Moreover, you could use your house as the basis for a line of credit and live high on the hog while you waited for your house to appreciate as surely as the sun rises in the east.
Thus, real estate loans at all commercial banks increased from January 2002 to January 2009 by 110 percent, and the banks’ total consumer credit outstanding increased during the same period by 37 percent. Household credit-market debt outstanding rose between the first quarter of 2002 and the third quarter of 2008 by 77 percent. Got the picture? The country was, and remains, awash in debt. Of course, these huge increases in real-estate and consumer debt would not have been possible had the Fed not engineered a great increase in the money and credit coursing through the system: thus, the money stock (M2) increased from January 2002 to January 2009 by 51 percent. Greenspan and Bernanke, you gotta love ‘em — real good-time Charlies.
It was paradise, or as close to paradise as we’re likely to come in this vale of tears, but it was a fool’s paradise, which has long since become obvious to anybody with more than half a wit. Once the real-estate prices turned around and headed south, everything pyramided on top of them began to crumble — mortgages, mortgage-backed securities, real-estate-related derivatives of various sorts, credit default swaps, bank balance sheets, big investment banks, stock prices (especially financials), interbank lending, you name it. About the only things that have risen appreciably in the past year or more are fear and despair. (The smart money has taken a long position in them.)
Now, before we lose our focus, allow me to remind you that this whole sad story is a tale of excessive debt. If householders, banks, businesses, and, of course, governments at every level had not become so outrageously overleveraged, the piper would not be in a position, as he is now, to demand such extreme payment. But debt and more debt and still more debt formed the stairsteps by which the U.S. economy (and others) ascended to the dizzying heights from which the world is now in the process of plunging.
But never fear: our government will save the day. Or so it promises us. Especially since last September, the Fed and the Treasury have scarcely stopped for a decent night’s sleep. They have frantically seized upon one “plan” after another (God save us from the central planners!) to “thaw the frozen credit markets,” to “prevent the credit-market meltdown,” to restore the flow of credit to one and all — in short, to make sure that we do not reduce our excessive, unsustainable indebtedness, but instead resume our all-out borrowing whether it is prudent to do so or not, and for most individuals and businesses at present, it most emphatically is not.
This morning’s New York Times announces the latest installment in this cavalcade of cuckoo crisis-fighting, something called the Term Asset-Backed Securities Loan Facility, or TALF. The headline reads: “U.S. Tries a Trillion-Dollar Key for Locked Lending.” The article explains that
The Treasury Department and the Federal Reserve plan to spend as much as $1 trillion to provide low-cost loans and guarantees to hedge funds and private equity firms that buy securities backed by consumer and business loans.The Fed is expected to start the first phase of the program, which will provide $200 billion in loans to investors, in early March.
The program . . . does not try to change securitization practices that, many investors say, spread risks throughout the world and destroyed financial institutions. Policy makers acknowledge that for now, fixing credit ratings, reducing conflicts of interest and improving disclosure can wait.
Under the program, the Fed will lend to investors who acquire new securities backed by auto loans, credit card balances, student loans and small-business loans at rates ranging from roughly 1.5 percent to 3 percent.
Depending on the type of security they are borrowing against, investors will be able to borrow 84 percent to 95 percent of the face value of the bonds. Investors would not be liable for any losses beyond the 5 percent to 16 percent equity that they retain in the investment.
In the initial phase, the Treasury will provide $20 billion and the Fed will provide $180 billion. Treasury Secretary Timothy F. Geithner said last week that the Treasury could increase its commitment to $100 billion to allow the Fed to lend up to $1 trillion.
Well, there you have it. If you can imagine anything more idiotic in the present circumstances, your imagination is more powerful than mine.
I have this recurring nightmare in which Tim Geithner is lying in a dark corner of a saloon. His bosom buddy Ben Bernanke comes in, sees him lying there in a heap and rushes to his side. He finds his comrade breathing heavily and reeking of a warehouse worth of booze. He shouts for help: “Bartender, get over here quick. Bring this man a whiskey. And make it a double!”
Into such hands has fate delivered us. May God have mercy on our souls.
I had a foreboding that one of these messages might contain, shall we say, a bit of denunciation when I saw that its subject line read “You’re a fucking STUPID and VAPID.” In the body of the message, the sentence continues:
little insect.“Everything deregulated…”
Please shoot yourself now and by chance, you haven’t bred have you?
Scum sucking maggot, get the fuck off my CSPAN channel and get out of my society.
Although this foul-mouthed lingo is not the kind of language that my mother taught me to use, I understood it well enough to file it under the rubric of “strong disapproval.”
Over the past decade or so, my popular articles on the Web have frequently elicited similar expressions of personal contempt and hatred. Had I not been a student of ideology, I might have been somewhat perplexed by such malevolent missives. After all, what do my writings endorse? As a rule, they uphold peace, voluntary cooperation, tolerance, and friendship toward all who do not proclaim themselves to be my sworn enemies. How can such inoffensive views touch a reader’s nerves so painfully that he responds by assaulting my character and demanding that I evacuate the country in which my ancestors and I were born? (Indeed, some of my forebears lived here even before the Europeans came to North America. If my information is correct, one-eighth of my ancestors were Cherokees, who, historians inform us, did not formally invite the white people to invade their long-inhabited, well-developed territory and, later, to expell them from it at bayonet point and march them, amid great suffering, to live in a wilderness known as Indian Territory.) So, I always wonder, who the hell does my correspondent think he is that HE should command ME, of all people, to leave this country? Can’t we at least flip a coin to decide which of us must go?
During the painful years of the Bush regime, we had to endure the slings and arrows of the brown shirts who compose the so-called Republican base. Now that Obama has ascended the throne, the brown shirts of the left are emerging as the more conspicuous barbarians. Thank God it is not the case, as far too many people suppose, that we must be on one of these sides or the other. We can transcend this disgusting political spectrum, placing ourselves neither on the left nor on the right — nor even in the so-called “independent” zone somewhere between them — but rather rising above the entire line and insisting that red-state savagery and blue-state savagery are equally despicable and intolerable. I daresay that the future of our civilization hinges on whether a sufficient number of us will choose this transcendence.
I don’t recommend the Newsweek article. Although the writers, Jon Meacham and Evan Thomas, have absorbed a number of true facts, their level of economic understanding is abysmal, and hence their reasoning is close to worthless.
Truth is, socialism is not the wave of the future. Indeed, it is already almost as dead as the dodo. Hardly anybody in a position of political power or influence now wants to establish socialism along the lines of the Soviets or the Maoists. Everyone knows that doing so is a one-way ticket to widespread poverty, which leaves precious little surplus for the political kingpins to rip off.
No, the world is converging ever more visibly, not toward socialism, but toward what I (following Charlotte Twight’s usage) have for many years been calling participatory fascism. The hallmarks of this system are, on the political side, the trappings of democracy (parties, elections, procedural niceties, etc.), and, on the economic side, the form of private property rights (though not much of the substance that characterizes the real thing).
The beauty of this system is that the political system can easily be corrupted so that the power elite retains a firm hold on the state, despite the appearance that they rule only with the consent of the governed. The major political parties appear to compete, but for the most part they coalesce and conspire; on the basics, they are in complete agreement. The apparent “consent” they enjoy they actually manufacture by their control of the mass media, the schools and universities, and other key institutions, and no political opinion outside the 40-yard lines ever receives a hearing in serious political circles. (Remember how the oligarcos rolled their eyes when Ron Paul managed to get in an occasional word during the debates last year?)
