EU is salivating over showing these “capitalist pigs” a thing or two about competition…
LOL. The left takes the absolute opposite of this position - that the banks made “predator loans” to poor, unsuspecting, optimistic, hard-working poor people.
The correct position shouldn’t be anti-bank or anti-borrower, but pro-property rights. If the bank wants to make foolish loans (or “predator loans”), it does so by risking its own money. Likewise, borrowers borrow at their own risk, possibly losing “their” house if they can’t repay.
If the market has shifted significantly away from performing loans that benefit both buyer and seller towards non-performing loans that benefit neither, the proper course isn’t to find blame with one party or the other. We must instead search for changes in the way things worked, in regards to incentives and calculation. There were obviously many. The low-interest rate policies and the encouragement of ARM’s and other low-income home-ownership and the discovery of implicit government-backing to Fannie/Freddie all heavily distorted the market in both these ways.
In fact, for many people who made the horrible decisions, they have not lost anything or as much as they should. Some are getting mortgage relief. Some are able to refinance while rates are in the floor. Tax credits are keeping house prices higher. Etc. On the other side, the banks are getting bailed out, Fannie and Freddie are in conservatorship. etc.
Why? There is nothing here that refutes the Statist typical position that markets are inherently unstable and the wise and benovelent government must come to the rescue (in the short term and the long term).
