Archive for the ‘Banking Reform’ Category

Bernanke Moves the Sun-Dried Fish (Fun With Austrian-Style Crusoe Economics)

Sunday, February 22nd, 2009

In this adventure of Robinson Crusoe, the writer is so bitter that he takes it out on innocent characters in his own imagination, meanly depriving Crusoe of tools, supplies and opportunity.

Seven hundredths of a second after Crusoe thinks, “I wonder if I could rescue some supplies from the ship?” it sinks almost instantaneously with a perverse Champagne cork popping sound, into a trench a thousand fathoms deep.

Fish leap and play daily in Crusoe’s sight, but too far off for hand fishing.  The giant dwarf coconuts are five hundred feet tall, but with mini-nuts that take ten minutes each to crack and yield one calorie.  The island’s unique tortoises can outrun him.

Scrounging for enough food to starve over years instead of days is an exhausting grind.  Crusoe can only dream of capital projects.  There appear to be sources for tool making, but always a little too far from food sources to consider risking.

The problem that Crusoe has, as delineated by many Austrian School economists, is that he must have savings in order to produce tools (higher order capital goods).  Without savings of food he has to continue as he is, hand gathering for subsistence.  Crusoe plans, estimates and saves a few scraps.

Then Friday shows up.  The two divide the subsistence chores and start to do a little better.

They work out a detailed plan– by the standards of the island, it’s a massive capital project.  It involves building tools, and tools for building tools, in assembly line fashion.  The savings needed for them to complete their capital project according to their estimate– a thirty day supply of food.

Crusoe has been maintaining a rather ambitious food storage cave. He shows this to Friday.  It contains some pathetic food scraps of surplus over subsistence– the space carefully organized for the bounty that never comes.

Friday, now with considerable excitement about the thirty day plan, examines the potential of the space.  After all this waiting Crusoe is also catching emerging economy fever, and so as difficult as communication is for them anyway, they’re both hasty, and tragically fail to understand each other.

Friday thinks that Crusuoe is showing a food storage cave prepared for Friday to store Friday’s surplus.  Crusoe had only intended to convey that Friday should prepare a similar larder.

The two men dive into the tasks of hand gathering food, sometimes working together, sometimes apart, in accordance with the master plan.  When they work together, Crusue makes sure to leave half the production outside the food storage cave for Friday to move to his own larder.  Friday is a little puzzled by the extra work that Crusoe keeps leaving for him, but doesn’t wish to confront his friend, and so simply moves the food into the same cave later.

When Crusoe’s tally indicates that he has thirty days supply, he asks Friday what help he needs with finishing his supply, and is amazed at Friday’s indication that everything’s finished.  Both men are so elated that the savings plan went better than they’d dared to imagine, that they even expand the tool building plan.  They dive in with a near delirium of hope and ambition.

They’re so excited and work so hard over the following days, that their savings are almost depleted before they realize the error.

The more they look at it, the more sobering the disaster begins to appear.

Without adequate saving to deal with all of the plan’s dependencies, it has turned into a trap.  None of the tools on their assembly line are more than half completed.

A lot of the early production went to make fresh vine lashings.  These lashings need to be in place on the constructed item within a few weeks at most, or they become useless.

A half completed fish weir will wash away without ever endangering a fish.  They become despondent as they look at the same picture everywhere– it looks like some aggressively inattentive kids have been playing– half dug pits, trampled brush, scattered rocks, chopped trees.

How could they have been so foolish?

As a matter of fact it’s pretty easy.  Crusoe and Friday have just engaged in an accidental experiment with fractional reserve banking, absent the banks.  Perhaps (since most central bankers have magic powers), Ben Bernanke was even there, sneaking in to rearrange the supply cave to make it look like the savings were abundant for a little longer so as to protect the illusion of growth.  Regardless, Crusoe and Friday both perceived that the same savings were available for their particular use.  The illusion lasted until they realized their mistake, and then their economy crashed.

As Crusoe and Friday try to re-capture their subsistence methods, there’ll be further depressing damage assessment as they see how much of the low hanging fruit, in some cases literally, they’ve stripped away.  The assumption had been that the completed capital projects would more than make up for any lack of care and husbandry during early stages (something we duplicate in real life bubble economies).  For Crusoe and Friday, it may be a more serious issue than just wasteful projects– the upcoming time of malnourishment may kill them before they can regain their footing.  (From that perspective we can also see that the quicker the crash came to their economic boom, the better off they would have been.)