And while the ruling establishment retains an iron grip on state power, it allow entrepreneurs just enough room for maneuver so that innovators can continue to produce the new products, new methods of production, new raw materials, and new organizational forms that move the economy forward. The most enterprising entrepreneurs can still get rich, although even they will see a large chunk of the fruits of their labors ripped away by the state. The economy will improve its productivity sufficiently to keep a growing supply of creature comforts and amusements flowing to the masses, who are content with these things, along with the illusion of security that state functionaries induce in the people.
Lest you suppose that the masses are getting a raw deal, because their level of living would be so much higher in a genuine free-market system, bear in mind that virtually all of these people despise the free market. If you don’t think so, just give them an opportunity to live in one or even to move in that direction, conditional on their willingness to accept the personal responsibility and bear the risks that attend life in such a system – and you’ll see them flee quicker than a vampire exits at the first light of day. How do you think we got into our present situation, anyhow? It’s not as though the masses were repeatedly given what they didn’t want. They had plenty of opportunities to say no to dependency on the state, but they turned away; and they do not intend to go back any time soon to what they imagine to be an unbearably harsh style of life. Rugged individualism might have been okay for their great-grandparents, but they want no part of it.
All of which leaves us – by which I mean nearly everybody on earth — converging on the only form of politico-economic system that has a stable equilibrium in our present ideological circumstances: participatory fascism. I am not saying that this system is the only one possible, forever and ever, amen. I am saying, however, that until the world’s people abandon en masse the collectivist ideologies that now determine their social cognition, policy evaluation, political practices, and personal identities, any hope for moving to a freer form of economic order as a stable equilibrium is virtually nil.
Anyone who would like to see the preceding argument spelled out in greater detail will find my most recent statement in the final chapter of my 2007 book Neither Liberty Nor Safety.
Like most Americans, I know little about Turkey or the history of the territories its present government controls. So I consider the way in which I spent the evening of Monday, May 25, as one of my life’s wholly unexpected experiences. On that occasion, my wife Elizabeth and I found ourselves in the village of Şirince, high on a mountainside about nine kilometers from the town of Selçuk, which itself is about three kilometers from the ruins of the fabulous city of Ephesus, one of the greatest metropolises of the ancient world.
By a series of events unlikely to have happened to anyone but a certain lovely, vivacious, and outgoing Louisianan (a.k.a. my wife), Elizabeth, who had gone to Selçuk earlier on Sunday while I was still occupied with business elsewhere in Turkey, had become acquainted with an affable carpet dealer by the name of Aydin. Through him, we met Metin, a young man who works with or for Aydin. (In Turkey it seems that everybody works with or for a great many others, who are described in most cases as brothers, cousins, uncles, or nephews.) Both Aydin and Metin speak good English and have spent time in the United States.
Metin had previously kept a shop in Şirince, and he took us there on Monday evening, when Aydin, who had promised to take us, was diverted by business dealings. The village was nearly deserted when we arrived just after sundown, and almost all of the shops had closed. Metin informed us that the village had been inhabited for many generations by Greeks, whose houses were built in the customary Greek style (the style in which they remain today, at least on the outside). In the early days of Mustafa Kemal’s (Kemal Atatürk’s) reign as modern Turkey’s founding strong man, these Orthodox Christian people had been expelled in the great population exchange and replaced by Muslim Turks who had previously lived in Greece.
With no tourists swarming in the streets, our stroll around the village before dinner was pleasant and unimpeded. We then sat down to have dinner at a restaurant whose menu was extensive and inviting and in which for an hour or more no one else was being served. In response to our questions about present-day relations between Turks and Greeks, Metin indicated that he had nothing against Greeks. “Problem is not people,” he averred. “Problem is always governments.” In reaction to this delightfully unexpected libertarian statement, we expressed our wholehearted agreement.
When Metin inquired as to how we liked President Barack Obama, we replied that we dislike all politicians. He nodded as if he understood and agreed with our sentiment. Then, after a brief pause, he said. “But there is one who is different.” After pausing again, as if he were searching his mind, he said simply: “Ron Paul.” Quickly following up, he declared emphatically: “I love Ron Paul!” Nearly struck dumb by this amazing declaration, we asked how he knew about Dr. Paul. He said that everybody in Turkey knows about him, and many Turks like him better than other politicians. When we informed him that we are personally acquainted with Dr. Paul, it was almost as if we had told him we are personally acquainted with some world-famous celebrity. Elizabeth confessed to him that although she normally steers clear of politics, she had joined a meetup group to promote Dr. Paul’s Republican presidential candidacy and had placed a big Ron Paul sign in front of our house. Instant solidarity!
On Tuesday, we talked about Ron Paul with Aydin, who shares Metin’s enthusiasm for the Texas congressman and expressed a desire to bring him to Turkey to be elected president. I daresay Turkey could use such a leader, under whom there certainly would be no collectivist state atrocities such as the heartrending Greek-Turkish population relocations of 1923. As we left Aydin’s shop for our final departure from Selçuk, we could hear him speaking to another man. Although we could not understand what he was saying in Turkish, we did catch the recurrent words “Ron Paul.”
Watson spends the rest of his article rhapsodizing about the glorious possibility that the Obama administration will succeed in “changing American patterns of behavior,” not simply by improving rail transportation, but also, along the same lines, by establishing “a strong moral counterbalance to the ‘greed is good’ ethos that has ruled much of the last 28 years.” You would have trouble making up this stuff.
What are progressives thinking? If I prefer automobile transportation to taking a train, they condemn me for my greed. Their preference for taxing people and pouring the money into economically wasteful expenditures for rail facilities, however, they laud as the very heart and soul of public-spiritedness.
AMTRAK lives on subsidies; always has, always will. Americans have limited demand for passenger-train services. Nearly everyone prefers to use a personal automobile, for all sorts of good reasons, including privacy, flexibility, and convenience. None of this is news. Transportation economists have been documenting it in study after study for decades.
Yet the leftists of this country at some point — I’m not sure exactly when it happened — fell head over heels in ideological love with trains. I lived for many years in the Seattle area, where traditional religion does not rank very high with the bulk of the population, but devotion to “light rail” serves as a perfect substitute for belief in a higher power. For decades, the Seattle leftists worked to gain voter approval of their beloved light rail system. Finally they succeeded, and the people of Seattle are now getting the “benefits” of this democratic boondoggle good and hard.
Republicans dish out subsidies for perfectly understandable reasons: they wish to enrich their pals in the corporate sector at public expense. Although I do not rule out similar motives among Democrats, a substantial contingent of Democrats seems to love passenger-rail subsidies for reasons that have little or nothing to do with pork for their friends. As the article I quoted earlier suggests, they view rail-over-road as a religious matter: car = evil; train = virtuous. Reasoning with them is as futile as reasoning with any religious zealot. They simply know they are on the side of the angels.
I suspect that someone has written a book about this curious linkage of ideology and technology. If someone hasn’t written such a book, plenty of material surely awaits its interpreter. A cultural anthropologist might be best qualified for the task.
Perhaps the most important proposition in the economics of property rights is that people will not care for a resource they do not own as well as they will care for a resource they do own. It is amazing how much fashionable economic belief — for example, nearly everything ever advanced in support of socialism, as well as the bulk of what passes for environmentalist policy proposals — fails to take adequate account of this virtually axiomatic proposition.
But don’t take my word for it — or even the word of any of my illustrious former collegues at the University of Washington. Take the word of Jesus of Nazareth.
