A speciális érdekek azt ami az állam kezelése alatt rosszul működik azt a nép nyakába varrja, ami jól működik azt privatizálja.
The current financial crisis represents an important victory for an oft-overlooked school of thought: The Austrian school of economics
So much for all those predictions that the markets would begin to recover once members of the U. S. House of Representatives summoned the courage to resist the populist outcry and vote for Hank Paulson's $700-billion rescue plan. Whatever the excitement it generated, and the disappointment its original rejection by Congress caused, the market appears to have arrived at a more considered view of the U. S. Treasury Secretary's scheme. Sadly, the market's negative verdict is on the mark.
To understand this, we have to unravel the contradiction infecting much of the commentary and analysis regarding the current financial crisis. While there isn't perfect unanimity on this, it is widely acknowledged that a significant part, if not the root, of our difficulties originated with the low-interest-rate policy implemented by the Alan Greenspan-led Fed in 2001-2005. This generated a housing boom, which was further stoked by the financial engineering of Wall Street in securitizing mortgages, by obliging bond rating agencies in evaluating these securities and by portfolio managers eagerly willing to buy them, hungry for extra returns in a low interest rate environment.
To the extent that this assessment has been made, it represents an important victory for a school of thought that has long hung on the margins of the economics discipline: the Austrian school of economics, whose most illustrious figures include the Nobel prize winning Friedrich von Hayek and Ludwig von Mises. Austrian economists hold that downturns are the inevitable aftermath of loose monetary policy, thus opposing explanations typically heard prior to the current crisis that attributed recessions to price shocks, underconsumption or central bank tightening of monetary policy.
But if, to rephrase a well-known Nixon quote, we are all Austrians now, it illogically only extends to the diagnosis of the crisis and not to the school's market-based cure. For it is just not consistent to simultaneously assign blame to Greenspan's easy money and then support government intervention to fix the damage, as so many of the business op-ed writers and talking heads on CNBC have.
As the Austrian tradition points out, the dilemma with easy money is that the central bank sets rates below that which the market would naturally set. The natural rate reflects people's willingness to trade present for future satisfactions. When the actual rate is established under this, entrepreneurs and firms are issued a false signal that people are willing to defer more consumption into the future than they really are. As a result, excess investments in capital goods industries, such as housing, are made on the expectation that these will pay off in the long-run. The boom ends when monetary conditions are tightened back to natural levels or the passage of time makes clear that the demand was never really there to sustain the investments made. At this point, a crisis takes place in which capital investments get liquidated and resources are shifted such that the economy's productive capacity more appropriately reflects people's time preferences.
As we are witnessing now, this stage is not pretty, since the banks and creditors who financed the boom activities see the value of their loan assets impaired, forcing them to restrict credit to even credit-worthy customers. Financial institutions that became heavily exposed to the boom activities either go bust, like Lehman Brothers, or they become prey, as Merrill Lynch did to Bank of America, and to those who wisely minimized their participation in the bad investments. Depositors start to doubt the security of their funds and bank runs become a threat. This is, to be sure, less of a problem now thanks to government deposit insurance, though this security blanket comes at the price of giving banks incentives to take undue risk with the and thereby gain the confidence to provide credit to worthy customers at more normal interest rate spreads to government debt.
This stratagem would represent an authentic liquidation if the banks were to sell their mortgage debt at its real present value and the government, in turn, had no compunction in pursuing foreclosures on non-performing loans, no matter what the impact on house prices. But, as hinted by CIBC's recent deal with Cerberus to reduce its exposure on US$1.05-billion in problem mortgages, there is a sea of cash sitting in private equity, hedge and vulture funds waiting to buy distressed securities if the price is right. That they haven't bought much yet suggests the banks are resisting lowering their price. There being pressure to expedite the transfer of securities and assist the banks, the government is very likely to acquiesce to this resistance, pay above market and effectively institute a price support mechanism for mortgage assets.
Besides the public relations mess of having a throng of failed borrowers compelled to give up their homes by a government agency, the fear of contributing further to the decline in the real estate market means foreclosures will probably be kept to a minimum. In this way, the Paulson scheme will also turn into a price support regime for housing.
Most commentators resist following the Austrian logic through to the end out of the fear of repeating the policy mistakes that led to the Great Depression. This reflects the orthodox interpretation of that period, according to which the economy fell apart in the early 1930s while U. S. president Herbert Hoover took a laissez-faire approach to the downturn and the Fed ran an overly tight monetary policy.
