I am generally liberal, and generally support Obama, but this seems indefensible. When republicans do this kind of thing, it is bad. When democrats do this kind of thing, it is bad. Either side giving themselves a free pass because they think they are the "good guys" is the type of thing that destroys compromise and cooperation because it leads to viewing the other side as crooks and criminals rather than honorable people that disagree on policy. So, Obama, either provide a satisfactory explaination for this dismissal, or prosecute. This is unacceptable.
The Washington Post
EDITORIAL: Protecting Black Panthers: The Obama administration ignores voter intimidation
Friday, May 29, 2009
Imagine if Ku Klux Klan members had stood menacingly in military uniforms, with nightsticks, in front of a polling place. Add to it that they had hurled racial threats and insults at voters who tried to enter.
Now suppose that the government, backed by a nationally televised video of the event, had won a court case against the Klansmen except for the perfunctory filing of a single, simple document - but that an incoming Republican administration had moved to voluntarily dismiss the already-won case. Surely that would have been front-page news, with a number of firings at the Justice Department.
The flip side of this scenario is occurring right now. The culprits weren't Klansmen; they belonged to the New Black Panther Party for Self-Defense. One of the defendants, Jerry Jackson, is an elected member of Philadelphia's 14th Ward Democratic Committee and was a credentialed poll watcher for Barack Obama and the Democratic Party when the violations occurred. Rather conveniently, the Obama administration has asked that the cases against Mr. Jackson, two other defendants and the party be dropped. The Voting Rights Act is very clear. It prohibits any "attempt to intimidate, threaten or coerce" any voter or those aiding voters.
The explanation for moving to dismiss the case is shocking. According to the Department of Justice: "These same Defendants have made no appearance and have filed no pleadings with the Court. Nor have they otherwise raised any other defenses to this action. Therefore, the United States has the right ... to dismiss voluntarily this action against the Defendants." In other words, because the defendants haven't tried to defend themselves, the Justice Department won't punish them.
By that logic, if a murderer doesn't respond to the charges, he should be let free. That's crazy.
The Obama Justice Department did take one action against one of the four defendants: It forbade him from again "displaying a weapon within 100 feet of any open polling location" in Philadelphia. Given that it already was illegal to display a weapon at a polling place and that he was not even enjoined from carrying a weapon at polling places outside of Philadelphia, it is hard to see what this order accomplished.
We asked the Justice Department if it was unable to provide any explanation for dropping the case. Justice press aide Alejandro Miyar merely said: "That is correct." Multiple times we asked both the department and the White House to comment on charges that the dismissals represented political bias. We received no substantive response.
Hans Von Spakovsky, a legal scholar at the Heritage Foundation and a former commissioner at the Federal Election Commission, tells us, "In my experience, I have never heard of the department refusing to take a default judgment... . If a Republican administration had done this, it would be front-page news and every civil rights group in the country would be screaming about it."
Consider that the behavior of the defendants was so bad that witness Bartle Bull, a former Robert F. Kennedy organizer who did extensive legal work on behalf of black voters in Mississippi, testified it was "the most blatant form of voter discrimination I have encountered in my life."
Eric Eversole, a former litigation attorney with the Voting Section of the Civil Rights Division of the Justice Department, told us: "It is truly unprecedented for the Voting Section to voluntarily dismiss a case of such blatant intimidation. The video speaks for itself."
We couldn't agree more. After the 2000 Presidential election, Democrats complained about voter intimidation in Florida by pointing to a police car that had been two miles away from a polling place. The police didn't do anything to anyone, but their presence was deemed sufficient to vaguely intimidate people en route to the polls. In this case, the New Black Panther Party actually blocked access to a poll.
Unlike the Florida incident, this case involving the New Black Panthers screams out for tough justice. Instead, the Obama administration looks the other way. This all but invites racial violence at future elections.
Friday, May 29, 2009
Thursday, May 21, 2009
Monday, March 9, 2009
Tuesday, March 3, 2009
Thursday, February 26, 2009
Bobby Jindal: Is this the best the Republicans have to offer?
This is from a letter to the editor I wrote to a local neswpaper. This is not the first thing that has made me think Bobby Jindal is a tool, its just the latest. I'm of course not a republican, but I hate to see the party marginalized down to where it can't even introduce good opposition ideas. A competitive two party system helps pull everything back toward the center where it should be. If Bobby Jindal is the best the Republicans have to offer they may be in such dire straights that things will head left of where even I would want them.
Bobby Jindal has been all over the press recently grandstanding about why he needs to reject almost 100 Million dollars in federal stimulus aid for unemployment insurance. Unfortunately, the rationale for his rejection of this aid is based on a flawed interpretation of the law. Jindal’s argument rests on his incorrect interpretation of a single word in Section 2003(a) of the Recovery Act, the word permanent.
On Meet the Press, Jindal said, “We as a state would’ve been responsible for paying for those benefits after the federal money disappeared” and ”…this one’s crystal clear, black and white letter law. The federal stimulus bill says it has to be a permanent change in state law if you take this state money.”
Jindal is correct that the Act says the word “permanent”, but he is entirely wrong about what that word means. Black’s Law defines “permanent law” as law that continues for an indefinite time. The Act’s requirement that the law be “permanent” is simply a ban on sunset provisions, which can be thought of as “temporary law” or, as Section 2003(a) puts it, “law that is subject to discontinuation.” The act does not limit a state’s ability pass any law the state desires at a future time. It is one-hundred percent allowable that we could take these funds now, and change our state law again at a later time after the economic trouble has passed and/or the federal aid runs out. This fact has been misrepresented badly by many in the media.
Jindal’s flawed interpretation of the Recovery Act is pure legal fiction and does nothing for the people of Louisiana. It is however, a wonderful device to put him once again in the national spotlight as a leader of the opposition party. As last month’s unemployment numbers show, Louisiana is not immune to lay-offs. This part of the Recovery Act is to help people in Louisiana who have lost their jobs through no fault of their own. Apparently, helping Louisiana citizens through this crisis is not as important to Mr. Jindal as making his point on the national political stage.
Bobby Jindal has been all over the press recently grandstanding about why he needs to reject almost 100 Million dollars in federal stimulus aid for unemployment insurance. Unfortunately, the rationale for his rejection of this aid is based on a flawed interpretation of the law. Jindal’s argument rests on his incorrect interpretation of a single word in Section 2003(a) of the Recovery Act, the word permanent.
On Meet the Press, Jindal said, “We as a state would’ve been responsible for paying for those benefits after the federal money disappeared” and ”…this one’s crystal clear, black and white letter law. The federal stimulus bill says it has to be a permanent change in state law if you take this state money.”
Jindal is correct that the Act says the word “permanent”, but he is entirely wrong about what that word means. Black’s Law defines “permanent law” as law that continues for an indefinite time. The Act’s requirement that the law be “permanent” is simply a ban on sunset provisions, which can be thought of as “temporary law” or, as Section 2003(a) puts it, “law that is subject to discontinuation.” The act does not limit a state’s ability pass any law the state desires at a future time. It is one-hundred percent allowable that we could take these funds now, and change our state law again at a later time after the economic trouble has passed and/or the federal aid runs out. This fact has been misrepresented badly by many in the media.
Jindal’s flawed interpretation of the Recovery Act is pure legal fiction and does nothing for the people of Louisiana. It is however, a wonderful device to put him once again in the national spotlight as a leader of the opposition party. As last month’s unemployment numbers show, Louisiana is not immune to lay-offs. This part of the Recovery Act is to help people in Louisiana who have lost their jobs through no fault of their own. Apparently, helping Louisiana citizens through this crisis is not as important to Mr. Jindal as making his point on the national political stage.
Wednesday, February 18, 2009
The New Deal was a Good Deal: Part I, Monetary Causes and Solutions
This topic really is too large to handle in a single post, so here is part I.
In this post I view the great depression through the lens of Friedman, and argue that the monetary policies of the first new deal provided solvency for the underlying monetary causes of the great depression.
I plan to provide at least a second part when time permits, which will discuss more of the demand side and stimulative spending, viewing the great depression thought the keynesian lens.
The New Deal was a Good Deal: Part I, Monetary Causes and Solutions
The New Deal was a good deal, and it was an appropriate response to the Great Depression. The primary reason the New Deal, in particular the “100 days” was appropriate was that it addressed the underlying monetary causes of the “Great Contraction” and begin to solve them. In particular, the steps FDR took to leave the gold standard, and address the banking crisis were instrumental in the economic recovery that began in 1933 and continued to 1937 when a much smaller contraction occurred.
In order to understand how the New Deal addressed the causes of the great depression, you must first identify what the causes were. Although the causes of the great depression have been widely debated, and still are to some degree, some consensus has emerged around the Nobel Prize winning work of economist Milton Friedman, who focused on monetary causes. Specifically in A monetary History of the United States, he and Anna Schwartz argue that four major mistakes, which were all a tightening of monetary policy by the Federal Reserve Bank, caused the great depression.
Before discussing the four mistakes by the Fed, a discussion of the gold standard, the monetary system in place at the time is in order. The gold standard was a major factor in the Fed’s inability to ease monetary policy, and also a major contributor to the collapse of the banking system that occurred. Under the gold standard, the value of our currency was legally fixed, or “pegged”, to the value of gold. An important implication of this is that the exchange rate of our currency was also fixed to any other country that used the gold standard (which was a lot, in particular Great Britain). This left the dollar, and many other currencies world wide, open to “speculative attack”. Meaning that when depositors felt that a country would not be able to maintain the legally mandated value, they would immediately move to withdraw funds and convert them to gold.. Another important implication of this is that it forces one country to link its economic policies to that of another. For example, if country A raises its interest rates, investors in country B with lower rates will begin to move their assets to country A with higher returns. This will begin to deplete the gold reserves in country B. As a result country B will be more or less forced to also raise its interest rates. So, for these reasons, the gold standard was integrally related to the four mistakes in monetary policy Friedman and Schwartz identify as causing the great depression.
First, the Fed increased interest rates in 1928 to curb speculative investment. Essentially, the Fed was concerned that speculative investment by brokers was leading to a bubble in the stock market, so they tried to convince banks not to lend to speculators, but only to borrowers engaged in actual production. When this effort failed, they decided to use interest rates to curb lending altogether. This led them to raise interest rates in 1928. Although many point to the stock market crash of 1929 as the cause of the great depression, most economists agree that it was not the root cause, and many argue that this tightening of monetary policy facilitated the crash. That being said, the crash certainly exacerbated the problem by crushing public confidence in the financial sector.
Second, the Fed again raised interest rates in 1931 to protect the dollar. In the fall of 1931, economic slow down would seem to warrant an expansion of monetary policy. However, many investors began to withdraw deposits and, as a result, the United States gold reserves were becoming depleted. In order to stop this, the Fed raised interest rates in hopes that investors would leave deposits in dollars since returns would be higher. In the short term this did defend the dollar somewhat, but it did little to address underlying deficiencies in the deposit security, and it forced a tightening of the money supply when it should have been eased.
Third, the fed did not ease monetary policy in 1932 as Congress asked. They did some at first, this time using open market operations rather than interest rates, but as soon as congress adjourned the tightened the money supply again. This was mainly due to two main schools of thought among economists at the time. First, they believed that the money supply was already loose enough. They were mistaken, in large part due to the fact that they analyzed the nominal rate of return instead of the real rate of return. Meaning they did not take changes in currency value into account. Second, a substantial amount of economists at the time thought that taking any action to prevent recession was a bad idea, and that actually one was necessary to “cull the herd” if you will, meaning that they actually wanted weak banks to fail. This type of theory was referred to as “liquidationist”, and was held by many inside the Fed. So again, instead of easing the money supply when they should have, they tightened it.
