The globe is spinning. Its leading team of bumbling spinmeisters, statist incompetents, unalloyed greedsters, malicious socialists and phony conservatives is running this tired Western jalopy toward The Rock of Immovable Reality. Harpo, Gekko, Barko and Sarko are together in the catbird seat, still throwing off comforting gibberish but testing the buckles on their ejection seats.- - - - - - - - -
The systemic faults created by the gross incompetence and corruption of governments (1) have been exploited by the bankers to raid the bank. When reality check came and real estate values crashed, governments bailed out the malefactors and fanned the flames of fear to implement “solutions.” Such solutions took two forms: “bailout,” i.e. the transfer of toxic debt from the banks’ balance sheets to the governments’ balance sheets, or “stimulus,” i.e. throwing easy money at the hoi polloi and further inflating the governments’ balance sheets.
All that was merely another instance of the Western model of misgovernance, based on rolling over the consequences of wickedness and folly onto future generations. That protects the perpetrators but worsens the ultimate consequences for the rest.
The moral hazard and future consequences of bailing the banksters out were known. The Telegraph‘s 11 February 2009 headline said it all: “European banks’ toxic debts risk overwhelming EU governments.” Furthermore, the monetary/fiscal plague afflicting the world now erupted not in 2007 but in 1998. Its course was predicted and warnings were sounded from the outset by several Cassandras unwelcome in the corridors of power (2).
It started when Russia defaulted on its sovereign debt in 1998, precipitating the collapse of Long Term Capital Management and the subsequent near-collapse of stock markets worldwide. Central banks, particularly the U.S. Fed, responded by what money pros call “opening the spigot.” All that easy money created the Tech Bubble of 1998-1999, and the inevitable crash of 2000-2002. And that opened the central banks’ spigots much more than the first time — particularly the American spigots that were controlled by the hugely misguided Alan Greenspan.
Torrents of cheap money looking for a harbor found their way to the real estate market as of 2000. Real estate price doubled and tripled, particularly in places that had a sunny climate and beaches (e.g. Greece, Spain, Portugal, Italy, Florida, Coastal California) or a boomtown location (e.g. London, New York, Las Vegas). Thus, the worldwide housing bubble and its subsequent and, again, inevitable, crash. According to Martin Weiss of Weiss Research, just the American investors’ losses were $6.6 trillion from the Tech Wreck and $15.5 trillion from the burst Housing Bubble, a total of $22.1 trillion.
Central banks, however, read from the same book that has only one paragraph. With the third crash precipitated by exactly the same policies of cheap credit and too much money sloshing about, they just tore off the spigots completely, set interest rates at near zero, and let it rip. Hence “bailout,” “stimulus” and the resulting fourth bubble: the bubble of sovereign debt.
Between 15 September 2008 and 1 July 2009, for instance, the central banks of England, U.S., Switzerland and EU expanded their balance sheets (i.e. printed more paper money) by 127%, 119%, 80% and 39%, respectively (3). It’s the biggest bubble of them all. And now, this inflatable Mickey too is collapsing with a hiss.
They who inflated all these liquidity monsters in the first place, cannot but create “solutions” that are worse than the problems. The only problem that they have solved is the problem of governments’ lust for more power. Now they have much more such power.
With Ben Bernanke on the cover of Times Magazine, and Martin Wolf declaring at Financial Times that economists saved civilization, it’s worth reasserting that this has been just a classical Club of Crooks and Loons swindle: transform a Wall Street bankruptcy into a sovereign debt bankruptcy. Print money in a dozen underhanded ways to postpone a deflationary depression on your watch, even if that entails hyperinflation some years down the road. Or, to paraphrase the financial publisher Bill Bonner, Japan first, Zimbabwe later.
Read the rest at the Brussels Journal.
12 comments:
In hoc signo vinces
Was the root of all this the progressives, nineteen eighties classic laissez-faire economics.
Yes it was the laissez faire. Laissez faire is a nice principle in a farmers' market. But when you leave Wall Street to do its business unregulated and unsupervised they will rape and destroy you. And if you do "free trade" with countries that manipulate their currency and dump their products on your market subsidized by their state, you are a dope. Not you, we. The U.S.has acted in international trade like the biggest dope in history.