The truth is that the Fed at the time did try to add liquidity, lowering its rediscount rate until late 1931 and continuously increasing reserves under its control. Money supply nevertheless fell, but that was because people lost faith in the financial system and hoarded currency. Meanwhile, Hoover met the downturn with interventionist gusto. He passed the Smoot-Hawley tariff to help domestic industries and obtained the co-operation of business leaders to support wages and investment. We haven't gone down this protectionist and corporatist road yet but Hoover's attacks on short selling and his creation of the Reconstruction Finance Corporation, which among other things loaned money to banks, bear an eerie resemblance to the current policy response.
"We might have done nothing",Hoover said, "[but] we determined that we would not follow the advice of the bitter-end liquidationists." Thus has the Bush administration decided as well, having successfully cajoled a recalcitrant Congress to follow Hoover's example.
-George Bragues is Program Head of Business at the University of Guelph-Humber in Toronto.
The severe financial crisis and resulting worldwide economic recession we have been forecasting for years are finally unleashing their fury. In fact, the reckless policy of artificial credit expansion that central banks (led by the American Federal Reserve) have permitted and orchestrated over the last fifteen years could not have ended in any other way.
The expansionary cycle that has now come to a close was set in motion when the American economy emerged from its last recession in 1992 and the Federal Reserve embarked on a major artificial expansion of credit and investment, an expansion unbacked by a parallel increase in voluntary household saving. For many years, the money supply in the form of banknotes and deposits (M3) has grown at an average rate of over ten percent per year (which means that every six or seven years the total volume of money circulating in the world has doubled). The media of exchange originating from this severe fiduciary inflation have been placed on the market by the banking system as newly created loans granted at extremely low (and even negative in real terms) interest rates. The above fueled a speculative bubble in the shape of a substantial rise in the prices of capital goods, real-estate assets, and the securities that represent them and are exchanged on the stock market, where indexes soared.
Curiously, as in the "roaring" years prior to the Great Depression of 1929, the shock of monetary growth has not significantly influenced the prices of the subset of goods and services at the final-consumer level of the production structure (approximately only one third of all goods). The decade just past, like the 1920s, has seen a remarkable increase in productivity as a result of the introduction on a massive scale of new technologies and significant entrepreneurial innovations which, were it not for the "money and credit binge," would have given rise to a healthy and sustained reduction in the unit price of the goods and services all citizens consume. Moreover, the full incorporation of the economies of China and India into the globalized market has gradually raised the real productivity of consumer goods and services even further. The absence of a healthy "deflation" in the prices of consumer goods in a period of such considerable growth in productivity as that of recent years provides the main evidence that the monetary shock has seriously disturbed the economic process.
Economic theory teaches us that, unfortunately, artificial credit expansion and the (fiduciary) inflation of media of exchange offer no shortcut to stable and sustained economic development, no way of avoiding the necessary sacrifice and discipline behind all voluntary saving. (In fact, particularly in the United States, voluntary saving has not only failed to increase, but in some years has even fallen to a negative rate.)
Indeed, the artificial expansion of credit and money is never more than a short-term solution, and often not even that. In fact, today there is no doubt about the recessionary consequence that the monetary shock always has in the long run: newly created loans (of money citizens have not first saved) immediately provide entrepreneurs with purchasing power they use in overly ambitious investment projects (in recent years, especially in the building sector and real-estate development). In other words, entrepreneurs act as if citizens had increased their saving, when they have not actually done so.
Widespread discoordination in the economic system results: the financial bubble ("irrational exuberance") exerts a harmful effect on the real economy, and sooner or later the process reverses in the form of an economic recession, which marks the beginning of the painful and necessary readjustment. This readjustment invariably requires the reconversion of the entire real productive structure, which inflation has distorted.
The specific triggers of the end of the euphoric monetary "binge" and the beginning of the recessionary "hangover" are many, and they can vary from one cycle to another. In the current circumstances, the most obvious triggers have been the rise in the price of raw materials, particularly oil, the subprime mortgage crisis in the United States, and finally, the failure of important banking institutions when it became clear in the market that the value of their debts exceeded that of their assets (mortgage loans granted).
At present, numerous self-interested voices are demanding further reductions in interest rates and new injections of money, which permit those who desire it to complete their investment projects without suffering losses.
Nevertheless, this "flight into the future" would only temporarily postpone problems at the cost of making them far more serious later. The crisis has hit because the profits of capital-goods companies (especially in the building sector and in real-estate development) have disappeared due to the entrepreneurial errors provoked by cheap credit, and because the prices of consumer goods have begun to rise faster than those of capital goods.
At this point, an inevitable, painful readjustment begins, and in addition to a drop in production and an increase in unemployment, we are now seeing a very harmful rise in the prices of consumer goods (stagflation).
