14 December 2009

05 December 2009

Politics and Power

Power should not be won but destroyed. No matter for what noble purpose new laws are passed, they will only benefit in the long run the people who can play politics — power politics — the best.
Donald Meinshausen

30 November 2009

Independence of the Fed

Independent? Of you and me, to be sure, but not independent of Goldman, B of A, JPMorgan Chase, and the other old boys up there in the big city.
Robert Higgs dishes it out to Big Ben.

25 November 2009

Who Wins at War

Why of course the people don't want war. Why should some poor slob on a farm want to risk his life in a war when the best he can get out of it is to come back to his farm in one piece? Naturally the common people don't want war neither in Russia, nor in England, nor for that matter in Germany. That is understood. But, after all, it is the leaders of the country who determine the policy and it is always a simple matter to drag the people along, whether it is a democracy, or a fascist dictatorship, or a parliament, or a communist dictatorship.

Voice or no voice, the people can always be brought to the bidding of the leaders. That is easy. All you have to do is tell them they are being attacked, and denounce the peacemakers for lack of patriotism and exposing the country to danger. It works the same in any country.
Hermann Goering, President of the Nazi Reichstag

20 November 2009

Regulation is Big Bikkies

It is often said that deregulation, especially during the last eight years, is one of the central causes of the financial crisis.... In fact, during the last eight years, federal spending on regulation in the category of finance and banking has gone up notably. This trend is similar to the one we have seen in the last 50 years.

Overall, it is hard to argue that deregulation of the financial services industry was rampant in Washington when the spending on finance and banking regulatory agencies kept growing so fast.
Veronique de Rugy at the American.

12 November 2009

Deregulation Myth

A popular myth among leftists is that the financial crisis was caused by "deregulation". Of course, when pressed on exactly what deregulation was involved, they usually can't give an answer, revealing a blind faith that whatever the problem it had to involve lack of regulation.

Among the minority of leftists that can give a more specific description of what regulation was lacking, the 1999 repeal of the Glass-Steagal act (which prohibited companies from pursuing both commercial banking and investment banking) is the most common reply. Yet there is no evidence whatsoever of that having any negative role.

The companies that contributed the most to the bubble and subsequently suffered the most were companies that were either pure mortgage institutions like Freddie Mac and Fannie Mae, pure investment banks like Bear Stearns and Lehman Brothers or an insurance company (AIG which invested heavily in Credit Default Swaps that insured dodgy mortgages). None of those companies had been affected by the repeal of Glass-Steagal.
Stefan Karlsson on the Deregulation Myth.

07 November 2009

Moral Defect with Democracy

I wish to claim that democracy’s gravest defect has little or nothing to do with the defects traditionally ascribed to it. I maintain that its severest defect, indeed, a flaw so critical that it gives democracy the potential to destroy civilization, pertains to its effect in corrupting the people’s moral judgment...

If you or I were to threaten a neighbor with violence unless he handed over a specified sum of money, we would be universally recognized as engaged in extortion or attempted robbery.... Likewise, if I were to send a private Predator drone to Pakistan to fire explosive missiles into villages, killing women, children, and other innocent persons, I would be seen as a monstrous mass murderer, and demands would be made that I be apprehended and “brought to justice” or killed.

Yet when President Obama causes deaths in this way, no such demands are made. How did Barack Obama come by the right to kill innocent people? By democratic election to the presidency of the United States, of course. Most people actually believe, and act on the belief, that mere election to a political office can endow a person with standing to disregard the moral requirements applicable to people in general.....

Everybody understands, however, without any advanced instruction in the matter, that murder and robbery are wrong, and that no one has a justifiable right to bully his neighbors simply because he does like the way in which they are conducting their lives..... (yet) most people give a moral pass to such criminal actions when democratically elected functionaries take them. This presumed moral immunity by virtue of election to public office is... a montrous mistake in moral reasoning....
Robert Higgs on Democracy’s Most Critical Defect.

31 October 2009

To Big to Fail is a Dumb Idea

The essential dynamic of the market economy is that good businesses succeed and bad ones do not. There is a sense in which the bankruptcy of Lehman was a triumph of capitalism, not a failure. It was badly run, it employed greedy and overpaid individuals, and the services it provided were of marginal social value at best. It took risks that did not come off and went bust. That is how the market economy works.
John Kay at the Financial Times on Too big to Fail is too Dumb an Idea to Keep.

24 October 2009

Capitalism does not Need Greed

Adam Smith never argued that the more selfish we are, the better a market works. His point, rather, is that in a free market, each of us can pursue ends within our narrow sphere of competence and concern—our “self-interest”—and yet an order will emerge that vastly exceeds anyone’s deliberations.

Finally, and most importantly, Smith argued that capitalism channels greed. He recognized that human beings are not as virtuous as we ought to be. While many of us may live modestly virtuous lives under the right conditions, it is the rare individual who ever achieves heroic virtue. Given that reality, we should want a social order that channels proper self-interest as well as selfishness into socially desirable outcomes. Any system this side of heaven that can’t channel human selfishness is doomed to failure. That’s the genius of the market economy.

And that’s the problem with socialism and all sorts of nanny-state regulatory prescriptions: They don’t fit the human condition. They concentrate enormous power in the hands of a few political leaders and expect them to remain uncorrupted by the power. Then through aggressive wealth redistribution and hyper-regulation, they discourage the productive pursuit of self-interest, through hard work and enterprise. Instead, they encourage people to pursue their self-interest in unproductive ways such as hoarding, lobbying, or getting the government to steal for them.

In contrast, capitalism is fit for real, fallen human beings. “In spite of their natural selfishness and rapacity,” Smith wrote, business people “are led by an invisible hand ... and thus without intending it, without knowing it, advance the interest of the society.” Notice he says “in spite of.” His point isn’t that the butcher should be selfish, or even that the butcher’s selfishness particularly helps. Rather, he argues that even if the butcher is selfish, he can’t make you buy his meat. He has to offer you meat at a price you’ll willingly buy. He has to look for ways to set up a win-win exchange. Surely that’s good.

So a free market can channel the greed of a butcher. But that’s not the only thing it can channel. It can just as easily channel a butcher’s noble desire for excellence of craft, or his desire to serve his customers well because he likes his neighbors, or his desire to build a successful business that will allow his brilliant daughter to attend better schools and fully develop her gifts. Capitalism doesn’t need greed. What capitalism does need is human creativity and initiative.
Jay Richards explains why Greed is not Good and It is not Capitalism.

19 October 2009

Diagnostics and Therapeutics

Since the Great Depression, the American public has generally approved of an active, interventionist federal government. In a perceived crisis, most people want the government to “do something.” Of course, most politicians and government functionaries, for perfectly understandable self-serving reasons, are quite pleased to respond to such public demands for action ― after all, taking such action promises to butter their bread more thickly.

Franklin D. Roosevelt enthusiastically supported an approach whereby the government would “take a method and try it; if it fails, admit it frankly and try another. But above all, try something.” Likewise, more recently, despite the great confusion that prevailed about the current recession’s causes and about the best means of moderating or reversing it, Barack Obama, soon after taking office, declared, “The time for talk is over. The time for action is now.” In both instances the president was presuming that successful therapy can be administered without a sound diagnosis. This presumption is foolish, however, if one’s interest lies not in mollifying a bewildered electorate, but in implementing a genuine remedy for the perceived problem...

Yet, one thing we do know: Many Americans now believe many things about their government that are false, and they expect much from the government that the rulers cannot provide. The public at large embraces myths about what the government can do, what it actually does, and how it goes about doing it...
Robert Higgs on Diagnostics and Therapeutics in Political Economy.

