We students of Austrian economic theory have an uphill battle convincing people that free market ideas are better than other theories of how the world works. We get it daily from politicians, economists, academicians, the press, our neighbors, and even from various faiths. Almost all politicians support Neo-Keynesian—Neoclassical solutions to the problems they create. Even those who claim to be “free market” champions don’t get it right most of the time.
Today, I saw this cartoon republished in Barry Ritholz’s Big Picture (Why, Barry, why?):
Ha! Ha! Ha! Those damned corporations.
See what I mean?
What is this cartoon is saying:
1. Corporations are greedy and don’t care about people.
2. Corporations are rich and hold on to their profits to the detriment of workers.
3. Corporations have a duty to workers to provide them with jobs and decent wages.
4. Corporations are harming the economy by not spending their profits.
5. Public sector workers, unions, the disabled, and tradespeople are worthier than corporations.
6. The government should do something about this.
Corporations have always been held in low esteem by the media, not just recently, but going way back in American history, before Teddy Roosevelt. We have a long populist tradition in this country, probably inherited from the European continent and transplanted here. So this is nothing new. It is a popular meme in society high and low.
If I were to poll most people about Big Corporations, I would hear about the Robber Barons, BP, and Halliburton and what they did to us. I wouldn’t hear about Ford, Boeing, Microsoft, or Walmart and what business, big and small, have done for us.
This cartoon is just another populist, emotional rant against capitalism and corporations. You know, the system that creates businesses and hires people? … Continue reading The Evils Of … Cartoons?
I am getting requests for a PDF download of the entire article, “The Dodd-Frank Wall Street Reform and Consumer Protection Act: The Triumph of Crony Capitalism.” I had put a link at the bottom of the final Part 4 piece, but many of you missed it. So, here is where you can download the [...]
Until I began to examine the Dodd-Frank financial overhaul bill I had no idea that it would so significantly change the direction of the United States. It’s scope is so vast and pervasive that it is difficult to grasp its totality. I wrote this article to try to explain this and why I believe it is so important for us to understand it. Because of its complexity it was not possible to do this briefly, so I wrote this major “white paper” and divided it into four parts to make it easier to digest. This is the final part of this four part series.
Final, Part 4
Why Regulators Will Always Fail
Why should new regulations work when the old ones failed?:
“We failed completely to understand the complexity of what the impact of the national decline in housing prices would be in the financial system,” said Ms. [Janet] Yellen, currently president of the Federal Reserve Bank of San Francisco [and recently nominated as Vice-Chair of the Fed for financial risk]. “We saw a number of different things, and we failed to connect the dots.”
The problem with this kind of regulation is that new laws are always looking backward in an attempt to prevent the last bust from happening.
While the origins and outcomes of boom-bust cycles behave similarly, as Rogoff and Reinhart point out in their research, the asset classes and mechanics of the boom are different. As the Fed pumps money into the economy, money follows different paths and inflates and distorts different asset classes each time. In the Dot.com boom-bust cycle money flowed into high-tech companies and the stock market. Before that cycle, money flowed into real estate, mainly multi-family housing. The current cycle pushed money into housing, and more importantly, new forms of debt based on housing that hadn’t previously existed.
It is obviously more complicated than this, but the point of this paper is that regulators will never keep up with the next asset class boom and bust because they will be looking backwards. Will they know the “next one” when they see it? I doubt it.
What They Forgot
I discussed in the Part 1 of this article that there is almost nothing in the Act that actually prevents the Fed from creating new boom-bust cycles or that inhibits the federal government’s policies favoring, and thus distorting, the housing market. Here are things that they should have tackled but didn’t. … Continue reading The Dodd-Frank Wall Street Reform and Consumer Protection Act: The Triumph of Crony Capitalism (Final, Part 4)
Until I began to examine the Dodd-Frank financial overhaul bill I had no idea that it would so significantly change the direction of the United States. It’s scope is so vast and pervasive that it is difficult to grasp its totality. I wrote this article to try to explain this and why I believe it is so important for us to understand it. Because of its complexity it was not possible to do this briefly, so I wrote this major “white paper” and divided it into four parts to make it easier to digest. Please stick with me for the next few days; your eyes will be opened.