The most rigorous economic analysis and the coolest, most balanced interpretation of recent economic and financial events lead inexorably to the conclusion that central banks (which are in fact monetary central-planning agencies) cannot possibly succeed in finding the most advantageous monetary policy at every moment. This is exactly what became clear in the case of the failed attempts to plan the former Soviet economy from above.
To put it another way, the theorem of the economic impossibility of socialism, which the Austrian economists Ludwig von Mises and Friedrich A. Hayek discovered, is fully applicable to central banks in general, and to the Federal Reserve and (at one time) Alan Greenspan and (currently) Ben Bernanke in particular. According to this theorem, it is impossible to organize society, in terms of economics, based on coercive commands issued by a planning agency, since such a body can never obtain the information it needs to infuse its commands with a coordinating nature. Indeed, nothing is more dangerous than to indulge in the "fatal conceit" — to use Hayek's useful expression — of believing oneself omniscient or at least wise and powerful enough to be able to keep the most suitable monetary policy fine-tuned at all times. Hence, rather than soften the most violent ups and downs of the economic cycle, the Federal Reserve and, to a lesser extent, the European Central Bank, have most likely been their main architects and the culprits in their worsening.
Therefore, the dilemma facing Ben Bernanke and his Federal Reserve Board, as well as the other central banks (beginning with the European Central Bank), is not at all comfortable. For years they have shirked their fiduciary responsibility, and now they find themselves in a blind alley. They can either allow the recessionary process to begin now, and with it the healthy and painful readjustment, or they can procrastinate with a "hair of the dog" cure. With the latter, the chances of even more severe stagflation in the not-too-distant future increase exponentially. (This was precisely the error committed following the stock market crash of 1987, an error that led to the inflation at the end of the 1980s and concluded with the sharp recession of 1990-1992.)
Furthermore, the reintroduction of a cheap-credit policy at this stage could only hinder the necessary liquidation of unprofitable investments and company reconversion. It could even wind up prolonging the recession indefinitely, as occurred in the Japanese economy, which, after all possible interventions were tried, ceased to respond to any stimulus involving credit expansion or Keynesian methods.
It is in this context of "financial schizophrenia" that we must interpret the latest "shots in the dark" fired by the monetary authorities (who have two totally contradictory responsibilities: both to control inflation and to inject all the liquidity necessary into the financial system to prevent its collapse). Thus, one day the Fed rescues AIG, Bear Stearns, Fannie Mae, and Freddie Mac, and the next it allows Lehman Brothers to fail, under the amply justified pretext of "teaching a lesson" and refusing to fuel moral hazard. Finally, in light of the way events were unfolding, the US government announced a $700 billion plan to purchase illiquid (i.e., worthless) assets from the banking system. If the plan is financed by taxes (and not more inflation), it will mean a heavy tax burden on households, precisely when they are least able to bear it.
In comparison, the economies of the European Union are in a somewhat less poor state (if we do not consider the expansionary effect of the policy of deliberately depreciating the dollar, and the relatively greater European rigidities, particularly in the labor market, which tend to make recessions in Europe longer and more painful). The expansionary policy of the European Central Bank, though not free of grave errors, has been somewhat less irresponsible than that of the Federal Reserve. Furthermore, meeting the requirements for admission to the euro currency bloc (convergence) involved a healthful and significant rehabilitation of the chief European economies. Only a few countries on the periphery, like Ireland and especially Spain, engaged in considerable credit expansion from the time they initiated their processes of convergence.
The case of Spain is paradigmatic. The Spanish economy underwent an economic boom that was due, in part, to real causes (liberalizing structural reforms which originated with José María Aznar's administration). Nevertheless, the boom was also largely fueled by an artificial expansion of money and credit, which grew at a rate nearly three times the corresponding rates in France and Germany.
Spanish economic agents essentially interpreted the decrease in interest rates which resulted from the convergence process in the easy-money terms traditional in Spain: a greater availability of easy money and mass requests for loans from Spanish banks (mainly to finance real-estate speculation), loans which these banks have granted by creating the money ex nihilo while European central bankers looked on unperturbed. When faced with the rise in prices, the European Central Bank has remained faithful to its mandate and has decided not to lower interest rates despite the difficulties of those members of the Monetary Union which, like Spain, are now discovering that much of their investment in real estate was in error and are heading for a lengthy and painful reorganization of their real economy.
Under these circumstances, the most appropriate policy would be to liberalize the economy at all levels (especially in the labor market) to permit the rapid reallocation of productive factors (particularly labor) to profitable sectors. Likewise, it is essential to reduce public spending and taxes, in order to increase the available income of heavily indebted economic agents who need to repay their loans as soon as possible.
