printLast night I watched one of the many performances Stephen Moore and John Fund give on Glenn Beck’s show, talking up the bailout while making the obligatory noises about their free market credentials.
I wonder why Glenn Beck, whose instincts are generally good, and who disagreed with them, tolerates such obfuscation. Has Glenn done no research? Stephen Moore authored a book paradoxically titled Bullish on Bush: How the Ownership Society Is Making America Richer.
Here’s my truism, excerpted from “Bush & The Bailout Bandits”: “Bush’s ownership society, built as it was on quicksand, has metamorphosed into the bailout society.”
Is America ever going to fire its failed philosopher kings when they fail to predict anything?
Here is an excellent antidote (via LRC.Com) to the hydra-headed talking heads, exposing them for the philosophical commies they are. It’s written by the Canadian Austro-libertarian Martin Masse:
KARL’S COMEBACK
Martin Masse
Financial Post, September 30, 2008, FP13
In his Communist Manifesto published in 1848, Karl Marx proposed 10 measures to be implemented after the proletariat takes over power, with the aim of centralizing all instruments of production in the hands of the state. Proposal #5 was to bring about the “centralization of credit in the banks of the state, by means of a national bank with state capital and an exclusive monopoly.”
If he were to rise from the dead today, Marx might be delighted to discover that most economists and financial commentators, including many who claim to favour the free market, agree with him.
Indeed, analysts at the Heritage Foundation and Cato Institute, and commentators in the Wall Street Journal and in this very page, have made declarations in favour of the massive “injection of liquidities” engineered by central banks in recent months, the government takeover of giant financial institutions, as well as the still stalled $700-billion bailout package. Some of the same voices were calling for similar interventions following the burst of the dotcom bubble in 2001.
“Whatever happened to the modern followers of my free-market opponents?” Marx would likely wonder.
At first glance, anyone who understands economics can see that there is something wrong with this picture. The taxes that will need to be levied to finance this package may keep some firms alive, but they will siphon off capital, kill jobs and make businesses less productive elsewhere. Increasing the money supply is no different. It is an invisible tax that redistributes resources to debtors and those who made unwise investments.
So why throw this sound free-market analysis overboard as soon as there is some downturn in the markets?
The rationale for intervening always seems to centre on the fear of reliving the Great Depression. If we let too many institutions fail because of insolvency, we are being told, there is a risk of a general collapse of financial markets, with the subsequent drying out of credit and the catastrophic effects this would have on all sectors of production. This opinion, shared by Ben Bernanke, Henry Paulson and most of the right-wing political and financial establishments, is based on Milton Friedman’s thesis that the Fed aggravated the Depression by not pumping enough money into the financial system following the market crash of 1929.
It sounds libertarian enough. The misguided policies of the Fed, a government creature, and bad government regulation are held responsible for the crisis. The need to respond to this emergency and keep markets running overrides concerns about taxing and inflating the money supply. This is supposed to contrast with the left-wing Keynesian approach, whose solutions are strangely very similar despite a different view of the causes.
But there is another approach that doesn’t compromise with free-market principles and coherently explains why we constantly get into these bubble situations followed by a crash. It is centered on Marx’s Proposal # 5: government control of capital.
For decades, Austrian School economists have warned against the dire consequences of having a central banking system based on fiat money, money that is not grounded on any commodity like gold and can easily be manipulated. In addition to its obvious disadvantages (price inflation, debasement of the currency, etc.), easy credit and artificially low interest rates send wrong signals to investors and exacerbate business cycles.
Not only is the central bank constantly creating money out of thin air, but the fractional reserve system allows financial institutions to increase credit many times over. When money creation is sustained, a financial bubble begins to feed on itself, higher prices allowing the owners of inflated titles to spend and borrow more, leading to more credit creation and to even higher prices.
As prices get distorted, malinvestments, or investments that should not have been made under normal market conditions, accumulate. Despite this, financial institutions have an incentive to join this frenzy of irresponsible lending, or else they will lose market shares to competitors. With “liquidities” in overabundance, more and more risky decisions are made to increase yields and leveraging reaches dangerous levels.
During that mania phase, everybody seems to believe that the boom will go on. Only the Austrians warn that it cannot last forever, as Friedrich Hayek and Ludwig von Mises did before the 1929 crash, and as their followers have done for the past several years.