Fourth, during 1931 and 1932, the fed did nothing to address the problems in the banking sector. This was an incredibly important factor. It is important to understand that the money supply is not just the base money supply (1.e., the amount of dollars that exist), because banks do not hold all of the money deposited in reserve (they lend out more than they have) bank deposits actually are a part of the money supply. As a result, when the devaluation of the dollar, combined with the general panic about the security of deposits caused huge run on the banks, this was also a huge reduction in the supply of money. Instead of taking action to prevent this, like lending more money to banks or putting more money into the economy, the Fed did nothing to address the banking crisis. In large part due to the “liquidationist” theories discussed above.
So when FDR took office in 1933, he was faced with huge challenges and during his first hundred days in office he set about finding a way to repair the already severely damaged economy. He immediately declared a “Banking Holiday” which shut down all banks until they could be declared financially secure. This stopped the hemorrhaging, and FDR passed the Emergency Banking Relief Act, which allowed the banks to reopen, and receive increased lending from the federal government. Within 300 days 5,000 banks had reopened, and deposits flowed back in. Even more importantly, this legislation ended the gold standard. Citizens were mandated to trade in their gold for dollars. The U.S. would no longer pay gold for dollars on demand, gold would no longer be considered legal U.S. tender, and gold clauses in contracts became illegal. The dollar was devalued to about 40 percent of its former value, which brought an end to cycle of deflation. This also represented a huge expansion in monetary policy, since now gold would now buy more than twice as many dollars. Even though the dollar was only allowed to “float” briefly (until 1971 when it became permanent), this represented a significant shift in U.S. policy which began to address many currency problems.
In order to more permanently address the serious problems with deposit security, later that year the Glass-Stegal act was passed. This act created the FDIC (Federal Deposit Insurance Corporation) which at that time guaranteed deposits up to $5,000, and today insures deposits up to $100,000. The passages of the Glass-Stegal act essentially ended the possibility of a run on the banks, and in so doing forever prevented one of the major causes of the great depression. So, with regard to the monetary causes and solutions to the great depression, it becomes clear that the New deal was an appropriate response.
In this post I view the great depression through the lens of Friedman, and argue that the monetary policies of the first new deal provided solvency for the underlying monetary causes of the great depression.
I plan to provide at least a second part when time permits, which will discuss more of the demand side and stimulative spending, viewing the great depression thought the keynesian lens.
The New Deal was a Good Deal: Part I, Monetary Causes and Solutions
The New Deal was a good deal, and it was an appropriate response to the Great Depression. The primary reason the New Deal, in particular the “100 days” was appropriate was that it addressed the underlying monetary causes of the “Great Contraction” and begin to solve them. In particular, the steps FDR took to leave the gold standard, and address the banking crisis were instrumental in the economic recovery that began in 1933 and continued to 1937 when a much smaller contraction occurred.
In order to understand how the New Deal addressed the causes of the great depression, you must first identify what the causes were. Although the causes of the great depression have been widely debated, and still are to some degree, some consensus has emerged around the Nobel Prize winning work of economist Milton Friedman, who focused on monetary causes. Specifically in A monetary History of the United States, he and Anna Schwartz argue that four major mistakes, which were all a tightening of monetary policy by the Federal Reserve Bank, caused the great depression.
Before discussing the four mistakes by the Fed, a discussion of the gold standard, the monetary system in place at the time is in order. The gold standard was a major factor in the Fed’s inability to ease monetary policy, and also a major contributor to the collapse of the banking system that occurred. Under the gold standard, the value of our currency was legally fixed, or “pegged”, to the value of gold. An important implication of this is that the exchange rate of our currency was also fixed to any other country that used the gold standard (which was a lot, in particular Great Britain). This left the dollar, and many other currencies world wide, open to “speculative attack”. Meaning that when depositors felt that a country would not be able to maintain the legally mandated value, they would immediately move to withdraw funds and convert them to gold.. Another important implication of this is that it forces one country to link its economic policies to that of another. For example, if country A raises its interest rates, investors in country B with lower rates will begin to move their assets to country A with higher returns. This will begin to deplete the gold reserves in country B. As a result country B will be more or less forced to also raise its interest rates. So, for these reasons, the gold standard was integrally related to the four mistakes in monetary policy Friedman and Schwartz identify as causing the great depression.
First, the Fed increased interest rates in 1928 to curb speculative investment. Essentially, the Fed was concerned that speculative investment by brokers was leading to a bubble in the stock market, so they tried to convince banks not to lend to speculators, but only to borrowers engaged in actual production. When this effort failed, they decided to use interest rates to curb lending altogether. This led them to raise interest rates in 1928. Although many point to the stock market crash of 1929 as the cause of the great depression, most economists agree that it was not the root cause, and many argue that this tightening of monetary policy facilitated the crash. That being said, the crash certainly exacerbated the problem by crushing public confidence in the financial sector.
Second, the Fed again raised interest rates in 1931 to protect the dollar. In the fall of 1931, economic slow down would seem to warrant an expansion of monetary policy. However, many investors began to withdraw deposits and, as a result, the United States gold reserves were becoming depleted. In order to stop this, the Fed raised interest rates in hopes that investors would leave deposits in dollars since returns would be higher. In the short term this did defend the dollar somewhat, but it did little to address underlying deficiencies in the deposit security, and it forced a tightening of the money supply when it should have been eased.
Third, the fed did not ease monetary policy in 1932 as Congress asked. They did some at first, this time using open market operations rather than interest rates, but as soon as congress adjourned the tightened the money supply again. This was mainly due to two main schools of thought among economists at the time. First, they believed that the money supply was already loose enough. They were mistaken, in large part due to the fact that they analyzed the nominal rate of return instead of the real rate of return. Meaning they did not take changes in currency value into account. Second, a substantial amount of economists at the time thought that taking any action to prevent recession was a bad idea, and that actually one was necessary to “cull the herd” if you will, meaning that they actually wanted weak banks to fail. This type of theory was referred to as “liquidationist”, and was held by many inside the Fed. So again, instead of easing the money supply when they should have, they tightened it.
Fourth, during 1931 and 1932, the fed did nothing to address the problems in the banking sector. This was an incredibly important factor. It is important to understand that the money supply is not just the base money supply (1.e., the amount of dollars that exist), because banks do not hold all of the money deposited in reserve (they lend out more than they have) bank deposits actually are a part of the money supply. As a result, when the devaluation of the dollar, combined with the general panic about the security of deposits caused huge run on the banks, this was also a huge reduction in the supply of money. Instead of taking action to prevent this, like lending more money to banks or putting more money into the economy, the Fed did nothing to address the banking crisis. In large part due to the “liquidationist” theories discussed above.
So when FDR took office in 1933, he was faced with huge challenges and during his first hundred days in office he set about finding a way to repair the already severely damaged economy. He immediately declared a “Banking Holiday” which shut down all banks until they could be declared financially secure. This stopped the hemorrhaging, and FDR passed the Emergency Banking Relief Act, which allowed the banks to reopen, and receive increased lending from the federal government. Within 300 days 5,000 banks had reopened, and deposits flowed back in. Even more importantly, this legislation ended the gold standard. Citizens were mandated to trade in their gold for dollars. The U.S. would no longer pay gold for dollars on demand, gold would no longer be considered legal U.S. tender, and gold clauses in contracts became illegal. The dollar was devalued to about 40 percent of its former value, which brought an end to cycle of deflation. This also represented a huge expansion in monetary policy, since now gold would now buy more than twice as many dollars. Even though the dollar was only allowed to “float” briefly (until 1971 when it became permanent), this represented a significant shift in U.S. policy which began to address many currency problems.
In order to more permanently address the serious problems with deposit security, later that year the Glass-Stegal act was passed. This act created the FDIC (Federal Deposit Insurance Corporation) which at that time guaranteed deposits up to $5,000, and today insures deposits up to $100,000. The passages of the Glass-Stegal act essentially ended the possibility of a run on the banks, and in so doing forever prevented one of the major causes of the great depression. So, with regard to the monetary causes and solutions to the great depression, it becomes clear that the New deal was an appropriate response.
Tuesday, February 17, 2009
Resolved: The New Deal was an appropriate response to the great depression.
There it is. This debate seems particularly relevent given our current economic situation. Brief arguments for or against this proposition have been made in several posts recently, but I feel it deserves its own consideration rather just than a passing reference.
I have intentionally left the topic subjectively vague. Feel free to interpret "appropriate response" in any way you see fit.
I hope others of you will argue for or against this proposition. Given its almost uncanny relevance to current events it seems well worth the investment of time to clarify and refine your thoughts on the issue whatever they may be.
For my arguments on this topic see the posts titled "The New Deal was a Good Deal".
I have intentionally left the topic subjectively vague. Feel free to interpret "appropriate response" in any way you see fit.
I hope others of you will argue for or against this proposition. Given its almost uncanny relevance to current events it seems well worth the investment of time to clarify and refine your thoughts on the issue whatever they may be.
For my arguments on this topic see the posts titled "The New Deal was a Good Deal".
For a great explanation of capitalism versus socialism, see this quick clip of Milton Friedman on the old Donahue show: http://www.youtube.com/watch?v=RWsx1X8PV_A&eurl=http://www.reason.com/blog&feature=player_embedded.
The reason why socialism has a bad name is simply because it doesn't work. It doesn't create wealth. No matter how smart they think they are, it is simply impossible for a politician to know how to "manage" the economy and create wealth. The U.S. economy is made up of millions of people making new decisons everyday based upon their individual situations. Its a fascinating, uncontrolled phenomenon of cooperation and competition that results in an ongoing cycle of wealth creation and wealth destruction (the destruction part is vital).
While government has inherent government functions it must do, it should be limited to such functions. When government interferes in the capitalist system you get what we see today: (a) a bubble created by government policies (no matter how well intentioned) is now being "solved" by more of the same government policies that created the bubble in the first place, (b) businesses that should fail are being propped up by taxpayer money and (c) the government is taking on extreme financial obligations to add to its already extreme and unsustainable future liabilities. The result will be less freedom, less capitalism, less wealth, more government and more inflation.
At least the Red Wings will be fun to watch in the playoffs...
The reason why socialism has a bad name is simply because it doesn't work. It doesn't create wealth. No matter how smart they think they are, it is simply impossible for a politician to know how to "manage" the economy and create wealth. The U.S. economy is made up of millions of people making new decisons everyday based upon their individual situations. Its a fascinating, uncontrolled phenomenon of cooperation and competition that results in an ongoing cycle of wealth creation and wealth destruction (the destruction part is vital).
While government has inherent government functions it must do, it should be limited to such functions. When government interferes in the capitalist system you get what we see today: (a) a bubble created by government policies (no matter how well intentioned) is now being "solved" by more of the same government policies that created the bubble in the first place, (b) businesses that should fail are being propped up by taxpayer money and (c) the government is taking on extreme financial obligations to add to its already extreme and unsustainable future liabilities. The result will be less freedom, less capitalism, less wealth, more government and more inflation.
At least the Red Wings will be fun to watch in the playoffs...
Capitalism shouldn't be demonized either...
This is an interesting article, and in light of my recent defense of some of the socialized aspects of our economy, I wanted everyone to remember that defense is only in the context of socialism as a garnish on an otherwise capitalist economy. Now I do not agree with everything in this article, but it makes some good points. Particularly with regard to our over supply of fiat currency, and what amounts to the reckless printing of money by our goverment over the past year. This is something that should scare the absolute dickens out of liberals and conservatives alike, because it just don't make no damn sense!
Also, this article openly challenges the dominant paradigm, which I always think is good, right or wrong. This author seems also to share my belief, the one underlying the arguments I advanced in my "when did Socialism become a dirty word" post, that the way the political(and economic) debate is covered in this country usually does more to obscure the truth than to reveal it.
The Myth that Laissez Faire Is Responsible for Our Present Crisis
Daily Article by George Reisman Posted on 10/23/2008 12:00:00 AM
Ludwig Von Mises Institute
The news media are in the process of creating a great new historical myth. This is the myth that our present financial crisis is the result of economic freedom and laissez-faire capitalism.