Economic agents in general and companies in particular can only rehabilitate their finances by cutting costs (especially labor costs) and paying off loans. Essential to this aim are a very flexible labor market and a much more austere public sector. These factors are fundamental if the market is to reveal as quickly as possible the real value of the investment goods produced in error and thus lay the foundation for a healthy, sustained economic recovery in a future that, for the good of all, we hope is not too distant.
Szabad utat kapott a monetáris inflálás!
Az Idiokrácia című film igen jól érzékelteti az infláció hatását.
Egyébként érdemes megnézni az egész filmet.
is a unique hedge fund.
It is the largest in the world, with expected initial capital of $700 billion. It has a free and unlimited credit line should it need more. It has no fixed mandate, though it is expected to initially focus on mortgage-backed securities. And it is the only fund backed by the full faith and credit of the U.S. Government.
Pull the plugs. Let the dead men be buried. Trying to keep insolvent bad deals alive uses all the scarce resources that newborn good deals need. This produces staggering costs of lost opportunity. Like Japan, we might not recover for a very long time if we think we can keep dead men walking. Let necessary liquidation happen. Recession is the mandatory painful reality of clearing markets in order to regain a recovering economy. Booms and busts will happen as long as the money system we have in place is such an unsound one.
But, within the reality of the money system we do have, happy days can not be here again by propping up the corpses of all the bad stuff that was birthed by reckless Federal policy. Greenspan and Bernanke deliberately drove interest rates from 6% to 1% and deliberately reduced the purchasing power of each unit of money by flooding the money supply by a 9% increase. It was boom time. Credit was thrown at everybody. Debt was the name of Nirvana, while savings were taxed. Everyone was high on a wealth effect that came from the effervescent bubbles. Our homes became our ATM machines. We were never as rich as the boom times led any of us to believe.
Don’t adopt the corpses through bailout deals. They will not revive. Ever. Bury them properly through liquidation. Return them to dust. Hunker down. Stop spending beyond means. Save.
by Thaddeus McCotter,
Michigan 12th District
Thank you. I rise today not to change anyone's mind but to express to my constituents my reasons for opposing this bill. There will always be time and pretext enough for people to compromise their principles and put forward poor public policy that may in the short run be popular but in the long run will be detrimental to the long-term interests of the American people. We learn this through history.
In the 1832 Bank Panic, Andrew Jackson had the question of whether he would remove the Bank of the United States' charter. The people in the bank did not like that. They threatened the prosperity of the American people and in the middle of the panic Andrew Jackson looked at these bankers and said: "There are no necessary evils in government. The treasury to you, gentlemen, is closed." This was an act of courage on the part of President Jackson because he understood what was at stake was not merely an ephemeral prosperity or a panic caused by the very people with their hand out. Andrew Jackson understood this was about majoritarian rule. It was about the faith in the people's representative institutions and those who inhabit the seats in which they are entrusted.
Today we are in a global financial bank panic. It is the first of our global economy. We are seeing a leveraged bailout of the United States Treasury. And in the end, these interests that want your money are threatening your prosperity. And the choice you face is this: You will lose, potentially, for prosperity for a short period of time, at the expense of your long-term Liberty. Once the federal government has got you to take that risk and pass it onto you as a quote-unquote moral hazard, they will be in the marketplace and as the free market is diminished your freedom itself is diminished. And as your Congress does not stand up to these and put forward a better plan that truly protects the taxpayers, and truly has the long-term interests of the United States at heart, you will be in jeopardy of losing both your prosperity and your Liberty.
The choice is stark and it was put forward in the book by Doestoevsky. In the Brothers Karamazov the Grand Inquisitor came to Jesus and he said, "If you wish to subject the people, give them miracle, mystery and authority; but above all give them bread." And it has always been the temptation in a crisis especially to sacrifice Liberty for short-term promises of prosperity. And it was no mistake during that during the 1917 Bolshevik revolution the slogan was "Peace, land, and bread." Today you are being asked to choose between bread and freedom. I suggest that the people on Main Street have said they prefer their freedom, and I am with them.
I yield back.
Editor's note: Jeffrey A. Miron is senior lecturer in economics at Harvard University. A Libertarian, he was one of 166 academic economists who signed a letter to congressional leaders last week opposing the government bailout plan.
Economist Jeffrey Miron says the bailout plan presented to Congress was the wrong solution to the crisis
CAMBRIDGE, Massachusetts (CNN) -- Congress has balked at the Bush administration's proposed $700 billion bailout of Wall Street. Under this plan, the Treasury would have bought the "troubled assets" of financial institutions in an attempt to avoid economic meltdown.
This bailout was a terrible idea. Here's why.