15 October 2009

Fool's Game for the Masses

I go through life constantly bemused by all the weight that people put on partisan political loyalties and on adherence to the normative demarcations the parties promote. Henry Adams observed that “politics, as a practice, whatever its professions, has always been the systematic organization of hatreds.” This marshalling of hatreds is not the whole of politics, to be sure, but it is an essential element. Thus, Democrats encourage people to hate big corporations, and Republicans encourage people to hate welfare recipients.

Of course, it’s all a fraud, designed to distract people from the overriding reality of political life, which is that the state and its principal supporters are constantly screwing the rest of us, regardless of which party happens to control the presidency and the Congress. Amid all the partisan sound and fury, hardly anybody notices that political reality boils down to two “parties”:
  1. those who, in one way or another, use state power to bully and live at the expense of others; and
  2. those unfortunate others.
Robert Higgs on Partisan Politics.

24 September 2009

Chesterton Chestnut

The whole modern world has divided itself into Conservatives and Progressives. The business of Progressives is to go on making mistakes. The business of the Conservatives is to prevent the mistakes from being corrected.
GK Chesterton

19 September 2009

Truth to Power

The vast majority of Christians in America have accepted the Constantinian notion that the primary political task of the church is to rule, to be in charge. What that means at the very least is that Christians are to play a prophetic role in the political court of Washington DC. Second, it means that most Christians have accepted the modern dichotomies of left/right, liberal/conservative, Democrat/Republican.

In accepting these two "truths" the problem becomes clear. As Christians, instead of identifying ourselves as primarily kingdom citizens, we see ourselves first and foremost as Democrats or Republicans, conservatives or liberals. The Sermon on the Mount gets eclipsed by the political platforms of the DNC and the RNC. We like to say that we transcend such earthly contrived political conventions, but we can point to very little evidence to show that this is indeed the case. James Dobson is clearly a conservative Republican and Jim Wallis is obviously a liberal Democrat. The only truth they speak to power is their own Republican or Democratic truth to the power of the other party. The criticism of their own is basically absent or woefully inadequate at best. It appears that both men desire to play the role of Nathan in David's court, but they find they only have influence in that court when "David" is part of their own party; and then their prophetic denunciations are reserved only for the opposition outside the court and not those who are in power. They have very little of a prophetic nature to say to the king from their own party whom they serve. In other words, the church cannot speak truth to power because the church itself is up to its armpits in power and, therefore, has a stake in such power.

In cosying up to the principalities and powers, Christians on the left and the right have chosen the politics of power over the politics of witness; indeed, they cannot even imagine, in spite of what they say, what the politics of the Kingdom of God might look like apart from the politics of left and right.
Allan Brevere on Why the Church in America cannot Speak the Truth to Power

11 September 2009

Bludgeoning

Democracy means simply the bludgeoning of the people by the people for the people.
Oscar Wilde

31 August 2009

Limited Government

A "limited government" is a contradiction. Either it is limited (in which case, the entity doing the limiting is sovereign), or it is government. It cannot be both.
John Sampson on Limited Government.

27 August 2009

Gospel or State

The long history of Christendom is astonishingly plentiful in magnificent moral, intellectual, and cultural achievements... But it has also been the history of a constant struggle between the power of a the gospel to alter and shape society and the power of the state to absorb every useful institution into itself.
David Bentley Hart, a historian of ideas, in Atheist Delusions: The Christian Revolution and Its Fashionable Enemies
.

04 August 2009

Paper Money

Daniel Webster said,
We are in danger of being overwhelmed with irredeemable paper, mere paper, representing not gold nor silver; no sir, representing nothing but broken promises, bad faith, bankrupt corporations, cheated creditors and a ruined people.

Of all contrivances for cheating the laboring classes of mankind, none has been more effective than that which deludes them with paper money.
and quantitative easing.

28 July 2009

Nation State

The nation state. Interesting phrase. It is different from the state, which is ancient. The nation state as we know it is a modern invention -- also called the managerial state. The idea is that the state survives and is independent from its head. It has a life that exists outside the dictator, president, monarch, or whatever. It is also called the impersonal state, and its heartbeat is the bureaucracy, and it certainly has a genesis in the late medieval period. It is the only state anyone in the developed world has known for centuries.
Jeffery Tucker at Mises.org.

24 July 2009

Economists

Critics argue that economists missed the origins of the crisis; failed to appreciate its worst symptoms; and cannot now agree about the cure. In other words, economists misread the economy on the way up, misread it on the way down and now mistake the right way out.
The Economist on Economists.

18 July 2009

No one Saw it Coming????

I do not know anyone who predicted this course of events. This should give us cause to reflect on how hard a job it is to make genuinely useful forecasts. What we have seen is truly a ‘tail’ outcome – the kind of outcome that the routine forecasting process never predicts. But it has occurred, it has implications, and so we must reflect on it.
Glenn Stevens, Governor of the Reserve Bank of Australia quoted by Dirk J Bezemer of the University of Groningen. Dirk proves that the common wisdom is wrong and lists a number of economist who saw it coming. The full article is worth a read.

15 July 2009

Economists

Long gone are the days when economists thought deeply about how life actually works. Adam Smith, Adam Ferguson, Anne-Robert Turgot – the great "moral philosophers" – all died hundreds of years ago. Since then, the trade has gone bad. They're all numbers guys now. An economist, of the modern variety, is a statistician...an extrapolator...and a mountebank. If numbers go up two months in a row, he predicts they will go up another one. He rarely stops to ask whether his numbers really make any sense.
Bill Bonner on Bubble Deniers.

11 July 2009

Saving or Borrowing

In 2005, Americans saved nothing. Not even aluminum foil or string. Now, the savings rate is approaching 5% of disposable income - a big turnaround.

We know from logic and experience that saving money - not spending it - is the key to getting wealthier. Saving money gives you capital. And it’s capital accumulation - in the form of factories, roads, ships, buildings, machines…and raw savings - that gives people the ability to produce more. It may take a man with a shovel a whole day to dig a decent grave. Give him capital - in the form of a backhoe - and he can bury everyone in town. That’s why capitalism works. It rewards the fellow who saves his money.

Yet every yahoo economist in the year of our Lord 2009 takes news of rising savings rates like the death of Michael Jackson. If households don’t consume, they reason, how can a consumer economy grow?

The problem is that you can’t really grow an economy by borrowing and spending.

Recent history proves it. Despite the biggest splurge of borrowing and spending in history, the US consumer economy barely grew at all.
Bill Bonner on the Great Credit Contraction.

06 July 2009

Austrian Economics

What distinguishes the Austrian School and will lend it everlasting fame is its doctrine of economic action, in contrast to one of economic equilibrium or nonaction. The Austrian School makes use of the ideas of rest and equilibrium, without which economic thought cannot get along. But it is always aware of the purely instrumental nature of these ideas.

The Austrian School aims to account for prices actually paid in the market, and not just prices that might be paid under certain never-realizable conditions. It rejects the mathematical method, not because of ignorance or an aversion to mathematical accuracy, but because it does not place importance upon the detailed description of the condition of a hypothetical and static equilibrium.

The Austrian School has never succumbed to the fatal illusion that values can be measured, and has never misunderstood that statistical data has nothing to do with economic theory, but belongs to the history of economics alone.
From the Memoirs by Ludwig von Mises.

01 July 2009

Extraordinary Evil?

Poor Bernie Madoff. The man has been ordered to spend 150 years in the hoosegow. What for? Who did he kill? A century and a half seems a little excessive for a financial crime. You could hold up three liquor stores and rape a whole convent and still not get 150 years. With a little bit of good lawyer-ing, a history of child abuse in the family, and good behavior in the big house, you'd be back on the street in 18 months.