In the tenth chapter of the Gospel According to John, Jesus is trying to make a point, but his listeners are not getting it, so he finally gives them a parable he can be sure they will understand (verses 11-13):
The good shepherd lays down his life for the sheep. The hired hand, who is not the shepherd and does not own the sheep, sees the wolf coming and leaves the sheep and runs away — and the wolf snatches them and scatters them. The hired hand runs away because a hired hand does not care for the sheep. I am the good shepherd. I know my own and my own know me.
Hired hands must be monitored closely if the owner is to prevent them from diminishing or destroying the value of the capital he has provided for them to work with. In postbellum southern agriculture, for example, plantation owners monitored sharecroppers, to whom they furnished mules, more closely than they monitored tenants who furnished their own mules. The typical plantation layout placed the wage workers in fields closest to the owner’s house, the sharecroppers a little farther away, and the fixed-rent tenants in the most outlying areas. This arrangement allowed monitoring costs to be minimized. (Anyone who wants to see a thorough survey and analysis of these contractual arrangements might wish to consult Lee J. Alston and Robert Higgs, “Contractual Mix in Southern Agriculture since the Civil War: Facts, Hypotheses, and Tests,” Journal of Economic History 42 [June 1982]: 327-53.)
If you don’t care for economic theory or econometrics, just read the Bible.
William Jess Higgs (always known as Jess) does not appear on anybody’s list of great men. Good thing, too, given the truth of Lord Acton’s declaration that “great men are almost always bad men.” (A statement whose truth, by the way, hinges on the assumption that Acton’s reference to “great men” pertains to men who occupy positions of great governmental power. Who can dispute that William Shakespeare or J. S. Bach was a great man?) Jess never cast a shadow in the halls of power, nor did he wish to do so. When I was growing up and got old enough to think I knew something about politics and to express opinions about politicians, he used to infuriate me by simply saying, “They’re all crooks.” I’d think, What does he know about it? Fifty years later, I am inclined to think that he knew practically everything he needed to know about politicians.
Born in the backwoods of Muskogee County, Oklahoma, unable to attend school after a brief attendance at grade school, thrust at a tender age into the position of the family farm’s chief worker by the death of his father and later by the death of his stepfather, Jess lived in the world of work. And he was very good at working: when I was growing up, I never knew him to miss a day of work. I always supposed that he was happiest when he was at work. He was reputed to be an excellent farmer, among many other things.
The range of things he knew how to do — to grow, to build, to repair — never ceased to amaze me. I used to look over his shoulder as he worked on an automobile or tractor engine and marvel that whenever he needed a wrench, he simply reached into the tool box and took out the one that fit every time. (To this day, I try one, discover it’s too big; try another; discover it’s too small; and pray for an eventual convergence on the right one.) Even after I had earned my Ph.D., he used to look at me with a gleam in his eye and say, “The trouble with you is that you don’t know nothin’.” And I knew he was right.
I didn’t need any commandment to honor my father and mother. It never occurred to me to do otherwise, in view of the examples they set. My father belonged to a generation in which a father generally did not play the role of pal to his kids. Although I never doubted that he loved me, he occupied a different, somewhat elevated stratum. So, as I matured, I automatically came to respect him, at the same time that I loved him. I appreciated that his own understanding of his chief duty in life was to support his family, which he invariably did, even during the Great Depression, when finding work was a difficult task. He was not the kind of man to go on the dole. Indeed, I doubt that he ever gave any thought to that possibility, even when people all around him were eagerly accepting some sort of relief.
Although he had a wonderful, practical-joking sense of humor and loved to tell cock-and-bull stories at the dinner table, waiting for my mom to finally catch on that he was pulling her leg, Jess was a taciturn man. Yet hardly a standoffish man. Everybody loved him, especially the children. He obviously preferred the kids to the grownups, if given a choice. Everyone who worked for him, when he became a foreman and then the assistant superintendent on the big ranch in the San Joaquin Valley of California where I grew up between 1954 and 1961, was extremely loyal to him and spoke highly of him: “Jess” they’d say, “is a good man to work for.” He expected every man to do what he was hired to do, but he posed no threat to jerk anyone around just because he was in a position to do so. Although he had been reared in a racially bigoted environment and some of his idioms would not pass muster with today’s guardians of political correctness, he treated everyone the same, regardless of race.
It’s natural for a man to compare himself to his father. I’ve done so a million times, and not once did I measure up. After he died, so many people came to his funeral that the chapel overflowed, and some had to stand outside the doors during the service. I remember thinking, “When I die, I’ll be lucky if a dozen people show up.” To say that he had a greater, more fundamental effect than anyone else in making me the kind of man I became would be an understatement. I don’t know for sure that they aren’t making men like him anymore, but if they are, I’m not encountering them. Maybe the years that followed closely after 1909 produced a different kind of men, or maybe there was something in the water he drew from the family well on that backwoods farm in Muskogee County.
In its first report to Congress, the Wartime Contracting Commission presents a bleak assessment of how tens of billions of dollars have been spent since 2001. The 111-page report, obtained by The Associated Press, documents poor management, weak oversight, and a failure to learn from past mistakes as recurring themes in wartime contracting.. . .
The commission cites concerns with [inter alia] a massive support contract known as “LOGCAP” that provides troops with essential services, including housing, meals, mail delivery and laundry. . . . KBR Inc., the primary LOGCAP contractor in Iraq, has been paid nearly $32 billion since 2001. The commission says billions of dollars of that amount ended up wasted due to poorly defined work orders, inadequate oversight and contractor inefficiencies.
KBR’s chairman William P. Utt responded to the allegations by saying, more or less, “Liar, liar, pants on fire.” According to the AP report, his exact words were: “As we look back on what we’ve done, we’re real proud . . . .” You can bank on his pride in what the company has accomplished, all right. Raking in $32 billion in less than a decade for providing workaday services to the U.S. troops in Iraq is no mean achievement, as contractor rip-offs go.
Many readers will interpret this latest news item as evidence of the government’s"failed policies” for managing the Iraq war, but this interpretation is completely wrong. There are no failed government policies — at least, none that last very long. The government is accomplishing exactly what it seeks to accomplish. If it were not doing so, it would soon change the policies to bring them into accord with its aims.
If you doubt my claim, you may wish to consider that these very “failed policies” in military contracting have remained business as usual ever since World War II, when the modern military-industrial-congressional complex (the MICC) came into being. They have been the subject of countless investigations and several major studies throughout that span of nearly seventy-years. Each study finds basically the same thing; each makes similar proposals to fix the system; but the government never alters the system’s basic workings.
In Arms, Politics, and the Economy, a book edited by me and published by Holmes & Meier in cooperation with The Independent Institute in 1990, William E. Kovacic presents a detailed account of three “blue-ribbon commissions” created to study military contracting and related matters: the 1955 Hoover Commission Task Force, the 1970 Fitzhugh Commission, and the 1986 Packard Commission. Kovacic concludes: “As judged by most who have studied postwar movements to reform the weapons acquisition process, blue ribbon commissions have elicited little basic change in the way the United States buys armaments. . . . Experience with the postwar blue ribbon commissions demonstrates that the inspiration to reform without the commitment to persevere yields little change.”
I am willing to say bluntly what Kovacic never quite concludes in plain language: Nothing changes fundamentally because the investigations are all for show, to give the public the impression that the government is not simply shoveling the taxpayers’ money heedlessly into the contractors’ bank accounts, but none of the leading actors in the MICC—not the military services or the Department of Defense, not the private contractors, not the congressional appropriations and oversight committees—really wants to change the system because, as it now stands, it is serving their interests magnificently.
