In U.S. history, defense and foreign policy making has exemplified this pattern to a greater degree than anything else. Ever since the United States began to exert itself aggressively on the world stage at the end of the nineteenth century, a relative handful of persons drawn from a common, highly unrepresentative background has tended to call the shots in foreign and defense policy making. Perhaps this pattern has weakened somewhat in the past two or three decades, but it has certainly not disappeared.
Earlier it was so blatant as to be unmistakable. People at the top of the heap in foreign and defense policy making often had attended the same exclusive boarding schools, the same universities, and the same law schools. They generally had worked in top law firms or top investment banks in New York City. They had often known one another since boyhood. (Girls didn’t play in this league until very recently.)
One of the most important figures of the twentieth century in U.S. foreign and defense policymaking was Henry Stimson, who was twice secretary of war (under Taft and then under Franklin Roosevelt and Truman) and once secretary of state (under Hoover). Stimson, who epitomized the elite’s exclusivity, drew the same sort of people to him, giving them an opportunity to put their noses under the tent of power, where many of them kept themselves until quite recently.
In reading a biography of Stimson by Godfrey Hodgson, The Colonel: The Life and Wars of Henry Stimson, 1867-1950, I came across a passage (on pp. 247-48) whose content is so remarkable, not to say astonishing, that I am moved to share it. This passage has to do with the men Stimson took on as his chief subordinates at the War Department after he became secretary there in 1940: Harvey Hollister Bundy, Robert A. Lovett, John J. McCloy, George Harrison, and Robert Patterson.
Stimson, Bundy, Lovett, [and] Harrison were all members of Skull and Bones [a secret society of students at Yale]. Only McCloy and Patterson of the inner circle were not. Stimson, Bundy, Harrison, McCloy and Patterson were all graduates of the Harvard Law School; only Lovett was not. Stimson, Harrison, Lovett, McCloy, and Patterson were all prominent on Wall Street; only Bundy was not, and he practiced law on State Street, the nearest thing to Wall Street in Boston. All six men were Republicans. The plain fact is that, during a war for democracy conducted by a Democratic President — which was also, more than any previous foreign war in American history, a democratic war in the sense that millions of men from every corner of American life fought it together — the War Department was directed by a tiny clique of wealthy Republicans, and one that was almost as narrowly based, in social and education terms, as a traditional British Tory Cabinet.
Readers who wish to learn much more about such men, their backgrounds, their thinking, and their leading roles in the conduct of official affairs may wish to read The Wise Men, by Walter Isaacson and Evan Thomas.
That deflation is always and everywhere a bad thing, not simply a bearer of bad news, but bad news in itself, is now an almost universal article of faith among mainstream economists and financial commentators. Clicking on the scary headline, I opened an article by Ted Allrich, who is described as “the founder of The Online Investor and author of the book Comfort Zone Investing: Build Wealth and Sleep Well at Night." Allrich’s article, which does nothing to alter my belief that most investment “experts” are simply charlatans, encapsulates virtually every untutored and fallacious idea you’ve ever encountered in regard to deflation.
As he tells the story, deflation brings on all the horrors in the catalog of economic devastation.
As prices decline, businesses sell less, then go out of business. Fewer goods and services are offered. Less doesn’t become more. It becomes less. As businesses fold, capital dries up because investors don’t believe any business will make it, no matter what the product or service. Investors hang on to their cash. Hording becomes synonymous with survival. Wall Street (what’s left of it) can’t find capital for new companies to grow. Investors won’t invest.. . . So with deflation, there is less of everything. Businesses don’t grow. Jobs are fewer. Capital is not available. Everything comes to a slow and grinding halt.
Allrich concludes his litany of deflation horrors, naturally, by singing the praises of inflation: “Regular inflation, in fact, can be a good thing since it suggests an ever growing economy where jobs are plentiful and goods and services abound. ”
Well, all right, we can’t expect Allrich to have read George Selgin’s splendid little book Less than Zero: The Case for a Falling Price Level in a Growing Economy (London: Institute of Economic Affairs, 1997). After all, the book has been available for only eleven years, and investment experts are busy people.
But why, one wonders, has he not taken to heart what I wrote thirty-seven years ago in my first book, The Transformation of the American Economy, 1865-1914 (New York: Wiley, 1971), on p. 21: “Notably, rapid economic growth occurred both before and after 1897; neither a falling nor a rising general price level was uniquely associated with economic growth.” To elaborate just a bit, the rate of economic growth from 1866 to 1897, a period of secular deflation, was perhaps the greatest ever experienced by the U.S. economy during a period of comparable length. Real GDP grew by more than 4 percent per year, on average, notwithstanding the persistent deflation.
So, even if you’ve not mastered the works of Ludwig von Mises and Murray Rothbard, even if you are a confirmed positivist in your methodological bent (as I was in 1971), you can see clearly that the rate of economic growth and the rate of price-level change have been independent, at least within the ranges of these variables in U.S. economic history. (Hyper-inflation or hyper-deflation would be another matter: either would be devastating by making economic calculation and long-term contracting virtually impossible.)
Any decent economics teacher makes sure that before the students have gone more than a week or two, they have mastered the difference between absolute (nominal) and relative (real) prices. All of economic analysis hinges on this understanding. Yet, practicing politicians, investment gurus, news media hyper-ventilators, and others who play important roles in influencing public opinion are completely lacking in this basic understanding. The upshot is a destructive bias in favor of secular inflation, with the risk of periodic bouts of rapid inflation.
