Thursday, September 18, 2008

The Empire Melts Down...

Those of us who have been studying economics for 40 years - 30 of them libertarian free market economics - have known this week was coming. The one where all the government crony corporations and millionaires who have been scamming Americans and sucking us dry collapse good and hard. First it was the gold standard which artificially limited the amount of credit that could be extended, helping to stifle competition against large existing businesses and the already wealthy. Populists called for Silver as a basis of exchange and repeated William Jennings Bryan's slogan "Don't Crucify Humanity on a Cross of Gold." Given the constant populist uprisings, the power elite in 1913 created the Federal Reserve System to control the expansion of the money supply so that they could skim off the top. (If rich bankers borrow from the public at 3% interest and then make sure inflation averages 3%, they are getting that money for free every year - and even making a buck when inflation goes over 3%! What a great scam!)

They over-expanded the money supply during the twenties, encouraging fun practices like buying stock on margin (no money down!), leading to a 1929 bursting stock market bubble. And then the government under Hoover and then Roosevelt decided to be conservative and refused to put enough money into the system to facilitate trade, leading to an 12 year depression. Credit remained relatively tight with the elites happy to live off all that profitable borrowed money for 40 years - until Jimmy Carter started printing all that money. The U.S. experienced 10% plus inflation for the first time since - the Revolutionary War??

Suddenly people began to realize there is a difference between a government printing money, thereby causing across the board inflation, and banks extending credit to foment real production and trade. Of course, if the government says it's "OK" banks extend more money than is prudent creating bubbles and financial collapse for the least prudent banks and investors. It was in the early eighties I myself studied up on monetary theory and wrote my still formidable article "Trade Creates Money" - the title based on
E.C. Riegel's theories of the legitimate expansion of the money supply. (I sent it to economists Friedrich Hayek, who loved it, and Milton Friedman, who hated it.)

Unfortunately, libertarians, who were all against government fiat money-caused inflation, were divided between gold standard advocates and those who believed free market banking would show us what monetary system - or competing systems - worked best. So we couldn't educate the baby boomers who were sick and tired of being poor and started demanding or engineering a loosening of credit - and what we baby boom brats wanted, we got. (Don't ask me for a reliable source on that one, just sounds reasonable to me!)

The elites just found new additional ways to rip us all off, of course, between excessive credit card fees, wacky investment schemes, war profiteering, etc. And then came in 1995 Clinton and his buddies got that great idea to force banks to loan to anybody who wanted to buy a house, whether or not they could afford it. Pretty soon the sharks were telling poor folks they could afford to move into $200,000 houses, getting a guarantee from Fannie or Freddie Mae. The sharks walked off with big fat fees. The permutations of the scams they pulled boggle the mind.

But don't take my word for it. The Investor's Business Daily article The Real Culprits In This Meltdown was re-printed by dozens of publications this week. It said most importantly:

''The untold story in this whole national crisis is that President Clinton put on steroids the Community Redevelopment Act, a well-intended Carter-era law designed to encourage minority homeownership. And in so doing, he helped create the market for the risky subprime loans that he and Democrats now decry as not only greedy but "predatory." Yes, the market was fueled by greed and over leveraging in the secondary market for subprimes, vis-a-vis mortgaged-backed securities traded on Wall Street. But the seed was planted in the '90s by Clinton and his social engineers.'' Obviously the Bush administration also was totally complicit.

Mark Skousen's Ride out Wall Street's hurricane - The real reasons we're in this mess – and how to clean it up Christian Science Monitor article says in part:

...did not Congress amend the Community Reinvestment Act in 1995 to require commercial and mortgage banks to lend to high-risk borrowers? Banks that failed to comply were hit with fines and faced rejection when they requested mergers and branch expansions. Suddenly the sub-prime mortgage business boomed, and Countrywide Financial became its poster child. Furthermore, to encourage home ownership, did not the federal government offer an implicit guarantee to cover the performance of mortgage-securities giants Fannie Mae and Freddie Mac? The result was corporate abuse and a systematic easy-money policy that lasted for more than a decade in real estate. Like all artificial inflationary policies, the overheated property market led inevitably to widespread turbulence. Recently the quasi-private Financial Accounting Standards Board imposed "mark-to-market" accounting regulations on financial institutions, forcing mortgages and other loans to be written down to zero simply because they couldn't be sold, even if they were still being paid by customers. As a result, we've seen financial tornadoes causing institutions to be downgraded and, in some cases, completely collapse.

OK, if your heart is beating too fast and your debts and impending job loss are making your nervous, take a break and watch a meditation video and then I'll continue...

Now there doubtless were lots of other factors at work here. A systematic study of relevant government laws and regulations, and selective exemptions to them, can help explain a lot. Few of us are aware of even 1% of the tens of thousands of laws and regulations that make the rich richer and the middle class and poor, poorer.

We have seen there are government-induced boom bust cycles which are far more devastating than any natural cycles which may or may not exist. But instead of allowing companies and individuals who most foolishly jumped on the bandwagon fail, while allowing productive companies and credit-worthy individuals to keep obtaining sufficient credit, governments are now "solving" the problem by printing money and throwing it at the most irresponsible - and or crooked and or connected to Bush/Cheney - lenders and borrowers. The rich cannot be allowed to go broke even if we all pay for it with inflation, even massive inflation cannot be far behind.

Solution wise, we have to assume people will always do stupid, manic and crooked things with money, especially with lots of money. What is the best way to protect yourself? Trusting politicians and bureaucrats who are constantly corrupted by wealthy, greedy and often crooked special interests? Or hiring an affordable private consumer agency whose researchers are totally on top of which banks, investment houses, insurers, etc. are trustworthy and which are not. Who do you trust - Bill Clinton and George Bush or Ralph Nader and Consumer Reports? :-)

Yes, get the government out of the money and banking and investment and mortgage business. It's like letting the Mafia run Las Vegas, except it's the economy! Of course, being a smart consumer is the other half. Banking in a local credit union where you have a say in where you money gets invested can help protect the little guy. Playing the stock market only if you know what you are doing, can afford to lose or stick it out through cyclic downturns. And not falling for phony schemes that are too good to be true. I wrote an idealistic article in the mid-1980s called Finding Freedom in Your Own Back Yard about local economics. Keeping things local where we can keep our eyes on them remains a pretty good idea. In economics and in government...secede and survive!!

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