Now, what should be done when that pyramidal scheme starts crashing to the floor, because of a series of cascading failures or concern from the central bank that inflation is getting out of control? It’s obvious that credit will shrink, because everyone will want to get out of risky businesses, to call back loans and to put their money in safe places. Malinvestments have to be liquidated; prices have to come down to realistic levels; and resources stuck in unproductive uses have to be freed and moved to sectors that have real demand. Only then will capital again become available for productive investments.
Friedmanites, who have no conception of malinvestments and never raise any issue with the boom, also cannot understand why it inevitably leads to a crash. They only see the drying up of credit and blame the Fed for not injecting massive enough amounts of liquidities to prevent it.
But central banks and governments cannot transform unprofitable investments into profitable ones. They cannot force institutions to increase lending when they are so exposed. This is why calls for throwing more money at the problem are so totally misguided. Injections of liquidities started more than a year ago and have had no effect in preventing the situation from getting worse. Such measures can only delay the market correction and turn what should be a quick recession into a prolonged one.
Friedman – who, contrary to popular perception, was not a foe of monetary inflation, but simply wanted to keep it under better control in normal circumstances – was wrong about the Fed not intervening during the Depression. It tried repeatedly to inflate but credit still went down for various reasons. This is a key difference in interpretation between the Austrian and Chicago schools.
As Friedrich Hayek wrote in 1932, “Instead of furthering the inevitable liquidation of the maladjustments brought about by the boom during the last three years, all conceivable means have been used to prevent that readjustment from taking place; and one of these means, which has been repeatedly tried though without success, from the earliest to the most recent stages of depression, has been this deliberate policy of credit expansion. … To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about…”
The confusion of Chicago school economics on monetary issues is so profound as to lead its adherents today to support the largest government grab of private capital in world history. By adding their voices to those on the left, these confused free-marketeers are not helping to “save capitalism”, but contributing to its destruction.
*Martin Masse is publisher of the libertarian webzine Le Québécois Libre and a former advisor to Industry minister Maxime Bernier
[Further recommended reading is here, scroll down, please.]
For anyone who has ANY moral sense this is a no-brainer. Fractional reserve banking is based on both fraud and theft. Fraud because it lends out money that it says is available on demand. Theft because such loaning out INCREASES the money supply and causes inflation. FRB started out as petty cheating that early bankers found they could get away with most of the time. In time, they got the state to legitimize that cheating.
The Austrian economists trace the boom-bust cycle to fractional reserve banking. If we end up with more socialism or fascism it will be because of the economic instability this dishonest banking system causes.
Ilana,
I should have mentioned it in my previous post but your article is detailed and brilliant. Thanks.
Perhaps a better goal will be to talk about what country to move to in order to sustain economic and personal freedom.
Are there certain countries that are becoming more free market oriented than ours? After my ordeal with the professor today, I am done debating issues of economic or political theory with Americans.
It’s time to move on.
Ilana, these times that try men’s souls. I have lost even a residual of respect for those “conservatives” and “libertarians” who endorse this Socialistic Putsch. Their great idea is to add “tax cuts” to the inflationary bailout! To them, “freedom” means replacing the income tax to fund the $ 4 Terabuck Welfare-Warfare State with a “Fair Tax” where the government monitors every single purchase of every American and all financial transactions are electronically monitored by the Halliburton State. Good god, things are so bad that even Nader! and Kucinich! seem to be better or no worse than the statist-quo. The American people are angry at seeing their savings go into the toilet bowl while the politicians and their Korrupt Korporate Komrades loot the system and grab more power. I notice that the “mainstream” media/press have ZERO dissenting views on the bailout – we MUST do it, be bipartisan, responsible…. e.g. apishly follow the criminals who have brought us to this precipice and ignore the “extremist nut cases” such as:
http://www.house.gov/paul/congrec/congrec2002/cr071602.htm
who PREDICTED this back in July 2002. This “bailout” is the equivalent of a patient with a tumor in his lungs doubling his smoking instead of getting the needed surgery.