The attempt to place the blame on laissez faire is readily confirmed by a Google search under the terms "crisis + laissez faire." On the first page of the results that come up, or in the web entries to which those results refer, statements of the following kind appear:
"The mortgage crisis is laissez-faire gone wrong."
"Sarkozy [Nicolas Sarkozy, the President of France] said 'laissez-faire' economics, 'self-regulation' and the view that 'the all-powerful market' always knows best are finished."
"'America's laissez-faire ideology, as practiced during the subprime crisis, was as simplistic as it was dangerous,' chipped in Peer Steinbrück, the German finance minister."
"Paulson brings laissez-faire approach on financial crisis…."
"It's au revoir to the days of laissez faire."[1]
Recent articles in The New York Times provide further confirmation. Thus, one article declares, "The United States has a culture that celebrates laissez-faire capitalism as the economic ideal…."[2] Another article tells us, "For 30 years, the nation's political system has been tilted in favor of business deregulation and against new rules."[3] In a third article, a pair of reporters assert, "Since 1997, Mr. Brown [the British Prime Minister] has been a powerful voice behind the Labor Party's embrace of an American-style economic philosophy that was light on regulation. The laissez-faire approach encouraged the country's banks to expand internationally and chase returns in areas far afield of their core mission of attracting deposits."[4] Thus even Great Britain is described as having a "laissez-faire approach."
The mentality displayed in these statements is so completely and utterly at odds with the actual meaning of laissez faire that it would be capable of describing the economic policy of the old Soviet Union as one of laissez faire in its last decades. By its logic, that is how it would have to describe the policy of Brezhnev and his successors of allowing workers on collective farms to cultivate plots of land of up to one acre in size on their own account and sell the produce in farmers' markets in Soviet cities. According to the logic of the media, that too would be "laissez faire" — at least compared to the time of Stalin.
Laissez-faire capitalism has a definite meaning, which is totally ignored, contradicted, and downright defiled by such statements as those quoted above. Laissez-faire capitalism is a politico-economic system based on private ownership of the means of production and in which the powers of the state are limited to the protection of the individual's rights against the initiation of physical force. This protection applies to the initiation of physical force by other private individuals, by foreign governments, and, most importantly, by the individual's own government. This last is accomplished by such means as a written constitution, a system of division of powers and checks and balances, an explicit bill of rights, and eternal vigilance on the part of a citizenry with the right to keep and bear arms. Under laissez-faire capitalism, the state consists essentially just of a police force, law courts, and a national defense establishment, which deter and combat those who initiate the use of physical force. And nothing more.
The utter absurdity of statements claiming that the present political-economic environment of the United States in some sense represents laissez-faire capitalism becomes as glaringly obvious as anything can be when one keeps in mind the extremely limited role of government under laissez-faire and then considers the following facts about the present-day United States:
Government spending in the United States currently equals more than forty percent of national income, i.e., the sum of all wages and salaries and profits and interest earned in the country. This is without counting any of the massive off-budget spending such as that on account of the government enterprises Fannie Mae and Freddie Mac. Nor does it count any of the recent spending on assorted "bailouts." What this means is that substantially more than forty dollars of every one hundred dollars of output are appropriated by the government against the will of the individual citizens who produce that output. The money and the goods involved are turned over to the government only because the individual citizens wish to stay out of jail. Their freedom to dispose of their own incomes and output is thus violated on a colossal scale. In contrast, under laissez-faire capitalism, government spending would be on such a modest scale that a mere revenue tariff might be sufficient to support it. The corporate and individual income taxes, inheritance and capital gains taxes, and social security and Medicare taxes would not exist.
There are presently fifteen federal cabinet departments, nine of which exist for the very purpose of respectively interfering with housing, transportation, healthcare, education, energy, mining, agriculture, labor, and commerce, and virtually all of which nowadays routinely ride roughshod over one or more important aspects of the economic freedom of the individual. Under laissez-faire capitalism, eleven of the fifteen cabinet departments would cease to exist and only the departments of justice, defense, state, and treasury would remain. Within those departments, moreover, further reductions would be made, such as the abolition of the IRS in the Treasury Department and the Antitrust Division in the Department of Justice.
The economic interference of today's cabinet departments is reinforced and amplified by more than one hundred federal agencies and commissions, the most well known of which include, besides the IRS, the FRB and FDIC, the FBI and CIA, the EPA, FDA, SEC, CFTC, NLRB, FTC, FCC, FERC, FEMA, FAA, CAA, INS, OHSA, CPSC, NHTSA, EEOC, BATF, DEA, NIH, and NASA. Under laissez-faire capitalism, all such agencies and commissions would be done away with, with the exception of the FBI, which would be reduced to the legitimate functions of counterespionage and combating crimes against person or property that take place across state lines.
To complete this catalog of government interference and its trampling of any vestige of laissez faire, as of the end of 2007, the last full year for which data are available, the Federal Register contained fully seventy-three thousand pages of detailed government regulations. This is an increase of more than ten thousand pages since 1978, the very years during which our system, according to one of The New York Times articles quoted above, has been "tilted in favor of business deregulation and against new rules." Under laissez-faire capitalism, there would be no Federal Register. The activities of the remaining government departments and their subdivisions would be controlled exclusively by duly enacted legislation, not the rule-making of unelected government officials.
And, of course, to all of this must be added the further massive apparatus of laws, departments, agencies, and regulations at the state and local level. Under laissez-faire capitalism, these too for the most part would be completely abolished and what remained would reflect the same kind of radical reductions in the size and scope of government activity as those carried out on the federal level.
What this brief account has shown is that the politico-economic system of the United States today is so far removed from laissez-faire capitalism that it is closer to the system of a police state. The ability of the media to ignore all of the massive government interference that exists today and to characterize our present economic system as one of laissez faire and economic freedom marks it as, if not profoundly dishonest, then as nothing less than delusional.
Government Intervention Actually Responsible for the Crisis
Beyond all this is the further fact that the actual responsibility for our financial crisis lies precisely with massive government intervention, above all the intervention of the Federal Reserve System in attempting to create capital out of thin air, in the belief that the mere creation of money and its being made available in the loan market is a substitute for capital created by producing and saving. This is a policy it has pursued since its founding, but with exceptional vigor since 2001, in its efforts to overcome the collapse of the stock market bubble whose creation it had previously inspired.
The Federal Reserve and other portions of the government pursue the policy of money and credit creation in everything they do that encourages and protects private banks in the attempt to cheat reality by making it appear that one can keep one's money and lend it out too, both at the same time. This duplicity occurs when individuals or business firms deposit cash in banks, which they can continue to use to make purchases and pay bills by means of writing checks rather than using currency. To the extent that the banks are then enabled and encouraged to lend out the funds that have been deposited in this way (usually by the creation of new and additional checking deposits rather than the lending of currency), they are engaged in the creation of new and additional money. The depositors continue to have their money and borrowers now have the bulk of the funds deposited. In recent years, the Federal Reserve has so encouraged this process, that checking deposits have been created equal to fifty times the actual cash reserves of the banks, a situation more than ripe for implosion.
All of this new and additional money entering the loan market is fundamentally fictitious capital, in that it does not represent new and additional capital goods in the economic system, but rather a mere transfer of parts of the existing supply of capital goods into different hands, for use in different, less efficient, and often flagrantly wasteful ways. The present housing crisis is perhaps the most glaring example of this in all of history.
"Laissez-faire capitalism has a definite meaning, which is totally ignored, contradicted, and downright defiled by such statements…"
Perhaps as much as a trillion-and-a-half dollars or more of new and additional checkbook-money capital was channeled into the housing market as the result of the artificially low interest rates caused by the presence of an even larger overall amount of new and additional money in the loan market. Because of the long-term nature of its financing, housing is especially susceptible to the effect of lower interest rates, which can serve sharply to reduce monthly mortgage payments and in this way correspondingly increase the demand for housing and for the mortgage loans needed to finance it.
Over a period of years, the result was a huge increase in the production and purchase of new homes, rapidly rising home prices, and a further spiraling increase in the production and purchase of new homes in the expectation of a continuing rise in their prices.
To gauge the scale of its responsibility, in the period of time just since 2001, the Federal Reserve caused an increase in the supply of checkbook-money capital of more than 70 percent of the cumulative total amount it had created in the whole of the previous 88 years of its existence — that is, almost 2 trillion dollars.[5] This was the increase in the amount by which the checking deposits of the banks exceeded the banks' reserves of actual money, that is, the money they have available to pay depositors who want cash. The Federal Reserve caused this increase in illusory capital by means of creating whatever new and additional bank reserves were necessary to achieve a federal funds interest rate — that is, the rate of interest paid by banks on the lending and borrowing of reserves — that was far below the rate of interest dictated by the market. For the three years 2001–2004, the Federal Reserve drove the federal funds rate below 2 percent and, from July of 2003 to June of 2004, drove it even further down to approximately 1 percent.
The Federal Reserve also made it possible for banks to operate with a far lower percentage of reserves than ever before. Whereas in a free market, banks would hold gold reserves equal to their checking deposits — or at the very least to a substantial proportion of their checking deposits[6] — the Federal Reserve in recent years contrived to make it possible for them to operate with irredeemable fiat-money reserves of less than 2 percent.
The Federal Reserve drove down the federal funds rate and brought about the vast increase in the supply of illusory capital for the purpose of driving down all market interest rates. The additional illusory capital could find borrowers only at lower interest rates. The Federal Reserve's goal was to bring about interest rates so low that they could not compensate even for the rise in prices. It deliberately sought to achieve a negative real rate of interest on capital, that is, a rate below the rate at which prices rise. This means that a lender, after receiving the interest due him for a year, has less purchasing power than he had the year before, when he had only his principal.
In doing this, the Federal Reserve's ultimate purpose was to stimulate both investment and consumer spending. It wanted the cost of obtaining capital to be minimal so that it would be invested on the greatest possible scale and for people to regard the holding of money as a losing proposition, which would stimulate them to spend it faster. More spending, ever more spending was its concern, in the belief that that is what is required to avoid large-scale unemployment.
As matters have turned out, the Federal Reserve got its wish for a negative real rate of interest, but to an extent far beyond what it wished. It wished for a negative real rate of return of perhaps 1 to 2 percent. What it achieved in the housing market was a negative real rate of return measured by the loss of a major portion of the capital invested. In the words of The New York Times, "In the year since the crisis began, the world's financial institutions have written down around $500 billion worth of mortgage-backed securities. Unless something is done to stem the rapid decline of housing values, these institutions are likely to write down an additional $1 trillion to $1.5 trillion."[7]
This vast loss of capital in the housing debacle is what is responsible for the inability of banks to make loans to many businesses to which they normally could and would lend. The reason they cannot now do so is that the funds and the real wealth that have been lost no longer exist and thus cannot be lent to anyone. The Federal Reserve's policy of credit expansion based on the creation of new and additional checkbook money has thus served to give capital to unworthy borrowers who never should have had it in the first place and to deprive other, far more credit worthy borrowers of the capital they need to stay in businesses. Its policy has been one of redistribution and destruction.
The capital it has caused to be malinvested and lost in housing is capital that is now unavailable for such firms as Wickes Furniture, Linens 'N Things, Levitz Furniture, Mervyns, and innumerable others, who have had to go bankrupt because they could not obtain the loans they needed to stay in business. And, of course, among the foremost victims have been major banks themselves. The losses they have suffered have wiped out their capital and put them out of business. And the list of casualties will certainly grow.
Any discussion of the housing debacle would be incomplete if it did not include mention of the systematic consumption of home equity encouraged for several years by the media and an ignorant economics profession. Consistent with the teachings of Keynesianism that consumer spending is the foundation of prosperity, they regarded the rise in home prices as a powerful means for stimulating such spending. In increasing homeowners' equity, they held, it enabled homeowners to borrow money to finance additional consumption and thus keep the economy operating at a high level. As matters have turned out, such consumption has served to saddle many homeowners with mortgages that are now greater than the value of their homes, which would not have been the case had those mortgages not been enlarged to finance additional consumption. This consumption is the cause of a further loss of capital over and above the capital lost in malinvestment.