But all the papers seem delighted. "Locked up for Life!" says one of today's headlines. The judge "threw the book at him," says another. His victims wanted him to get no mercy. The judge gave him none, imposing the maximum sentence. He is "extraordinarily evil," said the man on the bench.

Justice has been done. Right? ......

But, what is the point of keeping Madoff in prison? He represents no threat. Rather than pay $30,000 per year to keep him locked up, we suggest that he be forced to do community service work. He should be pressed into service as the next head of the Federal Reserve after Ben Bernanke's term expires in December. With Madoff in the big office, there would be no longer any illusions about what sort of bank the Fed is running.
Bill Bonner puts the evil of the century into perspective.

27 June 2009

Baby Boom Thieves

Generations X (30-45) and Y (15-30) need to wake up and see the massive inter-generational theft happening before their eyes. Baby-boomers need to be shocked into knowing they are being shortsighted and will end up living in two retirement islands and having to visit their grandchildren overseas.
Bernard Hickey of interest.co.nz at the Herald.

23 June 2009

Business Pressure

If you feel you are being forced to buy something by a business,
you will usually find a government law or regulation behind their power.

19 June 2009

Following

Twitter is not a social network. It is a tool for social and political elites (the followed) to lead their sheep (the followers).
The whole world “followed” the beast (Rev 13:3).
People think that we are living in the age of democracy,
but multitudes are being deceived into serving the beast,
while thinking they are free.

I do not follow Twitter; I am following Jesus.

17 June 2009

Hoorah for Capitalism

The rich hate capitalism because it threatens to take away their money. The poor hate it because they think it keeps them from getting any money in the first place. And everywhere you look, the chiselers are offering bailouts, boondoggles and bamboozles. With so many people trying to improve on capitalism, it’s a wonder they’ve never come up with something better.

When you leave people alone: some people watch TV...some blabber about politics...and some build wealth. The rules are simple: Thou shalt not steal, it saith in the Bible. Do unto others as you would have them do unto you, Jesus added. Everything else - from hedge funds to derivatives - is merely an elaboration. People make deals with their neighbors in order to get what they want. One plants the wheat; the other bakes the bread. As long as they respect each other's deals and each other's property, everything goes tolerably well.

The western, capitalist economies are in the midst of their own perestroika. They are being restructured. But not by the world-improvers. Instead, they are being restructured by capitalism itself... Leave capitalism alone and it will do the job far faster and far better than the meddlers could ever do.
From Hoorah for Capitalism by Bill Bonner

11 June 2009

Making Things Work

..many governmental actions -- including several pursued by Franklin Roosevelt during the Great Depression -- can make things worse. I wish I could be confident that the array of U.S. policies already in place and those likely forthcoming will be helpful. But I think it more likely that the economy will eventually recover despite these policies, rather than because of them.
Wisdom from Robert Barro at the Wall Street Journal. Read the full article

04 June 2009

Collective Prolifigacy

This is a crisis brought on by our collective profligacy, which manifested itself in too much spending, too much debt and no savings. The normal way to get out of a situation like that is to spend less, reduce borrowing and save more. I’m wondering why we haven’t taken that approach – well, I know why, but I still question the response.
Julian Robertson quoted by Rolfe Winkler at Option Armageddon

29 May 2009

Higher Interest Rates

We know that interest rates are going to go up eventually. But no-one wants the cost of borrowing to go up right now - least of all the world's overextended governments. That's why the ructions in the US government bond market this week has people nervous.......

But the second lesson is more fundamental: we all have higher interest rates in our future. And when I say higher, I don't just mean higher than the record lows they are at today, I mean higher than they were before the crunch. An era of cheap money partly got us into this mess. Thanks to the mountain of public debt now sitting on government balance sheets, it's a fair bet that money is going to more expensive when we come out the other side....

The financial crisis has generated a "scrambling for public funds of war-like proportions". Other things equal, basic economic theory suggests that a rise in government borrowing on that scale will push up the long-term cost of borrowing once the recovery gets going. Of course, that might not happen overnight, especially with so much slack in the big economies due to the recession. But even sceptics about the effect of borrowing on rates would probably accept that this kind of rise in government debt will have an effect on the cost of debt....

When the advanced economies pull out of this crisis, the level of public debt is going to be the central fact of economic and political life for years to come.
Stephanie Flanders at BBC.

Inflation Rescue

Liam Halligan wrote,
For what we're doing instead is surely a folly of historic proportions. The Bank of England is about to start printing money. We're piling government debt on top of debt. Our leaders seem to have decided that the only solution is to inflate away the UK's crippling liabilities – while spinning a yarn the danger is deflation instead.

Well, the money market won't have it. The UK's foreign creditors, in particular, won't buy gilts if they see our currency being debauched. Then we'll be in serious trouble – facing an IMF bail-out and with our credit rating shot. But don't worry – the bankers will still get their bonus …

20 May 2009

End of Plentiful Debt

There is confusion between the "disease" — high levels of debt — and the "cure" — the reduction of the level of debt now under way (deleveraging). Debt within the financial system is falling as some borrowers default, destroying existing debt and also limiting the capacity for further credit creation. Total losses from the crisis are estimated by the International Monetary Fund at about $US4.1 trillion ($A5.4 trillion), of which $US2.7 trillion will be borne by financial institutions.

Government ownership, or de facto nationalisation, has become the primary option to recapitalise the banking system in many countries. Even after recapitalisation there is likely to be a capital shortfall in the global banking system of about $US1 trillion-plus, forcing a contraction in global credit of about 20-30 per cent from existing levels. This is much more than a banking problem. At this point it affects the real economy.
Satyajit Das at The Age on End of the Age of Plentiful Debt.

19 May 2009

Houses and Money

Modern people live with an assumption that house prices will always rise. This is a false view. The intrinsic value of a house declines over time as it deteriorates and become old fashioned. What actually happens is the money loses its value over time, as central banks and governments manipulate their country’s currency. People confuse a decline in the value of money with an increase in the value of their houses. That latter is an illusion (unless captured by leverage).

16 May 2009

Cover the Countryside with Concrete?

The Japanese experience does not make Bill Bonner enthusistic about stimulus programs.
In this morning’s paper is a front-page article describing how Japan “wasted trillions” on its various stimulus programs.
Japan’s rural areas have been paved over and filled in with roads, dams, and other big infrastructure projects, the legacy of trillions of dollars spent to lift the economy from a severe downturn caused by the bursting of a real estate bubble in the late 1980s (The International Herald Tribune).
Public spending was so aggressive, it boosted Japan’s government debt to 180% of GDP – more than two times the current U.S. level. But did all that cement buy Japan out of its slump?

You be the judge. Housing prices in Japan are now back down to where they were in 1975 – nearly 90% below the late-’80s peak. And stocks? The Nikkei index is back down to where it was a quarter century ago. Stocks sell for half their book value – and they’re still considered too expensive for beaten-down, hyper-fearful Japanese investors. The downturn began in 1990. Over the following 19 years, it did more property damage than the Great Tokyo Fire of ’23 and the Enola Gay combined, wiping out wealth equal to three times the country’s GDP. This was despite interest rates at zero...and a heroic effort at Keynesian stimulation.

If America were to follow Japan’s example, it would have to leave its interest rates near zero for the next decade...and add about $10 TRILLION to its public debt. And if it got the same results, you’ll be able to sell your house in 2026 for the same price you paid in 1992.
In a nutshell,Japan’s experience suggests that infrastructure spending, while a blunt instrument, can help revive a developed economy, say many economists (The International Herald Tribune).
Are these, perhaps, the same economists who thought America’s super-consumption, eternal-debt economy would never fail? The same economists who thought the bankers were providing a public service, by offering so many people so much credit...and then planting their debt bombs all over the planet? The same economists who forecast rising stock prices in 2008?