As the legendary defense analyst Ernest Fitzgerald once said to me, “A defense contract is just a license to steal.” And who wouldn’t want to have such a license? You can bet that KBR enjoys having one, as do Lockheed Martin, Boeing, Northrop Grumman, General Dynamics, Raytheon, and the rest of the major licensees. Indeed, it appears that the U.S. military-contracting system constitutes one of the most successful organized-crime rackets in the history of the world.
A native of Australia, Max enjoyed a long, eventful life. Born and reared in the outback of New South Wales, he progressed to teacher training, school teaching, service in the army during the war, graduate training, and a life of productive scholarship in England and the United States. He was an outstanding economic historian and contributed greatly to the “Standard of Living Debate,” defending the view that the Industrial Revolution, far from having been a Marxist nightmare for the working class, was the means by which they were gradually lifted from the poverty that had been their lot from time immemorial. Max spent the heart of his career at Nuffield College, Oxford, where he trained a number of outstanding economic historians. Later, after his retirement from Oxford, he alternated between teaching at the University of Virginia and teaching at the University of Chicago.
Others will write full-fledged obituaries for him, I am confident. Here I wish only to recall how much I admired and loved him. He was one of the most decent people I ever knew. To be around him was always a joy, because Max was the very embodiment of a positive outlook and of sheer joie de vivre.
I met Max in 1969, when he came to Seattle during the summer, and he and I team-taught a graduate seminar in European economic history at the University of Washington, where I had joined the faculty the previous year. One of my first publications was a somewhat controversial review article we wrote together for the American Historical Review. Later, he invited me to Nuffield as a visiting fellow, and the time I spent there during 1971-72 was a landmark of my life and career. He delighted in advising and encouraging me, and in protecting me. More than once, at tea time at Nuffield, Max would sit silently while his fellow dons huffed and puffed about something in their characteristically arrogant way. Then, suddenly, Max would explode: “Bullshit!” Which always moved the conversation in a more illuminating direction.
I cherish countless stories Max told me of his life, career, travels, and people he knew. Max was the classical liberal’s classical liberal — always level-headed, always recalling the pitfalls that await every species of single-mindedness. I eventually became more radical than he, but I never lost an ounce of respect for his opinions. In the early 1990s, I was glad to participate in a Festschrift conference for him at the University of Virginia, where the assembled celebrants included some of the world’s leading figures in economics and economic history, each of whom held Max in the highest regard. Max would refer to me in public as his “co-author,” and I was always honored by this recognition. A longtime member of the Mont Pelerin Society, Max served as its president and wrote an excellent history of this important classical-liberal association, which I reviewed in an early issue of The Independent Review.
No one can replace Max; he was one of a kind. He was, in more ways than one, a brightly shining light in a world of darkness. He lived life to the full, and he was fortunate that his days were long and filled with the love of his family and his friends. Rest in peace, old friend.
“People, people,” he exhorts them in a calm, world-weary voice, “do not panic. I am here to assess the damage and make recommendations for reforms that will prevent a recurrence of this unfortunate and wholly unforeseen act of God.” Whereupon he proceeds to lay out his assessment and recommendations, always speaking in the same quiet, unemotional voice. The stunned and wounded survivors gaze at him in astonishment. “He’s a madman,” one cries out.
Undismayed by the swelling chorus of curses and the groans of the injured, the truck driver addresses the gathering crowd of stunned onlookers. “We must have a strategy that regulates the street-fair system as a whole . . . not just its individual components.” He then methodically lays out a series of recommendations for strengthening the construction materials of stalls and regulating their placement along the street, for ensuring that each transient merchant have an adequate capital cushion against such crises, for monitoring fruitmongers and hippy artists deemed “too big to fail,” to keep them from taking excessive risk. He proposes that the city council consider new ordinances to require that wooden crafts such a birdhouses be made sturdier and to establish a “limited system of insurance” to protect against customer runs on the most daring drug-paraphernalia sellers.
“Moreover,” he continues, “street fairs are too important to be left for each town to regulate on an ad hoc basis.” He proposes that the rules be harmonized among the mayors of all the world’s great cities and that a global street-fair authority be created to monitor street-fair risks and protect the people from accidents such as the one that has just occurred. Listeners look on in amazement, their mouths agape.
With that walk on the imaginary side as a warmup, I invite you to consider the speech Bernanke gave to the Council on Foreign Relations today, March 10, 2009. In this address, he proposes a sweeping overhaul of the regulation of “the financial system as a whole . . . not just its individual components.” According to the Associated Press report,
Bernanke offered new details on how to bolster mutual funds and a program that insures bank deposits. He also stressed the need for regulators to make sure financial companies have a sufficient capital cushion against potential losses.. . .
To guide the regulatory overhaul, Bernanke laid out four key elements. One is for Congress to enact legislation so the failure of a huge financial institution can be handled in such a way to minimize fallout to the national economy—similar to how the Federal Deposit Insurance Corp. deals with bank failures. Such “too big to fail” companies must be subject to more rigorous supervision to prevent them from taking excessive risk, he said.. . . Policymakers also should consider ways to bolsterimoney market mutual funds that are susceptible to runs by investors, Bernanke said. That could be done by imposing tighter restrictions on the financial instruments that money markets can invest in or through a limited system of insurance for certain funds. Bernanke also called for a review of regulatory policies and accounting rules, suggesting a larger financial buffer for the FDIC’s insurance program for bank deposits that could be used when conditions worsen. Capital regulations for banks and other financial institutions also must be “appropriately forward-looking” to ensure sufficient money is set aside against potential losses.
These proposals certainly answer the question, How do you make a byzantine regulatory system more byzantine by an order of magnitude? At the same time, they show how you display a conviction that if only you tinker with the apparatus long enough, you can make monetary central planning work, even though central planning has always and everywhere produced economic calamity.
All of this second-order handwaving might be dismissed as touchingly naive or as workaday establishment obtuseness, were it not such transparent grasping for power in the fashion that crisis always brings to the fore in a world entranced by the ideology of salvation by the grace of government. Bernanke concludes that “the government should consider creating an authority specifically responsible for monitoring financial risks and protecting the country from crises like the current one.” And who, pray tell, might fill these mighty shoes? Well, of course, none other than the Federal Reserve System, over which Ben Bernanke presides with such placid and self-confident mien.
In view of the Fed’s fundamental, if wholly unacknowledged, role in bringing about the world’s present economic debacle – by spewing forth the ample fuel that allowed the recent ill-fated mania in real estate and related financial dealings to flame so high ― the question that Bernanke’s current proposals immediately raise could not be more obvious: Quis custodiet ipsos custodes? Until someone can provide a compelling answer to this insistent question, we will be well advised to ignore, or even to denounce, the proposals advanced by this lunatic truck driver.
Across the United States, state governments are crafting economic strategies that blur the boundaries between the public and private sectors. They are targeting specific industries and intervening in ways that go far beyond traditional perks like tax breaks and cheap land.
The article gives many examples of government venture funds, R&D consortiums, and other so-called public-private partnerships now operating or about to begin.
States have always engaged in such activities to some extent, although a public revulsion against them curtailed them to some extent in the wake of the debacle of the late 1830s and early 1840s, when some states revised their constitutions to forbid or constrain such undertakings. Recently, however, the states, like all other levels of government in the United States, have launched into public-private partnerships with unprecedented vigor and funding.