A discussion of the housing debacle would also not be complete if it did not mention the role of government guarantees of many mortgage loans. If the government guarantees the principal and interest on a loan, there is no reason why a lender should care about the qualifications of a borrower. He will not lose by making the loan, however bad it may turn out to be.
A substantial number of mortgage loans carried such guarantees. For example, a New York Times article describes the Department of Housing and Urban Development as "an agency that greased the mortgage wheel for first-time buyers by insuring billions of dollars in loans." The article describes how HUD progressively reduced its lending standards: "families no longer had to prove they had five years of stable income; three years sufficed… lenders were allowed to hire their own appraisers rather than rely on a government-selected panel … lenders no longer had to interview most government-insured borrowers face to face or maintain physical branch offices," because the government's approval for granting mortgage insurance had become automatic.
The Times' article goes on to describe how "Lenders," such as Countrywide Financial, which was among the largest and most prominent, "sprang up to serve those whose poor credit history made them ineligible for lower-interest 'prime' loans." It notes the fact that "Countrywide signed a government pledge to use 'proactive creative efforts' to extend homeownership to minorities and low-income Americans."[8] "Proactive creative efforts" is a good description of what lenders did in offering such bizarre types of mortgages as those requiring the payment of "interest only," and then allowing the avoidance even of the payment of interest by adding it to the amount of outstanding principal. (Such mortgages suited the needs of homebuyers whose reason for buying was to be able to sell as soon as home prices rose sufficiently further.)
Just as vast numbers of houses were purchased based on an unfounded belief in an endless rise in their prices, so too vast numbers of complex financial derivatives were sold based on an unfounded belief that the Federal Reserve System actually had the power it claimed to have of making depressions impossible — a power which the media and most of the economics profession repeatedly affirmed.
Derivatives have received such a bad press that it is necessary to point out that the insurance policy on a home is a derivative. And many of the derivatives that were sold and which are now creating problems of insolvency and bankruptcy, namely, "credit default swaps (CDSs)," were insurance policies in one form or another. Their flaw was that unlike ordinary homeowners' insurance, they did not have a sufficient list of exclusions.
Homeowners' policies make exclusions for such things as damage caused by war and, in many cases, depending on the special risks of the local area, earthquakes and hurricanes. In the same way, the more complex derivatives should have made an exclusion for losses resulting from financial collapse brought on by Federal Reserve–sponsored massive credit expansion. (If it is impossible actually to write such an exclusion, because many of the losses may occur before the nature of the cause becomes evident, then such derivatives should not be written and the market will no longer write them because of the unacceptable risks they entail.) But decades of brainwashing by the government, the media, and the educational system had convinced almost everyone that such collapse was no longer possible.
Belief in the impossibility of depressions played the same role in the creation and sale of "collateralized debt obligations (CDOs)." Here disparate home mortgages were bundled together and securities were issued against them. In many cases, large buyers bundled together collections of such securities and issued further securities against those securities. As more and more homeowners have defaulted on their loans, the result has been that no one is able directly to judge the value of these securities. To do so, it will be necessary to disentangle them down to the level of the underlying individual mortgages. Such tangles of securities could never have been sold in a market not overwhelmed by the propaganda that depressions are impossible under the government's management of the financial system.
Finally, a discussion of the housing debacle would not be complete if it did not include mention of forms of virtual extortion that served to encourage loans to unworthy borrowers. Thus, the online encyclopedia Wikipedia writes,
The Community Reinvestment Act [CRA] … is a United States federal law designed to encourage commercial banks and savings associations to meet the needs of borrowers in all segments of their communities, including low- and moderate-income neighborhoods … CRA regulations give community groups the right to comment or protest about banks' non-compliance with CRA. Such comments could help or hinder banks' planned expansions.
The meaning of these words is that the Community Reinvestment Act gives the power to "community groups," to determine in an important respect the financial success or failure of a bank. Only if they are satisfied that the bank is making sufficient loans to borrowers to whom it would otherwise choose not to lend, will it be permitted to succeed. The most prominent such community group is ACORN.
Part and parcel of the environment that has made an act such as the CRA possible, is threats of slander against banks for being "racist" if they choose not to make loans to people who are poor credit risks and also happen to belong to this or that minority group. The threats of slander go hand in glove with intimidation from various government agencies that exercise discretionary power over the banks and are in a position to harm them if they do not comply with the agencies' wishes. The same points apply to mortgage lenders other than banks.
What this extensive analysis of the actual causes of our financial crisis has shown is that it is government intervention, not a free market or laissez-faire capitalism, that is responsible in every essential respect.
The Laissez-Faire Myth and the Marxism of the Media
The myth that laissez faire exists in the present-day United States and is responsible for our current economic crisis is promulgated by people who know practically nothing whatever of sound, rational economic theory or the actual nature of laissez-faire capitalism. They espouse it despite, or rather because of, their education at the leading colleges and universities of the country. When it comes to matters of economics, their education has steeped them entirely in the thoroughly wrong and pernicious doctrines of Marx and Keynes. In claiming to see the existence of laissez faire in the midst of such massive government interference as to constitute the very opposite of laissez faire, they are attempting to rewrite reality in order to make it conform with their Marxist preconceptions and view of the world.
"Decades of brainwashing by the government, the media, and the educational system … convinced almost everyone that such collapse was no longer possible."
They absorb the doctrines of Marx more in history, philosophy, sociology, and literature classes than in economics classes. The economics classes, while usually not Marxist themselves, offer only highly insufficient rebuttal of the Marxist doctrines and devote almost all of their time to espousing Keynesianism and other, less-well-known anticapitalistic doctrines, such as the doctrine of pure and perfect competition.
Very few of the professors and their students have read so much as a single page of the writings of Ludwig von Mises, who is the preeminent theorist of capitalism and knowledge of whose writings is essential to its understanding. Almost all of them are thus essentially ignorant of sound economics.
When I refer to the educational system and the media as Marxist, I do not intend to imply that its members favor any kind of forcible overthrow of the United States government or are necessarily even advocates of socialism. What I mean is that they are Marxists insofar as they accept Marx's views concerning the nature and operation of laissez-faire capitalism.
They accept the Marxian doctrine that in the absence of government intervention, the self-interest, the profit motive — the "unbridled greed" — of businessmen and capitalists would serve to drive wage rates to minimum subsistence while it extended the hours of work to the maximum humanly endurable, imposed horrifying working conditions, and drove small children to work in factories and mines. They point to the miserably low standard of living and terrible conditions of wage earners in the early years of capitalism, especially in Great Britain, and believe that that proves their case. They go on to argue that only government intervention in the form of pro-union and minimum-wage legislation, maximum-hours laws, the legal prohibition of child labor, and government mandates concerning working conditions, served to improve the wage earner's lot. They believe that repeal of this legislation would bring about a return to the miserable economic conditions of the early 19th century.
They view the profits and interest of businessmen and capitalists as unearned, undeserved gains, wrung from wage earners — the alleged true producers — by the equivalent of physical force, and hence regard the wage earners as being in the position of virtual slaves ("wage slaves") and the capitalist "exploiters" as being in the position of virtual slave owners. Closely connected with this, they regard taxing the businessmen and capitalists and using the proceeds for the benefit of wage earners, in such forms as social security, socialized medicine, public education, and public housing, as a policy that serves merely to return to the wage earners some portion of the loot allegedly stolen from them in the process of "exploitation."
In full agreement with Marx and his doctrine that under laissez-faire capitalism the capitalists expropriate all of the wage earner's production above what is necessary for minimum subsistence, they assume that the government's intervention harms no one but the immoral businessmen and capitalists, never the wage earners. Thus not only the taxes to pay for social programs but also the higher wages imposed by pro-union and minimum-wage legislation are assumed simply to come out of profits, with no negative effect whatever on wage earners, such as unemployment. Likewise for the effect of government-imposed shorter hours, improved working conditions, and the abolition of child labor: the resulting higher costs are assumed simply to come out of the capitalists' "surplus value," never out of the standard of living of wage earners themselves.
This is the mindset of the whole of the left and in particular of the members of the educational system and media. It is a view of the profit motive and the pursuit of material self-interest as inherently lethal if not forcibly countered and rigidly controlled by government intervention. As stated, it is a view that sees the role of businessmen and capitalists as comparable to that of slave owners, despite the fact that businessmen and capitalists do not and cannot employ guns, whips, or chains to find and keep their workers but only the offer of better wages and conditions than those workers can find elsewhere.
Not surprisingly, the educational system and media share the view of Marx that laissez-faire capitalism is an "anarchy of production," in which the businessmen and capitalists run about like chickens without heads. In their view, rationality, order, and planning emanate from the government, not from the participants in the market.
As I say, this, and more like it, is the intellectual framework of the great majority of today's professors and of several generations of their predecessors. It is equally the intellectual framework of their students, who have dutifully absorbed their misguided teachings and some of whom have gone on to become the reporters and editors of such publications as The New York Times, The Washington Post, Newsweek, Time, and the overwhelming majority of all other newspapers and news magazines. It is the intellectual framework of their students who are now the commentators and editors of practically all of the major television networks, such as CBS, NBC, ABC, and CNN.[9] And it is this intellectual framework within which the media now attempts to understand and report on our financial crisis.
In their view, laissez-faire capitalism and economic freedom are a formula for injustice and chaos, while government is the voice and agent of justice and rationality in economic affairs. So firmly do they hold this belief, that when they see what they think is evidence of large-scale injustice and chaos in the economic system, such as has existed in the present financial crisis, they automatically presume that it is the result of the pursuit of self-interest and the economic freedom that makes that pursuit possible. Given this fundamental attitude, the principle that guides contemporary journalists so-called is that their job is to find the businessmen and capitalists who are responsible for the evil and the government officials who set them free to commit it, and, finally, to identify and support the policies of government intervention and control that will allegedly eliminate the evil and prevent its recurrence in the future.
Their fear and hatred of economic freedom and laissez-faire capitalism, and their need to be able to denounce it as the cause of all economic evil, is so great that they pretend to themselves and to their audiences that it exists in today's world, in which it clearly does not exist even remotely. By making the claim that laissez faire exists and is what is responsible for the problem, they are able to turn the full force of their hatred for actual economic freedom and laissez-faire capitalism against each and every sliver of economic freedom that somehow manages to exist and which they decide to target. That sliver, they project, is part and parcel of the starvation of the workers in the inhuman exploitation of labor that, in their ignorance, they take for granted is imposed by capitalists under laissez faire. Their brainwashed audience — as much the product of the contemporary educational system as they themselves — then quickly follows suit and obliges their efforts to arouse hatred.
The result is summed up in words such as these, which appeared in one of the same New York Times articles I quoted earlier:
"We now have a collective anger, disgust, over our whole financial system and it's obvious we're going to get a regulatory backlash…" [with] a spillover effect to other industries because voters have the perception that "big companies are animals and they need to be put in their cages."[10]
In this way the enemies of capitalism and economic freedom are able to proceed in their campaign of economic destruction and devastation. They use the accusation of "laissez faire" as a kind of ratchet for increasing the government's power. For example, in the early 1930s they accused President Hoover of following a policy of laissez faire, even as he intervened in the economic system to prevent the fall in wage rates that was essential to stop a reduced demand for labor from resulting in mass unemployment. On the basis of the mass unemployment that then resulted from Hoover's intervention, which they succeeded in portraying as "laissez faire," they deceived the country into supporting the further massive interventions of the New Deal.
$95 $80
"The enemies of capitalism and economic freedom … use the accusation of 'laissez faire' as a kind of ratchet for increasing the government's power."
Today, they continue to play the same game. Always it is laissez faire that they denounce, and whose alleged failures they claim need to be overcome with yet more government regulations and controls. Today, the massive interventions not only of the New Deal, but also of the Fair Deal, the New Frontier, the Great Society, and of all the administrations since, have been added to the very major interventions that existed even in the 1920s and to which Hoover very substantially added. And yet we still allegedly have laissez faire. It seems that so long as anyone manages to move or even breathe without being under the control of the government, laissez faire allegedly continues to exist, which serves to make necessary yet still more government controls.