15 May 2009

Capital

The French word for livestock, “cheptel,” is the root for the word “capital.” This reminds us of the nature of capital. The first capital was livestock. Keeping livestock is more productive than hunting and gathering.

11 May 2009

Crowding Out

What the Federal Reserve and Treasury have set in motion is the mother of all crowdings-out. The Fed is compelled to buy substantial amounts of Treasuries to prevent the federal deficit from turning into a $1.8 trillion black hole that sucks in all the free savings of the world and then some. The moment that yields start to rise, the stock market reacts negatively. There is no “give” in the economy for any substantial rise in yields: the penalty to growth expectations is exacted immediately.

By ballooning the deficit and tying the credit of the United States to the balance sheet of the banking system, the Fed has avoided panic, but has crippled the economy for the long term. There is no way to finance the deficit except by suppressing financing for everyone else. The massive amount of liquidity created by the Fed has no inflationary effect as long as the market does not want to hold real assets — and it will not as long as the federal government sucks up the available savings. The most likely scenario is a paralytic, zombie-like stasis.
From Seeking Alpha.

07 May 2009

Fractional Reserve Lending

Fractional Reserve Lending (FRL) is fraudulent. Indeed, FRL in conjunction with micro-mismanagement of interest rates by the Fed is the root cause of the financial crisis we are in.
Mish Shedlock at Global Economic Analysis. This is really worth reading.

04 May 2009

Caring for Property

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.
Robert Higgs at the Independent.

30 April 2009

Participatory Facism

Economist Robert Higgs has convincingly argued that the real tendency is not toward pure socialism, but toward a mixed economy and corporate liberalism. This means a corporate state where big business, special interests and the governing elite together rule over an economy of heavily regulated and politically connected crony capitalism. The public also tends to be included in a semi-democratic fashion -- unlike in outright totalitarian regimes of the past, there is wide enfranchisement and encouragement that the people engage in the system.

There is just enough of an opening for business and just enough of an illusion of public involvement that neither economic law nor public opinion will cause the government to fold over, despite its many tyrannical vagaries and encroachments on the liberties of the people. Higgs calls this system "participatory fascism" -- the economics of corporatist central planning coupled with a democratic form of government -- and says it is the dominating tendency in the modern developed world.

Discussion of fascism, like socialism, is often dismissed as hyperbolic, but the fundamental features of fascist central planning can be seen in our economic system. Politically protected big business, cartels, nominal private property rights, a welfare state and socialized risk -- crony capitalism and social interventionism -- mark both systems.
From The Mixed Economy in Crisis by Anthony Gregory at Campaign for Liberty.

27 April 2009

Derivatives and Risk

Martin Wolf - whom finance ministers and leading economists read in order to find out what to think - had a nice turn of phrase. Derivatives, he said, did not - as advertised - transfer the risk to those people most able to manage it. "They transferred the risk to those least able to understand it."

But when Wall Street's vaults were open, what did they find? They hadn't transferred it at all! So much risk was left in the hands of the people who created it that - when it blew up - it flattened the entire investment banking industry.
Bill Bonner at the Daily Reckoning.

24 April 2009

Hoarding is not Saving

To the extent that "hoarding" or, more accurately, an increase in the demand for money for cash holding takes place, it is not because people have decided to save. What is actually going on is that business firms and investors have decided that they need to change the composition of their already accumulated savings in favor of holding more cash and less of other assets.

For example, an individual may decide that instead of being 90 percent invested in stocks and other securities and having only 10 percent of his savings in cash in his checking account, he needs to increase his cash holding to 20 or 25 percent of his savings.

Similarly, a corporation may decide that it needs to increase its cash holding relative to its other assets in order to be better able to meet its bills coming due. Indeed, this is happening right now as more and more firms find that they can no longer count on being able to borrow money for such purposes.
George Reisman

21 April 2009

Naivety

The 1929 crash exposed the naivety and ignorance of bankers, businessmen, Wall Street experts and academic economists high and low; it showed they did not understand the system they had been so confidently manipulating. They had tried to substitute their own well-meaning policies for what Adam Smith called ‘the invisible hand’ of the market and they had wrought disaster. Far from demonstrating, as Keynes and his school later argued—at the time Keynes failed to predict either the crash or the extent and duration of the Depression—the dangers of a self regulating economy, the degringolade indicated the opposite: the risks of ill-informed meddling.
Paul Johnson in Modern Times. I doubt that the G20 has done any better.

16 April 2009

Search for Profit

The search for profit and the avoidance of loss is the essence of the capitalist process. In a market economy, individuals and firms have incentives to discover products and services that consumers want and then produce them at the lowest cost. Profits become a signal of success and a reward for serving consumers efficiently. Contrariwise, when losses appear, they signal failure and inflict a penalty on firms for producing poor products or having bloated costs of production.
Dom Armentano (Professor Emeritus at the University of Hartford CT) on Bailout Baloney

13 April 2009

Morality and Force

Do you not see, first, that — as a mental abstract — physical force is directly opposed to morality; and, secondly, that it practically drives out of existence the moral forces? How can an act done under compulsion have any moral element in it, seeing that what is moral is the free act of an intelligent being? If you tie a man's hands there is nothing moral about his not committing murder. Such an abstaining from murder is a mechanical act; and just the same in kind, though less in degree, are the acts which men are compelled to do under penalties imposed upon them by their fellow men. Those who would drive their fellow men into the performance of any good actions do not see that the very elements of morality — the free act following on the free choice — are as much absent in those upon whom they practice their legislation as in a flock of sheep penned in by hurdles.
Auberon Herbert quoted at Christian Libertarianism.

03 April 2009

Facism Not Socialism

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.

And while the ruling establishment retains an iron grip on state power, it allows 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. Productivity will increase 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....

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.
Robert Higgs says We are Not All Socialists Now.

31 March 2009

Anger at Wall Street

The Wall street traders who were doing this stuff for constant profits on a day to day basis were on a Sherman’s March through these companies, financed by our 401(k)s, and all their incentives were for short-term profits. They burnt down the house with our money and walked away as rich as hell.
Jon Stewart made this statement during his interview of Jim Cramer. The interview has created a great deal of debate. I do not take either man seriously, because they are both more interested in their performance than the truth. My only comment is that the statement quoted above sums up the anger that many Americans are currently feeling.

28 March 2009

Participatory Fascism

Economist Robert Higgs has convincingly argued that the real tendency is not toward pure socialism, but toward a mixed economy and corporate liberalism. This means a corporate state where big business, special interests and the governing elite together rule over an economy of heavily regulated and politically connected crony capitalism. The public also tends to be included in a semi-democratic fashion -- unlike in outright totalitarian regimes of the past, there is wide enfranchisement and encouragement that the people engage in the system.

There is just enough of an opening for business and just enough of an illusion of public involvement that neither economic law nor public opinion will cause the government to fold over, despite its many tyrannical vagaries and encroachments on the liberties of the people. Higgs calls this system "participatory fascism" -- the economics of corporatist central planning coupled with a democratic form of government -- and says it is the dominating tendency in the modern developed world.

Discussion of fascism, like socialism, is often dismissed as hyperbolic, but the fundamental features of fascist central planning can be seen in our economic system. Politically protected big business, cartels, nominal private property rights, a welfare state and socialized risk -- crony capitalism and social interventionism -- mark both systems.
From The Mixed Economy in Crisis Anthony by Gregory at Campaign for Liberty.

26 March 2009

They Understood the Danger

During 2004-07 I saw the financial industry stacking up the powder kegs that would eventually blow up. I tried on occasion to warn people. But my warnings fell on deaf ears at Lehman and elsewhere, but not for the reasons you might think.