To Alex:
I’ve been wondering about Belize – they speak English and the cost of living is low. Is the crime rate lower than South Africa?? Can anyone really retire in the US with the financial instutions we have? – Myron
Myron;
Thanks for the information. As to your question – and this is an interesting idea that has been carried about by classical liberals and libertarians – the answer is probably ‘no’.
You see, investments in a market are not difficult to sustain, and even flourish – if the market is given enough freedom. The more freedom of prices and capital – the closer the market gets to achieving true ‘pure’ capitalism – the easier it is to invest, absent a crazy monetary policy (such as the Fed.)
However… we live in an era of Democracy being God, and unfortunately, every four to eight years, financial institutions are turned upside down on their heads playing a guessing game not only with the Fed, but also with the current economic policy of the Man in Charge.
This leads to moral hazard, and instead of merely asking ‘what will be profitable’ in thirty years, investors also have to read the future, and see were political idealogy will be.
Politics are abstract; markets are reality. When we place abstract ideas above reality and it’s systems of resource allocation, we get a lot of problems that continue to get worse. Also see socialism and communism (and Canada).
It would be wise of me, and perhaps you, to consider investing overseas. An Austrian economist, Robert Murphy, might have something interesting to say on the subject.
I don’t consider America worth – or able – to be saved at this point. It’s better to move on, and get out while possible. After I get my degree, I will likely be one of the many young men who leave this country for something much better overseas. Call it White Flight, call it Capital Flight – I call it common sense.
Alex,
I would agree with you except for one thing: What is Ron Paul for? Plus the dimwits went too far in thinking they could predict the climate.
I have lived to see Greenspan disgraced, I hope to see others join him.
All ten planks of the Communist Manifesto have been implemented, more or less.
And most of the people in America think that’s just “how things are” and don’t conceive any reason why things should or could be different.
Even in the face of losing everything, they’ll go with the crowd rather than think. Even when confronted with the evidence of the causes and the solutions, they turn away and blank it out.
When real crash becomes apparent, they will line up with their hands out, demanding that the government ‘do something’. A nation that votes for politicians who promise them benefits extracted from others is a nation of beggars and thieves. When those beggars and thieves believe they have a right to the products of another man’s toil, they will not hesitate to urge their government to use force to get it when the loot dries up. And the politicians that pander to them will be only too happy to do it.
My only response to all of this is to try to amass some portable wealth and be ready to abandon property when the emergency measures are declared, keeping in mind that “it CAN happen here”.
Another good book to read is “The Ominous Parallels”. I don’t particularly like the author, but the book is brilliant.
Let’s not forget something else:
The socialist theory of money that everyone in Washington and Wall Street subscribe to also believes that World War II got the U.S. out of the First Great Depression.
What’s different this time? This time, there are nuclear weapons all over the place.
I too have considered emigrating to another country, but I haven’t done any heavy research into which place would be “best.” I was also disappointed to hear Sen. Jim Webb voted for the bail out last night.
I do not envision America becoming totalitarian. If one views freedom, authoritarianism, and totalitarianism as states of matter like gas, liquid, and solid – it appears that Mussolini was truly the Man Of The Future (see McMussolini … or is it O’Benito?) with his fascistic Corporate State. Putin and Hu Jintao are not interested in mass murder and mindless regimentation when nominal markets with political control will do just as well. In that regard, Orwell got it slightly wrong. The future is one of sufficient prosperity and diversions (music, porn, cable TV, booze) to keep us as sheep with enough flexibility (nominal “businesses” and “markets”) in service to the State – but probably not the gulags and mass starvation of North Korea. Order and stability trump ideology. //
RECOMMENDED READING: How the housing bubble evolved out of “affirmative action” for homeowners: query.nytimes.com/gst/fullpage.html?res=9C0DE7DB153EF933A0575AC0A96F958260&sec=&spon=…
(NY Times of Sept. 30, 1999 on Fannie)
“This time, there are nuclear weapons all over the place.” John Danforth
Therein lies out safety. Nukes can reach out and touch our elites so perhaps they will eventually see the utility of peace.
Having been in political science class, I am more or less in the thick of it.
I can say that I definitely don’t see much hope for America, especially after my exchanges with students and professors.
Yep, they really are that dumb guys. Don’t believe me? Go to college, and try to argue our points.