In hoc signo vinces
Takuan Seiyo,
It is amusing that in the U.K. every politician and economist claims not to have seen this crash coming the liberal politician Vince Cable is put up as some kind of visionary for predicting the crash in real end time, the political elite could not all plead ignorance so he has been put-up as their colective soothsayer.
For this dope on the street the laissez-faire economic policies of the eighties manifested itself particularly in the home ownership policy of the Thatcher government.
The housing market was like a game of property pass the parcel with the mortgage increasing in value with each move only because the banks were financing the non-productive participants, to make that possible without enterprise or industry the financial system had to be deregulated literally opening the bank vault doors to all and sundry in the name of free market economics and conservatism.
At the time the dangers of this market were apparent and that the policies were not conservatism but neoliberalism the banks acting like a golden welfare state, all those years ago this dope seen the crash coming why do they pretend that they did not?
It's not laissez faire. It's far away from true free markets. Central banks printing money is nothing more than counterfeiting. And same thing for private banks having less than 100% reserve requirements.
It's not laissez faire when governments take more debt, it's opposite (more debt -> more taxes).
Bailouts and stimulus are not laissez faire.
Several Austrian School economists predicted this crisis.
There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.
- Ludwig von Mises, Human Action
In hoc signo vinces
@LS,
"Bailouts and stimulus are not laissez faire."
Counterfeit laissez-faire -
The counterfeit laissez-faire bailouts and quantitative easing of the laissez-faire economies is the end game or the final act of the nineteen eighties (pseudo) laissez-faire economic policies which caused the crash.
Margaret Thatcher called her (pseudo) laissez-faire economic policies “ordered liberty”.
As to UK, the best predictor of things to come was the uniformly hostile treatment of Hayek and his work during his few years in London v. the lionizing of the charming but fraudulent Keynes -- the global warmist of economics. Anyone who continues with socialist policie after "The Road to Serfdom" does not want to see.
Fractional banking is okay, but like in everything there must be balance. I don't know enough about this to determine what the optimal ratio of reserves should be, but it's between 25% and 50% -- and we have allowed our banks to go to 3%. That's not laissez faire but criminal government negligence and staggering corruption. That's one of the few things we need a government for and in this, like in the few other things we need them for, i.e. guarding the borders, administering immigration etc. they have proved thoroughly useless. Instead they import jihadis and put spy chips in garbage bins.
@4Symbols,
The problem is that one thinks counterfeit/pseudo laissez faire is (almost) laissez faire. It's like half-pregnant, there is no such thing. Monetary freedom (no counterfeiting allowed) is in the core of true laissez faire.
@Takuan Seiyo,
I believe that austro-libertarianism (libertarianism with respect to Austrian School) is the solution to these problems.
First banks. Less than 100% reserve requirements is fraud. Same case is for central banks when they print money. There is no need for government regulations, just anti-fraud laws. If banks can't print/counterfeit more money governments can't get these huge debts. They are forced to hold tight budgets. And private banks will be much more stable.
Libertarianism can also solve immigration problem. When there is no tax-funded welfare on immigration and almost everything is privately owned the problem solves itself.
I hope that Austrian School will become mainstream. Nixon once said: "We are all keynesians now." I hope that one day someone will say: "We are all Austrians now."
BTW, since you are living in Japan here is Austrian perspective of Japan's monetary policy.
Was the root of all this the progressives, nineteen eighties classic laissez-faire economics.
That's a firm: 'No'!
What is imploding here is a policy demanded by Karl Marx as early as 1848 in his 10-point programme:
5) The centralisation of all credit into the hands of the state by means of a national bank with state capital and an exclusive economy.
This is what we have implemented throughout the 20th century. This is a system that lends itself to abuse, and the key step towards that abuse was abandoning the gold standard.
Now, I believe that a system of small, floating currencies would be viable, but unfortunately we've created a system of large currencies where manipulation and inner tension is tearing them apart - most notably the euro.
