Monday, November 24, 2008

The failed policies of big government: the source of our economic crisis

A number of things irritate me right about now. Sex-offender laws, people slow and incompetent at taking metal object out of their pockets in airport security lines, my football teams (Notre Dame and San Diego), and the sudden plummeting of the temperature in South Bend. Yet I'd gladly accept all that if only our government wasn't so incompetent. Here's my complete stream-of-consciousness rant about the state of our economy.

I've been against all this bailout/rescue plan/buying mortgage-backed securities/increasing liquidity/unfreezing the credit markets/propping up the auto industry shenanigans from the very beginning. I've written all of my Congressmen about the issue, this being the first and only issue I've ever contacted my elected officials about. I'll also be perfectly upfront about where I'm coming from on this issue. I'm certainly not an expert on the economy and know little about how the nation's economic institutions function. And if you don't know how things normally work, it's not easy to diagnose the pathology. I don't even have that firm of a grasp of the nation's economic history, as in what specifically caused the Great Depression, for example. All I know is what I read and what people I trust tell me.

I come at this economic problem asking the question: What is the proper role of the federal government in all of this? The clear answer is: Not what they're doing. Regardless of how unfortunate it is for people to lose their homes, it is not the role of the federal government to buy and renegotiate their mortgages. They are living in houses they cannot afford. No matter how essential General Motors seems to be to our economy, it is not the role of the federal government to decide that the taxpayers should support their business as opposed to any other. If they are not making products that are successful in the market, they should fail. Why give money to people who haven't even used their own money effectively? Toyota has. We, as consumers in the market, buy more from them because they have better products.

The US federal government claimed today that they are willing to lend about $7.5 trillion to...I-don't-even-think-they-know-what. We also guaranteed more than $300 billion to Citigroup Inc. yesterday. Did Citigroup's stock jumped over 50% as a function of sound business decisions as judged by its shareholders? Of course not. It was the result of government manipulation.

Just think about the amount of money that $7 trillion is. I don't even think I can. That is more than half of the nation's GDP, which is around $14.3 trillion. What? That is more than half of every single thing every single person in the country has produced in the last year. Half of everything has been promised by the federal government to our banking, financial, other other "too big to fail" institutions. That is taking $25,000 from every single person in the United States and giving it people who have made bad decisions and don't deserve a single penny.

Say I failed a test because I didn't study for it. Say this has happened a couple times all because of some bad decisions I've made. I didn't have my priorities straight. What would happen if I went to the teacher and said, "I know I've been incompetent, but it's going to be bad for Notre Dame as a whole if one of its Honors Program students fails out. Because of that, you should let me pass even though I've given no indication that I'm going to change the way I act." Maybe I'd get the response, "Oh sure, we can take some points away from the rest of the students to prop you up for a while. You're too important to fail." But then again, maybe I wouldn't. Maybe I shouldn't. Who knows. But people think the government is capable of determining that!

Another good question about that ludicrous amount of money is this: Where the heck is it coming from? I certainly don't have any idea where the federal government is going to come up with half our GDP. The Fed, on the other hand, is busy thinking of ways. My grandpa, before he died, used to preach the value of commodity money to me. He always said we should go back to the gold standard and all this fiat currency junk is a horrible thing on which to base our economy. I kind of laughed him off as being a bit old-fashioned, but he was right. The Federal Reserve and its fiat currency is the biggest scam in the modern economic world. The Federal Reserve is the complete antithesis of free-market capitalism. It serves as a tool for the government to interven in the exchange of the most important economic commodity: our currency.

If politicians were forced to tax the people directly to come up with these trillions of dollars, everyone would go nuts. There would be riots on the streets. Granted, there was a little rioting from all the Ron Paul shut-down-the-Fed fanatics a few days ago, which is great. As my favorite libertarian blog put it yesterday, "Where else would you see masses of handsome homemade signs noting that fractional-reserve banking is fraudulent?" I personally liked the sign the read "Bernanake cut 325 points and all I got was this lousy food and energy inflation." Wonderful. We need more people like that in the world.

Fortunately for the politicians (and the unelected people on the private boards of the private Federal Reserve banks which probably shouldn't exist), they can just print money and people don't and can't stop it. Printing money is the ultimate taxation without representation. This is probably an oversimplification as there are a million other factors, but here is one way to think about it: There is a given amount of wealth in the country at a given time. Imagine there are 100 $1 bills in the United States and each is worth 1 WU (wealth unit). That represents all of the wealth in the country. Say the government needs 50 WUs for a silly government program. One possibility is to take, through taxation, half of the dollars from everyone in the country. However, the people would not allow that and would revolt. On the other hand, they could instead print 100 new $1 bills and use them. There would then be a total of 200 $1 bills now circulating in the country. Unfortunately for the country, no wealth was actually created doing this. That means there are still 100 WUs spread around. Now every dollar that each private citizen had is worth 0.5 WUs instead of 1 WU. That is the same thing as a 50% tax, but the people can't do anything to stop it.