Part 3
Regulation of Derivatives and ABS
Recall that one of the major themes behind the Act is that the “murky” world of “exotic” instruments such as credit default swaps and asset backed securities (ABS) added unacceptable risk to the financial system. The goal of the Act is to provide “transparency” and “accountability” for those engaged in such instruments.
The SEC and Commodity Futures Trading Commission (CFTC) will regulate derivative markets. The CFTC is involved because they regulate the futures and options markets which are included within definition of “derivatives.”
The new rules:
- Require securitizers of ABS to maintain 5% of the credit risk in assets transferred, sold, or conveyed through the issuance of ABS … The new rules must allocate the risk retention obligation between securitizers and originators. The retained risk may not be hedged. [The “skin in the game” rule.]
- Banks must spin off “riskier” swaps dealing activities but can still conduct such activities through separately capitalized affiliates.
- All standardized swaps must be cleared and exchange-traded.
- End users [i.e., those who use derivatives for actual commercial hedging purposes] are exempt from the clearing requirement …
- The banking regulators, the SEC and the CFTC, will set margin and capital requirements for uncleared swaps.
- Security-based swap dealers and major security-based swap participants will be required to comply with SEC-prescribed business conduct standards. … [They] will have a duty to communicate with counterparties in a fair and balanced manner based on principles of fair dealing and good faith and other standards and requirements prescribed by the SEC. [If you read The Big Short, you might say that this is the “Goldman Sachs Rule.”]
- It imposes new liability on securitizers for the underlying mortgages originated by third parties.
The Wall Street Journal ran an article exploring the world of farmers and futures contracts. Farmers rely on forward contracts to hedge their risks. What was interesting is the conclusion of the article: “There is no real understanding if the Act will exempt, say farmers who use futures as a hedge, or make it more difficult for them to hedge.”
… Continue reading The Dodd-Frank Wall Street Reform and Consumer Protection Act: The Triumph of Crony Capitalism (Part 3)
Until I began to examine the Dodd-Frank financial overhaul bill I had no idea that it would so significantly change the direction of the United States. It’s scope is so vast and pervasive that it is difficult to grasp its totality. I wrote this article to try to explain this and why I believe it is so important for us to understand it. Because of its complexity it was not possible to do this briefly, so I wrote this major “white paper” and divided it into four parts to make it easier to digest. Please stick with me for the next few days; your eyes will be opened.
Part 2
Assumptions Guiding the Act
The Act is guided by several broad concepts:
- Wall Street must be strictly regulated to prevent systemic risk and to promote financial stability.
- Large interconnected international financial companies are inherently risky.
- Excessive leverage leads to systemic risk.
- A lack of transactional transparency impeded necessary regulatory control.
- Investors lacked information to properly understand the nature of complex risky securities.
- Regulators are capable of carrying out the intent of the Act.
Specific blame for the financial collapse is assigned as follows:
Lenders, investment bankers, credit-rating firms, mortgage brokers and others had ample incentive to take risks, often with other people’s money. That led to a bubble in credit: too much borrowing.
The explosion of trading in the shadowy worlds of derivatives and hedge funds hid risks, and perhaps even created new ones, without the transparency essential to well-functioning markets.
Big financial firms lacked sufficient capital cushions to withstand a shock, and assets they could sell quickly to raise needed cash. …
For the inevitable day when another big financial firm gets into trouble, the bill attempts to impose order and punishment—but gives authorities the power to use taxpayer money if they deem it necessary. …
Description of the Act
What is obvious from a review of the Act is that the powers granted are very broad, almost unlimited, ill-defined, and yet to be written. The following descriptions of the Act are intended to give you an idea as to the vast scope of the Act and the powers granted. I have picked out some of the more important powers, but the Act is much more invasive and controlling than what I am describing here. I have gone into some detail because I believe that most people don’t understand how pervasive the Act is. Please bear with me here; it will be eye-opening.