The demand for 'more regulation' is a red herring. What we really need is to stop printing money - stop expanding the money supply. If we do that, the need for more 'regulation' (more bureaucrats) will fall away by itself, and power will revert to people who work hard and produce value.
Re: Libertarianism/ Austrian Econ
“Government regulation” in the sense I use it is the enforcement of antifraud laws. Nothing more. However, the ways in which a man can defraud another are so many, and not necessarily all economic (e.g. voting fraud, ident. theft etc.) that quite a bit of such regulation is needed. The government should act as the impartial referee in the laissez faire game. But the point is, without such a referee, the game is moot.
I agree that Austrian economics is the answer, as is the gold standard. I have problems with pure libertarianism, though. These too big to go into here, but roughly predicated on two issues. First, libertarianism seems to be based on the same misguided premise as economics: that man is rational and basically good. But true conservatism starts from the premise that man is a fallen creature – you can see that vividly in the writings of the American Founding Fathers. Second, libertarianism is the product of Northern-European minds, and is a suitable doctrine by which a Northern-European ethny, in the Old World or New could govern itself. When you add to this some facts of modern existence, from the percentages of racial minorities in America, to Muslim immigrants all over, to nuclear Iran. NorKor, not to speak of Russia and China, that changes the picture quite a bit.
No use even mentioning Japan; the subject’s too big. The only images the word “Austrian” conjure in the Japanese economist’s mind are Mozart and Sacher torte. All they know is Keynesianism, and this has been mated to a massive political corruption machine. The pols reward their countryside constituencies by spending stupefying amounts of tax and “stimuls” money to flatten mountains that need no flattening, build highways where even ways are redundant etc. It provides “jobs” for the locals. It’s criminal mischief on many counts, one of which is that they have destroyed much of the natural beauty of what used to be one of the most beautiful countries in the world.
@Takuan Seiyo,
There are two main branches of libertarianism: Anarcho-capitalism and minarchism (classiscal liberalism). I'm advocate of latter one. Minarchism means minimum government: Government only handles security (army, police, justice) and enforces anti-fraud laws, thus acting as impartial referee. US Constitution resembles minarchist pact but as we have seen it's not strict enough.
The good thing about Austrian economics is that it doesn't have bizarre assumptions (unlike other schools) like hyperrational man or perfect market. In fact Austrians proved that there can be no perfect market. And in Austrian economics if indian is making rain dance he is acting rationally (if he thinks that the dance will bring rain).
Austrian economics tells that no government intervention to economy can make economy any better. And in most cases government intervention hurts economy and therefore lowering standard of living of people.
About gold standard. Many Austrians don't want gold as only currency. In fact they want several competing currencies.
@LS
Minarchism -- I'll have to read up on that. Reminds me of the term I thought up for the current slant of Western democracy in action: "minoritarian tyranny". Gold of course cannot be a medium of exchange, unless we go back to wearing sword and dagger for self-protection (not firearms, as there are too many incompetents and risk of collateral damage too big). As to gold as the backstop to currency, there is so little of it relative to the modern economy that the introduction of a pure gold standard would mean the practical wipeout of the wealth of the Western world. Maybe a basket of rare metals including gold, platinum, cobalt etc. would do it. China, while not too aggressive in gold acquisitions, has quietly cornered the market in rare earths. As usual, they think 25 years ahead.
@Takuan Seiyo,
One way out this mess could be to raise res. req. to 100%, disband central banks (of course not instatly) and allow competing currencies.
Competing currencies may include paper money (100% res. req. and no central bank). Also paper money backed with one or more precious metals is one possibility. And gold can be used for bigger purchases (like buying house).
In free society banks have basically two desks. Desk A is where you can put money to your account. Bank probably charges small fee for managing your account. Desk B is where you can loan money to bank and bank will loan it forward (and bank pays you premium).
True free market will find effecient currencies. The most important thing is to keep governments from controlling money.
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If you are interested to learn more about libertarianism, Austrian School, history and ethics of liberty then Ludwig von Mises Institute is THE PLACE. Hundreds of books that can be read for free or ordered (plus articles, videos, audio records, ...). I started my journey to austro-libertarianism with
What has government done to our money? (to read, to order) and
Economics in one lesson (to read, to order)
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