The current mess would never have occurred in the absence of ill-conceived federal policies. The federal government chartered Fannie Mae in 1938 and Freddie Mac in 1970; these two mortgage lending institutions are at the center of the crisis. The government implicitly promised these institutions that it would make good on their debts, so Fannie and Freddie took on huge amounts of excessive risk.
Worse, beginning in 1977 and even more in the 1990s and the early part of this century, Congress pushed mortgage lenders and Fannie/Freddie to expand subprime lending. The industry was happy to oblige, given the implicit promise of federal backing, and subprime lending soared.
This subprime lending was more than a minor relaxation of existing credit guidelines. This lending was a wholesale abandonment of reasonable lending practices in which borrowers with poor credit characteristics got mortgages they were ill-equipped to handle.
Once housing prices declined and economic conditions worsened, defaults and delinquencies soared, leaving the industry holding large amounts of severely depreciated mortgage assets.
The fact that government bears such a huge responsibility for the current mess means any response should eliminate the conditions that created this situation in the first place, not attempt to fix bad government with more government.
The obvious alternative to a bailout is letting troubled financial institutions declare bankruptcy. Bankruptcy means that shareholders typically get wiped out and the creditors own the company.
Bankruptcy does not mean the company disappears; it is just owned by someone new (as has occurred with several airlines). Bankruptcy punishes those who took excessive risks while preserving those aspects of a businesses that remain profitable.
In contrast, a bailout transfers enormous wealth from taxpayers to those who knowingly engaged in risky subprime lending. Thus, the bailout encourages companies to take large, imprudent risks and count on getting bailed out by government. This "moral hazard" generates enormous distortions in an economy's allocation of its financial resources.
Thoughtful advocates of the bailout might concede this perspective, but they argue that a bailout is necessary to prevent economic collapse. According to this view, lenders are not making loans, even for worthy projects, because they cannot get capital. This view has a grain of truth; if the bailout does not occur, more bankruptcies are possible and credit conditions may worsen for a time.
Talk of Armageddon, however, is ridiculous scare-mongering. If financial institutions cannot make productive loans, a profit opportunity exists for someone else. This might not happen instantly, but it will happen.
Further, the current credit freeze is likely due to Wall Street's hope of a bailout; bankers will not sell their lousy assets for 20 cents on the dollar if the government might pay 30, 50, or 80 cents.
The costs of the bailout, moreover, are almost certainly being understated. The administration's claim is that many mortgage assets are merely illiquid, not truly worthless, implying taxpayers will recoup much of their $700 billion.
If these assets are worth something, however, private parties should want to buy them, and they would do so if the owners would accept fair market value. Far more likely is that current owners have brushed under the rug how little their assets are worth.
The bailout has more problems. The final legislation will probably include numerous side conditions and special dealings that reward Washington lobbyists and their clients.
Anticipation of the bailout will engender strategic behavior by Wall Street institutions as they shuffle their assets and position their balance sheets to maximize their take. The bailout will open the door to further federal meddling in financial markets.
So what should the government do? Eliminate those policies that generated the current mess. This means, at a general level, abandoning the goal of home ownership independent of ability to pay. This means, in particular, getting rid of Fannie Mae and Freddie Mac, along with policies like the Community Reinvestment Act that pressure banks into subprime lending.
The right view of the financial mess is that an enormous fraction of subprime lending should never have occurred in the first place. Someone has to pay for that. That someone should not be, and does not need to be, the U.S. taxpayer.
The events taking place in the financial market offer an illustration of the soundness of the Austrian theory of money, banking, and credit cycles, and Mises.org is your source not only for analysis of these events but also the economic theory that helps explain what is happening and what to do about it. There are many thousands of articles available, and also the full text of thousands of books as well as journal articles. It is impossible to draw attention to the full range of literature one can use to understand the crisis.
However, below we offer a brief look into the topics most discussed in these times, with extended treatments of each in the sidebar. Mises.org also offers both a blog and a community forum for reading and discussing them all.
It's never been more important to spread a sound view of money and banking, not only as a protection against the fallacies of "stabilization" and "reflation" but also as way to see what kind of reforms are essential now.
The Theory of Money and Credit, by Ludwig von Mises
America's Great Depression, by Murray Rothbard
The Mystery of Banking, by Murray Rothbard
Prices and Production, by F.A. Hayek
Causes of the Economic Crisis, by Ludwig von Mises
Austrian Theory of the Trade Cycle and Other Essays, by Ludwig von Mises, et al.