Which brings us to the second question: for better or worse, does deflation actually loom at present? If it does, its occurrence will surprise me greatly, because the Fed has been creating base money as if there were no tomorrow, and if the bailouts continue, as seems likely, more of the same is virtually certain. So far, the huge spurt in base money has simply been absorbed and held by the banks in the form of (legally) excess reserves, but the likelihood that the banks will sit on $268 billion of excess reserves forever is nil. Once they feel more secure, their loans and investments will go forth in search of a higher yield than the Fed pays them (since a recent change in policy) on their reserves, and at that point the banking system’s money multiplier will kick in with terrific force.
In short, given the monetary conditions now prevailing, the greater threat by far is inflation, not deflation. And contrary to what the investment “experts,” the politicians, and the mainstream economists believe, inflation is not a benign element in the economy’s operation. It is, as it has always been, the most dangerous and destructive form of taxation.
This action comes immediately after Goldman Sachs announced that it had won the same kind of charter in an “effort to change its investment banking model and gather deposits.” Two months earlier, Goldman, an investment bank, received permission from the Federal Reserve to become a bank holding company, thereby gaining access to funds being distributed by the U.S. Treasury under the Troubled Asset Relief Program (TARP), a scheme created to acquire “toxic assets” (i.e., assets whose market values had fallen substantially) from banks and other financial companies, but not used for the statutorily authorized purpose. Goldman received an allotment of $10 billion from the TARP.
Higgs told reporters that his hobby farm had fallen onto hard times during the past year. Although his operation was not highly leveraged - Higgs’s parents had reared him to steer clear of situations where he might be unable to pay his honest debts - he complained that the government’s ethanol subsidies had diverted so much corn into the faux-environmental boondoggle that the prices of poultry feed had gone sky high, greatly augmenting the losses he normally incurred on his birds. He therefore blamed Wall Street, reasoning that the ruling class operates as a coherent unit, and if the power elite was responsible for wrecking the country’s great financial institutions and shoving the losses onto the taxpayers, then the elite ought properly to be held accountable for his hobby-farming losses, as well.
Goldman’s acquisition of a state banking charter gives it the authority to conduct retail banking operations in some twenty-five states that have reciprocal agreements with New York, although it “will continue to focus on investment banking,” doing its business a shade more prudently than it has in the past few years - “go belly up twice, shame on us,” said a Goldman spokesperson.
Higgs expects to do business under the name Higgsbank (which he hopes will never be confused with Riggs Bank or associated in any way with the Bank of Credit and Commerce International, Clark Clifford, or the House of Saud), but hobby farming will continue to be his principal focus. “Financial shenanigans come and go,” said Higgs, “but chickens, ducks, and geese are forever. No matter how low the S& P falls, I’ll still have fresh eggs to eat.”
Higgs declined to say whether he would apply to the TARP for bailout money, expressing concern that any hobby farmer who went on the government dole might create a stigma for other hobby farmers who have resolved to bear their usual losses without whining for the feds to save them from their own bad judgments and, to speak frankly, their sometimes cockeyed decisions.
Nevertheless, reporters who gathered at Higgs’s rundown property for his news conference quickly noticed a foul odor that did not seem to emanate from the chicken droppings. One insisted, “I smell a rat,” but others were unable to say exactly what the odor was, and, in particular, whether it had anything to do with Higgs’s unrevealed intention to use his bank for disreputable purposes.
Medical tourism is a rapidly growing industry, estimated to bring in gross revenues now well in excess of $60 billion per year, and Mexico is a convenient destination for many Americans in need of pharmaceutical drugs, dental work, and surgical procedures. Prices may be as much as two-thirds below those in the United States for comparable goods and services. The Los Angeles Times reports, for example, that at Los Algodones, a Mexican town of about 10,000 population on the border with California, “dental offices outnumber restaurants 49 to nine. Add in the 26 pharmacies, 20 optical shops and 14 physicians offices, and you’ve got something of a mecca of medicine.” Similar towns may be found here and there along the entire Mexican border, especially across from Texas.
U.S. hospital firms are now investing in the construction of new care facilities in Mexico, to serve Mexicans, to be sure, but also with an eye toward the norteamericanos who are expected to seek their services.
These developments are one of the many unanticipated consequences of the jerry-rigged interventionist nightmare known as the U.S. health care system, which is geared to soak up money from people with so-called health care insurance (more accurately described as prepaid health care, because insurance principles have little to do with how the policies are formulated or implemented). If, like me, you have no insurance to cover noncatastrophic health contingencies, you quickly discover that the pricing arrangements for medical care in this country savagely discriminate against those who pay out of their own pockets. (Insurers have made arrangements for the providers to accept much less than I must pay on my own account.) So, a huge potential market exists for cross-border health care. Of course, too, Medicare does not pay for dental work, so that situation also draws many elderly customers south of the border.
If the Obama administration moves in the direction it has indicated it will seek to move, toward even greater government intervention in, or perhaps complete takeover of, the U.S. health care system, look for the growth of the Mexican health care industry to become extremely rapid. As the United States has long been to Canadians (who seek to escape from the national health care system up north), Mexico may become to Americans, who will need a similar refuge from their government’s “compassion.”