I recall numerous conversations with senior people at various global financial firms on topics ranging from Fed policy, to the US/UK housing markets, securitisation and its potential pitfalls, the CDS tangle, and so on. One thing that is clear to me is that key people at these firms were aware for the most part what risks they were taking. They knew that it was all going to blow up someday, if not so spectacularly as it now has done. But they all believed that somehow they would be quicker and cleverer than rival firms, that they would effectively hedge themselves and they would get out first, before things got really ugly. As you well know, that sort of collective "greater fool theory" mindset is characteristic of bubbles and, if widely held, almost ensures that liquidity will dry up suddenly as markets turn for the worse.

Believe me, they knew they were playing with fire to a much greater extent than is currently acknowledged.
These words were written by a correspondent with Bill Bonner at the Daily Reckoning. The wide boys new that they were playing with fire, but they did not put the petrol away, because the money was too good. They thought that they would be clever enough to get out before it all blew up in their faces. Well they weren't and now the taxpayers are bailing them out.

22 March 2009

Debt and GDP.

Economic growth is a function of population growth plus improving productivity.

GDP is simply a nation’s output: it must grow if the increasing population is to be fed, and because we are an endlessly inventive and curious species, stuff gets invented all the time and new ways of doing things are found. New technology constantly improves productivity, which means the same number of people can produce more stuff by doing less.

The only problem that occurred over the past ten years – the only one in my view – is that debt grew faster than economic growth.

That is, the present generation borrowed excessively from the future to pay for a better life today. It’s now payback time.
Alan Kohler at the Business Spectator.

21 March 2009

Whos Afraid of the Big Bad Wolf

Though there are indeed militant forms of Islam that have a wide following, terrorists number only a handful; and these have by now been largely contained. In the years since 9/11,
Al Qaeda Central — the group led by Osama bin Laden and Ayman Zawahiri — has been unable to launch a major attack anywhere. It was a terrorist organization; it has become a communications company, producing the occasional videotape rather than actual terrorism. (p. 13)
Nowadays, terrorist Muslim groups are confined to the local, with "almost no connection to Al Qaeda Central." The local terrorism of these groups cannot succeed.
[It has] a crippling weakness; it kills locals, thus alienating ordinary Muslims…. Over the last six years [i.e., through 2007], support for bin Laden has fallen steadily throughout the Muslim world. (p. 13)
David Gordon reviewing The Post-American World by Fareed Zakaria.

20 March 2009

State Murder

R.J. Rummel of the University of Hawaii calculates that in the twentieth century alone, governments murdered about 162,000,000 million of their own subjects. This figure doesn’t include the tens of millions of foreigners they killed in war.

19 March 2009

Cause of the Crisis

The current crisis stems from changes that have been quietly taking root in the west for many years. Half a century ago, banking appeared to be a relatively simple craft. When commercial banks extended loans, they typically kept those on their own books – and they used rudimentary calculations (combined with knowledge of their customers) when deciding whether to lend or not.

From the 1970s onwards, however, two revolutions occurred: banks started to sell their credit risk on to third-party investors in the blossoming capital markets; and they adopted complex computer-based systems for measuring credit risk that were often imported from the hard sciences – and designed by statistical “geeks” such as Mr den Braber at RBS.

Until the summer of 2007, most investors, bankers and policymakers assumed that those revolutions represented real “progress” that was beneficial for the economy as a whole.

Regulators were delighted that banks were shedding credit exposures.....

Bankers were even more thrilled, because when they repackaged loans for sale to outside investors, they garnered fees at almost every stage of the “slicing and dicing” chain.

Moreover, when banks shed credit risk, regulators permitted them to make more loans – enabling more credit to be pumped into the economy, creating even more bank fees.......

When a team at JPMorgan developed credit derivatives in the late 1990s, a favourite buzzword in their market literature was that these derivatives would promote “market completion” – or more perfect free markets. In reality, many of the new products were so specialised that they were never traded in “free” markets at all.

The result was that a set of innovations that were supposed to create freer markets actually produced an opaque world in which risk was being concentrated – and in ways almost nobody understood. By 2006, it could “take a whole weekend” for computers to perform the calculations needed to assess the risks of complex CDOs, admit officials at Standard & Poor’s rating agency.

Most investors were happy to buy products such as CDOs because they trusted the value of credit ratings. ....

In July 2007, this blind faith started to crack....

Gillian Tett in the Business Spectator.

17 March 2009

Post War Rationalisations

Each country, each national group, each political party fashioned its own version of the war and , as time went on, burnished remembrance and amnesia into self-serving myth. For some peoples, such as Serbs and Jews, a narrative of victimhood was a potion that came to serve as justification for resurgent nationalism. For the British, the lone struggle of 1940-1, the heroism of the few in the Battle of Britain and the many in the Blitz, reinvigorated national self-consciousness. For the French, the petty day-to-day accommodations that most had made with the occupier were overshadowed by the legend of resistance, that the Vichy regime had been made in France and supported, at least, initially, by the great majority of the French people.

For Germans the chief components of wartime memory were the agonies of the eastern front, the terror of Allied carpet-bombing of German cities, and the flight of civilian population from the path of the Russian army in East Prussia and elsewhere in the east…. From 1947 onwards the Cold War rendered the earlier struggle of the German army against Bolshevism somehow respectable. Military service on the eastern fron became a virtual badge of honour with all responsibility for the attendant atrocities against prisoners of war and civilians shunted onto the shoulders of the disbanded police state apparatus….For many Germans the terrible losses from Allied bombings of German cities somehow canceled out the crimes committed by the Nazis.
From
Barbarism & Civilization: A History of Europe in Our Time by Bernard Wasserstein

16 March 2009

Barbarism and Civilisation

During the past century Europe was the scene of some of the most savage episodes of collective violence in the recorded history of the human species. Yet the same period has also seen incontestable improvements in many aspects of the life of most inhabitants of the continent: human life has been extended, on average, by more than half; standards of living have increased dramatically; illiteracy has been all but eliminated; women, ethnic minorities, and homosexuals have advanced closer to equality of respect and opportunity.
---------------
The root of European disorder in 1914 was not…class, but ethnicity. Solidarities and antagonisms based on ethnicity, for reasons that lie buried in human hearts, answer to some of the most deeply rooted and instinctive social feelings of our species. European history in our time shows how futile it is to ignore them.
From Barbarism & Civilization: A History of Europe in Our Time by Bernard Wasserstein

15 March 2009

Credit is the Lifeblood of the Economy??

Consider the assertion - made almost daily by politicians and monetary policy figures - that all we need to do to end this economic crisis is “kick start” lending and that credit is the “lifeblood of the economy.” These baseless assertions infect news article after news article and are repeated by the vast majority of economists and market pundits over and over again as “self-evident” truths.

The reality is that these assertions are non-sequiturs. I had to laugh the first I heard “Credit is the Lifeblood of the Economy”. After it was repeated 20 times then espoused by Congress, the Treasury, and the Fed, and indeed even President Obama, it became more scary than funny.

This is why: The flip side of credit is debt. Is debt the lifeblood of the economy?

Surely not! It’s not that debt is bad in and of itself. Debt is fine as long as it is going to productive uses or as long as the lending is backed up by savings somewhere. No one can argue that savings should not be lent.

However, the problem is that credit has been extended without savings backing it up to those who had no possible means of paying it back, with leverage, and with “no money down”.

Clearly debt is not the lifeblood of the economy. By extension, credit is not the lifeblood of the economy either. Rather it is savings that is the lifeblood of the economy, because without adequate savings, extending credit is nothing but a pyramid scheme that eventually implodes, which is of course what happened.
Mish Shedlock on Savings and Credit

14 March 2009

US Dairy Crisis

Many of the more than 60,000 dairy farms in the United States have been cutting costs, selling off their cows, or leaving the dairy business altogether as milk prices plummet 35 percent in just the past two months while dairy farm operating costs remain uncomfortably high.