Understanding the Dollar Crisis, by Percy Greaves
The Case Against the Fed, by Murray Rothbard
Money, Bank Credit, and Economic Cycles, by Jesus Huerta de Soto
History of American Currency, by William Graham Sumner
Banking and the Business Cycle, by C.A. Phillips
Fiat Money Inflation in France, by Andrew Dickson White
Sept. 29 (Bloomberg) -- The Federal Reserve will pump an additional $630 billion into the global financial system, flooding banks with cash to alleviate the worst banking crisis since the Great Depression.
The Fed increased its existing currency swaps with foreign central banks by $330 billion to $620 billion to make more dollars available worldwide. The Term Auction Facility, the Fed's emergency loan program, will expand by $300 billion to $450 billion. The European Central Bank, the Bank of England and the Bank of Japan are among the participating authorities.
The Fed's expansion of liquidity, the biggest since credit markets seized up last year, came hours before the U.S. House of Representatives rejected a $700 billion bailout for the financial industry. The crisis is reverberating through the global economy, causing stocks to plunge and forcing European governments to rescue four banks over the past two days alone.
... read more
WASHINGTON - The U.S. House rejected on Monday a proposed $700 billion financial bailout package supported by the Bush administration, the Federal Reserve and the congressional leadership of both parties. The vote was 205 for and 228 against...Some critics said the plan was a giveaway to the very companies that created the crisis, while others said it amounted to socialism.
Ez ám a hyper növekedés!
The economy is in a recession. The bugaboo word, "depression," is at last being used by high-level officials, economists, and talking heads on TV. This is the first time in my lifetime that people of influence have used the word, except in this sentence: "A depression is no longer possible because of central bank policy and government regulation."
Secretary of the Treasury Paulson followed the Keynesian and Chicago School party lines on this issue until September 18, 2008. Then, out of the blue, he announced the need for a $700 billion bailout. The implication was clear: depression is knocking at the door. Like the Big Bad Wolf in the ancient Disney cartoon, the depression threatened to huff and puff and blow our house in.
Congress is now debating whether or not to pass legislation that will enable Paulson to write checks to American banks and financial institutions to enable them to fulfill the highly leveraged contracts that they voluntarily agreed to.
Well, this is not quite true. Congress is not debating whether or not to pass the legislation. It is debating about how many new restrictions will be placed on the capital markets, and how much pork can be squeezed out of the Bush Administration as a quid pro quo. Obama is pushing for a new Section 8 housing subsidy: letting people who cannot pay their mortgages remain in their homes at taxpayers' expense.
This entire charade is really about this issue: contracts. How much will it cost taxpayers to enable people who made binding legal contracts to now escape their obligations? Some of these people are legal fictions: corporations. Others are real people: families. They have made contracts with each other, and now they all seek to escape the terms of these contracts, yet also be allowed to get the benefits. Corporations will stay in business, and homeowners will stay in their homes.
I don't think most homeowners who cannot pay will be allowed to stay in their homes. But large financial corporations who cannot pay will be allowed to stay in business.
THE GREAT DEBATE
I am glad that Congress is debating this issue. It reminds the public about just how bad the mess is. But I do not think that Congress will send Bernanke and Paulson packing. From what I can see from the brief televised snippets of the cross-examination of Bernanke and Paulson, the Senate is ready to capitulate. But, in an election year, the Senators are going through the motions in order to persuade the voters that the Senate has done due diligence in examining the claims of Paulson and Bernanke. It is a charade, but what isn't in Washington?
Congress insists that all future transactions of the banks be transparent and open and fair and low risk and just good for everyone. It does this every time there is a crisis to bail out. Then there is another wave of profits followed by a crisis.
We have had the Federal Reserve System since 1914. We have had extensive Federal regulation of the securities markets since 1933. The result? We now need to bail out the financial system by $700 billion, in addition to the $85 billion AIG bailout that was announced two days before Paulson made his announcement about the need for $700 billion more. This was two weeks after Paulson, on his own authority, announced that the Federal government would absorb $5 trillion worth of Fannie Mae and Freddie Mac debt. Yet we are assured, "this is the last time. Congress is making sure that this is the last time."
It is all a charade. The voters really do not care. The voters do not understand the complexity of these issues. Why should they? The bankers and the largest insurance company did not understand the complexity of these issues, and they put their firms in the hole by at least $800 billion. The economists who created the mathematical models that made possible these preposterous, money-losing contracts clearly did not understand the complexity of these issues. The two Nobel prize-winning economists who created the sophisticated mathematical models that bankrupted Long-Term Capital Management in 1998 did not understand the complexity of these issues.
The reason why bankers do this is that they want short-term profits. They believe that they are masters of the universe. They believe that mathematics will save them. They believe they can use highly sophisticated mathematical models, which all of their competitors use, and still extract billions of dollars of profit from these models, despite the competition.