These partnerships, which epitomize economic fascism, promise to waste resources on a wide front. The idea that politicians and politically appointed “experts,” in league with rent-seeking businessmen, can allocate resources more effectively than the private capital markets is a characteristic form of the folly that is leading our generation to march over the same cliff that our forebears marched over in the 1930s. Each step in this direction moves us farther from economic liberty and closer to the complete politicization of economic life—a trend that recent de facto or de jure government takeovers of large banks and other financial firms are already accelerating.
During the present recession, however, there is little doubt that labor-market conditions have deteriorated substantially - that many jobs have been “lost,” as people say. The most recent report from the Bureau of Labor Statistics (BLS) puts the unemployment rate for May 2009 at 9.4 percent, a rate greater than any reported since the recession of the early 1980s. During the recent economic expansion, the unemployment rate fell to a cyclical low in late 2006 and early 2007 of 4.4 percent. Since it last touched that low point, in March 2007, it has increased by 114 percent. Putting the matter in this way makes the economic bust appear to be already quite bad.
Some observers, hankering to make it look even worse, have called attention to a more encompassing concept of “unemployment” (though the BLS does not describe it in this way), which is produced by adding to the officially unemployed persons (1) those persons working part-time who say they would prefer to work full-time (9.1 million in May 2009) and (2) those persons who have left the labor force because, they say, they believe they could not find a job even if they tried (hence, “discouraged workers,” amounting to 0.8 million in May 2009). By my calculation, this bulked-up, unofficial measure of unemployment stood at 15.6 percent of the civilian labor force (including discouraged workers in the denominator, for consistency) in May 2009.
It is tempting to think of employment and unemployment as mirror images of the same phenomenon, but doing so may easily mislead us. The official rate of unemployment purports to measure the number of civilians not employed but actively seeking employment in the survey period as a percentage of the number of civilians who are either currently employed or actively seeking employment (that is, all those “in the civilian labor force”). When people leave employment, however, they may either become officially unemployed (if they continue to seek employment actively) or not (if they leave the labor force). Similarly, when people enter the civilian labor force, they may do so by becoming employed or by becoming unemployed (by actively seeking but not yet finding acceptable employment). Therefore, the ebb and flow of the labor force acts as a sort of buffer between official employment and official unemployment. Careful labor economists routinely monitor all of these variables, including the number of involuntarily part-time workers and the number of discouraged workers.
To some extent, these complications can be circumvented by paying attention not to unemployment, but to employment during the ups and downs of the economy’s aggregate fluctuations. Recently, for example, the number of civilians employed reached a peak in November 2007, when 146.665 million persons were reported as employed. By May 2009, the number of employed persons had fallen to 140.570 million, or by 4.2 percent.
So, depending on whether you wish to make the recession appear to be bad or not so bad, using official BLS data in both cases, you may say that the rate of civilian unemployment last month had risen 114 percent from its previous cyclical trough, or you may say that the number of civilians employed last month stood at 95.8 percent of its previous cyclical peak. That the public, the media, and the politicians tend to focus more on the former sort of statement than on the latter tells us something about the public’s fears, the media’s desire to gain the attention of readers and viewers by frightening them, and the politicians’ desire to validate a crisis in order to justify their actions as ostensible rescuers delivering life-saving “stimulus packages” and all the rest of their pseudo-salvation.
Hummel and Henderson base their argument mainly on the claim that the Fed was not an engine of inflation between 2001 and 2006 because the rate of growth of the monetary base and the rate of growth of various monetary aggregates were declining during that period. Indeed, they were declining. Computing the rates of growth for the December value relative to the preceding December value, I find the rates to be as follows for the monetary base: 2001, 8.7%; 2002, 7.5%; 2003, 5.8%; 2004, 5.0%; 2005, 3.6%, and 2006, 2.9%. The rates of growth of M2, computed on the same basis, were as follows: 2001, 10.3%; 2002, 6.3%; 2003, 5.0%; 2004, 5.7%; 2005, 4.0%; and 2006, 5.4%.
It does not follow, however, that simply because these (and other monetary) rates of growth were declining, the Fed bore no responsibility for fueling the housing bubble. If we begin at a high rate of growth, as indeed we did in 2001, then rates may fall and still be “inflationary” in their effect on certain asset markets. Consider, for example, that during the entire period from the fourth quarter of 2000 to the fourth quarter of 2006, real GDP rose by only 14.9%, whereas during the same period (December-to-December monthly figures being used) the monetary base increased by 38.3% and M2 by 42.7% — or, by 2.6 times and 2.9 times as much as real GDP, respectively.
In pondering the Hummel-Henderson thesis, I keep coming back to various analogies, such as this one: I walk onto the street and I’m hit by a car going 50 mph; the next day, I walk out and I’m hit by a car going 45 mph; and, being a slow learner, I walk out during the next three days and I’m hit in daily succession by cars going 40 mph, 35 mph, and 30 mph. After five days, I am pretty nastily banged up, but Hummel and Henderson come along to comfort me by informing me that my being hit repeatedly cannot actually have hurt me because each day the car that hit me was going slower than the one that hit me the day before.
Hummel and Henderson also continue to endorse Alan Greenspan’s story that the real culprit was a surge in foreign savings that was invested in large part in U.S. housing-related securities, such as Fannie and Freddie’s bonds. I confess that I have never understood this story. In order to invest in U.S. securities of any kind, foreigners need to acquire dollars. And all dollars ultimately come from the Fed, because every dollar consists of either a circulating Federal Reserve note or a dollar deposit account subject to a variety of Fed controls. Was the Fed really powerless to “sterilize” the inflow of foreign savings? Or did it simply not attempt to offset this inflow, which it might have done by, for example, selling securities on the open market or by increasing required bank-reserve ratios?
In raising these questions, I assure my readers that I harbor no ideological or personal animus whatsoever against Jeff Hummel and David Henderson. Indeed, I love each of them as I would love a brother (which, in a sense, each of them is to me). I am puzzled by their persistence in attempting to persuade us with a story seemingly aimed at vindicating the Fed (while insisting, however, that, all things considered, the world would be better off without this central bank). I continue to believe that the Fed deserves a major part of the blame for the housing bubble because, however we tell this whole sorry story, our interpretation must inevitably include a plausible answer to the question: where’d the money (i.e., the dollars) come from?
Rogers agreed to do so. Whereas Calvin Coolidge had responded to requests that he run again by saying “I do not choose to run,” Rogers made his slogan “He chews to run.”
In his acceptance speech, he said:
Life’s offer has left me dazed—if I can stay dazed, I ought to make a perfect candidate. Now, let us be honest. We want the wet vote and we want the dry vote. Our plank hereby endorses wine for the rich, beer for the poor, and moonshine liquor for the prohibitionist.
Many famous persons, including Amelia Earhart, Babe Ruth, and Henry Ford, endorsed Rogers’s candidacy. In August, Rogers challenged Herbert Hoover to a joint debate, “in any joint you name,” but Hoover, who preferred a good cigar to a joint, did not meet the challenge (a fitting warm-up, no doubt, for a series of other challenges he would fail to meet from 1929 to 1933).
Although a number of voters wrote in Rogers’s name on their ballots in the November election, the political system was not ready for anyone running under the No Bunk banner, and, sad to say, Hoover was ultimately declared the winner. Said Rogers: “We went into this campaign to drive the Bunk out of politics. But our experiment, while noble in motive was a failure.” He concluded: “the thing that stopped our party is that we are a hundred years ahead of times.”
