Too Big to Bail

From a discussion I recently had with a fellow passenger, flying back from my visit to India, I was asked while explaining my economic views as what changes I would propose and how they would help. I responded in the following fashion:

There are 3 key reasons why the ordinary person, not the politician, should be for repeal of legal tender laws, and thereby privatisation of currency and enhanced currency competition.

1. Most of all, it gives people the choice and opportunity to avoid using currencies that are being actively and consistently debased in the name of producing elusive benefits, all the while destroying their savings by devaluing their money relative to other goods by inflation. This is the most vicious of all flat taxes, hurting the poor the most, yet those that claim to care for the poor seem to share a strange ignorance of this fact.
2. It will force governments to cut their spending, especially not allowing them to live beyond their means with aggressive militarism engaged abroad(especially by the US), dubious “stimulus” spending and bailout policies and corporate welfare. With the government cutting its bids for resources and factors of production in the economy this would allow private individuals to renew their bids for these factors at lower prices and allow for the reorientation of the structure of capital to the production of those goods actually demanded and exchanged voluntarily with consumers, producing sustainable increases in productivity, income and wealth.
3. Connected with the above, governments will be forced to be much more sensible with regard to their funding of more “luxurious” public spending given that further increases will have to come out and be funded through increased taxation. This brings an immediate awareness and resistance upon the part of the citizenry to the real costs of such policies, and also can help prevent government attempts to bamboozle the public as to the details of the costs of their policies with their usual smoke and mirror tricks (increasing debt, and financing deficits in the long run through credit expansion).

edit: I must apologise for the terrible neglect I have made to updating this blog over the past year.

A friend of mine sent me the following link the other day.

Shaffi Mather: A new way to fight corruption

I have quite honestly, found it to be the most inspiring thing I have seen on the internet for quite some time. Shaffi Mather, a former employee of Reliance industries, has gone on to found 1298 for Ambulance (the same service that  heroicallyreached and provided ambulance services for the victims of the Mumbai attacks before any government services were anywhere near the locations), a for profit ambulance service that is succeeding in providing this emergency healthcare, an area the government has failed in so badly there its presence is not even felt, as well as an education initiative creating schools and providing elearning services throughout India.

However, his most impressive feat by far is his latest initiative to provide a private service that will fight on behalf for victims of corruption utilising legal mechanisms to do so. A wonderful example of the divison of labour at work!

I urge readers to spread this clip, truly revolutionary. All we need now is to start issuing private currencies, while the rupee still holds only de facto legal tender status. That should give the Manmophan Singh the Keyesian something to worry about!

So, “market failure” anyone?

Far from adding cozily to the private sector, the public sector can only feed off the private sector; it necessarily lives parasitically upon the private economy.

- Murray N. Rothbard, The Fallacy of the “Public Sector”

Hit the link to read the full essay here

The drama of the PIIGS’ debt crisis continues to unfold, as some say it foreshadows what will happen to the US eventually. History is replete with countries that experienced economic crises which turned into fiscal crises. It appears that we may be in the beginning stages of this cycle.

Check out the great post from bearishnews.com on this subject.

If the all of the fiscal stimulus and massive deficits has spawned its own crisis (which could be even worse than the financial crisis), does this render all of the stimulus worthless (assuming you even thought it was a good idea to begin with)? Have we simply turned a financial crisis into an even greater fiscal crisis? Share your thoughts in the comments.

Consider this fantastic summary of “The Fed as Giant Counterfeiter” by Robert Murphy:

Ah, but we’re not done yet. Not only does the Fed’s accumulation of Treasury debt artificially push down the interest rate, but the Fed gives the interest payments right back to the Treasury! After all, interest is how the Fed “makes money.” It writes checks on itself (created out of thin air) and accumulates assets, and then earns the interest and (in some cases) capital gains on the assets. But after the Fed pays its employees, pays its electric bill, and throws the staff Christmas party, it remits the excess earnings back to the Treasury….

…Sorry, but our own monetary system has the same feature. When the Treasury securities held by the Fed mature — so that the Treasury has to pay back the face value in principal — the Fed rolls over the debt. Over time, the nominal market value of the Fed’s holdings of Treasury debt continually grows. Barring a sudden reversal in this policy, the Treasury knows that it will never have to pay off this debt. For all practical purposes, any Treasury debt ultimately finding its way onto the Fed’s balance sheet is economically equivalent to our monarch running the printing press to pay his bills.

Related to this, consider Thomas Jefferson’s warning to America concerning private issuance:

I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.

Milton Friedman published in 1966 an essay, which arguably, combined with Keynes’ General Theory were the two pieces of literature most responsible for shunting economics on to the wrong track, to use the same expression William Stanley Jevons used to describe the influence of David Ricardo on the science’s development. FA Hayek once said he regretted later not writing responses to both these works.