Why were they able to extract these enormous profits? Because they ignored the economic effects of a reduction in the rate of monetary inflation by the Federal Reserve System. None of them understood the Austrian theory of the business cycle. So, they loaded up on enormous quantities of highly leveraged debt, and they skimmed off the profits from the front end of the contracts.
Now these contracts have gone the other way. The entire financial structure is dependent upon the fulfillment of these contracts, but these contracts cannot be fulfilled by the people who wrote them. So, the people who wrote them went to Secretary of the Treasury Paulson and Federal Reserve Chairman Bernanke and moaned and groaned and screamed and begged and pleaded: "Give us the money we need to fulfill our contracts." That is exactly what Paulson and Bernanke are doing with Congress. They are acting as the representatives of the profit-seeking, bonehead bankers who loaded up on debt, skimmed off the front-end commissions, and have now gone away, with tens of millions of dollars in their pockets. Now the taxpayers will be saddled with the obligations to the tune of almost $2 trillion.
It is always this way. This is what Federal regulation means. Federal regulation creates rules that can be circumvented by any banker, lawyer, and accountant who want to get really creative. When they get creative, they load up on massive debt, and then they stick the taxpayers with the bill, either indirectly through Federal Reserve inflation or directly through the Treasury. It has been this way ever since 1933. As the regulatory structure has increased its control over the financial markets, the financial markets have found ways of beating the system. But they all depend on one assumption: the United States government will intervene in a crisis and load up on massive debt in the name of the People in order to bail out financial institutions that say they are going bankrupt. The entire system depends on the fact that the government will take over the obligations of big-time losers. This is called "moral hazard," and it has been a well-known phenomenon since the middle of the 19th century. The phrase is not recent. It is over 150 years old.
Now the politicians are going to flex their muscles. They stand in front of the cameras and tell the voters next time it will be different. Next time, we will impose restrictions on these greedy capitalists. "We will make certain that they don't get lots of profits." It is all a charade. Yes, they will pass legislation. This legislation will create careers for high-paid Wall Street lawyers and well-paid government agency lawyers. The lawyers will figure out ways to get around the regulations, just as they always have since 1933.
There is no question that these regulations will hamper the free market economy. It will transfer oligopoly status to large firms that can afford to hire lawyers that get paid $500 an hour to identify loopholes in the regulatory system. Small businesses will be penalized. Small businesses are where most of the economic growth originates. It will become more difficult for small businesses to raise capital.
Congress is insisting that senior managers will no longer be paid high salaries. Well, most senior managers were not paid high salaries. They were given stock options. So, they ran up the value of the stock options by using corporate money to buy shares of stock in the open market. Instead of developing new, creative ways of serving the consumer, they did what any self-respecting, self-interested official would do. They saw their opportunities and they took them.
They have now gone away, with tens of millions of dollars or hundreds of millions of dollars in their various financial accounts. This is why it is so important the government intervene to bail out the financial system. If the government did not do this, the former heads of these corporations, who took their money and left, might lose a lot of money. They don't want to lose money. So, Congress will intervene to make certain that they don't lose any money. Congress will do this in the name of the People.
This is called locking the barn door after the horses have escaped. The horses left behind a massive pile of droppings. Congress is going to use taxpayers' money to clean out the Augean stables. Meanwhile, the guys who got rich are gone, and the guys who replaced them will find it more difficult to get rich. But they will find ways to do this eventually. Their lawyers will find ways. Then, once again, Congress will be facing the need to bail out the financial markets.
THE FEDERAL RESERVE
This is inescapable, because the Federal Reserve System has the power to inflate at any time, for any reason. The Federal Reserve System controls the money supply. The chairman of the Federal Reserve System always believes that he can outsmart the financial markets. He believes that he and his staff know what is good for the economy. So, they regulate short-term interest rates by creating money at varying rates of expansion.
The Federal Reserve System is at the heart of the American economy, and it is a government-protected monopoly. The people inside the FED do not get rich, but they gain enormous power. People who possess power like to use power. This is why they manipulate the American economy. They get their jollies by directing the economy in ways they think the economy should go.
Recently, the economy went over a cliff. Anyway, this is what the Secretary of the Treasury and the chairman of the Federal Reserve System are telling Congress. Whether it is true or not, no one knows. The reason no one knows is because the complexity of the system is so great that no one can possibly know. This is why we have free markets: to distribute risk and to decentralize information. The problem is, in the field of monetary policy, we do not have a free market. We have a government-created, government-protected cartel. From time to time, the cartel of commercial banks loses money, and it goes to the Federal Reserve System and to the United States Treasury to tap into the taxpayers' accounts. Congress debates, and then it capitulates.