Here is a major law firm’s (Gibson Dunn) overview of the Act:
[The Act] … seeks to increase financial marketplace transparency and stability by establishing a Financial Stability Oversight Council (the “Council”) focused on identifying and monitoring systemic risks posed by financial firms and by financial activities and practices. It establishes a new regulatory and supervisory framework for “large, interconnected” banking organizations and certain nonbank financial companies. By a two-thirds vote, the Council can determine which U.S. and foreign nonbank financial companies that are predominantly engaged in financial activities (together “NBFCs”) are to be subject to enhanced supervision (“Supervised NBFCs”) by the [Fed], based on the perceived risk a company poses to financial stability in the United States. Empowering the Fed to implement this regime substantially enhances its powers and responsibilities.
As you will see, the Act, while it comprises 2,300 pages, speaks mostly of legislative goals, with specific requirements that require fleshing out by rules and regulations that will follow. For the most part, the actual law will be developed by the mandarins. … Continue reading The Dodd-Frank Wall Street Reform and Consumer Protection Act: The Triumph of Crony Capitalism (Part 2)
Until I began to examine the Dodd-Frank financial overhaul bill I had no idea that it would so significantly change the direction of the United States. It’s scope is so vast and pervasive that it is difficult to grasp its totality. I wrote this article to try to explain this and why I believe it is so important for us to understand it. Because of its complexity it was not possible to do this briefly, so I wrote this major “white paper” and divided it into four parts to make it easier to digest. Please stick with me for the next four days; your eyes will be opened.
Part 1
The new financial overhaul bill is the greatest government takeover of the financial sector of the economy since the National Recovery Act of 1933 when Franklin Roosevelt attempted to introduce central planning in America.
More than just a new law, the Dodd-Frank “Wall Street Reform and Consumer Protection Act” (the “Act”) gives government a relatively free hand to set prices and wages, to make business decisions, to promote or eliminate businesses, and to break up businesses. It establishes a large new bureaucracy to enable the government to dictate its wishes to the industry.
A major law firm described the Act as follows:
The Act marks the greatest legislative change to financial supervision since the 1930s. This legislation will affect every financial institution that operates in this country, many that operate from outside this country and will also have a significant effect on commercial companies. As a result, both financial institutions and commercial companies must now begin to deal with the historic shift in U.S. banking, securities, derivatives, executive compensation, consumer protection and corporate governance that will grow out of the general framework established by the Act. While the full weight of the Act falls more heavily on large, complex financial institutions, smaller institutions will also face a more complicated and expensive regulatory framework.
The Act isn’t directed just at the financial sector; because of its vast scope, it is directed against everyone.
Startling as it may seem, the Act does nothing significant to prevent the real causes of this or any future boom-bust cycle. At best one may analogize this as the doctor breaking the thermometer to cure a fevered patient. At worst it is a massive federal power grab which will inhibit financial innovation, increase the cost of money, and open wide the gates to a favored few where politicians, politics, and lobbyists, rather than markets, determine the direction of the financial sector of America’s economy.
While the new law has been signed by the President, it has not yet been written. That task will be the job of federal mandarins, the career lawyers and economists inside and outside of government who live off of government regulation. As such the ultimate consequences of this Act are unknown and will not be fully known until years later after the regulations have been written, agencies are established, and power is distributed among the bureaucrats. In other words, the Act’s advocates have no idea how the new law will impact the economy.
The ‘Failure of Capitalism’
The Act assumes that the economic bust was caused by a failure of capitalism and a failure of government to properly regulate the economy.
Upon signing the Act, President Obama said:
“For years, our financial sector was governed by antiquated and poorly enforced rules that allowed some to game the system and take risks that endangered the entire economy,” Mr. Obama said.
The new law, he said, would better protect consumers, empower investors and bring transparency to dark corners of the financial markets.
“The American people will never again be asked to foot the bill for Wall Street’s mistakes,” Mr. Obama said. “There will be no more taxpayer-funded bailouts. Period.”
… Continue reading The Dodd-Frank Wall Street Reform and Consumer Protection Act: The Triumph of Crony Capitalism (Part 1)
UPDATED
Regular readers of The Daily Capitalist know I think we are headed for a decline in economic growth in 2010 and that the data is starting to show this.
Why isn’t our economy recovering? I ask that question often and have written about it many times. Perhaps a better question is: what needs to happen in order to make our economy grow? I offer some solutions.