Some farms are losing $200 per head every month.

Milk prices are down more than 50 percent from last summer after hitting all-time highs in 2007 and notching the second highest prices on record in 2008.

Analysts expect milk prices to remain depressed through at least the first half of the year, and prices later this year may only be high enough to cover production costs.

Farmers have an opportunity to get paid for culling their herds via the farmer-funded CWT program

Industry analysts say the reason for the steep drop in milk prices is simple-- too much milk and not enough demand for it.

Restaurant traffic is down in the United States as recession jitters have consumers reeling in their spending.

About 40 percent of U.S. milk production is made into cheese and roughly 60 percent of the cheese is used in the restaurant and food-service sectors, according to analysts.

Dairy exports, which helped drive U.S. milk prices to the sky-high levels in 2007 and 2008, are also down sharply.

Importing nations are buying less amid global economic woes and a firmer dollar, which makes dollar-denominated commodities like milk more expensive for buyers holding other currencies.
From Reuters.

13 March 2009

Quantative Queasing

The Fed has been buying up corporate bonds for several months, but the Chairman, Ben Bernanke has so far resisted calls to buy US government debt. Does he know something that Mervyn King doesn't?

When asked, Ben Bernanke says he has no ideological objection to buying government debt - he simply thinks that right now, it's more effective to tackle the corporate credit shortage directly.

There are several reasons the Bank can't follow his lead. One is simply that the US corporate bond market is much, much bigger relative to the size of the economy than ours is.

If the Bank of England tried to buy £75bn-worth of corporate bonds it would find itself buying up roughly the entire market. It would then be in the uncomfortable position of being the sole purchaser of the debt of some of Britain's biggest companies...

Our central bank is also concerned about taking too much corporate risk onto its balance sheet. That doesn't seem to be much of a worry to the Fed (though some at Threadneedle Street wonder why not).
Stephanie Flanders explaing why the Bank of England is buying Gilts (government debt).

12 March 2009

Private Equity Fades

For a brief moment, as record after record was smashed, it seemed that private equity buyout prices were destined to keep rising.

As the last few weeks have demonstrated, it was a falsehood – and a grossly expensive one at that.

After the boom period saw private equity firms compete among themselves to buy ever bigger companies for even bigger sums, the value of those investments is now tumbling.
Abigail Townsend gives the details at the UK Telegraph.

11 March 2009

Recession or Depression

CalculatedRisk puts the current down turn in perspective.



Follow this link for the full explaination.

Hedge Funds Suffer

While hedge funds have performed better than the market-at-large, losing only about half what the markets have lost, they have been embroiled in the crisis themselves and, indeed, have been decimated by it.

A sector that was worth $US1.9 trillion at the start of last year is now expected to be worth $US1 trillion, at best, by the end of this year.

The hedge funds .. are .. victims of their own miscalculations and of the general environment.

During the credit boom, the funds chased growth, with the cheap credit and mis-pricing of risk enabling them to pursue transactions that would have been unachievable in more normal times.

As with all other financial players, credit is no longer cheap and, for leveraged players, virtually unattainable. The economics of existing deals are imploding as borrowings mature and asset values fall and there is no funding, debt or equity, for new deals.

Their plight is, however, worse than a simple return of financial gravity to unsustainable deals entered into at the top of a credit bubble.

Some of the bigger and more experienced funds went into the crisis with significant levels of uninvested funds or other sources liquidity. They should have been very well placed to take opportunistic advantage of the general distress in the financial system and the leveraged impact that has had on asset values.

Instead, they have experienced their own liquidity issues as anxious investors and lenders have retreated to the sidelines, sucking as much available liquidity from any available source that they can. The stronger hedge funds and private equity firms have been hit by a flood of redemptions from instantly risk-averse investors preferring to sit on their own cash.

Many of the funds have had to freeze withdrawals to control the outflows, adding to the general uncertainty about the future of the leveraged funds’ sector. Even those with significant residual cash and liquidity, however, can’t leverage those funds – they can’t get the credit to do sizeable deals.

That’s why the funds haven’t played a role in blunting the impacts of the crisis – they don’t have the free liquidity of their own to supply it to distressed markets and companies.

The leveraged investment sector, when the dust finally settles and the majority of them, by number, have exited the scene, will be a fraction of the size it was at the peak.
Comment by Stephen Bartholomeusz.

10 March 2009

Warning Message

An earth-shattering calamity is about to happen. it is going to be so frightening, we are all going to tremble - even the godliest among us.
David Wilkerson speaking in New York on 7 March 2009

Famous Last Words

#4 Ben Bernanke
I expect there will be some failures” of smaller banks. “Among the largest banks, the capital ratios remain good and I don't anticipate any serious problems of that sort among the large, internationally active banks that make up a very substantial part of our banking system.
—Federal Reserve Chairman Ben Bernanke in February 2008.

#3 Erin Callan
Categorically no.
Lehman Brothers CFO Erin Callan responding on March 18, 2008, to the question as to whether the firm would be the next to go out of business.

Callan was ousted from her job in June. In September, Lehman Brothers filed for Chapter 11 bankruptcy protection..
See Mish Shedlock for more.

09 March 2009

The Government Can Makes Things Worse

..many governmental actions -- including several pursued by Franklin Roosevelt during the Great Depression -- can make things worse. I wish I could be confident that the array of U.S. policies already in place and those likely forthcoming will be helpful. But I think it more likely that the economy will eventually recover despite these policies, rather than because of them.
Wisdom from Robert Barro at the Wall Street Journnal. Read the full article.

08 March 2009

What is Quantitative Easing?

It is economists' jargon for what is more colloquially termed "printing money" – increasing the quantity of money. Nowadays that does not literally mean speeding up the printing presses at the Bank of England's works at Debden in Essex; it means an electronic transfer of money between the Bank of England and the commercial banks, and thence, so the idea runs, to companies and households.

The Bank of England uses "open market operations" – financial transactions in the markets. It buys the banks' assets, such as government securities and commercial bonds and maybe even their devalued mortgage-backed securities. Importantly, it does so without funding that purchase by borrowing money itself; in effect the Bank just creates the money and transfers it to the banks.
Good explanation from Sean O'Grady. Read the whole article.

06 March 2009

Josephus

Norman Horn quotes Josephus on Government.
As much as Josephus can be relied upon as a source, his account emphasizes four points:

  1. The origin of human government is rebellion against God.
  2. The government sets itself up specifically in opposition to the rule of God.
  3. The rulers exalt themselves while deceiving the people.
  4. Human government drives a wedge between people, pitting them against each other.

05 March 2009

Hoorah for Capitalism

The rich hate capitalism because it threatens to take away their money. The poor hate it because they think it keeps them from getting any money in the first place. And everywhere you look, the chiselers are offering bailouts, boondoggles and bamboozles. With so many people trying to improve on capitalism, it’s a wonder they’ve never come up with something better.

When you leave people alone: some people watch TV...some blabber about politics...and some build wealth. The rules are simple: Thou shalt not steal, it saith in the Bible. Do unto others as you would have them do unto you, Jesus added. Everything else - from hedge funds to derivatives - is merely an elaboration. People make deals with their neighbors in order to get what they want. One plants the wheat; the other bakes the bread. As long as they respect each other's deals and each other's property, everything goes tolerably well.

The western, capitalist economies are in the midst of their own perestroika. They are being restructured. But not by the world-improvers. Instead, they are being restructured by capitalism itself... Leave capitalism alone and it will do the job far faster and far better than the meddlers could ever do.
From Hoorah for Capitalism by Bill Bonner

04 March 2009

Production makes Consumption Possible

Consumption is made possible by production and that credit is made possible by savings. The size and complexity of modern economies has obscured these simple concepts, but reducing the picture to a small scale can help clear away the fog.