The logical stopping point of this process is that one day everyone will end up being shackled to a wall, or at the very least being compelled to do something comparable to living in a zip code that matches his social security number. Then the government will know who everyone is, where he is, and that he can do nothing whatever without its approval and permission. And then the world will be safe from anyone attempting to do anything that benefits him and thereby allegedly harms others. At that point, the world will enjoy all the prosperity that comes from total paralysis.
Also, this article openly challenges the dominant paradigm, which I always think is good, right or wrong. This author seems also to share my belief, the one underlying the arguments I advanced in my "when did Socialism become a dirty word" post, that the way the political(and economic) debate is covered in this country usually does more to obscure the truth than to reveal it.
The Myth that Laissez Faire Is Responsible for Our Present Crisis
Daily Article by George Reisman Posted on 10/23/2008 12:00:00 AM
Ludwig Von Mises Institute
The news media are in the process of creating a great new historical myth. This is the myth that our present financial crisis is the result of economic freedom and laissez-faire capitalism.
The attempt to place the blame on laissez faire is readily confirmed by a Google search under the terms "crisis + laissez faire." On the first page of the results that come up, or in the web entries to which those results refer, statements of the following kind appear:
"The mortgage crisis is laissez-faire gone wrong."
"Sarkozy [Nicolas Sarkozy, the President of France] said 'laissez-faire' economics, 'self-regulation' and the view that 'the all-powerful market' always knows best are finished."
"'America's laissez-faire ideology, as practiced during the subprime crisis, was as simplistic as it was dangerous,' chipped in Peer Steinbrück, the German finance minister."
"Paulson brings laissez-faire approach on financial crisis…."
"It's au revoir to the days of laissez faire."[1]
Recent articles in The New York Times provide further confirmation. Thus, one article declares, "The United States has a culture that celebrates laissez-faire capitalism as the economic ideal…."[2] Another article tells us, "For 30 years, the nation's political system has been tilted in favor of business deregulation and against new rules."[3] In a third article, a pair of reporters assert, "Since 1997, Mr. Brown [the British Prime Minister] has been a powerful voice behind the Labor Party's embrace of an American-style economic philosophy that was light on regulation. The laissez-faire approach encouraged the country's banks to expand internationally and chase returns in areas far afield of their core mission of attracting deposits."[4] Thus even Great Britain is described as having a "laissez-faire approach."
The mentality displayed in these statements is so completely and utterly at odds with the actual meaning of laissez faire that it would be capable of describing the economic policy of the old Soviet Union as one of laissez faire in its last decades. By its logic, that is how it would have to describe the policy of Brezhnev and his successors of allowing workers on collective farms to cultivate plots of land of up to one acre in size on their own account and sell the produce in farmers' markets in Soviet cities. According to the logic of the media, that too would be "laissez faire" — at least compared to the time of Stalin.
Laissez-faire capitalism has a definite meaning, which is totally ignored, contradicted, and downright defiled by such statements as those quoted above. Laissez-faire capitalism is a politico-economic system based on private ownership of the means of production and in which the powers of the state are limited to the protection of the individual's rights against the initiation of physical force. This protection applies to the initiation of physical force by other private individuals, by foreign governments, and, most importantly, by the individual's own government. This last is accomplished by such means as a written constitution, a system of division of powers and checks and balances, an explicit bill of rights, and eternal vigilance on the part of a citizenry with the right to keep and bear arms. Under laissez-faire capitalism, the state consists essentially just of a police force, law courts, and a national defense establishment, which deter and combat those who initiate the use of physical force. And nothing more.
The utter absurdity of statements claiming that the present political-economic environment of the United States in some sense represents laissez-faire capitalism becomes as glaringly obvious as anything can be when one keeps in mind the extremely limited role of government under laissez-faire and then considers the following facts about the present-day United States:
Government spending in the United States currently equals more than forty percent of national income, i.e., the sum of all wages and salaries and profits and interest earned in the country. This is without counting any of the massive off-budget spending such as that on account of the government enterprises Fannie Mae and Freddie Mac. Nor does it count any of the recent spending on assorted "bailouts." What this means is that substantially more than forty dollars of every one hundred dollars of output are appropriated by the government against the will of the individual citizens who produce that output. The money and the goods involved are turned over to the government only because the individual citizens wish to stay out of jail. Their freedom to dispose of their own incomes and output is thus violated on a colossal scale. In contrast, under laissez-faire capitalism, government spending would be on such a modest scale that a mere revenue tariff might be sufficient to support it. The corporate and individual income taxes, inheritance and capital gains taxes, and social security and Medicare taxes would not exist.
There are presently fifteen federal cabinet departments, nine of which exist for the very purpose of respectively interfering with housing, transportation, healthcare, education, energy, mining, agriculture, labor, and commerce, and virtually all of which nowadays routinely ride roughshod over one or more important aspects of the economic freedom of the individual. Under laissez-faire capitalism, eleven of the fifteen cabinet departments would cease to exist and only the departments of justice, defense, state, and treasury would remain. Within those departments, moreover, further reductions would be made, such as the abolition of the IRS in the Treasury Department and the Antitrust Division in the Department of Justice.
The economic interference of today's cabinet departments is reinforced and amplified by more than one hundred federal agencies and commissions, the most well known of which include, besides the IRS, the FRB and FDIC, the FBI and CIA, the EPA, FDA, SEC, CFTC, NLRB, FTC, FCC, FERC, FEMA, FAA, CAA, INS, OHSA, CPSC, NHTSA, EEOC, BATF, DEA, NIH, and NASA. Under laissez-faire capitalism, all such agencies and commissions would be done away with, with the exception of the FBI, which would be reduced to the legitimate functions of counterespionage and combating crimes against person or property that take place across state lines.
To complete this catalog of government interference and its trampling of any vestige of laissez faire, as of the end of 2007, the last full year for which data are available, the Federal Register contained fully seventy-three thousand pages of detailed government regulations. This is an increase of more than ten thousand pages since 1978, the very years during which our system, according to one of The New York Times articles quoted above, has been "tilted in favor of business deregulation and against new rules." Under laissez-faire capitalism, there would be no Federal Register. The activities of the remaining government departments and their subdivisions would be controlled exclusively by duly enacted legislation, not the rule-making of unelected government officials.
And, of course, to all of this must be added the further massive apparatus of laws, departments, agencies, and regulations at the state and local level. Under laissez-faire capitalism, these too for the most part would be completely abolished and what remained would reflect the same kind of radical reductions in the size and scope of government activity as those carried out on the federal level.
What this brief account has shown is that the politico-economic system of the United States today is so far removed from laissez-faire capitalism that it is closer to the system of a police state. The ability of the media to ignore all of the massive government interference that exists today and to characterize our present economic system as one of laissez faire and economic freedom marks it as, if not profoundly dishonest, then as nothing less than delusional.
Government Intervention Actually Responsible for the Crisis
Beyond all this is the further fact that the actual responsibility for our financial crisis lies precisely with massive government intervention, above all the intervention of the Federal Reserve System in attempting to create capital out of thin air, in the belief that the mere creation of money and its being made available in the loan market is a substitute for capital created by producing and saving. This is a policy it has pursued since its founding, but with exceptional vigor since 2001, in its efforts to overcome the collapse of the stock market bubble whose creation it had previously inspired.
The Federal Reserve and other portions of the government pursue the policy of money and credit creation in everything they do that encourages and protects private banks in the attempt to cheat reality by making it appear that one can keep one's money and lend it out too, both at the same time. This duplicity occurs when individuals or business firms deposit cash in banks, which they can continue to use to make purchases and pay bills by means of writing checks rather than using currency. To the extent that the banks are then enabled and encouraged to lend out the funds that have been deposited in this way (usually by the creation of new and additional checking deposits rather than the lending of currency), they are engaged in the creation of new and additional money. The depositors continue to have their money and borrowers now have the bulk of the funds deposited. In recent years, the Federal Reserve has so encouraged this process, that checking deposits have been created equal to fifty times the actual cash reserves of the banks, a situation more than ripe for implosion.
All of this new and additional money entering the loan market is fundamentally fictitious capital, in that it does not represent new and additional capital goods in the economic system, but rather a mere transfer of parts of the existing supply of capital goods into different hands, for use in different, less efficient, and often flagrantly wasteful ways. The present housing crisis is perhaps the most glaring example of this in all of history.
"Laissez-faire capitalism has a definite meaning, which is totally ignored, contradicted, and downright defiled by such statements…"
Perhaps as much as a trillion-and-a-half dollars or more of new and additional checkbook-money capital was channeled into the housing market as the result of the artificially low interest rates caused by the presence of an even larger overall amount of new and additional money in the loan market. Because of the long-term nature of its financing, housing is especially susceptible to the effect of lower interest rates, which can serve sharply to reduce monthly mortgage payments and in this way correspondingly increase the demand for housing and for the mortgage loans needed to finance it.
Over a period of years, the result was a huge increase in the production and purchase of new homes, rapidly rising home prices, and a further spiraling increase in the production and purchase of new homes in the expectation of a continuing rise in their prices.
To gauge the scale of its responsibility, in the period of time just since 2001, the Federal Reserve caused an increase in the supply of checkbook-money capital of more than 70 percent of the cumulative total amount it had created in the whole of the previous 88 years of its existence — that is, almost 2 trillion dollars.[5] This was the increase in the amount by which the checking deposits of the banks exceeded the banks' reserves of actual money, that is, the money they have available to pay depositors who want cash. The Federal Reserve caused this increase in illusory capital by means of creating whatever new and additional bank reserves were necessary to achieve a federal funds interest rate — that is, the rate of interest paid by banks on the lending and borrowing of reserves — that was far below the rate of interest dictated by the market. For the three years 2001–2004, the Federal Reserve drove the federal funds rate below 2 percent and, from July of 2003 to June of 2004, drove it even further down to approximately 1 percent.
The Federal Reserve also made it possible for banks to operate with a far lower percentage of reserves than ever before. Whereas in a free market, banks would hold gold reserves equal to their checking deposits — or at the very least to a substantial proportion of their checking deposits[6] — the Federal Reserve in recent years contrived to make it possible for them to operate with irredeemable fiat-money reserves of less than 2 percent.
The Federal Reserve drove down the federal funds rate and brought about the vast increase in the supply of illusory capital for the purpose of driving down all market interest rates. The additional illusory capital could find borrowers only at lower interest rates. The Federal Reserve's goal was to bring about interest rates so low that they could not compensate even for the rise in prices. It deliberately sought to achieve a negative real rate of interest on capital, that is, a rate below the rate at which prices rise. This means that a lender, after receiving the interest due him for a year, has less purchasing power than he had the year before, when he had only his principal.
In doing this, the Federal Reserve's ultimate purpose was to stimulate both investment and consumer spending. It wanted the cost of obtaining capital to be minimal so that it would be invested on the greatest possible scale and for people to regard the holding of money as a losing proposition, which would stimulate them to spend it faster. More spending, ever more spending was its concern, in the belief that that is what is required to avoid large-scale unemployment.
As matters have turned out, the Federal Reserve got its wish for a negative real rate of interest, but to an extent far beyond what it wished. It wished for a negative real rate of return of perhaps 1 to 2 percent. What it achieved in the housing market was a negative real rate of return measured by the loss of a major portion of the capital invested. In the words of The New York Times, "In the year since the crisis began, the world's financial institutions have written down around $500 billion worth of mortgage-backed securities. Unless something is done to stem the rapid decline of housing values, these institutions are likely to write down an additional $1 trillion to $1.5 trillion."[7]
This vast loss of capital in the housing debacle is what is responsible for the inability of banks to make loans to many businesses to which they normally could and would lend. The reason they cannot now do so is that the funds and the real wealth that have been lost no longer exist and thus cannot be lent to anyone. The Federal Reserve's policy of credit expansion based on the creation of new and additional checkbook money has thus served to give capital to unworthy borrowers who never should have had it in the first place and to deprive other, far more credit worthy borrowers of the capital they need to stay in businesses. Its policy has been one of redistribution and destruction.