There are many problems seen as hindering recovery. Here are the common ones I wish to examine:
- Too much debt encumbering consumers;
- The lack of consumer demand to fuel growth;
- Too much debt encumbering banks; and
- The government’s interference in the economy.
There are a host of other issues that are also important but let me focus on these points and show what can be done to fuel a recovery.
Numbers 1 and 2 (debt/demand) are related.
Our economy is consumer driven and we are reminded over and over again that consumer consumption is 70% of our economy. To put this in perspective, for Germany it is about 57% of GDP.
Our economy is built on consumption which is fine as long as it is supported by real savings, productivity growth, and wage growth. The data reveal that most of the consumption binge of the boom phase of this current cycle was financed directly or indirectly by debt related to rising home values. Personal savings declined to almost zero. Now savings are back up to 4%.
Here is why this is seen as a problem for recovery: PCE will decline as consumers pay down debt and increase savings. Spending drives the economy and the economy will decline.
Is this really a problem?
Saving is a process necessary for a recovery. Consumers are acting rationally to uncertainty and they will give us the signal when they are ready to spend again. About $10 trillion in household net worth was wiped out during the bust. Until consumers see unemployment decrease, wages go up, and their debt go down, they aren’t going to spend anyway.
But savings is never bad for an economy. Economists often fail to look at the other side of savings which is an increase in capital necessary to fuel future growth. In a normal cycle, increased savings reduces interest rates, which sends a signal to producers of capital goods that consumers don’t want to buy consumer goods right now, and that there is opportunity for them to increase production of durable goods such as machines, homes, and basic equipment. They use the loan funds to pay workers who will spend which, as this capital works its way through the economy, will create new and real economic activity.
While manufacturers have been increasing production in response to normal business cycle activity (inventory recovery; weak dollar advantages), they are just utilizing current capacity. If they wanted to expand, unless they are a large company with access to money center capital, they now report they are having trouble getting a bank loan.
What does this mean? It means they can’t expand and hire new workers whose spending will take up the slack from consumers who save. The government and the Fed have confused our ability to make economic decisions because they are artificially lowering interest rates.
What can we do to fix this? Savings is the fix. There is nothing that should be done to prevent this from occurring. In the longer term it will prepare the economy for new growth. See No. 4 for why flogging a dead horse is harmful to recovery.
The question is: why can’t we get loans?
… Continue reading How To Start An Economic Recovery
 courtesy Sourdough Jim  courtesy Sourdough Jim
I never ever thought I would agree with Nancy Pelosi on anything, yet here it is:
U.S. House Speaker Nancy Pelosi said Congress should consider eliminating any cap on the damages a company such as BP Plc might have to pay for harm caused by oil spills.
“There is a movement afoot in Congress for that. Why have a cap?” Pelosi said in an interview on Bloomberg Television’s “Political Capital with Al Hunt” to air this weekend.
Pelosi had previously voiced support for a proposal under consideration to raise the existing $75 million cap to $10 billion for economic damages caused by each environmental disaster. After being thwarted March 13 in the Senate, backers of that legislation have vowed to renew efforts to win passage.
“You would hope that there would not be more than $10 billion of damage, but understand it is for each episode,” she said. Asked about eliminating the cap altogether, Pelosi said: “I think it’s worthy of looking at.”
I’m not against Big Oil, Little Oil, or anyone in the Oil Patch, but the liability cap is just another example of how industry uses the government to gain market advantages at the expense of someone else. In this case it is the Gulf Coast inhabitants and those that live off of that huge resource.
As I understand the law, BP is responsible to pay 100% of the cost of the clean-up. What the liability cap does is to cap economic damages to $75 million. What that means is if anyone suffers a loss of income or property as a result of a spill, BP is only obligated to pay $75 million even though the losses may be in the billions. That is not right.
… Continue reading Oil Drilling Liability Cap Led To The Gulf Spill
This morning the National Bureau of Economic Research (NBER) came out with the conclusion that it is too early to tell if the recession is over.
The NBER defines a recession as:
A recession is a period between a peak and a trough, and an expansion is a period between a trough and a peak. During a recession, a significant decline in economic activity spreads across the economy and can last from a few months [minimum of two months] to more than a year. Similarly, during an expansion, economic activity rises substantially, spreads across the economy, and usually lasts for several years.