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So, as the current recession deepens and the rate of unemployment rises, we might have confidently predicted that Congress, in its infinite compassion for the little guy, would extend the period during which the unemployed may collect unemployment-insurance benefits. President Bush signed a bill today that will provide as many as 13 weeks of additional benefits, on top of the additional 13 weeks of benefits approved last June, which was on top of the 26 weeks the basic program provides.
The Associated Press notes that “Congress has enacted federally funded extensions seven times in the past 50 years during economic slumps - in 1958, 1961, 1972, 1975, 1982, 1991 and 2002.” Thus, this particular sort of counterproductive economic policy is almost as predictable as the sun’s rising in the east.
The availability of unemployment benefits reduces the cost of remaining unemployed, and therefore increases the amount of unemployment that workers choose. They more readily turn down existing job offers, in hopes that with additional time to search, they will find better ones. Or they simply take life easy for a while, not searching seriously at all. More people are happy to do nothing if they can collect a payment for doing nothing.
The Associated Press report also states: “The measure is estimated to cost about $5.7 billion, although economists put the positive impact at $1.64 for every dollar spent on jobless benefits because the money helps sustain other jobs and restores consumer confidence.” It’s good that the economists responsible for this estimate remain anonymous, because the nonsense it expresses brings no credit to their professional reputation.
Think about it: according to this claim, every time the government takes a dollar from earners and hands it to someone for not working, there’s a net gain of 64 cents. (In a spirit of professional generosity, I am ignoring the large costs of processing this transfer as well as the large deadweight cost associated with any tax.) So, why don’t we insist that the government tax more and more money away from those who earn it, and hand the loot over to those who are not working — after all, that net gain of 64 cents per dollar continues to beckon, does it not?
In a word, no, because a nasty little consequence will certainly ensue. As the tax increases, fewer people will choose to earn income; and as the handouts increase, more people will choose to stop working and collect the dole. Before long – yes, you guessed it — nobody will be working and everybody will be collecting a government payment for not working. It’s the paradise of which every social democrat has always dreamed.
Well, okay, maybe this scheme will run into some problems before it reaches nirvana. Maybe the problem will turn out to be the pesky fact that before the recipeints can consume (which requires getting something of value in exchange for their unemployment-benefit dollars), somebody must have worked to produce those goods and services. Little things like the need to produce (hence the need to save, invest, and work) before consuming and the need to provide incentives to the savers, entrepreneurs, and workers tend to get lost in the shuffle of modern mainstream economics, especially macroeconomics, where the narrow focus on the short run leads analysts to take for granted the economy’s potential to produce.
In any event, we may expect unemployment to increase as the recession grows worse, and we may confidently understand that a portion of the unemployment that exists at any particular time will be attributable to the availability of unemployment-insurance benefits. Congress will blame the market for the unemployment and take credit for, in effect, helping to increase and extend it.
Hirsch, you’ll recall, became renowned for his amazing style of running with the football. After one game, a sports writer reported: “His crazy legs were gyrating in six different directions, all at the same time; he looked like a demented duck.” That description might equally well be applied to the actions of a certain baldheaded secretary of the Treasury (aka Bailout Czar).
Said Czar begged the committee members today for understanding and compassion. “There is no playbook for responding to turmoil we have never faced. We adjusted our strategy to reflect the facts of a severe market crisis.” They certainly did, in a manner of speaking.
Our dedicated public servants in Congress have been watching the Czar like bird dogs, of course, and some of them expressed doubts today about the erratic flight pattern of the Treasury’s demented duck. “We all understand that when conditions on the ground change, policymakers must be agile enough to adjust to those changed circumstances,” said Alabama bird dog Spencer Bachus. “But changing too quickly, without adequately explaining why you’ve changed or what you’re going to do next, risks sending mixed signals to a marketplace that is in dire need of certainty and a sense of direction.” Arf, arf, arf (that’s bird dog for “amen, congressman”).
Pennslvania bird dog Paul Kanjorski also complained about the recent “180 degree change in policy,” and wondered aloud: “Do we have a plan?” Of course, “we” have a plan, sir. Here it is: “‘We’ plan to take trillions of dollars from the taxpayers, in one way or another, and hand it out to the banks, insurance companies, and other financial deadbeats because, well, congressman, they are just our kind of people and they’ve got themselves in a bit of a bind lately, and, gosh, if we don’t steal a shipload of money and pass it along to them, they might even be reduced to working for a living–you know, like the peasants we’re taking the money from–and that just wouldn’t be fair, because they’ve never had any experience with work, and, heck, they wouldn’t even know where to start.”
Crazy Legs Paulson then gave the committee an awesome hip fake, followed by an amazing limp leg and a incredibly sharp change of direction, promising that the Treasury is now looking into what AP reporter Jeannine Aversa describes as “new ways to boost the availability of auto loans, student loans and credit cards.”
Splendid. That’s just what the world needs right now: more loans to people with extremely iffy ability to repay those loans. We certainly can’t recall ever getting into any trouble in the past by indulging in that sort of reckless lending.
Remember: this administration wants no child (borrower) left behind! It’s not enough if credit card issuers, as in the past, simply offer credit to dogs. No, Mr. Secretary, we’ve got to do a lot better than that, because any stinting on the issuance of credit now runs the risk of plunging the entire world into a depression that will make the Great Depression of the 1930s look like a corporate Christmas party.