Who can deny that ever since 1928, without a doubt, political discourse in this country has consisted almost entirely of bunk? Where are the cowboy philosophers when we need them? Barack Obama, I understand, can’t even do a rope trick—but a growing number of Americans do seem to be concluding that he tricked them into voting for him last November by promising them “change.” If Rogers had been running in 2008, he might have promised the voters that he would change their flat tires.
In contrast, when I think of Bernanke’s actions as chairman of the Fed, I am appalled. During the past year, he has taken the lead in flooding the financial system with an unprecedented amount of newly created central-bank credit - more than a trillion dollars of new Fed credit has been advanced since mid-September 2008, more than doubling the total amount outstanding. Thus, Bernanke has shown himself to be the greatest inflationist of modern times in the advanced economies.
Because the commercial banks have added almost all of the newly created base money to their reserve accounts at the Fed, rather than using it to make new loans and investments, the effect on the money supply and hence on the price level has been muted so far. Bernanke clearly supposes that he has been heroically fending off the greatest threat to the world economy he can imagine - the dreaded deflation of the price level for currently produced goods and services, a phenomenon associated in his mind with the horrors of the Great Contraction of 1929-33.
He also believes that when the price level begins to accelerate as the banks put their vast, (legally) excess reserves to use, he will be able to take counter-measures, such as paying a higher rate of interest on commercial-bank reserves at the Fed or selling securities now held by the Fed in the open market, which will soak up just enough of the potential for the creation of new money that the Fed will be able to disengage gradually and smoothly from its recent, gigantic effusion of new credit, thus avoiding the hyperinflation that it might otherwise produce.
I have serious doubts about whether Bernanke will be able to pull off this Houdini escape from the ravages of the still-dormant monster he has created, but at the moment my concern is not so much with that issue as with the amazing fact that so many investors and economists have applauded his actions so far. The politicians are not so puzzling: in today’s world, they invariably demand resort to inflation of money and credit whenever a recession begins - they are inflationists to their very souls (that’s assuming they have souls). Putting aside the politicians, I am willing to conjecture as to why so many investors and economists are making what seems to me a huge mistake in evaluating Bernanke’s actions.
The root problem, I believe, lies in the aggregative character of contemporary thinking about macroeconomic fluctuations. In this view, rising aggregate real output is good, no matter what the composition of the newly produced goods and services. A recession, which most analysts understand as a sustained decline of aggregate real output, is bad, and, in their view, it should be combated by fiscal “stimulus” and by expansionary monetary policy in order to reverse the decline in aggregate demand. They do not worry about - indeed, they rarely even pay much attention to - the makeup of the aggregate output that is added during business expansions, lost during business recessions, or brought into being by the government’s compensating fiscal and monetary actions. Output is output; spending is spending. In fact, the whole idea of using government spending to offset reduced spending by investors or consumers turns on this assumption that a dollar spent is a dollar spent, regardless of what it is spent for.
In today’s vulgar Keynesian environment, investors and economists do not appreciate how the seeds of macroeconomic busts are sowed by artificially created credit that is employed to finance investments that would not be undertaken if they had to be financed by real savings - investments known in economic theory as malinvestments. When a large volume of malinvestments has been undertaken during a boom (e.g., much of the investment in residential housing and commercial real-estate development between 2002 and 2006), and when for whatever reason the pace of new credit creation slows, causing interest rates to rise, then the unsustainability of these malinvestments becomes increasingly apparent. More and more of them are terminated, often in unfinished condition, and many such projects go bankrupt for want of buyers willing and able to pay for them in the market.
If the government and the central bank use their fiscal and monetary policies to prop up these malinvestments, they do not solve the basic problem; they only paper it over for the time being. The vast assistance given recently to financial institutions embarrassed by investments in bad real-estate-related securities, for example, has allowed these institutions to delay the write-offs and other balance-sheet adjustments that would reflect the errors they have made. The bailouts have created a large number of zombie financial institutions, much like the ones that caused the Japanese economy to stagnate during the 1990s and later. Owners and managers of financial firms laden with rotten securities have been holding out for government rescues of various sorts, rather than carrying out the required restructuring, which in many cases must include bankruptcy proceedings.
Just as the malinvestments were made possible in the first place by effusions of artificially created credit and hence artificially depressed interest rates, so now the Treasury and the Fed are keeping the owners of these malinvestments afloat by further effusions of artificially created credit. But so long as these inherently unsustainable projects continue, they constitute a huge legion of the living dead. They may look viable, but their viability hinges entirely on de facto subsidies via the government’s various bailout schemes. Such projects will remain unsustainable unless continually propped up at the expense of the general public, who will suffer because of increased ordinary taxes or a mounting inflation tax on their dollar-denominated assets. If the government goes forward in this fashion, it will be sustaining an economy rife with malinvestments kept in operation only by constant transfusions of other people’s wealth channeled to the zombie projects by the Treasury and the Fed - a permanent policy of robbing prudent, responsible Peter to pay imprudent, irresponsible Paul. No sound, long-run economic development can be based on such productivity-sapping transfers of wealth into projects that are not worth the expense of keeping them going and which misallocate resources to the overall economy’s detriment so long as they continue.
Meanwhile, to return to the Bloomberg poll, “more than three-quarters of investors expect U.S. financial institutions will be in better shape a year from now,” and a majority believe “the world economy is stable or improving.” And why do they expect this progress will occur? Because, “almost three quarters say[,] central banks will hold rates near current levels to support growth.” Indeed, Bernanke promises that this policy is precisely the one he will continue to follow. “Monetary policy remains focused on fostering economic recovery,” he declares. The Fed will maintain a “highly accommodative” stance “for an extended period.” In short, if an immense amount of monetary-base inflation and other artificial credit expansion is good, then a great deal more of the same is even better. Après nous le déluge - oh, but I forget, Bernanke stands ever ready to sponge up that base money the minute the price indexes begin to rise at more than a slight, tolerable annual rate. Trust him.
Except for the Austrian School economists, hardly anyone is worried that the extensive restructuring necessary to put the economy back on a healthy, market-sustainable track is not being carried out - or, certainly not being carried out on the scale that the current situation requires. For the overwhelming majority of today’s investors, economists, and policy makers, output is output, and spending is spending. They are blind to the mountain of malinvestments staring them in the face. In the seventy years since John Maynard Keynes steered macroeconomic policy thinking into the dead-end street of misleading, highly aggregative thinking, tremendous damage has been done, but clearly a great deal of additional damage will have to be suffered before the people who bear the burdens of this kind of policy-making awaken to its operation as a mechanism for robbing the many for the benefit of the politically connected few.
First, “central bank independence has been shown to be essential for controlling inflation.” A little difficulty for this claim, however, resides in the undeniable fact that for more than a century before the Fed’s establishment, the purchasing power of the dollar fluctuated around an approximately horizontal trend line—that is, despite inflations and deflations usually associated with the wartime issuance of fiat money and the postwar return to specie-backed currency, the dollar more or less retained its exchange value against goods and services over the long run, whereas since the Fed’s establishment the dollar has lost more than 95 percent of its purchasing power. If this post-1913 experience is what these economists consider “controlling inflation,” I would not want to see what happens to a currency’s purchasing power when inflation is not controlled! It seems that the petitioning economists have placed the performance bar absurdly low in their judgment of the Fed’s containment of inflation. Evidently, barring a Weimar-Germany-style hyperinflation, they suppose that everything is hunky-dory on the monetary front.