Suppose there is a very small barter-based economy consisting of only three individuals, a butcher, a baker, and a candlestick maker. If the candlestick maker wants bread or steak, he makes candles and trades. The candlestick maker always wants food, but his demand can only be satisfied if he makes candles, without which he goes hungry. The mere fact that he desires bread and steak is meaningless.

Enter the magic wand of credit, which many now assume can take the place of production. Suppose the butcher has managed to produce an excess amount of steak and has more than he needs on a daily basis. Knowing this, the candlestick maker asks to borrow a steak from the butcher to trade to the baker for bread. For this transaction to take place the butcher must first have produced steaks which he did not consume (savings). He then loans his savings to the candlestick maker, who issues the butcher a note promising to repay his debt in candlesticks.

In this instance, it was the butcher’s production of steak that enabled the candlestick maker to buy bread, which also had to be produced. The fact that the candlestick maker had access to credit did not increase demand or bolster the economy. In fact, by using credit to buy instead of candles, the economy now has fewer candles, and the butcher now has fewer steaks with which to buy bread himself. What has happened is that through savings, the butcher has loaned his purchasing power, created by his production, to the candlestick maker, who used it to buy bread.

Similarly, the candlestick maker could have offered “IOU candlesticks” directly to the baker. Again, the transaction could only be successful if the baker actually baked bread that he did not consume himself and was therefore able to loan his savings to the candlestick maker. Since he loaned his bread to the candlestick maker, he no longer has that bread himself to trade for steak.

The existence of credit in no way increases aggregate consumption within this community, it merely temporarily alters the way consumption is distributed. The only way for aggregate consumption to increase is for the production of candlesticks, steak, and bread to increase.

One way credit could be used to grow this economy would be for the candlestick maker to borrow bread and steak for sustenance while he improves the productive capacity of his candlestick-making equipment. If successful, he could repay his loans with interest out of his increased production, and all would benefit from greater productivity. In this case the under-consumption of the butcher and baker led to the accumulation of savings, which were then loaned to the candlestick maker to finance capital investments. Had the butcher and baker consumed all their production, no savings would have been accumulated, and no credit would have been available to the candlestick maker, depriving society of the increased productivity that would have followed.

On the other hand, had the candlestick maker merely borrowed bread and steak to sustain himself while taking a vacation from candlestick making, society would gain nothing, and there would be a good chance the candlestick maker would default on the loan. In this case, the extension of consumer credit squanders savings which are now no longer available to finance other capital investments.
Peter Schiff on Putting the Economic Cart before the Horse

03 March 2009

Monetary Policy Error

The current very aggressive easing of policy by the RBNZ has all the hallmarks and an aura of déjà-vu from their very aggressive monetary policy tightening in 2005 to 2007. Both monetary policy actions are extreme and both could prove to be “inappropriate” and serious policy mistakes. Inappropriate, in that neither action has or will do anything to influence the inflation rate, but can (and has) caused substantial collateral damage to the economy.

We stated at the time of the 2005 to 2007 tightening that the “high interest rate/high exchange rate” policy would have no impact on inflation (the inflation was coming from oil/commodity and Government sources that interest rates did not affect) but would only send the NZ$ higher, cause problems for exporters and eventually cause a recession. That proved to be an accurate assessment of what subsequently occurred later in 2007 and 2008.

Today the RBNZ seem to be pressured once again by the short-term and changeable views of bank economists (as they were in 2006) into extreme monetary policy action at the other end of the scale. The bank economists did not predict that the 2005-2007 monetary tightening would cause economic recession in 2008 and goaded the RBNZ to push 90-day rates to over 9.00%. That was a grave policy error and the export and household sectors have been paying the price of that policy mistake ever since.

Moneymarket pricing and bank economist forecasts today are again pressuring the RBNZ to cut interest rates to record low levels of 2.50%. The RBNZ are obliging with 1.5% OCR cuts, but who will pay the price in 2-3 years time if this proves to be another policy error and inflationary pressures are re-ignited through interest rates being too low? ....

At some point, someone independent has to stand back and look at the last five years of monetary policy management and interest rate movements in New Zealand from 4% to 9% and back to 3.5%, and conclude that the extreme changes have done nothing to control inflation, all that they have done is destroy investment in the wealth/growth-creating export sector.
Wisdom from Roger Kerr

02 March 2009

Mises on Business

In the Interventionist State it is no longer of crucial importance for the success of an enterprise that the business should be managed in a way that it satisfies the demands of consumers in the best and least costly manner. It is far more important that one has 'good relationships' with the political authorities so that the interventions work to the advantage and not the disadvantage of the enterprise.
Quoted by Richard Ebeling.

01 March 2009

Economic Survival Guide

Be a part of a community. Today people are much more alone, much more isolated. We used to be close with our neighbors. If one person had a bigger or better garden or orchard, they shared the vegetables and fruits with others in need. Society has shifted from caring for one another to being dependent upon government aid and welfare. That is why so many today trust in government to deliver them. They've forgotten an America that used to rally around one another in smaller clusters, called neighborhoods and communities. We must rekindle those local communal fires and relearn the power of that age-old commandment, 'Love thy neighbor.'
From An 87-Year-Old's Economic Survival Guide by Chuck Norris

28 February 2009

Debtors Prison

The intellectual fashion has been for companies to have “efficient” balance-sheets. If cash is not immediately needed to reinvest in the business, it should be handed back to shareholders, who can use it more profitably elsewhere. Hoarding cash for a rainy day was seen as a failure of executive imagination.

Corporate-finance theory may state that the value of a company should not be affected by its decision to finance itself with equity or debt. But, in practice, interest payments are generally tax-deductible; dividends are not. That gives companies a big push in the direction of debt.
Buttonwood in the Economist.

27 February 2009

Bill Bonner on Capitalism

What is capitalism, after all? It is not a system...not a plan...not a program. It was not decreed by any half-wit tyrant...nor written into law by any earnest assembly. It has no constitution...and no boundaries. It is merely a recognition of basic principles. 'Thou shalt not steal,' it says in the Bible. Capitalism recognizes other peoples' property. The baker has a right to his oven. The farmer has a right to his land. The capitalist has a right to his money. What they do with these things is up to them.

Will they make mistakes? Of course they will. Will they do evil and obnoxious things? No doubt about it. Will they occasionally lose their heads and overprice their assets...or run the whole economy into too much debt...or blow themselves up in a bubble? You bet.

As Adam Smith described, they will also bumble along to create the wealth of nations.
Bill Bonner on Capitalism.

26 February 2009

German Jokes

About banking.
These days, banks are happy to get robbed. It's a sign they've still got cash left!

I don't trust my bank anymore. I was talking to them about a loan, but I decided not to give them one.
Speigel Online

International Financial Crisis

In the second week of September 2008, the international banking system staggered an almost collapsed after Lehman Brothers went into bankruptcy. Bankers and governments managed to keep the system from going under, but four four major problems still haunt the clever people of the world.

1. Sub-prime Crisis
The collapse of the housing bubble has caused enormous problems for banks. This is often referred to as the subprime crisis, but the problem goes far beyond subprime sectors. Defaults have increased among all borrowers and the shocks have spread to financial institutions throughout America and Europe due to the wide spread securitisation of mortgages.