Our dedicated public servants in Congress have been watching the Czar like bird dogs, of course, and some of them expressed doubts today about the erratic flight pattern of the Treasury’s demented duck. “We all understand that when conditions on the ground change, policymakers must be agile enough to adjust to those changed circumstances,” said Alabama bird dog Spencer Bachus. “But changing too quickly, without adequately explaining why you’ve changed or what you’re going to do next, risks sending mixed signals to a marketplace that is in dire need of certainty and a sense of direction.” Arf, arf, arf (that’s bird dog for “amen, congressman”).
Pennslvania bird dog Paul Kanjorski also complained about the recent “180 degree change in policy,” and wondered aloud: “Do we have a plan?” Of course, “we” have a plan, sir. Here it is: “‘We’ plan to take trillions of dollars from the taxpayers, in one way or another, and hand it out to the banks, insurance companies, and other financial deadbeats because, well, congressman, they are just our kind of people and they’ve got themselves in a bit of a bind lately, and, gosh, if we don’t steal a shipload of money and pass it along to them, they might even be reduced to working for a living–you know, like the peasants we’re taking the money from–and that just wouldn’t be fair, because they’ve never had any experience with work, and, heck, they wouldn’t even know where to start.”
Crazy Legs Paulson then gave the committee an awesome hip fake, followed by an amazing limp leg and a incredibly sharp change of direction, promising that the Treasury is now looking into what AP reporter Jeannine Aversa describes as “new ways to boost the availability of auto loans, student loans and credit cards.”
Splendid. That’s just what the world needs right now: more loans to people with extremely iffy ability to repay those loans. We certainly can’t recall ever getting into any trouble in the past by indulging in that sort of reckless lending.
Remember: this administration wants no child (borrower) left behind! It’s not enough if credit card issuers, as in the past, simply offer credit to dogs. No, Mr. Secretary, we’ve got to do a lot better than that, because any stinting on the issuance of credit now runs the risk of plunging the entire world into a depression that will make the Great Depression of the 1930s look like a corporate Christmas party.
I still have some investments in stocks, even though I switched the bulk of my stockholdings to bonds back in January. (I felt like an idiot for waiting so long, but looking back, I feel somewhat better, knowing that at least I saved myself from the much greater losses I would have sustained since then, had I not made the switch.) On most days, my stock investments, though widely diversified, take a further beating. The odds that I will live long enough to recover these losses are slim to none. Yet I cling to a shred of hope that I will be wrong, that the market will recover in time to win the race against the Grim Reaper, and therefore that I will have a little bonus to enjoy when I reach 80 or 85 years of age.
Here is a chart of the Standard & Poor’s 500 stocks index over the past 15 years. Unfortunately, it does not show clearly how low the index has sunk recently. The index closed today at 851, which means that it has lost 46 percent since its recent high in October 2007.
To reach a comparable value of the S&P 500, you have to go back to June 1997. So, if you invested $1 million at that time, you now have stock holdings worth–blaring trumpets, please–exactly $1 million.
Not really, of course, because the value of the dollar has fallen during the interim by about 27 percent, if we use the CPI as our price index for the calculation.
If we adjust for the depreciation in the dollar, today’s S&P 500 stands, not at 851, but at 622 (in dollars comparable to those of June 1997). To reach that level of the index, we’d need to go back to the autumn of 1995. So, the investor has held his bundle of S&P shares for 13 years, received piddling dividends, and enjoyed a capital gain of exactly 0 percent. Pretty cool, eh?
The experts always tell us that in the long run the stock market is our best bet for building wealth. I’m beginning to have some doubts. But even if it is, that fact is cold comfort to those of us whose long run is getting short enough to count on the fingers and (for those with especially stout genes) the toes.
The latest such exhibition took place in Washington, D.C., on Friday and Saturday, when the leaders of the G-20 nations met to give the appearance that they are, as AP reporter Jennifer Loven reports , “battling a dire and deepening economic crisis.” Fortunately for everybody, these clown princes failed to reach agreement on any Grand Plan to Save the World. Such plans invariably make matters worse. Let us pray for gridlock.
The leaders did utter brave words, however, as they are wont to do on such occasions. “There shall be no blind spots,” declared German Chancellor Angela Merkel. “There is here a great common will to ensure that such a crisis is not repeated.”
One might have thought that the first step in precluding a repetition of the crisis would be a clear recognition of how it arose. This, however, is the last thing we can expect from our glorious leaders. As Loven reports, those assembled for the meeting were “uncharacteristically determined to hold their tongues,” and “talk of blame was kept to a minimum,” as well it should have been, lest someone so much as suggest that government policies themselves might lie at the root of the present debacle.
Many members of the group adhered instead to the privately expressed idea that “the primary fault for the cascade of ruinous events lies with a U.S., where it has become the norm to offer easy credit, outsize rewards for high-risk investing, and lax oversight to the whole process.” Very good indeed that no one spoke aloud about the “easy credit,” because doing so would lead too directly to a recognition that the Fed and other government agencies made such credit conditons both possible and, in certain areas, such as subprime mortgage loans, virtually mandatory.
President George W. Bush, the lame duck du jour, did reveal to the group that “he had agreed to the recent $700 billion rescue plan for U.S. financial institutions only after being told the nation was at risk of falling into ‘a depression greater than the Great Depression.’” It would be interesting to know who told him about this risk, but security concerns no doubt prevent the president from revealing the sources and methods of his intelligence gathering. (I am picturing a captive economist, standing on a cartridge box, wearing a hood over his head, with electrical wires attached to his genitals.)