I hope I have done my own small part in providing a response to Milton Friedman’s “The Methodology of Positive Economics” in the following essay I am providing a link to. I have also decided to dedicate it to the memory of a friend and not so long ago fellow classmate of Mises University, hosted by the venerable Ludwig Von Mises Institute.

http://www.yourfilehost.com/media.php?cat=other&file=1665Why_Friedman_misunderstood_Physics_and_Mises_was_right_about_Economics.doc

A succinct version of this essay shall soon be published at mises.org.

No doubt I may well be the thousand and umpteenth person to blog this, though I thought I may as well do my bit to help spread this noteworthy video:

\”Fear the Boom and Bust\” a Hayek vs. Keynes Rap Anthem

Aside from the inaccurate portrayal of both men’s personalities (I think Hayek was much more of a lady’s man, while Keynes was a homosexual and not extraordinarily attractive to either men or women…), the video was excellent.

Keynes’s theory is portrayed fairly accurately as not much more than a scam based on the facile idea that keeping the money “moving around” lowering interest rates and boosting expenditure is somehow boosting the economy.

Hayek (or “Freddy H”) is then able to move in and flatly crush the theory, first pointing out that the policy consequences of credit expansion, thereby aritificially lowering interest rates then causes a false investment boom into certain projects that appear profitable, though this an illusion. The illusion is due to the fact the lowered interest rates result from central bank inflation of the money supply, and not increased saving and lowered consumption by the population at large. When this mismatch is finally communicated y the price system and the fact business owners can no longer find customers or returns to their long term investment projects a bust ensues. And we can thank “Lord Keynes” for that.

But hey, don’t take my word for it, here’s Freddy H!

The boom gets started with an expansion of credit
The Fed sets rates low, are you starting to get it?
That new money is confused for real loanable funds
But it’s just inflation that’s driving the ones

Who invest in new projects like housing construction
The boom plants the seeds for its future destruction
The savings aren’t real, consumption’s up too
And the grasping for resources reveals there’s too few

So the boom turns to bust as the interest rates rise
With the costs of production, price signals were lies
The boom was a binge that’s a matter of fact
Now its devalued capital that makes up the slack.

It would have been nice to have a shout out to Mises and Rothbard too, but I guess you can’t have everything, perhaps a sequel is in store.  Kudos to John Papola and Russ Roberts in any case!

Just a quick, if obvious thought. I was watching a show on the history channel about US presidents. They showed the famous clip from George Bush, Sr.’s campaign promise “read my lips. No new taxes!” Fast-forward a few years and taxes increased. The Law of Economics demanded that taxes be increased. It’s very simple: there is no such thing as the public sector. Any money that the government “has” or “spends” comes from the private sector. It is like a balance sheet. Whatever the government spends must come at the expense of funds from the private sphere. When the government runs massive deficits, taxes go up. We can try all we we want to try to maintain a fantasy reality in which the law of economics does not apply, but in the end the law will prevail. The same situation is going on now. Obama promised to be modest with taxes, but as a recent opinion piece in the WSJ noted, the only thing businesses and households see in the future is tax increases. You can’t have it both ways. The money has to come from somewhere. Any expenditure on the part of the government must result in a decrease in the resources of the people. For a much better and deeper analysis of this problem, read Henry Hazlitt’s “Economics in One Lesson.” You should read it anyways if you haven’t because it’s a must-read for anyone who wants to understand the repetitive cycles of government folly. You can read it online here: http://jim.com/econ/

Related to this: Ottawa’s deficit problems.  http://www.cbc.ca/money/story/2010/01/25/dale-orr-structural-deficits.html

If I were President, I’d have one simple rule: absolutely no bail outs.

The bails outs that have saved the insolvent banks in the US have created such great problems and have served only to expand the reach of government. It is so predictable that the government cannot just bail out “systemically important” institutions smoothly; there will always be problems. The government might feel like they can smooth out the issues after the bail out, but it always turns out that its not so simple. It fuels more debate, more social unrest, more nonsensical regulation and legislation.

Take a look at what is happening now. Obama proposes a tax to be levied against banks in order to recoup the money spent bailing them out. This might sound sensible enough, except that it is a practice in ex post facto lawmaking. The money given to “capitalize” the banks never came with taxes attached. This is simply an example of strong-arm government. This is only exaggerated by Obama’s always political and populist instincts. All of this foolishness only clouds the real problem and, quite frankly, I’m shocked that people, the likes of George Soros, have no real analysis of this issue when they share their opinions on the need for new financial reform.