In both recessions and expansions, brief reversals in economic activity may occur—a recession may include a short period of expansion followed by further decline; an expansion may include a short period of contraction followed by further growth. The Committee applies its judgment based on the above definitions of recessions and expansions and has no fixed rule to determine whether a contraction is only a short interruption of an expansion, or an expansion is only a short interruption of a contraction.
The NBER:
examines and compares the behavior of various measures of broad activity: real GDP measured on the product and income sides, economy-wide employment, and real income. The Committee also may consider indicators that do not cover the entire economy, such as real sales and the Federal Reserve’s index of industrial production (IP).
One can argue about the proper data to measure but the point of their conclusion is not to forecast but to identify broad trends in the economy. So, to say that they should look at money supply, credit, or U-6 rather than U-3 is not significant in the sense that we all understand that these markers are guesses and approximations, dicta, if you will, rather than “truths.”
Let’s look at this recession in comparison to past cycles (courtesy of the Wall Street Journal).
Our recession is the red line and you will see it is at the bottom of all the others which says something about the breadth of it. The NBER pegs December, 2007 as the commencement date of the current recession. While it shows a bottoming out of GDP after 6 months, industrial output and employment has contracted far more than in the other measured cycles.
While there are many data to look at, and I do comment on this regularly, I think this is a pretty good snapshot of the economy.
In light of the data how does one assess it? … Continue reading Is The Recession Over?
OK. Here is the opportunity. Reader Dylan reads this blog, obviously interested in ideas that run counter to what he has learned. He is very critical of capitalism. Can we win his heart and mind? That’s my goal and, because of his background (see below), I think he could be convinced that capitalism is, well … good. Let’s give him a try. I apologize in advance for the length of this piece. Now that I’ve written it, I see that Dylan and I are quite windy.
For those of you joining us late, Dylan commented on my article “Health Care in America: We Now Join Europe,” my lament over the passage of the health care bill. Dylan thought I should be more willing to accept these government programs as a social safety net. I took his comment and made it into an article, “A Comment on Health Care Reform: Winning Hearts and Minds.”
Here is Dylan’s response to my answer to his original comment. I’ve taken the liberty to highlight some of the key terms and ideas in his response:
Jeff
Thanks for the response.
And yes this is a debate i’d like to have with you.
First to your questions:
“If there was a better system of distributing wealth and bringing the most economic benefits to the most people at the least cost, [and the most freedom] would you be in favor of it?” – Yes as long as it was sustainable.
“If I told you that your assumptions about capitalism were wrong and that everything you were taught about capitalism was wrong, would you believe me?” – Maybe put you’d have to do more than tell me. Youd need to explain this to me. I like [Marx's] Capital Vol.1 but im sure you would rather i read the book you mentioned, which in the spirit of fairness i shall go and look at.
“If I told you that almost everything you read in the popular press and what you see as commentary on TV was faith-based economics, would you be willing to question them?” Most definitely (btw i already think this so score one for common ground!)
“If I told you that your views would achieve exactly the opposite of what you intended, would you blindly follow them regardless of the consequences?” No. Im not against capitalism, im against the zero sum mechanics of it. You i am led to believe believe in free market capitalism, i would prefer a capitalism with more of a social conscious and hence direct state intervention such as free education and healthcare which i believe are fundamental human rights.
You then go on to say – quite condescendingly [JH: mea culpa, but you started it with "fundamentialist"] i must add because we can compare letters after our names whenever you want – that i have not studied economics and that I unquestioningly accept everything i was told. If that isnt a playground put down im not quite sure what to call it.
To be most correct i am an social anthropologist (you know, one of those public academics trained to think critically). My background is in social justice so granted i am coming from a different point of view than most economics Phds. Added to which I do not have a full economics background as you do. However that does not mean i cant cite academics such as Gillian Tett who now writes for the FT who have shown that much of the belief of free market economists have many of the same cultural qualities as other fundamentalisms. Yup, you got it, those religious ones. Some people say that sort of fundamentalism and faith in free market capitalism since the late 1970s is how we got into the economic mess were currently in, i prefer to think of it in terms of blatant ponzi inspired theft.