It would have been a godsend if the president’s economic adviser had alerted him to the fact that the original Great Depression occurred not because the market system suddently went horribly awry, but because a relentless series of counterproductive government polices transformed what would probably have been a brief recession into an unprecedented economic catastrophe–in the words of economists Thomas Hall and David Ferguson, government officials made “an incredible sequence of policy errors that generated a cataclysmic event reaching around the globe.” Hall and Ferguson’s account of these policy errors does not agree in every detail with other economists’ accounts, but nearly all economists now agree that in some way the severity and duration of the Depression may be traced to government policy errors, not to a spontaneous breakdown of the market system.
Nevertheless, “an incredible series of policy errors” is now unfolding before our eyes. Presidents, prime ministers, and parliamentarians all seem to be acting under the sway of vulgar Keynesianism, as they stampede toward the enactment of promiscuous bailouts and “stimulus” outlays. At the Fed, Chairman Ben Bernanke acts as though he learned only one thing from his studies of the Great Depression: when the macroeconomy declines, keep dumping new money and credit on it until it says uncle and turns around. Finance ministers around the world appear to agree with this disastrous recipe for recovery. If only these masters of money had taken to heart one of Milton Friedman’s valid lessons, instead of this inflationary panacea.
Ernest Hemingway is alleged to have said, “The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.” Whether Hemingway made this statement or not, it’s true.
You may have heard recently that the U.S. Congress approved an increase in FDIC coverage to up to $250,000 per depositor, per institution until December 31, 2009. It is possible to qualify for more than $250,000 in FDIC coverage at the same insured institution if you have deposit accounts in different ownership categories such as single accounts, joint accounts, Individual Retirement Accounts (IRAs), and trust accounts. Additionally, business account deposits at the same institution are insured up to $250,000 and are insured separately from the personal accounts of the entity’s stockholders, partners, or members.
So, besides pressing banks to lend, whether or not they have creditworthy borrowers with whom to transact, the government has relaxed the incentive for depositors to monitor the safety of their bank deposits, and therefore lessened the constraints on reckless behavior by the banks. If my deposits are guaranteed by the government, what do I care whether the bank is behaving foolishly in its lending? It’s not my problem. And if nobody cares whether the bank is acting responsibly in its lending, why shouldn’t the bank shoot the moon, lending to high-risk borrowers at an elevated rate of interest? There’s less need for prudence if the government stands ready to pick up the pieces.
Because I have a personal account and a business account at the bank, I can place $500,000 there with full protection. Now, if I only had $500,000.
Things are not, however, always what they appear to be, as government stabilization policies illustrate when we consider them carefully. Anyone who has studied economic policy over a long period has encountered one stabilization policy after another that aside from failing to stabilize anything, was never actually intended to stabilize anything in the first place.
Instead, like most government policies, those purportedly aimed at stabilization are actually intended to transfer wealth, doing so under cover of the seemingly admirable announced goal of restoring order to something currently askew.
Thus, for example, government stabilization policies ostensibly aimed at taming the business cycle by means of fiscal actions are actually aimed at enriching the recipients of government payments at taxpayer expense (current or delayed). Government policies to stabilize the Middle East are aimed not so much at the establishment of peace in that region as at the enrichment of the military-industrial-congressional complex and at the gratification of the egos of the president and leading members of his entourage who take pleasure in moving rooks, knights, and queens about on the global chess board.
Lately, we have heard endless claims that the government is seeking to stabilize the financial markets. One might wonder, however, how propping up enterprises that, absent a large, permanent stream of subsidies, are doomed to ultimate failure qualifies as stabilization. (Not that we can expect government decision makers to worry about the long run, of course; if these men and women suffer any disability at all, they suffer extreme myopia, never seeing beyond the next election.)
The whole song-and-dance is a fraud. The government isn’t stabilizing the financial markets. It is robbing taxpayers for the benefit of privileged beneficiaries with the political clout and connections to put themselves at the head of the line when the Treasury hands out the loot. Because people have been led to fear that another Great Depression will occur unless the government “does something,” the circumstances are ideal for pulling off this sort of heist. Previous crises have operated in similar circumstances to similar effect: each has become a carnival of opportunism. Ever was it thus.
When Jesse James or John Dillinger wanted to transfer wealth to themselves and their gang, they walked into a bank, pointed a gun at the teller, and threatened to kill him unless he handed over the money. When Goldman, Sachs and Morgan Stanley want to rob the Treasury, they don’t have to act so obviously, because they already have their man on the inside–in fact, giving them the money is openly admitted to be his idea. Why do people sit still for this daylight robbery? Because the whole rotten undertaking is advertised as a necessary means of preventing complete disaster and disorder–because, in short, it is essential that the government stabilize the markets.
The next time you hear this stabilization claim, look around. See if you can identify who’s making off with the loot.
Later, however, I began to mull over the altogether unsurprising fact that, to my knowledge, Congress has held no televised hearings to look into the tremendous fall in fuel prices since last summer, when I paid more than $4.00 per gallon for a while. Oil company executives have not been summoned to Washington so that they can be applauded for sloughing off the greed that (allegedly) impelled them to charge so much for their products in June and July. No member of Congress has apologized for calling the businessmen there last spring to berate and threaten them while angrily mouthing sentiments that can only be described as idiotic.