The capital it has caused to be malinvested and lost in housing is capital that is now unavailable for such firms as Wickes Furniture, Linens 'N Things, Levitz Furniture, Mervyns, and innumerable others, who have had to go bankrupt because they could not obtain the loans they needed to stay in business. And, of course, among the foremost victims have been major banks themselves. The losses they have suffered have wiped out their capital and put them out of business. And the list of casualties will certainly grow.
Any discussion of the housing debacle would be incomplete if it did not include mention of the systematic consumption of home equity encouraged for several years by the media and an ignorant economics profession. Consistent with the teachings of Keynesianism that consumer spending is the foundation of prosperity, they regarded the rise in home prices as a powerful means for stimulating such spending. In increasing homeowners' equity, they held, it enabled homeowners to borrow money to finance additional consumption and thus keep the economy operating at a high level. As matters have turned out, such consumption has served to saddle many homeowners with mortgages that are now greater than the value of their homes, which would not have been the case had those mortgages not been enlarged to finance additional consumption. This consumption is the cause of a further loss of capital over and above the capital lost in malinvestment.
A discussion of the housing debacle would also not be complete if it did not mention the role of government guarantees of many mortgage loans. If the government guarantees the principal and interest on a loan, there is no reason why a lender should care about the qualifications of a borrower. He will not lose by making the loan, however bad it may turn out to be.
A substantial number of mortgage loans carried such guarantees. For example, a New York Times article describes the Department of Housing and Urban Development as "an agency that greased the mortgage wheel for first-time buyers by insuring billions of dollars in loans." The article describes how HUD progressively reduced its lending standards: "families no longer had to prove they had five years of stable income; three years sufficed… lenders were allowed to hire their own appraisers rather than rely on a government-selected panel … lenders no longer had to interview most government-insured borrowers face to face or maintain physical branch offices," because the government's approval for granting mortgage insurance had become automatic.
The Times' article goes on to describe how "Lenders," such as Countrywide Financial, which was among the largest and most prominent, "sprang up to serve those whose poor credit history made them ineligible for lower-interest 'prime' loans." It notes the fact that "Countrywide signed a government pledge to use 'proactive creative efforts' to extend homeownership to minorities and low-income Americans."[8] "Proactive creative efforts" is a good description of what lenders did in offering such bizarre types of mortgages as those requiring the payment of "interest only," and then allowing the avoidance even of the payment of interest by adding it to the amount of outstanding principal. (Such mortgages suited the needs of homebuyers whose reason for buying was to be able to sell as soon as home prices rose sufficiently further.)
Just as vast numbers of houses were purchased based on an unfounded belief in an endless rise in their prices, so too vast numbers of complex financial derivatives were sold based on an unfounded belief that the Federal Reserve System actually had the power it claimed to have of making depressions impossible — a power which the media and most of the economics profession repeatedly affirmed.
Derivatives have received such a bad press that it is necessary to point out that the insurance policy on a home is a derivative. And many of the derivatives that were sold and which are now creating problems of insolvency and bankruptcy, namely, "credit default swaps (CDSs)," were insurance policies in one form or another. Their flaw was that unlike ordinary homeowners' insurance, they did not have a sufficient list of exclusions.
Homeowners' policies make exclusions for such things as damage caused by war and, in many cases, depending on the special risks of the local area, earthquakes and hurricanes. In the same way, the more complex derivatives should have made an exclusion for losses resulting from financial collapse brought on by Federal Reserve–sponsored massive credit expansion. (If it is impossible actually to write such an exclusion, because many of the losses may occur before the nature of the cause becomes evident, then such derivatives should not be written and the market will no longer write them because of the unacceptable risks they entail.) But decades of brainwashing by the government, the media, and the educational system had convinced almost everyone that such collapse was no longer possible.
Belief in the impossibility of depressions played the same role in the creation and sale of "collateralized debt obligations (CDOs)." Here disparate home mortgages were bundled together and securities were issued against them. In many cases, large buyers bundled together collections of such securities and issued further securities against those securities. As more and more homeowners have defaulted on their loans, the result has been that no one is able directly to judge the value of these securities. To do so, it will be necessary to disentangle them down to the level of the underlying individual mortgages. Such tangles of securities could never have been sold in a market not overwhelmed by the propaganda that depressions are impossible under the government's management of the financial system.
Finally, a discussion of the housing debacle would not be complete if it did not include mention of forms of virtual extortion that served to encourage loans to unworthy borrowers. Thus, the online encyclopedia Wikipedia writes,
The Community Reinvestment Act [CRA] … is a United States federal law designed to encourage commercial banks and savings associations to meet the needs of borrowers in all segments of their communities, including low- and moderate-income neighborhoods … CRA regulations give community groups the right to comment or protest about banks' non-compliance with CRA. Such comments could help or hinder banks' planned expansions.
The meaning of these words is that the Community Reinvestment Act gives the power to "community groups," to determine in an important respect the financial success or failure of a bank. Only if they are satisfied that the bank is making sufficient loans to borrowers to whom it would otherwise choose not to lend, will it be permitted to succeed. The most prominent such community group is ACORN.
Part and parcel of the environment that has made an act such as the CRA possible, is threats of slander against banks for being "racist" if they choose not to make loans to people who are poor credit risks and also happen to belong to this or that minority group. The threats of slander go hand in glove with intimidation from various government agencies that exercise discretionary power over the banks and are in a position to harm them if they do not comply with the agencies' wishes. The same points apply to mortgage lenders other than banks.
What this extensive analysis of the actual causes of our financial crisis has shown is that it is government intervention, not a free market or laissez-faire capitalism, that is responsible in every essential respect.
The Laissez-Faire Myth and the Marxism of the Media
The myth that laissez faire exists in the present-day United States and is responsible for our current economic crisis is promulgated by people who know practically nothing whatever of sound, rational economic theory or the actual nature of laissez-faire capitalism. They espouse it despite, or rather because of, their education at the leading colleges and universities of the country. When it comes to matters of economics, their education has steeped them entirely in the thoroughly wrong and pernicious doctrines of Marx and Keynes. In claiming to see the existence of laissez faire in the midst of such massive government interference as to constitute the very opposite of laissez faire, they are attempting to rewrite reality in order to make it conform with their Marxist preconceptions and view of the world.
"Decades of brainwashing by the government, the media, and the educational system … convinced almost everyone that such collapse was no longer possible."
They absorb the doctrines of Marx more in history, philosophy, sociology, and literature classes than in economics classes. The economics classes, while usually not Marxist themselves, offer only highly insufficient rebuttal of the Marxist doctrines and devote almost all of their time to espousing Keynesianism and other, less-well-known anticapitalistic doctrines, such as the doctrine of pure and perfect competition.
Very few of the professors and their students have read so much as a single page of the writings of Ludwig von Mises, who is the preeminent theorist of capitalism and knowledge of whose writings is essential to its understanding. Almost all of them are thus essentially ignorant of sound economics.
When I refer to the educational system and the media as Marxist, I do not intend to imply that its members favor any kind of forcible overthrow of the United States government or are necessarily even advocates of socialism. What I mean is that they are Marxists insofar as they accept Marx's views concerning the nature and operation of laissez-faire capitalism.
They accept the Marxian doctrine that in the absence of government intervention, the self-interest, the profit motive — the "unbridled greed" — of businessmen and capitalists would serve to drive wage rates to minimum subsistence while it extended the hours of work to the maximum humanly endurable, imposed horrifying working conditions, and drove small children to work in factories and mines. They point to the miserably low standard of living and terrible conditions of wage earners in the early years of capitalism, especially in Great Britain, and believe that that proves their case. They go on to argue that only government intervention in the form of pro-union and minimum-wage legislation, maximum-hours laws, the legal prohibition of child labor, and government mandates concerning working conditions, served to improve the wage earner's lot. They believe that repeal of this legislation would bring about a return to the miserable economic conditions of the early 19th century.
They view the profits and interest of businessmen and capitalists as unearned, undeserved gains, wrung from wage earners — the alleged true producers — by the equivalent of physical force, and hence regard the wage earners as being in the position of virtual slaves ("wage slaves") and the capitalist "exploiters" as being in the position of virtual slave owners. Closely connected with this, they regard taxing the businessmen and capitalists and using the proceeds for the benefit of wage earners, in such forms as social security, socialized medicine, public education, and public housing, as a policy that serves merely to return to the wage earners some portion of the loot allegedly stolen from them in the process of "exploitation."
In full agreement with Marx and his doctrine that under laissez-faire capitalism the capitalists expropriate all of the wage earner's production above what is necessary for minimum subsistence, they assume that the government's intervention harms no one but the immoral businessmen and capitalists, never the wage earners. Thus not only the taxes to pay for social programs but also the higher wages imposed by pro-union and minimum-wage legislation are assumed simply to come out of profits, with no negative effect whatever on wage earners, such as unemployment. Likewise for the effect of government-imposed shorter hours, improved working conditions, and the abolition of child labor: the resulting higher costs are assumed simply to come out of the capitalists' "surplus value," never out of the standard of living of wage earners themselves.
This is the mindset of the whole of the left and in particular of the members of the educational system and media. It is a view of the profit motive and the pursuit of material self-interest as inherently lethal if not forcibly countered and rigidly controlled by government intervention. As stated, it is a view that sees the role of businessmen and capitalists as comparable to that of slave owners, despite the fact that businessmen and capitalists do not and cannot employ guns, whips, or chains to find and keep their workers but only the offer of better wages and conditions than those workers can find elsewhere.
Not surprisingly, the educational system and media share the view of Marx that laissez-faire capitalism is an "anarchy of production," in which the businessmen and capitalists run about like chickens without heads. In their view, rationality, order, and planning emanate from the government, not from the participants in the market.
As I say, this, and more like it, is the intellectual framework of the great majority of today's professors and of several generations of their predecessors. It is equally the intellectual framework of their students, who have dutifully absorbed their misguided teachings and some of whom have gone on to become the reporters and editors of such publications as The New York Times, The Washington Post, Newsweek, Time, and the overwhelming majority of all other newspapers and news magazines. It is the intellectual framework of their students who are now the commentators and editors of practically all of the major television networks, such as CBS, NBC, ABC, and CNN.[9] And it is this intellectual framework within which the media now attempts to understand and report on our financial crisis.
In their view, laissez-faire capitalism and economic freedom are a formula for injustice and chaos, while government is the voice and agent of justice and rationality in economic affairs. So firmly do they hold this belief, that when they see what they think is evidence of large-scale injustice and chaos in the economic system, such as has existed in the present financial crisis, they automatically presume that it is the result of the pursuit of self-interest and the economic freedom that makes that pursuit possible. Given this fundamental attitude, the principle that guides contemporary journalists so-called is that their job is to find the businessmen and capitalists who are responsible for the evil and the government officials who set them free to commit it, and, finally, to identify and support the policies of government intervention and control that will allegedly eliminate the evil and prevent its recurrence in the future.
Their fear and hatred of economic freedom and laissez-faire capitalism, and their need to be able to denounce it as the cause of all economic evil, is so great that they pretend to themselves and to their audiences that it exists in today's world, in which it clearly does not exist even remotely. By making the claim that laissez faire exists and is what is responsible for the problem, they are able to turn the full force of their hatred for actual economic freedom and laissez-faire capitalism against each and every sliver of economic freedom that somehow manages to exist and which they decide to target. That sliver, they project, is part and parcel of the starvation of the workers in the inhuman exploitation of labor that, in their ignorance, they take for granted is imposed by capitalists under laissez faire. Their brainwashed audience — as much the product of the contemporary educational system as they themselves — then quickly follows suit and obliges their efforts to arouse hatred.