Also i’d like to hope youd know that a persons’ background on theory and history might be far more solid than one emotional post about health care could reveal (especially as i’d just woken up and had my coffee). In fact in my personal work I have written much on the collision between colonialism and capitalism, how the two are related and the conduits, mechanisms, motives and personalities between both. My theoretical is not Marxist, but it does refer often to Marx, David Harvey, Antonio Gramsci, Rosa Luxembourg – all intellectuals who could take your position to task quite easily. It doesnt mean they are right and you are wrong, or vice versa, it means you and I both think there are different answers to the questions of the times. … Continue reading Winning Hearts and Minds: Part II
I received this comment on my article lamenting the passage of the health care bill, “Health Care in America: We Now Join Europe.” The person who wrote it has been following this blog for a while and he has added good commentary in the past. I don’t mean to pick on him, but it [...]
America has now joined Europe as just another quasi-socialist state with the passage of the health care bill. Our new system is similar to France’s. No one believes the Democrat’s promises about cost containment or the true cost of this legislation. The result will be higher costs for everyone, higher taxes for almost anyone [...]
In my research for my series on “China’s Fragile Economy,” I came across two blockbuster statements from the very top of China’s ruling structure: Premier Wen Jiabao and He Keng, vice chairman of the Financial and Economic Committee of the National People’s Congress. Both were to the effect that they feared a [...]
I just read the 11 page summary of the President’s Proposal on health care reform put out by the White House. Fellow Americans, you have no idea of the financial havoc this plan, or the House or Senate plans, will cause to the health care system specifically or to the economy in general.
The rules and regulations are so invasive that we will be forever mired in endless bureaucratic control of this most important segment of our lives. These plans, while they say they give us choice, are as much “top down” as if the government were running the health care system as in the Canadian or UK systems.
The visions I had were from the movie “Brazil” where huge rows of gray offices provided meaningless jobs for bureaucrats who never understood in the least what their part in the evil system was.
Everything in the Proposal is a lie and so counter-intuitive to the Laws of Economics that one can only assume blatant ignorance of economics or a perverse desire to centralize the role of the state in our affairs regardless of the consequences. I think it is both.
Here is the White House’s summary of this Proposal:
- It makes insurance more affordable by providing the largest middle class tax cut for health care in history, reducing premium costs for tens of millions of families and small business owners who are priced out of coverage today. This helps over 31 million Americans afford health care who do not get it today – and makes coverage more affordable for many more.
- It sets up a new competitive health insurance market giving tens of millions of Americans the exact same insurance choices that members of Congress will have.
- It brings greater accountability to health care by laying out commonsense rules of the road to keep premiums down and prevent insurance industry abuses and denial of care.
- It will end discrimination against Americans with pre-existing conditions.
- It puts our budget and economy on a more stable path by reducing the deficit by $100 billion over the next ten years – and about $1 trillion over the second decade – by cutting government overspending and reining in waste, fraud and abuse.
I don’t have to remind you that in every program the federal government has ever implemented costs have been grossly underestimated intentionally by lying, or by incompetence, or both. Recently disclosed FOIA disclosures reveal that Lyndon Johnson lied about the costs of Medicare because he knew that he couldn’t get the bill through if the true costs were known. Even so the costs have risen geometrically above the worst estimates back then.
I don’t believe that the Obama Administration is just well meaning but misguided. … Continue reading The President’s Health Care Proposal
This is yet another very clever, funny, and well done music video. You’ll enjoy it.
Hat tip to [...]
Excellent comments from Cato scholars David Boaz and John Samples on Scott Brown’s victory in Massachusetts:
The theme of the World Economic Forum Annual Meeting in Davos, Switzerland this year is “Improve the State of the World: Rethink, Redesign, Rebuild.” It starts today.
As you know, this annual meeting is where governments and businesses meet to “exchange ideas” and issue puffy statements about the world, pledge international cooperation and solidarity, [...]
Q: Is Avatar a metaphor for “capitalism?” Is the rape of another planet capitalism? Is the movie left wing Hollywood schlock propaganda?