These congressional show trials, which are held whenever gasoline prices rise substantially, always adhere to a tight protocol and a traditional script for each of the actors. Members of Congress huff and puff, demand to know how much the executives are earning, threaten new taxes and controls, and suggest ominously that the government may have to take over the companies unless something gives. Company executives do not laugh at these antics or dismiss them as the foolishness they are, but rather respond in solemn seriousness, explaining how changes in supply and demand have brought about the price increases.
Yeah, yeah, supply and demand. Isn’t that just the sort of excuse you’d expect a robber baron, caught red-handed, to invoke?
It’s no wonder the public always believes that conspiracies among the companies explain the high prices, and hence that the public supports government action to whip the conspirators into line or to impose price controls. It’s a perfect match: ignorant (and immoral) members of the public and ignorant (and immoral) members of Congress to represent them in Washington. We are witnessing democracy in action. As H. L. Mencken said, “votes are collared under democracy, not by talking sense but by talking nonsense.”
I first became aware of this moronic charade back in the 1970s, during the first “energy crisis.” William E. Simon, whom Nixon appointed to be the “energy czar” at that time, later gave a hilarious account of it in his book A Time for Truth (1978). Simon described “the demogoguery that is often unleashed at these hearings and is a gross caricature of the process of seeking information.” He illustrated his claim by reproducing the transcript of an exchange he had at one of the hearings with Congressman Joe McDade, who was certainly among the most corrupt members in the history of the corrupt House of Representatives. Read it (on pp. 62-64) and weep. “I knew,” wrote Simon, “I was faced with an economic illiterate or with a political hypocrisy so great that it stunned me.”
I challenge you, however, to read the transcript of the hearings the House conducted to bully the oil company executives as recently as last spring and reach a conclusion any different from Simon’s.
In his book, Simon noted “the compulsion in a dominantly liberal Congress to believe any rumor, however baseless, from any source, however absurd, which suggested that the shortage was ‘unreal,’ a product of a vicious oil company plot, and the compulsion to ‘demagogue’ whenever the red light of the television camera lit up.”
The more things change . . . .
Michael Alix, who worked at Bear Stearns for 12 years and was its senior risk manager since 2006, was named a senior vice president in the bank supervision group of the Federal Reserve Bank of New York, according to an announcement by the Fed.
This report speaks for itself. I have nothing to add.
Yes, in the circumstances just sketched, the year 1932 was drawing to a close, much as the year 2008 is drawing to a close. Should we expect next year’s events to resemble those of 1933? Devoutly may we hope they will not.
If they do, we are all in for a great deal of unnecessary trouble. But when did that bleak prospect ever give pause to a new gang of looters and world-savers? People might act to preclude a repetition of the drawn-out wretchedness after 1932 if they understood what happened then and why, but, sad to say, their understanding of that episode is by and large a tissue of myths and mistaken ideas. In our present fix, then, we may be excused if we conclude with Hegel that “the only thing we learn from history is that we learn nothing from history.”
Little comfort may be drawn from Mark Twain’s observation that “history doesn’t repeat itself, but it does rhyme.” Given what I see on the horizon, I expect that our political and economic future will have more rhyme than reason, and that 2009 will have more similarities with 1933 than a well-informed friend of humanity would wish to see.
Anthony Ryan, acting undersecretary for domestic finance at the Treasury, told those attending the annual meeting of the Securities Industry and Financial Markets Association: “As these banks and institutions are reinforced and supported with taxpayer funds, they must meet their responsibility to lend, and support the American people and the U.S. economy.” Like Perino, he felt the need to add a thinly veiled threat: “It is in a strengthened institution’s best financial interest to increase lending once it has received government funding.”
So much for the idea that because the government is taking nonvoting preferred shares in exchange for its handouts, it will have no influence over how the privileged banks are managed. Indeed, the idea that it would keep its hands off was always preposterous, regardless of the formal status of its newly acquired ownership stake. In view of the many ways in which the government can hurt a bank whenever it wishes to do so, no ownership position was necessary in any event.
As always, government officials are worshiping at the altar of easy credit, confident that any economic problem, no matter what it may be or how it may have arisen, can be solved by dumping cheap credit on it. Evidently, government leaders have not paused to reflect on how the economy came to be in its present troubled condition.
If they had given the matter any informed thought, they would have realized that outpourings of cheap credit lie at the root of the entire sorry situation. Recall how the Fed pushed the Fed Funds rate down to 1 percent in the wake of the dot-com bust of 2000-2002. With Fed credit available to banks for years on end at a negative real rate of interest, how could they resist plowing ahead with loans that normally would have seemed absurdly risky, especially when they could pass much of the rotten paper along to Fannie, Freddie, and other buyers in the secondary market? The rest, as they say, is history.
Now, the banks and other lenders have been chastened by the nasty turn of events during the past year. Giants such as Bear Stearns, Lehman Brothers, AIG, Wachovia, Washington Mutual, Merrill Lynch, Fannie Mae, and Freddie Mac have drowned in the swift currents stirred by years of feckless lending. Lenders have properly become more cautious. Eager to rebuild depleted capital and reserve balances, they are reluctant to lend except to clearly creditworthy borrowers. Riskier borrowers, if they are served at all, must pay hefty interest-rate premiums to compensate the lenders for dealing with them.
So, the present so-called credit crunch deserves to be recognized as an exhibition of prudence, which now reappears after a long absence, whereas the credit markets during the past five or six years deserve to be recognized as an exhibition of a fool’s paradise. Seemingly too good to be true at the time, they were, indeed.