The result is summed up in words such as these, which appeared in one of the same New York Times articles I quoted earlier:
"We now have a collective anger, disgust, over our whole financial system and it's obvious we're going to get a regulatory backlash…" [with] a spillover effect to other industries because voters have the perception that "big companies are animals and they need to be put in their cages."[10]
In this way the enemies of capitalism and economic freedom are able to proceed in their campaign of economic destruction and devastation. They use the accusation of "laissez faire" as a kind of ratchet for increasing the government's power. For example, in the early 1930s they accused President Hoover of following a policy of laissez faire, even as he intervened in the economic system to prevent the fall in wage rates that was essential to stop a reduced demand for labor from resulting in mass unemployment. On the basis of the mass unemployment that then resulted from Hoover's intervention, which they succeeded in portraying as "laissez faire," they deceived the country into supporting the further massive interventions of the New Deal.
$95 $80
"The enemies of capitalism and economic freedom … use the accusation of 'laissez faire' as a kind of ratchet for increasing the government's power."
Today, they continue to play the same game. Always it is laissez faire that they denounce, and whose alleged failures they claim need to be overcome with yet more government regulations and controls. Today, the massive interventions not only of the New Deal, but also of the Fair Deal, the New Frontier, the Great Society, and of all the administrations since, have been added to the very major interventions that existed even in the 1920s and to which Hoover very substantially added. And yet we still allegedly have laissez faire. It seems that so long as anyone manages to move or even breathe without being under the control of the government, laissez faire allegedly continues to exist, which serves to make necessary yet still more government controls.
The logical stopping point of this process is that one day everyone will end up being shackled to a wall, or at the very least being compelled to do something comparable to living in a zip code that matches his social security number. Then the government will know who everyone is, where he is, and that he can do nothing whatever without its approval and permission. And then the world will be safe from anyone attempting to do anything that benefits him and thereby allegedly harms others. At that point, the world will enjoy all the prosperity that comes from total paralysis.
Monday, February 16, 2009
Saturday, February 14, 2009
Socialism
Socialism has a bad connotation to it because it flies in the face of everything that America stands for. Or at least, what America once stood for and, God willing, will stand for again.
I'll be brief, Cajun. (See how I remembered to use the moniker?? I'd never want to mess with your professional resume is the main reason.)
The items you mention in support of Socialism are supposed to be handled by the government. You actually mention the very few things that are outlined in the Constitution, even. The federal government should provide defense, national infrastructure, etc. Education is another argument, and my view is that there is a place for government there as well, although it's not outlined in the Constitution. (Which, by the way, I suspect you have not read lately??)
Free speech and the other ideas you mention are not liberal ideas, in the sense that they are obvious ideas that the Founders felt were bestowed by our Creator and were (and are) inherently granted to everyone.
FDR did not pull us out of the depression with his New Deal. Far from it. The New Deal was a colossal mistake that prolonged the Depression, and what got us going again was a mix of WWII and the natural cycles of the economy -- it (the economy) does go up and down, bulls / bears, etc. No bad FREE economic cycle lasts forever, but Socialist or Communist economies can, and what happens is that the people eventually just take it as the status quo, and do not realize that things could ever be better.
Free enterprise, and free-dom are what America stands for. America does not stand for Socialism. If you read any US history you will discover this, so don't start with 1932 and claim that Socialism is inherently a good thing or an "American" thing.
To paraphrase one of the Founding Fathers: "Once the people realize they can vote with the power of the purse, I fear we shall not long last." Basically, once the rule of law and private ownership are gone, and 51% of the people choose to take from the other 49%, that's the beginning of the end. The only good thing about Obama is that he will likely hasten this process, and my hope is that once the people see what's happening, we have another turn around like Reagan in 1980 or even the Congressional deal in 1994. We'll see.
Like any good Conservative, I am hopeful and I am optimistic. America cannot and will not become the place that we left.
I'll be brief, Cajun. (See how I remembered to use the moniker?? I'd never want to mess with your professional resume is the main reason.)
The items you mention in support of Socialism are supposed to be handled by the government. You actually mention the very few things that are outlined in the Constitution, even. The federal government should provide defense, national infrastructure, etc. Education is another argument, and my view is that there is a place for government there as well, although it's not outlined in the Constitution. (Which, by the way, I suspect you have not read lately??)
Free speech and the other ideas you mention are not liberal ideas, in the sense that they are obvious ideas that the Founders felt were bestowed by our Creator and were (and are) inherently granted to everyone.
FDR did not pull us out of the depression with his New Deal. Far from it. The New Deal was a colossal mistake that prolonged the Depression, and what got us going again was a mix of WWII and the natural cycles of the economy -- it (the economy) does go up and down, bulls / bears, etc. No bad FREE economic cycle lasts forever, but Socialist or Communist economies can, and what happens is that the people eventually just take it as the status quo, and do not realize that things could ever be better.
Free enterprise, and free-dom are what America stands for. America does not stand for Socialism. If you read any US history you will discover this, so don't start with 1932 and claim that Socialism is inherently a good thing or an "American" thing.
To paraphrase one of the Founding Fathers: "Once the people realize they can vote with the power of the purse, I fear we shall not long last." Basically, once the rule of law and private ownership are gone, and 51% of the people choose to take from the other 49%, that's the beginning of the end. The only good thing about Obama is that he will likely hasten this process, and my hope is that once the people see what's happening, we have another turn around like Reagan in 1980 or even the Congressional deal in 1994. We'll see.
Like any good Conservative, I am hopeful and I am optimistic. America cannot and will not become the place that we left.
Tuesday, February 10, 2009
When did socialsm become a dirty word?
One thing that I had to deal with for most of my adult life was a notion that many Americans held to be Gospel truth; that being a “liberal” is bad. I don’t mean just the right. The word liberal (and not necessarily all the ideas it describes, but many) were demonized so badly that even the left wouldn’t admit to it. For many people, if you were left of center in the 90’s you might have described yourself as moderate, or open-minded, but god-forbid you called yourself a liberal. Although many people bought into this and artfully dodged the term liberal, some of us held onto it as a badge of honor. During this period I was a zealous defender of liberal ideas and more than that, of being a liberal. I would go so far as to say a lot of my political identity was formed during this period, and I came to view myself as part of an unfairly maligned minority. So now, imagine how strange it is for me to suddenly feel that I am no longer in the minority. Rightly or wrongly, I do feel less maligned, and less in the minority. It does seem that being “liberal” is no longer as unfashionable.
I feel like the last two election cycles have born out the fact that most Americans are starting to abandon their ill-advised and nearly complete rejection of all things liberal. I am hoping this is more than just a rejection of an unpopular president, but a realization that liberalism wasn’t some radical notion that some hippies made up in the 60’s, but rather liberal ideas embody many of the basic principles on which this country was founded. Free speech, free exercise, freedom of the press, petition for redress of grievances. All these can be considered “liberal” ideas. This “liberal” trend continued throughout our nation’s development. The 14th amendment and due process clause is arguably one of the greatest devices for extending rights in our nation’s history and liberals can claim ownership of this as much as anyone. The New Deal and FDR, was no doubt a “tax and spend liberal policy” yet this was one of our nation’s greatest presidents, and a policy that got us out of the great depression set the stage for the United States to rise to international dominance as a superpower and later the world sole superpower. So it is my hope that many American’s who had forgotten are now remembering that liberal is not a bad word, but a description of many of the ideals that made, and make, this country great.
However, I am afraid that this may not have happened, and that what we are seeing is exclusively a rejection of the Bush years, rather than an electorate afflicted with ideological amnesia regaining their collective memory. What scares me most about this is the speed with which the right has moved to demonize the term “socialism”. Seeing the way you can simply assert some policy is a socialist and it is automatically assumed to be bad brings back not to distant memories, of the tarring and feathering of anything “liberal”. This is never more evident than when you realize that no one will even try to defend a policy against an accusation of socialism with any other argument than “no it’s not”. Well, I guess it’s time for the maligned minority of socialists like me to come out and hold our badge of honor high. That’s right. I said it… Socialists like me. Seriously, what’s wrong with a little socialism?
Socialism is merely a reference to an economic model where the state owns the means of production and distribution of goods and services. Now I’m not suggesting that our economy should be purely socialist, that would be as ridiculous as advocating that it be completely devoid of anything socialized. Free markets are great also. In truth, the ideal economy is a mix of capitalism and socialism. In fact, without getting into to much depth, even Karl Marx viewed socialism itself as a blend, as a transitional state between capitalism and communism. Let me give you one example of how socialism exists in the United States to everyone’s benefit. Our transportation infrastructure is… you guessed it… Socialist. Seriously, just think for a second if every mile of every interstate highway had to be owned and produced through private initiative. I really don’t think you’d be getting anywhere very fast. How about your local police force? Do you think we should turn them out on the street and wait for the ensuing crime spree to generate private capital investment in private security forces? Do you think that every community would even have a police force in that scenario? How about our socialized military? Do we even need a standing army? Maybe you think we can just wait until a time of national security crises and the demand for protection from whatever threatens us will give rise to private production of a supply of private armies (we call those mercenaries) to protect us? In short, I am quite happy with our roads, police forces, and military being socialized. As such, I don’t think that the concept of socialism in its entirety is inherently flawed. There are certainly other areas in which I may not want full socialization, but I certainly don’t want unregulated free markets or pure capitalism. In fact, there are other areas of our economy that I would be perfectly willing to entertain that they be fully socialized. At least to the extent roads are fully socialized, providing a basic foundation that the free market is welcome to augment. Education is one of these areas. So, given that I think it’s hard to argue with a straight face that every aspect of our economy should be a model of pure unadulterated capitalism, I ask you, when did Socialism become a dirty word?
I feel like the last two election cycles have born out the fact that most Americans are starting to abandon their ill-advised and nearly complete rejection of all things liberal. I am hoping this is more than just a rejection of an unpopular president, but a realization that liberalism wasn’t some radical notion that some hippies made up in the 60’s, but rather liberal ideas embody many of the basic principles on which this country was founded. Free speech, free exercise, freedom of the press, petition for redress of grievances. All these can be considered “liberal” ideas. This “liberal” trend continued throughout our nation’s development. The 14th amendment and due process clause is arguably one of the greatest devices for extending rights in our nation’s history and liberals can claim ownership of this as much as anyone. The New Deal and FDR, was no doubt a “tax and spend liberal policy” yet this was one of our nation’s greatest presidents, and a policy that got us out of the great depression set the stage for the United States to rise to international dominance as a superpower and later the world sole superpower. So it is my hope that many American’s who had forgotten are now remembering that liberal is not a bad word, but a description of many of the ideals that made, and make, this country great.
However, I am afraid that this may not have happened, and that what we are seeing is exclusively a rejection of the Bush years, rather than an electorate afflicted with ideological amnesia regaining their collective memory. What scares me most about this is the speed with which the right has moved to demonize the term “socialism”. Seeing the way you can simply assert some policy is a socialist and it is automatically assumed to be bad brings back not to distant memories, of the tarring and feathering of anything “liberal”. This is never more evident than when you realize that no one will even try to defend a policy against an accusation of socialism with any other argument than “no it’s not”. Well, I guess it’s time for the maligned minority of socialists like me to come out and hold our badge of honor high. That’s right. I said it… Socialists like me. Seriously, what’s wrong with a little socialism?