The core of the problem is that the implicit and, often times, explicit guarantee of financial institutions and banks in the US is what makes them “too big to fail” in the first place. If the FDIC and Fed, didnt exist, then you and I would only trust are money to a bank after prudent investigation as to the bank’s assets and ability to pay depositors. But because of the guarantees of the government, the institutions become huge and there is simply no reason for a person to rationally be concerned with the (in)solvency of the bank that he parks his money in. Instead of removing the hand of government from financial affairs, we continue to blame the banks and free markets for all of the damage that has taken place, when, in reality, it is the government control of and involvement in the financial system that creates all of the problems which will only compound with new legislation.

Think about it this way: when all of the members of the government only care to vote for a bill when their interests are reflected in it, do you really think some sort of sensible, coherent reform will emerge? A Senator from Nebraska votes for health care reform only because of the pork promised to his state. This is exactly the type of shenanigans that go on in government on a daily basis. When the process works this way, we are asking for a miracle if we think that rational, sensible laws will emerge that will somehow help the crisis. To sum it up: its more of the same. The administration bullies business and banks to appeal to the populist rage, ignoring the need for serious corrections to a financial system that has such distorted incentives which are created BY the government in the first place.

I heard on the radio yesterday, the latest in the long spate of “advertisements” which the UK government uses to educate its hapless citizens that leaving their valuables lying around the house in places that are easily observable is generally not a good idea. The general gist of their message can be gleaned from the following:

http://letskeepcrimedown.direct.gov.uk/index.html

Now the reader may be puzzled as to why I mention this scheme. Is it not surely the zenith of libertarian pedantry to be blogging about an issue involving a government scheme as defensible as this? Indeed, I surely do find its aims agreeable, it is surely in individuals’ and society’s interests that their property is not stolen by criminals, and this is one of the rare instances that the state’s interests align with those interests to an extent.

Of course, the reason why the state or government is eager that citizens are not robbed is the same reason a mafia or any protection racket would generally like to “keep the peace”, from other criminals unaffiliated with its organisation; it serves against the mafia’s own interests, perturbing the conditions that allow for its own collection of income to be as maximal and peaceful as possible. However, given that the government is a monopolist of final decision making over its territory, and by necessity its mode of achieving its ends is largely restricted to compulsion via threats of violence; it is hampered from utilising incentives that can only be achieved in a method of governance that could be achieved through voluntary contractual arrangements. The work of Hans Herman Hoppe is great at illustrating this principle of governance through private courts, insurance and defence, in the following essay.

We can illustrate this using the topic of this post as an example. The way in which governments, and therefore their police forces are funded is through taxation and debt financing. This is a system for the provision of security that is rather disconnected from those presumed to be its beneficiaries; the taxpayers. The incentives which allow for the best possible provision of services in a market scenario are considerably weakened, there is little choice and buying power the consumer and receiver of these services can exercise with such a monopoly can exercise. Hence, given the state is really only interested in protecting “vital interests” in preserving law and order, we see that it generally is not able to tackle and convict effectively the criminals that pursue small scale crime. We are expected not to “waste their time”, having paid for services that they cannot sufficiently complete, with the police concentrating mainly on limiting only heinous crimes like murder and victimless crimes like the possession and sale of drugs.

This is without regard to the problems that occur from disputes citizens may have with the state. If the mafia has committed a crime against you, and your only court of appeal comes from a part of the mafia, no sane person would argue that such a trial could be immune from bias, dictating the settlement.

In any case, this “problem” that is the topic of this article, insofar as it is not a consequence of the incompetence of police not being able to catch the criminals that perpetuate small scale robbery, thereby not providing a suitable deterrent to this behaviour; is one of citizens erring in protecting their valuables. This strikes me however, as something that would be a complete non-problem under a system of private governance.

Imagine that your security is not provided by the state, but by an insurance company under which you would be compensated for any damages to your person or property they were not able to prevent or correct. For such a company, providing insurance for those who are reckless with their property in the first place would be immensely damaging to their bottom line. Indeed, companies that did pursue such a policy could be expected to swiftly go out of business. Hence, in addition to providing and warning people with information relating to the risks associated with reckless show boating of their valuables; they would be able to issue a far more effective financial incentive for people to behave in a more responsible way, by charging higher premiums for their less risk averse customers.

This in many ways, could be reasoned to be far more effective in tackling this problem, than pouring money for years and years down a rabbit hole with a  largely ineffective PR scheme.

The state cannot be in principle this effective, since it is not a voluntary entity. People have no choice over who provides their security, policemen are paid largely the same whether they catch criminals or not, and it is completely a lost concept that citizens would ever be redeemed on what property they lost. However, since everyone pays at the same rate for the provision of security, no matter how poor it may be; they would not have the same incentive provided by private system of security since they would be paying the same for security regardless of how careful they are of their property. To the extent they can “free-load” on the security services provided by other taxpayers, people will, and this helps explain why many people in modern society may be less careful in preventing their goods being stolen than they otherwise would be.