Yet, in this concert hall, the government knows the lyrics to only one song: lend, lend, lend. Worry not about the morrow. After all, should you get into trouble, you can again draw from the government’s bottomless well, which is fed by its base-money fountain, to slake your thirst for another bailout.
So far, however, the banks have chosen to allow their reserves at the Fed to build up astonishingly. For the week that ended September 10, reserve balances with federal reserve banks averaged $8 billion. Then they began to increase rapidly, and by the week that ended October 22, they averaged $301 billion.
Although reluctance to lend to poorly qualified borrowers may explain a large part of this buildup, we might also note that on October 6 the Fed announced that henceforth it would pay interest on required and excess reserves, thereby greatly increasing the incentive for banks to hold the latter. So, on the one hand we see the government giving banks a reason not to lend out excess reserves, but to hold them in a riskless form while nonetheless earning interest on them, and on the other hand we see the government threatening banks that do not lend out their excess reserves, regardless of the risks associated with such lending in the present circumstances. If you suspect that the left hand does not know what the right hand is doing, you may well be barking up the right tree.
Recalling the aftermath of 9/11, he observes that the fear that “had cut through us like a hot poker” soon changed; it “became instead a low-grade fever, ambient noise, wallpaper, something you feel without feeling, hear without hearing, see without seeing.” We hardly noticed what was happening to us.
Then you look up one day and realize how profoundly that fear has changed your world. People are imprisoned without charges or access to attorneys, and it’s routine. People are surveilled, their reading habits studied, their telephone usage logged, and it’s commonplace. People, including children, end up on a secret list of those who are not allowed to fly, nobody will tell you why, there is no appeal, and it’s ordinary. We swallow lies like candy, nod sagely at babblespeak, and it’s unexceptional.
Torture is inflicted with White House approval, the president lies about it and it’s just another Tuesday.
Pitts is describing here the latest episode of a recurrent phenomenon that I have been studying and writing about for almost thirty years: the ideological transformation that follows the government’s sustained conduct of extraordinary policies during a crisis, real or imaginary. Living for years on end without previous freedoms, many people lose their awareness of the loss. They become accustomed to the new normality.
In moments of rhetorical enthusiasm, freedom lovers often declare that the love of liberty cannot be stamped out. They are wrong. It can be, and it has been. For most people, however, no stamping is required. All that is necessary is that people, whether they approve or not, be made subject to extraordinary government powers, which are always justified by the supposed dangers of the moment. Keep people in this condition for a few years, and most of them will accommodate themselves to it, first in their actions and eventually in their thinking, as well. After a while, they will have lost not only their old liberties, but also their yearning to be free.
I give you Exhibit A: Nearly everybody in the United States today believes that he is living in a free country! The disconnect between perception and reality is breathtaking. With sadness and a deep sense of loss, we recall what Goethe declared long ago, “None are more hopelessly enslaved than those who falsely believe they are free.”
McReynolds fumed that the government’s seizure of the country’s monetary gold and its abrogation of all contractual gold clauses, in both private and public contracts, spelled dishonor. “This amounts,” he declared, “to a declaration that the Government may give with one hand and take away with the other. Default is thus made both easy and safe! . . . Loss of reputation for honorable dealing will bring us unending humiliation; the impending legal and moral chaos is appaling.”
None of these objections dented the Roosevelt administration’s zeal to abolish the gold standard and all of its accouterment. These dedicated public servants were too busy saving capitalism to be deterred by plausible claims that they were actually destroying it.
These historical incidents have streamed back into my consciousness often during recent weeks, as I have witnessed the government’s floundering, flailing actions ostensibly to break free the “locked up” credit markets and to induce the banks to lend as freely as they were lending in recent years, when they were inflating the greatest global financial bubble of all time.
Don’t talk to me about heroin or cocaine. If you really want to see an addictive drug, take a look at cheap credit. I have heard that the drug cartel meets in Washington, D.C., in a big white building with a dome and that the drug’s most active pusher is known on the streets as “the Fed.” Although the Fed has been pushing the drug for a long time, everybody is scared of him, and nobody dares to arrest him and shut down his business.
This morning, the president gave a brief speech in the White House Rose Garden, to give reporters advance notice of what Treasury Secretary Henry Paulson and other government officials would spell out more fully a little later. These financial czars, Bush said, “will make clear that each of these new programs contains safeguards to protect the taxpayers. They will make clear that the government’s role will be limited and temporary. And they will make clear that these measures are not intended to take over the free market, but to preserve it.”
In the immortal words of W. H. Auden, “But should our beggars ask the cost/ Just whistle like the birds.”
Our rulers speak of their economically foolish and morally monstrous measures an essential steps to “restore confidence” and thereby “to directly benefit the American people by stabilizing our overall financial system and helping our economy recover.” This kind of talk gives me new respect for Jesse James: He might have been a robber and a murderer, but he did not dispense such drivel to his victims.
Bush’s promise that “the government’s role will be limited and temporary,” in particular, caught my attention. In decades of studying government actions during crises, I have encountered exactly such a promise again and again. This time, I recalled in particular a previous president with whom Bush has often been compared because of his crusade to “make the world safe for democracy,” just as Bush ostensibly seeks to make it with his so-called War on Terror.