There's a reason that Thomas Jefferson said "I believe that banking institutions are more dangerous to our liberties than standing armies," and "If the American people ever allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all their property until their children will wake up homeless on the continent their fathers conquered." Then again, Jefferson owned slaves, so everything he ever said was wrong. I think that's what my high school history teacher taught me about him.

That inflationary policy is what's happening now. If gold and silver were allowed to be used as legal currency (bought and sold without being taxed), there would be open competition in the market for currencies. If people could store their wealth in gold, the Federal Reserve would be required to hold a constant value for their money, or people would be insane to use Federal Reserve notes. Open currency competition would be the beginning of the end for the Federal Reserve. If only...

So I suppose I'll get back to the current situation. The problem, as I understand it, is that the huge bubble in our economy right now isn't based on real value. It is all the result of a total manipulation of interest rates, the money supply, and access to credit. Politicians, and many people in the country, have come to believe in the idea that there is such thing as a free lunch. If we pull enough strings, we can prop up the bubble and keep the delusion alive. But that there isn't such thing as a free lunch is probably the one economic maxim everyone knows and it's still being disregarded. As Ron Paul puts it, "[It's] like the philosopher's stone that could turn lead into gold...prosperity without work is a dream of the ages."

Another sane guy and president of Euro Pacific Capital, Peter Schiff, has said about this issue that "we have to go back to a sane economy where we save money and actually make stuff." That sounds refreshingly reasonable to me. We cannot continue to borrow trillions of dollars from the rest of the world, import significantly more than we export, and continue not saving our money. The United States became an economic superpower through production and savings. Now we've spent our way into a recession, and no government program is going to maintain the current system, which is just fog anyway; it's not founded on any substantial production of goods and services.

Things have to get worse for this to sort itself out. Housing prices must collapse. People have to be evicted. People have to lose their jobs, maybe by the millions. Unemployment needs to skyrocket. All, or at least most, of the companies that made horrible, company-ruining decisions need to go bankrupt. Propping up companies that "are too big to fail" (as absurd an idea as that is) simply stifles innovation. That is not the proper role of government. A more efficient, better run company should take the place of all these awful, predatory financial companies when they fail.

The same thing should happen for GM and the other car companies. The capital that would go from the taxpayers to the car companies should be redirected, by the market, to companies that use the money well (and actually make profitable cars.) The government is in no way competent to determine which companies most deserve money. It is arrogant for the government to think that they can distribute capital in the most economically productive way. Only the price system of the free market can determine that. Friedrich Hayek made that point decades ago. And it's funny that the world gave him a Nobel Prize in economics, but then ignored what he had to say about the price system. Peter Schiff raised another good point a few days ago when he asked on CNN, "Why should we prop up an unprofitable company and tax profitable companies to subsidize them?" Bankruptcy exists for a reason. Let GM use it.

Steve Forbes called Henry Paulson, the current Treasury Secretary, "the worst treasury secretary we've had in modern times." One reason is that he's talked all about transparency, but hasn't done anything transparently. He did not buy the mortgage-backed securities like he said he was going to, he isn't forcing the actions of the Fed to be transparent, and he isn't clear really how much money is being spent or even where it's going. I'm not even sure if he's being fraudulent. He just might not have any idea himself. What's more is that he is a product of the financial companies themselves. He was CEO of Goldman Sachs, which recently collapsed because of a long chain of bad decisions.

So you might hope that with Barack Obama coming in, and all the rhetoric of change, we could move away from this incompetence. You might expect there to be no more influence from big, failed financial companies in Obama's regime? That would be real change, right? Opps. Turns out "change" really was nothing more than a buzzword and Obama is just another big-government, financial-corporation-pandering politician.

Obama's appointee for the new Treasury Secretary is New York Federal Reserve head Timothy Geithner. He helped orchestrate the rescue of both Bear Stearns and AIG. Robert Rubin is also part of Obama's economic team. He is the guy who bailed out Goldman Sachs when he was the Treasury Secretary for the Clinton administration and recently served as Chairman of Citigroup (who we the taxpayers are currently bailing out). There are a dozen more examples. One of today's comics in the Observer was wonderful and parodied this same issue. Sidenote: Hillary Clinton as Secretary of State? Yeah, that's change.

That same libertarian blog I mentioned above asked a great question today: "We are watching a grand experiment--how long can human beings working together as the state not deal with the consequences of their actions?" I don't know, but I hope we figure it out soon. Leave a comment and let me know what you think about the situation.


Brad Duffy said...

Andrew--great post. I agree with about everything you wrote here. It's a shame that Ron Paul, Peter Schiff, and Austrian economics haven't caught on more with the media and the public. People will be forced to listen soon, though, as more and more of their predictions play out. Thanks for the thoughtful post.

Brandon said...

Take heart, the Bolts are still in it, as improbable as that sounds.