Socialism is merely a reference to an economic model where the state owns the means of production and distribution of goods and services. Now I’m not suggesting that our economy should be purely socialist, that would be as ridiculous as advocating that it be completely devoid of anything socialized. Free markets are great also. In truth, the ideal economy is a mix of capitalism and socialism. In fact, without getting into to much depth, even Karl Marx viewed socialism itself as a blend, as a transitional state between capitalism and communism. Let me give you one example of how socialism exists in the United States to everyone’s benefit. Our transportation infrastructure is… you guessed it… Socialist. Seriously, just think for a second if every mile of every interstate highway had to be owned and produced through private initiative. I really don’t think you’d be getting anywhere very fast. How about your local police force? Do you think we should turn them out on the street and wait for the ensuing crime spree to generate private capital investment in private security forces? Do you think that every community would even have a police force in that scenario? How about our socialized military? Do we even need a standing army? Maybe you think we can just wait until a time of national security crises and the demand for protection from whatever threatens us will give rise to private production of a supply of private armies (we call those mercenaries) to protect us? In short, I am quite happy with our roads, police forces, and military being socialized. As such, I don’t think that the concept of socialism in its entirety is inherently flawed. There are certainly other areas in which I may not want full socialization, but I certainly don’t want unregulated free markets or pure capitalism. In fact, there are other areas of our economy that I would be perfectly willing to entertain that they be fully socialized. At least to the extent roads are fully socialized, providing a basic foundation that the free market is welcome to augment. Education is one of these areas. So, given that I think it’s hard to argue with a straight face that every aspect of our economy should be a model of pure unadulterated capitalism, I ask you, when did Socialism become a dirty word?
Tuesday, January 13, 2009
Tuesday, January 6, 2009
For everyone following the economic crisis, I thought this article was important. It's not a partisan article at all. I'm just wondering what other bros with a financial background think of this:
FT.com
COLUMNISTS
MARTIN WOLF
Choices made in 2009 will shape the globe’s destiny
By Martin Wolf
Published: January 6 2009 19:27 | Last updated: January 6 2009 19:27
Welcome to 2009. This is a year in which the fate of the world economy will be determined, maybe for generations. Some entertain hopes that we can restore the globally unbalanced economic growth of the middle years of this decade. They are wrong. Our choice is only over what will replace it. It is between a better balanced world economy and disintegration. That choice cannot be postponed. It must be made this year.
We are in the grip of the most significant global financial crisis for seven decades. As a result, the world has run out of creditworthy, large-scale, willing private borrowers. The alternative of relying on vast US fiscal deficits and expansion of central bank credit is a temporary – albeit necessary – expedient. But it will not deliver a durable return to growth. Fundamental changes are needed.
Already it must be clear even to the most obtuse and complacent that this crisis matches the most serious to have affected advanced countries in the postwar era. In a recent update of a seminal paper, released a year ago, Carmen Reinhart of Maryland University and Kenneth Rogoff of Harvard spell out what this means.* They note the similarities among big financial crises in advanced and emerging countries and, by combining a number of severe cases, reach disturbing conclusions.
Banking crises are protracted, they note, with output declining, on average, for two years. Asset market collapses are deep, with real house prices falling, again on average, by 35 per cent over six years and equity prices declining by 55 per cent over 3½ years. The rate of unemployment rises, on average, by 7 percentage points over four years, while output falls by 9 per cent.
Not least, the real value of government debt jumps, on average, by 86 per cent (see chart). This is only in small part because of the cost of recapitalising banks. It is far more because of collapses in tax revenues.
How far will the present crisis match the worst of the past? The continuing willingness of the world to finance at least the US – though not necessarily the smaller and more peripheral deficit countries, such as the UK – is a reason for optimism. It does allow the US government to mount a vast fiscal and monetary rescue programme.
Yet, as Profs Reinhart and Rogoff note in another paper, this is a global crisis, not a regional one (see chart).** It has reminded us that the US is still, for good or ill, the core of the world economy. In the big crises of recent decades, US demand has rescued the world. This was true during the 1990s, after the Asian crisis, and again after the stock market crash of 2000. But who, apart from its government, will rescue the US? And on what scale must it act?
This issue is addressed in another seminal paper, the latest in the series co-written by Wynne Godley and two others for the Levy Economics Institute of Bard College.*** The underlying argument is one with which readers of this column should, by now, be all too familiar.
What makes rescue so difficult is the force that drove the crisis: the interplay between persistent external and internal imbalances in the US and the rest of the world. The US and a number of other chronic deficit countries have, at present, structurally deficient capacity to produce tradable goods and services. The rest of the world or, more precisely, a limited number of big surplus countries – particularly China – have the opposite. So demand consistently leaks from the deficit countries to surplus ones.
In times of buoyant demand, this is no problem. In times of collapsing private spending, as now, it is a huge one. It means that US rescue efforts need to be big enough not only to raise demand for US output but also to raise demand for the surplus output of much of the rest of the world. This was a burden that crisis-hit Japan did not have to bear.
What has happened to US private spending follows from the collapse in borrowing: between the third quarter of 2007 and the third quarter of 2008 net lending to the US private sector fell by about 13 per cent of gross domestic product – by far the steepest fall in the history of the series (see chart). With borrowing out of the picture, private net saving – the difference between income and expenditure – is likely to remain positive for years, as households pay down debt, willingly or not.
Given the persistent structural current account deficit, how large does the fiscal deficit need to be to balance the economy at something close to full employment? Assuming, for the moment, that the private sector runs a financial surplus of 6 per cent of GDP and the structural current account deficit is 4 per cent of GDP, the fiscal deficit must be 10 per cent of GDP, indefinitely.
And to get to this point the fiscal boost must be huge. A discretionary boost of $760bn (€570bn, £520bn) or 5.3 per cent of GDP is not enough. The authors argue that “even with the application of almost unbelievably large fiscal stimuli, output will not increase enough to prevent unemployment from continuing to rise through the next two years”.
Now think what will happen if, after two or more years of monstrous fiscal deficits, the US is still mired in unemployment and slow growth. People will ask why the country is exporting so much of its demand to sustain jobs abroad. They will want their demand back. The last time this sort of thing happened – in the 1930s – the outcome was a devastating round of beggar-my-neighbour devaluations, plus protectionism. Can we be confident we can avoid such dangers? On the contrary, the danger is extreme. Once the integration of the world economy starts to reverse and unemployment soars, the demons of our past – above all, nationalism – will return. Achievements of decades may collapse almost overnight.
Yet we have a golden opportunity to turn away from such a course. We know better now. The US has, in Barack Obama, a president with vast political capital. His administration is determined to do whatever it can. But the US is not strong enough to rescue the world economy on its own. It needs helpers, particularly in the surplus countries. The US and a few other advanced countries can no longer absorb the world’s surpluses of savings and goods. This crisis is the proof. The world has changed and so must policy. It must do so now.
* The Aftermath of Financial Crises, December 2008; www.economics. harvard.edu/faculty/rogoff/files/ Aftermath.pdf; ** Banking Crises, December 2008, National Bureau of Economic Research Working Paper 14587, December 2008, www.nber.org; *** Prospects for the US and the World, December 2008, www.levy.org
martin.wolf@ft.com
FT.com
COLUMNISTS
MARTIN WOLF
Choices made in 2009 will shape the globe’s destiny
By Martin Wolf
Published: January 6 2009 19:27 | Last updated: January 6 2009 19:27
Welcome to 2009. This is a year in which the fate of the world economy will be determined, maybe for generations. Some entertain hopes that we can restore the globally unbalanced economic growth of the middle years of this decade. They are wrong. Our choice is only over what will replace it. It is between a better balanced world economy and disintegration. That choice cannot be postponed. It must be made this year.
We are in the grip of the most significant global financial crisis for seven decades. As a result, the world has run out of creditworthy, large-scale, willing private borrowers. The alternative of relying on vast US fiscal deficits and expansion of central bank credit is a temporary – albeit necessary – expedient. But it will not deliver a durable return to growth. Fundamental changes are needed.
Already it must be clear even to the most obtuse and complacent that this crisis matches the most serious to have affected advanced countries in the postwar era. In a recent update of a seminal paper, released a year ago, Carmen Reinhart of Maryland University and Kenneth Rogoff of Harvard spell out what this means.* They note the similarities among big financial crises in advanced and emerging countries and, by combining a number of severe cases, reach disturbing conclusions.
Banking crises are protracted, they note, with output declining, on average, for two years. Asset market collapses are deep, with real house prices falling, again on average, by 35 per cent over six years and equity prices declining by 55 per cent over 3½ years. The rate of unemployment rises, on average, by 7 percentage points over four years, while output falls by 9 per cent.
Not least, the real value of government debt jumps, on average, by 86 per cent (see chart). This is only in small part because of the cost of recapitalising banks. It is far more because of collapses in tax revenues.
How far will the present crisis match the worst of the past? The continuing willingness of the world to finance at least the US – though not necessarily the smaller and more peripheral deficit countries, such as the UK – is a reason for optimism. It does allow the US government to mount a vast fiscal and monetary rescue programme.
Yet, as Profs Reinhart and Rogoff note in another paper, this is a global crisis, not a regional one (see chart).** It has reminded us that the US is still, for good or ill, the core of the world economy. In the big crises of recent decades, US demand has rescued the world. This was true during the 1990s, after the Asian crisis, and again after the stock market crash of 2000. But who, apart from its government, will rescue the US? And on what scale must it act?
This issue is addressed in another seminal paper, the latest in the series co-written by Wynne Godley and two others for the Levy Economics Institute of Bard College.*** The underlying argument is one with which readers of this column should, by now, be all too familiar.
What makes rescue so difficult is the force that drove the crisis: the interplay between persistent external and internal imbalances in the US and the rest of the world. The US and a number of other chronic deficit countries have, at present, structurally deficient capacity to produce tradable goods and services. The rest of the world or, more precisely, a limited number of big surplus countries – particularly China – have the opposite. So demand consistently leaks from the deficit countries to surplus ones.
In times of buoyant demand, this is no problem. In times of collapsing private spending, as now, it is a huge one. It means that US rescue efforts need to be big enough not only to raise demand for US output but also to raise demand for the surplus output of much of the rest of the world. This was a burden that crisis-hit Japan did not have to bear.
What has happened to US private spending follows from the collapse in borrowing: between the third quarter of 2007 and the third quarter of 2008 net lending to the US private sector fell by about 13 per cent of gross domestic product – by far the steepest fall in the history of the series (see chart). With borrowing out of the picture, private net saving – the difference between income and expenditure – is likely to remain positive for years, as households pay down debt, willingly or not.
Given the persistent structural current account deficit, how large does the fiscal deficit need to be to balance the economy at something close to full employment? Assuming, for the moment, that the private sector runs a financial surplus of 6 per cent of GDP and the structural current account deficit is 4 per cent of GDP, the fiscal deficit must be 10 per cent of GDP, indefinitely.
And to get to this point the fiscal boost must be huge. A discretionary boost of $760bn (€570bn, £520bn) or 5.3 per cent of GDP is not enough. The authors argue that “even with the application of almost unbelievably large fiscal stimuli, output will not increase enough to prevent unemployment from continuing to rise through the next two years”.
Now think what will happen if, after two or more years of monstrous fiscal deficits, the US is still mired in unemployment and slow growth. People will ask why the country is exporting so much of its demand to sustain jobs abroad. They will want their demand back. The last time this sort of thing happened – in the 1930s – the outcome was a devastating round of beggar-my-neighbour devaluations, plus protectionism. Can we be confident we can avoid such dangers? On the contrary, the danger is extreme. Once the integration of the world economy starts to reverse and unemployment soars, the demons of our past – above all, nationalism – will return. Achievements of decades may collapse almost overnight.
Yet we have a golden opportunity to turn away from such a course. We know better now. The US has, in Barack Obama, a president with vast political capital. His administration is determined to do whatever it can. But the US is not strong enough to rescue the world economy on its own. It needs helpers, particularly in the surplus countries. The US and a few other advanced countries can no longer absorb the world’s surpluses of savings and goods. This crisis is the proof. The world has changed and so must policy. It must do so now.
* The Aftermath of Financial Crises, December 2008; www.economics. harvard.edu/faculty/rogoff/files/ Aftermath.pdf; ** Banking Crises, December 2008, National Bureau of Economic Research Working Paper 14587, December 2008, www.nber.org; *** Prospects for the US and the World, December 2008, www.levy.org
martin.wolf@ft.com
Friday, December 19, 2008
This is seriously funny. And before 'storyteller' (yes I know it's you, JVP) goes apeshit, let's keep in mind that it's satire...
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