In his first term, Woodrow Wilson responded to complaints from exporters and others that the war had caused shipping costs to skyrocket, hurting their business substantially. The Wilson administration undertook to remedy this situation by creating a new government agency, the U.S. Shipping Board, to regulate the rates and other terms of ocean shipping contracts and to create a government firm to build and operate ships in competition with private shipping lines. Naturally, this proposal frightened some people, who smelled the foul odor of socialism. Wilson reassured the opponents of his proposal, however. In a letter to O. G. Villard, he declared: “The idea in the proposal is not that the government should permanently embark in these things, but that it should do the immediate and necessary thing.” Wilson’s statement might well be adopted as an official template for any crisis measure whatsoever.
By the way, the federal government remains deeply engaged in the shipping business to this day, almost a century after Wilson promised that such involvement would be temporary.
In one of his finer moments, Herbert Hoover wrote, “Every collectivist revolution rides in on a Trojan horse of ‘Emergency.’” Hoover was wrong about many things, but he was right about this one.
Commenting on the global economic meltdown, Krugman told a news conference in Stockholm by telephone from the United States that some of his research was linked to currency crises and related issues.
“This is terrifying,” he said, comparing it to the financial crisis that gripped Asia in the 1990s. “I had never thought that in my lifetime I would see anything that resembles the Great Depression, but this in fact does.”
This statement shows either (1) that Krugman knows nothing about economic conditions during the Great Depression or (2) that he knows nothing about economic conditions at present. An unemployment rate of 20-25 percent is not comparable to an unemployment rate of 6 percent. A decline in real GDP of 30 percent is not comparable to ongoing growth in real GDP. Approximately 10,000 commercial bank failures are not comparable to a handful of such failures recently. Deflation of 20-25 percent is not comparable to the inflation we presently experience. Many other gross differences might be mentioned, as well.
For economists who would like the Nobel Prize to mean something, today is a very sad day. Besides making a travesty of the prize, Krugman’s selection constitutes an insult to the few excellent economists (I am thinking especially of F. A. Hayek and James Buchanan) who have received the prize in the past.
In explaining the government’s resort to this partial nationalization of the banking industry, the Times reporters note that “financial markets have been going downhill faster than anyone had seen before. Credit markets seized up and all but stopped functioning, making it impossible for most companies to borrow money on more than an overnight basis.”
For some time, most recently in a commentary I posted yesterday, I have been citing comprehensive, systematically collected evidence from the Fed’s website that this “seizing up” claim is false. Although the data show some evidence of diminished lending in some credit markets, they do not comport with allegations that the credit markets have “seized up,” “locked up,” or “frozen up” or with claims that “nobody is lending” or that the credit markets have “stopped functioning.” All such turns of phrase, which appear in virtually every report in the mainstream media, are sheer hyperbole–which, I might add, serve only to heighten a sense of panic among the public and within the inner sanctums of Our Blessed Rulers and Saviors.
To my amazement, it seems that the big-time reporters are ignoring my blog posts, not to mention the publicly available data linked in them. As my old friend Murray Rothbard would have said, shockeroo. As I myself am inclined to say, whuda thunk?
It’s true, I admit, that I pay my bills on time; my momma didn’t raise no deadbeats. But is it possible that I am a better credit risk than the country’s biggest corporations?
I raise this seemingly idiotic question because I continue to hear that such companies simply cannot borrow short-term funds because credit markets are “frozen.” Just yesterday, on NPR, I heard a Wall Street fellow, identified as the vice president of a financial-information firm, say that no money is moving. He stares at his computer, he says, but for the past several weeks, he has seen virtually nothing, whereas previously the billions flew past so frequently that he had to work like a demon to take note of all the traffic.
Other commentators admit that companies continue to borrow, but they insist that only very short-term funds are available, whereas 60-day and 90-day credits used to be available to the same borrowers. As a result, firms are allegedly having to work frantically from one day to the next to maintain the flow of financing to meet payroll expenses and purchase inventories. Interest rates are said to be extraordinarily high.
Unless the Fed’s system of collecting information on issuances of commercial paper has gone completely bonkers, however, all these claims are wildly off the mark. Looking at the data for the first four business days of the past week, I find that firms sold from $179 billion to $205 billion of commercial paper per day; the number of separate issuances per day ranged from 6,761 to 7,298. Both the total amount borrowed and the number of issuances per day increased steadily throughout the week (data for Friday have not yet been reported).
It is true that the bulk of the activity in this credit market has occurred recently at the very short-term end. On Thursday, for example, 1-4 day funds accounted for 79% of the value and 71% of the issuances. But this concentration at the short-term end of the spectrum is not particularly a characteristic of a current “credit crunch.” In 2007, for example, on average, 69% of the value and 62% of the issuances came from deals for 1-4 day funds.
At the other end of the term spectrum, on Thursday (the most recent day currently reported), for example, 10% of the value and 11% of the issuances came from deals with terms of 21 days or longer. In 2007, on average, the corresponding figures were 21% and 24%, respectively. So, yes, the commercial paper market has moved recently toward the short-term end, but it is not true either (1) that no commercial paper is being sold or (2) that it is being sold, but only for very short terms.
Now, it’s possible, I suppose, that guys interviewed by NPR and self-selected financial bloggers are right, and the Fed’s data-collection system is wrong. If so, however, it would be a public service for the doomsayers to let the world in on this secret, and to reveal (citing publicly accessible sources) exactly why rational people should ignore what is ostensibly the most comprehensive and reliable data source and, instead, believe the manic, unsubstantiated claims now circulating via the news media and the blogosphere.