2. Eastern Europe
European banks are heavily exposed in Eastern Europe. They have fund a housing bubble in these countries, but now with house prices falling and their currencies collapsing, many will be unable to repay their loans. Ambrose Evans-Pritchard at the UK Telegraph tends to be overdramatic, but he provides a good description of the problem.
Western banks that have lent $1.74 trillion to the ex-Soviet bloc -- split between $1 trillion in foreign loans and $700bn in local currency debt through subsidiaries,
3. Synthetic CDOs
A huge problem that has not yet surfaced is synthetic CDOs. These complex financial instruments have been clearly described by Alan Kohler at the Business Spectator. He suggests that that $0.5 trillion of these could be out standing. The sting in the tail is that if eight or nine major named financial institution collapse (five or six have already gone), the holders of these securities will lose their money. This might prove to be a worse problem than the subprime debacle.

4. Private Equity
Over the large decade private equity firms undertook a huge number of leveraged buyouts. The private equity model minimises equity and maximise debt. This has left banks with huge exposure to businesses that are declining in value as their profits collapse. These chickens have still no come home to roost, so the banks are uncertain what their liabilities will be. This is one reason why they are holding extra reserves.

25 February 2009

TARP Visualised

TARP Visualised
A good laugh.

Credit Easing or Quantatative Easing

Stephanie Flanders at Stephanomics tries to find the difference between Credit Easing and Quantatative Easing.
Things are complicated - especially monetary policy things. Central bankers, of all people, have to be precise.

But it's odd that two former teachers, previously known for their crystal clarity, should decide now is the time to be wilfully complex.

I suspect that the real reason they want to distance themselves from QE is that from there, it's only a small leap for commentators to a phrase that people understand only too well: printing money.

But here's the funny thing: they may not be doing QE. But they are very definitely printing money.

24 February 2009

Quantitative Easing

Stephanie Flanders at Stephanomics explains quantative easing.
But the most popular definition of printing money - the one the politicians are terrified of - is simply central bank financing of government deficits. Also known as "monetizing the government debt".

Since the Bank will be purchasing gilts on the secondary market, not from the government directly, the government will almost certainly say that this is not monetizing the debt. To say otherwise conjures up vision of Weimar and Zimbabwe.

To preserve this distinction, the Bank of Japan was legally forbidden to buy debt directly from the Ministry of Finance when they undertook QE in the 1990s.

Funnily enough, the Bank of England faces the same legal constraint: Article 101 of the Maastricht Treaty (of all things) forbids direct central bank financing of deficits.

But it is a distinction without a difference. When the Bank of England buys up gilts, one arm of the government is buying up debt owed by another arm of the government in exchange for money created by the central bank. Whether the gilt is brand new, or issued the day before, is quite simply irrelevant.

23 February 2009

Whisky is a Cure for Alcoholism

Robert Higgs on The Government’s Cure for Alcoholism — Whiskey, More and More Whiskey.
For nearly a decade, Americans acted as though taking on more debt posed no problem. After all, they owned real estate, and all the experts told them that real-estate prices always go up. The mightiest magnates of finance acted as if they believed this stupid story — I say stupid because the merest child might easily have confirmed that real-estate prices have always risen and fallen cyclically and that real-estate booms have often been the precursors of financial crashes and economic recessions. But things are always different this time, are they not?
And his nightmare.
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!”

22 February 2009

Economic Miracles

Bill Bonner on Economic Miracles.
In the bubble era people spent too much money they didn’t have on too many things they really didn’t need. Then came the credit crunch. Now, they hallucinate that if they spend even more money they don’t have, on things they hardly even want, they will get what they really need - jobs, growth and inflation. Even respected economists say they believe in miracles.

Resources have been made “idle” by the depression, they claim, like strong backs in an unemployment line. Government spending is just putting them to work. By this reasoning, things that were too expensive even in the boom years miraculously become cheap at any price. And things that weren’t worth spending money on in the fat years become miraculously indispensable in the lean ones.... They are only taking up ‘idle resources’ that would otherwise go to waste, explain the miracle workers.

21 February 2009

Securitisation

Peter Schiff on securitisation and credit.
In the worldview of Geithner and like-minded economists, credit, rather than savings, is the central figure in the economic equation. Therefore, he sees anything that eases the process of lending to be an effective economic policy. With such a view in mind, the centerpiece of Geithner’s plan is the commitment of up to $1 trillion to revive the collapsed market for securitized debt. In the lead up to the Crash of 2008 securitization, more than anything else, permitted Americans to borrow more than they had ever borrowed before.

Developed primarily over the last 10 years, securitization permitted loans of all shapes and sizes to be packaged into investment-ready securities. The system worked, fueling unprecedented levels of lending in the home, auto, student, and credit card sectors. But in the last few years as the collateral underpinning these securities has collapsed in value, the trillions of dollars of securitized debt now in circulation has become the toxic sludge at the bottom of our financial pit. Geithner is making the false assumption that cleaning up and rebuilding the securitization market is a prerequisite for a healthy economy.

Our nation’s short history with wide securitization has simply shown that the process can lead to massive mispricing of assets and risk. By artificially rebuilding the securitization market, and committing taxpayer funds as collateral, the U.S. economy will be pushed farther and farther out on a leveraged limb, until no amount of market medicine can prevent a total economic collapse.

In truth, the only vital function provided by securitization was that it offered foreign savers a pathway to lend directly to American consumers, and Wall Street executives a new asset class to over-leverage for massive profits. Our economy must dispense with these gimmicks if it hopes to pursue a meaningful recovery.

After more than a decade of unsustainable borrowing and spending, the private sector is currently attempting to restore balance through reduced consumer and mortgage credit, greater savings, and lower asset prices. With its trillions of dollars of credit injections and stimulus programs, the government hopes to allay this process by force-feeding Americans a diet of more borrowing. They feel that a restored securitization market will help. It won’t. It will just grease the skids for a quicker collapse.

Credit, whether securitized or not, cannot be created out of thin air. It only comes into existence though savings, which must be preceded by under-consumption....

Geithner stated that government should replace the demand lost by the private sector. However, those with even a marginal grasp of economics know that demand is unlimited. It is the ability to spend that is not. While Americans still want all the things they wanted years ago, they have made the rational choice that they can no longer afford to buy at the same levels they once did. Using a printing press to replace this lost ‘demand’ will simply cause consumer prices to rise. Printed money does not create new purchasing power, but merely redistributes it from savers to borrowers.

19 February 2009

Quantitative Easing

The Bank of England has asked the Treasury for the powers to engage in what is known as quantitative easing -- boosting the money supply. The is true dinkum printing of money.

18 February 2009

Crisis in Europe

Ambrose Evans-Pritchard of the Telegraph reports on problems faced by European Banks.
The region’s banks were coming under severe stress as the property bust combines with a rising debt burden. “Local currency depreciation is a major risk to East Europe banks.

There are contagion worries for Western banks that have lent $1.74 trillion to the ex-Soviet bloc -- split between $1 trillion in foreign loans and $700bn in local currency debt through subsidiaries.

Austria’s banks are the most exposed with the share of risk-weighted assets tied to the region reaching 54pc for Raffeisen and 38pc for Erste Bank. The exposure of Germany’s Bayern Bank is 48pc, Italy’s UniCredit is 45pc, and Swedbank is 29pc.

The region needs to roll over $400bn in foreign debts this year, equivalent to a third of total GDP, raising concerns that it may need a massive rescue programme from the International Monetary Fund and the European institutions.
Many of these banks are also exposed to the American subprime problem.

Reckless Banking

Liam Halligan wrote,
We need desperately to re-impose the split between commercial banks (where you and I deposit money, and which then lend to ordinary businesses) and investment banks (which carry-out higher risk strategies).

The removal of the "Glass-Steagall" firewall in both the US and UK is the prime reason for the current crisis. By merging with commercial banks, leveraging their taxpayer-guaranteed deposits and using them to place reckless bets, the investment banks have destroyed the financial strength of the Western world. Any schoolboy economist can see that. Why can't Gordon Brown or Barack Obama?