A: Yes, as James Cameron defines “capitalism.” No. Yes.
Is it also something else? Yes.
* * * * *
Here are some typical and atypical reactions [...]
President Obama used his bully pulpit on Thursday to chastise banks and bankers while announcing a punitive tax on them to assuage an angry populace. Is his rage against the big paydays justified? Not for the reasons he thinks. [...]
This has been a phenomenal year for the economy. There have been major, fundamental changes that will affect our lives for many years to come. I don’t see these changes as a good thing for the short or long term.
These changes are generational in that they don’t occur often and they will radically impact the economy and our well-being for decades. I thought of doing a decade review because it explains so much of why we are where we are today. But so much happened this year, that I’m glad the year is over.
1. The Triumph of Keynesian Economics.
Liberals, Progressives, and Democrats were eagerly waiting for an economic crash so they could clip capitalism’s wings. They got their wish.
When the crash happened, most people, including most Conservatives, scratched their heads and said, “Yup, it’s capitalism. Bad, but necessary system. Got to control it even more.” They ran to the Keynesian-New Deal play book.
Very few economists stood against this proposition and when the Democrats acted, it was right out of the Keynesian playbook: keep interest rates low, flood the economy with credit, pass spending bills to implement fiscal stimulus, and adopt more stringent rules to regulate financial institutions.
This is a result of 70 years of Keynesian economics education in America and the rest of the world. Paul Samuelson, who just died, was the father of the Neo-Keynesian econometrics movement in academia, and he and his fellow Keynesians are mostly responsible for this.
My fellow free market Austrian theory economists lost their seat at the policy table, and in fact have been banished to the back room. We need to do something about this. Our well being rides on it.
2. The Failure of Keynesian Economics.
The only problem with Keynesian theory and its policy applications is that it doesn’t work.
I am not unaware that many commentators and economists are pointing to recent “Green Shoots” as proof that Keynesian policies work, but it doesn’t. By their own admission, at least according to Paul Krugman and many other Keynesians, the fiscal stimulus has been insufficient to bring about a lasting recovery. Krugman worries about a second collapse when the stimulus runs out. He’s right.
What we are seeing in the economy that is labeled “recovery” comes from two things:
a. The temporary effect of federal spending from the $787 billion American Recovery and Reinvestment Act of 2009; and
b. Normal recovery behavior that occurs after every crash and that is unrelated to fiscal stimulus.
Much to the chagrin of our Economic Czars there are nagging problems of deep concern. Unemployment. Falling asset values, especially in the real estate market. Lack of bank liquidity and bank failures. Lack of credit. Falling consumer consumption and rising savings. “But, it’s supposed to work, dammit!” Keynesian theory was supposed to open the liquidity trap, create jobs, and stoke the economy by taking my money and give it to someone else to spend. It didn’t work in Japan and it isn’t working here.
The stimulus won’t last.
3. New Deal v. 2.0.
The Washington–Wall Street Economics Complex is in full swing.
Too Big To Fail has been the motto of this Administration (as well as the last one). As always there are many political strings tied to economic policy coming out of Washington. While TBTF is not this year’s story, the bankruptcy and bailout of GM and Chrysler in 2009 is. It is a bailout of the UAW and other auto industry unions and nothing more.
The bailout of the banks and major financial institutions is just the same. Yes, Citi didn’t fail and AIG was taken over, but this temporary relief will just stall a recovery. Bankrupt institutions must fail; otherwise their balance sheets will remain fouled and valuable capital will be lost, mired in unprofitable loans.
The Administration and Congress are now putting forward new legislation to further regulate businesses and financial companies. These new laws are not re-regulations, but are increased regulations that will give the federal government even more control over the economy. By asserting itself further into commerce in order to wield greater power, the center of power has moved farther from the money and commercial centers like NYC, Chicago, and L.A. into Washington, D.C.
These policies are political expediencies and work to undermine the best interests of the American people because they reward the very companies that ought to fail. It will delay economic recovery by propping up essentially bankrupt companies who are now relegated to begging Washington for more money.
It will be a boon for lawyers. … Continue reading 2009: Why It Will Affect Everyone’s Future For Generations To Come
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