Second, say our esteemed economists, “lender of last resort decisions should not be politicized.” This statement only goes to prove that, as everybody knew already, economists make terrible comedians: the statement is obviously a joke, but it’s just not funny. “Not be politicized,” they say? What is one to call the Fed’s decisions during the past year to dole out trillions in loans, credit lines, guarantees, asset exchanges, and so forth to the big boys on Wall Street? Are we supposed to believe that all those big investment banks that were permitted to transform themselves instantaneously into depository institutions, thereby gaining access to various forms of Treasury and Fed support, were selected and accommodated on purely disinterested grounds? Or may we be permitted to imagine that institutions such as Goldman Sachs and Morgan Stanley just might—might, I said—enjoy a tad more political coziness with the government in general and the Fed in particular than, say, you and I and another three hundred million Americans do?
Finally, the leading economists declare: “The democratic legitimacy of the Federal Reserve System is well established by its legal mandate and by the existing appointments process. Frequent communication with the public and testimony before Congress ensure Fed accountability.” But legitimacy, it would seem, properly lies in the eyes of the legitimizer, not in the tables, charts, and econometric exercises of top-tier academic economists. The Fed’s appointment process, as I see it, suggests more the co-conspiratorial character of the ruling elites than anything we might grace with the adjective “democratic.” And if frequent congressional testimony by Fed officials, notorious for its mumbo-jumbo lack of clarity and definiteness, suffices to “ensure Fed accountability,” then we are left to wonder what led Senator Byron Dorgan to complain on the floor of the Senate on February 3: “We’ve seen money go out the back door of this government unlike any time in the history of our country. Nobody knows what went out of the Federal Reserve Board, to whom and for what purpose. . . . When? Why?” Indeed, the lack of Fed transparency and accountability has been so outrageous during the past year that it has prompted nearly three hundred members of the House of Representatives to support congressman Ron Paul’s bill to audit the Fed.
All in all, the economists’ petition reflects the astonishing political naïvité and historical myopia that now characterize the top echelon of the mainstream economics profession. (I prefer this interpretation to the more conspiratorial one that they are fronting for the Fed in order to reap some form of personal gain. Academic economists are more often obtuse than evil.) Everybody now understands that economic central planning is doomed to fail; the problems of cost calculation and producer incentives intrinsic to such planning are common fodder even for economists in upscale institutions. Yet, somehow, these same economists seem incapable of understanding that the Fed, which is a central planning body working at the very heart of the economy—its monetary order—can produce money and set interest rates better than free-market institutions can do so. It is high time that they extended their education to understand that central planning does not work—indeed, cannot work—any better in the monetary order than it works in the economy as a whole.
It is also high time that the Fed be not only audited and required to reveal its inner machinations to the people who suffer under its misguided actions, but abolished root and branch before it inflicts further centrally planned disaster on the world’s people.
Disgraced financier Bernard Madoff has arrived at federal prison in Butner, North Carolina, CNBC has learned, though it is still not clear if that will be his permanent home.
President Barack Obama and the sitting members of Congress have not been charged, much less convicted and sentenced, for crimes that make Bernie Madoff’s look like child’s play. Note well: I am referring here not to the assorted murders, assaults, and batteries for which these men and women are manifestly guilty - I say guilty because they not only admit these crimes, but proudly take public credit for them - but to certain of their strictly financial crimes.
Madoff, 71, was sentenced last month to 150 years in prison after pleading guilty in March to charges that his investment advisory business was a multibillion-dollar scheme that wiped out thousands of investors and ruined charities.
Madoff caused people to lose billions of dollars. The U.S. government has caused people to lose trillions of dollars, and it’s not finished yet. The public’s losses mount during every minute of every day. By its effects in discouraging work, saving, and investment, and thereby reducing capital accumulation, the U.S. Social Security system has caused the nation’s gross domestic product to fall significantly below the levels it would otherwise have reached. According to Professor Edgar K. Browning, a leading researcher in this field, “the available evidence suggests that Social Security has reduced [current] GDP by 5 to 10 percent.” Ten percent of GDP is now approximately $1.4 trillion - or about 28 times the maximum amount Madoff is believed to have cost his clients. Moreover, Madoff’s harm is a one-shot loss, whereas the U.S. government’s Social Security harm is an ongoing loss that grows annually. In the future, the annual loss will be even greater than the currently estimated $1.4 trillion or so.
Authorities said Madoff had carried out the fraud for at least two decades before confessing to his sons in December that his investment business was a fraud and that he had lost as much as $50 billion.
The leaders of the U.S. government have carried out their Social Security fraud - essentially a Ponzi scheme, in substance exactly the same as Madoff’s scheme - since 1935, and they have yet to confess to their crimes, unless their family members have been told and have kept the confession to themselves.
Madoff, in contrast to the government, carried out his fraud in a civilized way: he merely misrepresented what he was doing, purporting to invest his clients’ money and to obtain a high rate of return on these investments. People dealt with him voluntarily. Those who suspected something was fishy did not do business with him, and some people went so far as to give substantial information to the SEC to show that Madoff’s business had to be fraudulent (which information the SEC ignored for years on end, of course).
The U.S. government, however, does not bother to claim any prowess in investing the money it forces people to surrender to its scheme. It admits that the “client’s” return is now close to zero (varying a bit according to the client’s age and other factors). Nor does it carry out its admitted Ponzi scheme in a civilized way. Not only is participation in the scheme involuntary, but the government threatens violence against anyone who fails to participate as it commands him. Thus, the government operates its Ponzi scheme in a markedly more thuggish manner than Bernie would ever have dreamed of. He might have been a crook, but he was not a thug.
Everyone (including Bernie himself) agrees that Bernie Madoff was a crook. What is the correct term for the U.S. government, or does the word government tell us everything we need to know about the honesty, humanity, and justice of its actions?
The good news is that reducing the number of such weapons helps to reduce the risks associated with them—still the most critical threat to humanity, notwithstanding the end of the Cold War twenty years ago.
The bad news is that even if the totals should ultimately be reduced to the ranges stipulated in the agreement, both sides will still have an absurdly large number of such weapons. It is fair to say that a nuclear exchange between these two countries that involved only a hundred large warheads on each side would wreak almost unimaginable death and destruction and extend its consequent horrors throughout the entire world, owing to the spread of radiation and the calamitous effects on the world economy.
What possible benefit warrants the continuing retention of such horrifying potential for global harm by either government? International communism is defunct as a serious threat to mankind. Even if its containment justified the maintenance of the gigantic U.S. nuclear arsenal during the Cold War—a highly debatable proposition in itself—no such justification now exists.
Obama and Medvedev have undertaken to move their governments in the right direction, but they need to move them much, much farther. Nothing short of scrapping these horrible, intrinsically indiscriminating weapons entirely will suffice to eliminate their terrible threat to mankind and other living creatures.
Perhaps Bernanke did save the system, at least for the moment, but the question remains: what do you mean by “the system”? If you mean an economy dominated by ill-managed, irresponsible big banks and other financial institutions (e.g., Fanny, Freddie, AIG) backed up by an ill-managed, irresponsible central monetary authority that stands ready to bail out these high-stakes gamblers, then, yes, Bernanke has saved the system so far. It may still crumble, however. This house of cards is surely not fated to last as long as the pyramids of Egypt.
