Stem Cells, Obama and the Austrians

As I predicted, the president lifted the funding ban on embryonic stem cells.  First, though, please indulge a rant…

“It’s not the lie. It’s the coverup” is the old political adage.

Usually, in politics, it’s much better to admit a mistake and move on. I wish to heaven we could learn that lesson in regard to economic downturns.

Downturns are not inevitable forces of nature. They are created, and usually by bad economic policies. This one is no exception.

Most of you have been Agora Financial readers for many years, so you knew this was coming. There is no question that Fed monetary policies, combined with congressional mandates that made easy mortgage loans a virtual entitlement, caused our current economic affliction. I suspect even the people behind these mistakes know this. There’s darned little confession going on, though.

Instead, we’re watching the financial equivalent of a coverup. The politicians who defended and promoted the practice of handing out and then bundling bad loans are blaming the financial institutions that did their bidding.

I’m not saying, by the way, that financial institutions are without blame. We know that because some resisted the lure of commissions that flowed like water from the affordable housing Ponzi scheme.

I’ve told you several times about Jeff Scott, the Austrian economist whose unwelcomed Jeremiah-like lamentations kept Wells Fargo from diving into the subprime river. W.F., as a result, is the healthiest bank in the country. My guess, by the way, is that Scott, like Jeremiah, will pay the price for having been right. You know the old saying about prophets in their own land.

Regardless, my point is that this recession was caused by meddling in the market. The solution to our current distress, therefore, would be to stop meddling.

Unfortunately, our government is in full coverup mode. Those responsible are not only pointing fingers elsewhere, they’ve increased the magnitude of their meddling. Now they are propping up institutions that made bad investments.

The term for these bad investments, in the jargon of Austrian economics, is “malinvestment.” These mistakes take resources out of the self-perpetuating economy, slowing economic growth. When enough malinvestment is eliminated, our economy will grow again. This is a natural process that Austrian economist Joseph Schumpeter called “creative destruction.”

Delaying that process will not help. The healthiest thing we could do now is to let institutions that mishandled resources fail. Most would be bought by better firms. Many individuals would need help during an intense period of creative destruction, and we should probably give it. The bankers who did the bidding of Congress, however, could sell their Manhattan townhouses and weather the storm well.

On the stem cell front, at least, there’s really good news. Transformational technologies will always overcome downturns in the long run. Some countercyclicals will even do well during a downturn. Once again, however, the media are getting the stem cell story wrong. This change will have little impact on companies working on SC therapies. As I’ve said many times, the ability to create induced pluripotent stem (iPS) cells from adult cells has changed everything. The use of embryonic cells in future therapies is now unnecessary, if not foolish.

This is not to say, though, that lifting the ban on the use of federal funding will not produce winners. The reason is that stem cells have important uses beyond therapies that were stifled by the funding ban.

Theoretically, it was possible to privately fund research on unapproved eSC lines under the Bush ban. To do so, though, researchers would have had to cut themselves off from any other work involving federal grant monies. In most cases, disconnecting from the intricate network of federally funded research was a practical impossibility. You would be hard pressed to find a university or big pharmaceutical company that does not accept government grants in some form. The impact of the ban was, therefore, enormous.

The field of research that suffered most was genetic disease drug discovery. Specifically, it was research aimed at finding cures for the inherited genetic diseases that afflict millions of Americans alone. What scientists have long wanted is access to stem cells that carry the diseases they want to treat. With an unlimited number of disease-carrying cells, potential treatments could be tested and analyzed with far greater efficiency.

It is ironic, by the way, that the availability of these cells will actually lead to fewer abortions. Researchers will use stem cells carrying cystic fibrosis, breast cancer, muscular dystrophy and other diseases to produce effective therapies for those conditions. This means that parents who carry those genes will be less likely to screen and reject embryos that have those DNA markers. Obviously, those therapies are also going to make smart investors fortunes. And they will deserve them.

Now, let’s move to the thorium front…

The Thorium Energy Independence and Security Act of 2008 is sponsored by Senate Majority Leader Harry Reid and Republican Sen. Orrin Hatch, and is designed in large part to produce an alternative solution to the problem of nuclear wastes. Thorium reactor technologies fit that bill for two reasons. Not only do they produce fewer byproducts, they can be used to burn the wastes produced by other nuclear technologies.

A couple of weeks ago, President Obama dramatically moved the thorium industry forward. He announced that he would kill the Yucca Mountain nuclear waste depository project. This is despite the $9 billion already spent on the project.

Reid, of course, is bragging about his role in the decision. So where does this leave us? The Yucca Mountain project, located in Reid’s home state of Nevada, was considered critical to the future of nuclear power generation in America. Since Obama, Reid and Pelosi all promote nuclear power, this significantly increases the likelihood that thorium reactor technologies will be fast-tracked.

Patrick Cox

March 12, 2009

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