The failure of the financial markets is being blamed on free enterprise. Almost nobody blames it on Alan Greenspan. Nobody blames it on the Federal Reserve System itself. Nobody blames the regulatory structure that has created this monster. No, they blame the free market. They blame de-regulation under Reagan. There was de-regulation under Clinton, too. His Secretary of the Treasury had been CEO at Goldman Sachs, just as Bush's is. No matter.
The critics blame greedy capitalists. Capitalists are indeed greedy. They are always greedy. The question then is this: Why does their greed lead to financial disasters during one period of time? The answer is monetary policy. This is the Austrian theory of the business cycle. But hardly anybody believes it, because if they did believe it, they would have to abolish the Federal Reserve System and the entire regulatory structure of the Federal Government over the financial markets. They would have to revert to a system in which contracts are in force. Nobody wants to live in that system who is in a position to milk the existing system by violating contracts.
We are going to see the banks come back again for another round of bailouts. The recession is going to intensify. There will be more bankruptcies. There will be more unexpected crises. The Treasury will come back again, hat in hand, begging for more money, and insisting that the worst is over, that this time it will be different. The worst is not over, and next time will be no different.
The voters never figure it out. The regulatory system and central banking system are deliberately complex, which keeps the voters from figuring it all out. The problem, above all, is the Federal Reserve System. Yet this institution is considered sacrosanct. Congress is listening to Bernanke as though Bernanke and his predecessor were not the primary cause of the disaster which Congress is now expected to bail out with taxpayers' money.
Paulson assured us that the financial system had no major problem. He insisted that it was safe and sound. Yet, somehow, in just one weekend, the system bordered on collapse, according to Paulson. Paulson and Bernanke were clueless, yet Congress is listening to them, praising them as great leaders, and vowing that this will never happen again. Paulson and Bernanke say they want more regulatory power. Surprise, surprise. Everybody in Washington wants more regulatory power. This time, the Federal Reserve System and the Treasury Department will get what they want. Why will they get it? Because they have jointly overseen the collapse of the financial structure. Anybody who oversees a collapse of the financial structure, who then goes before Congress saying capitalism has failed, is going to be granted more regulatory power.
The free market will be less free as a result of the shenanigans of the Federal Reserve System and the Treasury Department. The voters will capitulate because the politicians insist there is no other alternative. The politicians will insist this because they have been told that this is the case by the boneheads who created the crisis. And so it goes. It will not be different.
Economic growth will be slower because money will flow into Treasury debt rather than businesses.
The recession will last longer because of this intervention. The bad investments will stay on the books. Huge liabilities will remain. The projects that should not have been begun will be completed. They will lose money.
When the government intervenes to set the terms of exchange rather than enforce contracts, economic growth is reduced. Responsibility is transferred to regulators, who then go to the politicians and insist on more taxpayer money to bail out the system and more regulatory power. The politicians comply.
There is no organized opposition to this expansion of power. Even free market economists come around. "One last time!" "This time, it's necessary." Why? Because on one issue, they are agreed: the need for a government-licensed central bank. They all believe that the free market is not capable of developing a monetary system based on consumer choice and the enforcement of contracts.
Well, not quite all. The Austrian School doesn't. But this is a fringe group in the profession. Nobody pays attention to it.
We are witnessing the re-regulation of American capital. There was a brief loosening of the strings attached, but investment banks (R.I.P.) and financial institutions misused the system, knowing that Uncle Sugar would bail them out. A few did not get out in time. Bear Stearns didn't. Merrill Lynch didn't. Lehman Brothers Holdings didn't. But Goldman Sachs and Morgan Stanley got the government to allow them to switch from investment banks (less regulation) to commercial banks (regulation and bailout money) on Friday, September 19. This let them survive.
We have moved away from somewhat freer markets. In the process, critics of capitalism have been handed a great weapon: "See what the free market did. We must save capitalism from itself." It is the same old refrain. It goes back to Franklin Roosevelt's first term.
The noose will tighten.
Author: Gary North
Utószó: Vajon a mi liberálisaink most miért kussolnak? Máskor nagyon hősiesen küzdöttek az állami szabályozás ellen, most valahogy egy kórusba kerültek az igazi intervencionistákkal. Egyébként véleményem szerint sosem voltak nálunk liberálisok akik tényleg az igazi szabadpiacot védték. Mindent amit a szabad piac nevében ügyködnek, az tulajdonképpen intervencionizmus.
Csupán csak ha a legnagyobb húsz bankot nézzük, akkor együttvéve 400 milliárd dollár osztalékot fizetnek ki, miközben az állam segítségével az amerikai adófizetők 700 milliárd dollárjára tennék rá a kezüket.