Welch thinks Bernanke “is operating on [sic] a clear intellectual framework.” I agree. Bernanke’s career as a mainstream macroeconomist is a matter of public record. Inspecting his writings and his speeches over the years, one sees that with regard to macroeconomic stabilization, Bernanke believes in the Fed’s ability and its right to act as a monetary central planner for the U.S. economy (and to a large extent, for the world economy, owing to America’s dominant position in global trade and finance). He has never met a recession or depression he thinks cannot be prevented or moderated and reversed by sufficiently great inflation of the money stock. And he definitely practices what he preaches, as shown beyond all doubt by this evidence on the Fed’s recent doubling of the monetary base.
Welch’s approbation of Bernanke’s “clear intellectual framework,” however, must be taken with a grain of salt. What does Jack Welch know about macroeconomics or optimal monetary policy? In making such pronouncements, he follows in a long tradition of huffing and puffing about economics, politics, and all sorts of other things by men whose only proven talent is their ability to run a big company. In 1970, Herman Krooss brought forth a book about such pronouncements called Executive Opinion: What Business Leaders Said and Thought on Economic Issues, 1920’s-1960s. If this tome does not convince you that leading business executives tend to make fools of themselves whenever they make statements about anything other than their own businesses, then probably nothing can convince you.
I am provoked to make these observations not merely by having been exposed to the mainstream news media for the past fifty years or so, but also, just this morning, by having blundered across an Associated Press article headlined “Obama Seeks to Overhaul Financial Rules.”
Of course, the headline can’t be accurate. Barack Obama knows nothing about finance, so he would not have the foggiest idea where to start in overhauling the existing financial rules. But let’s be generous. The story attributes to the emperor himself a project that is actually being carried out by his scheming lackeys in the Treasury Department, the Federal Reserve System, and other parts of his vast bureaucracy. These faithful (and some, no doubt, not-so-faithful) servants are of course acting in the emperor’s name, whether or not he understands the details of their machinations.
“The goal,” the article informs us, “is to prevent a recurrence of the economic crisis that erupted in the United States and exploded last fall with devastating consequences still reverberating around the world.” This claim cannot be right. My best guess is that the actual goal is to give the impression of taking actions that will prevent a recurrence of these recent troubles, the better to shift the blame away from the actual perpetrators—various government officials and their harmful policies—and thereby in effect to place the blame on various financial actors and institutions in the private sector (if indeed there remains much of a truly private financial sector in the wake of all the recent government takeovers).
The article goes on to say that “in devising new regulations and oversight, the administration is looking to address four perceived weaknesses in the current system.” Let us briefly consider them.
First alleged weakness:
The need for an all-seeing government entity to detect institutional stresses that threaten the entire financial system. Think of the mortgage-backed securities that are still weighing down bank balance sheets.
Should we laugh or cry? “An all-seeing government entity to detect institutional stresses”? Unless this expression is meant as a joke, the reporter here reveals either terrible incompetence or shameful complicity in spreading government propaganda. The idea that a government agency, or a hundred government agencies all rolled into one gigantic can of red-tape worms, can be “all seeing” in its purview of the country’s financial transactions is ludicrous. We have miles and miles of financial laws and regulations on the books now. Most of them have been in force for decades. We have thousands of lawyers, accountants, economists, and other charlatans working for dozens of government agencies at every level who are, and long have been, charged with ensuring that nobody engages in financial hanky-panky. Did anyone in this kingdom of jobbery foresee the financial debacle that reached crisis proportions late last summer? Did not all of these supposed watchdogs, instead, devote themselves to proclaiming ceaselessly for years on end that everything was hunky-dory and that they had matters well in hand. Are we supposed to believe that these people will now, inexplicably, develop an acute case of competence?
Second alleged weakness:
The inability to step in and unwind large and complex institutions before they fail and become the thread that unravels the fabric of the system.
Ah, yes, we must empower the government to mount preemptive attacks against the greatly dreaded dragon of systemic risk. In this case, however, St. George seeks the power to slay a dragon that exists more in the hyperbole of government press agents than in reality. We have been told repeatedly that the financial system contains a number of large boulders, any one of which might set off a world-crushing avalanche if it were allowed to begin rolling down the hillside freely. But scientific evidence of such potentially destructive big rocks is as rare as hen’s teeth. The tale makes a splendid accompaniment, however, to a raid on the Treasury by a big bank or other mega-institution that, seeing its chance, seeks to snatch trainloads of money while the snatching is good.
Even if systemic risk does exist, why should anyone believe that the fakers and time-servers employed by a government regulatory agency will have the ability to gauge its magnitude and to identify the specific firms that must be eased away from the precipice—always, of course, at the great expense of taxpayers and holders of dollar-denominated assets?
Let’s be frank: systemic risk is the greatest—and perhaps the phoniest—excuse for unwarranted bailouts ever devised by the mind of man. After all, who wouldn’t prefer to cough up hundreds of billions of dollars to ill-managed banks, rather than enduring the collapse of the world economy?
Third alleged weakness,
The undercapitalization of large financial institutions. Heading into the financial crisis, too many banks were leveraged with significantly more debt than equity.
And why, pray tell, did the bank managers think that they did not need more equity? Might the answer have something to do with the various explicit and implicit ways in which the government has placed itself in readiness to bail out a big bank whose ultra-risky bets turn sour? Might government deposit insurance explain why depositors continued to hand their money over to banks run by high-stakes gamblers? If people had known that their own funds were always at risk and that they, and they alone, would have to bear fully any losses that arose, they would not have behaved as they did between 2002 and 2007. Government actions and promises to take the risk out of risky behavior produced exactly what any thinking person would have expected: massive moral hazard. Now, the government’s huge bailouts are validating all the expectations that the banking gamblers and others entertained during the boom, thereby setting the stage for the next destructive, government-induced boom in malinvestments. Moreover, the same government officials who were fundamentally instrumental in making possible the malinvestments of the past decade (and in some cases their chosen successors in office) have the gall to pretend that they are now fixing the system, even as they actually do nothing but reinflate the same ill-fated bubble.
Fourth alleged weakness,
Consumers and lenders whose unwitting or reckless credit and borrowing decisions placed families under staggering debts and contributed to the instability of the financial system. Obama [sic] is likely to recommend creation [of] a financial services consumer protection body with oversight powers over mortgages and credit cards and other consumer financial products.
I tell you, these guys could do stand-up; they’re hilarious. They have the outrageous chutzpah to imagine that they—the most financially irresponsible parties in the history of the world, the very people who control a government whose unfunded obligations run in excess of several times the country’s gross domestic product, the same people who whipped and goaded Fannie, Freddie, and the banks to dish out these dodgy mortgage loans in the first place—will henceforth oversee how private lenders and borrowers conduct their transactions, to insure that everyone acts with becoming prudence and responsibility. Ha ha ha ha—I’m rolling with laughter, I tell you. Does anybody take such drivel seriously? Really, anybody?
Well, okay, maybe the reporters for the mainstream media do. At least, they continue to file their reports with straight faces. But behind the scenes, Barney Frank, Chris Dodd, Chuck Schumer, and the rest of the congressional carnival barkers have to know better. They also have to know, however, that even though they played key roles in shoving first the financial system and then the whole economy over the brink, they have emerged from the mess that they made smelling like roses. They still have their power; the campaign contributions from the fat cats keep pouring into their coffers; and they continue to drive the Obama administration’s make-believe financial-reform bills through the congressional maze toward their ultimate enactment as the next round of bad financial law—the selfsame sort of bad law under which this country has suffered ever since Ben Cohen, James Landis, and Tom Corcoran fired up this destructive locomotive during the early New Deal.
Don’t expect the financial reporters to make any sense of all this, however. The evidence seems overwhelming that they are either clueless or co-opted by the government—and quite possibly they are both.