Of course they note a radical difference in work energy from the period of boundless hope, to that of seemingly bottomless despair.  But noticing it won’t entirely cure it. (Rather similar to the way it’s useless for some idiot financial analyst on TV to decry that consumers are turning their pessimism into a self-fulfilling prophecy by failing to spend and/or borrow.)

Both “Crusoe Economics” and identification of the bubble inducing problem of credit expansion are traditions of Austrian Business Cycle Theory.  I’ve borrowed particularly from economist Jesús Huerta de Soto for the above Crusoe and credit adventure.

But since I’ve personally found a sarcasm engendered catharsis to roll back the bitter tide for perhaps even as much as a full day, it’s at this point, while Crusoe and Friday have their heads in their hands, that a disoriented whale beaches next to them, and before they can recover from their astonishment, a lightening bolt knocks over and flames a dead palm, creating an impromptu barbecue pit.  (In the roots of the flaming palm, the two discover more than their collective weights in plump, wild sweet potatoes, with a scattering of wild herbs.)

Great rejoicing.

A barbecued whale for our sliding economy, however, absent an intervention from an advanced alien culture, would seem to have a problem of scale.  Too many credit bubbles have been layered on top of each other.  There’s nothing Fed Chairman Bernanke can do, with money or fish, to hide the waste anymore.  Credit expansion from fractional reserves– credit money out of “thin air”– must always leave us high and dry (and whaleless) at some point, but as perverse as it may seem, the sooner the better.

By Les Lafave

Abolish The Federal Reserve –

Where Does Speculation Come From?

Wednesday, January 21st, 2009

Speculation, as we know, comes about when bridge trolls get hold of refined sugar.  The rush of the abrupt shift from their normal grumpy diet of bone marrow and gruel, causes the trolls to dance out from under their bridges in a miasma of invisible gaseous trollulose, which makes the human world go mad.  Florida real estate soon follows.

This makes as much sense as most more commonplace explanations, when explanations are considered at all, and like “greed” most trolls are invisible– all you’ll ever see is their supposed primary effects.  (Something else: it’s frustrating that Congress has made no determination to regulate this bridge troll problem– a simple matter of requiring that no sugar, sodas, or baked goods be transported within five miles of any bridges– easily accomplishable by the use of dirigibles.)

Words must be made to work properly, and work hard, on behalf of their human (or egg) masters, contended Humpty Dumpty.  (I believe that Mr. Dumpty would have no issue with the slight shock transition here, since he’s willing to end poems in the middle of a sentence.  I’m not sure that every egg would have the guts to do that.)

It’s because of my humble attempts to make Mr. Dumpty’s philosophy of language live and breathe, and to do as he says (not to criticize too harshly, but as he says, not always as the great but inconstant semanticist does), that my keyboard caps lock key remains nearly virginal.  Its use could be viewed as a kind of cheating, since it deprives words of their proper labor.  I hardly ever even use exclamation points!!

But I’m drawn to embark on a strange desperate exercise:

Locate caps lock.  Check.

Fingers limber.  Check.

Brain function engaged…

Brain function engaged…






One can sort of understand– though not without some contemptuous lip curl– why our leaders skip over this simple analysis to get straight to their “solutions”.  Sub-consciously at least, they must know that close examination of speculative causes would for them be an exercise even more perilous than my latent discovery of the caps lock key will no doubt be for me.  Blame is a dish best served over-spiced, over-garnished, and over-sauced, to someone else, who really only wanted a sesame bagel.

And anyway, there’s an easy short cut for politicians to skip from their vigorous, over-sauced non-analysis to expensive, fatuous, over-garnished non-solutions.  That short cut of course, is GREED.

Why was there speculation?

Greed caused it.

Oh well then, there you go.  We need a solution for that.

Never mind that greed can cause or not cause anything, or anything’s opposite.  A greedy child could hoard all his lollipops, or give all of them away hoping to be rewarded with ice cream.  Gordon Gekko had it completely wrong, even from his own imperturbable perspective.  “Greed,” Gekko should have said, “is meaningless.  Greed, for lack of two better words, doesn’t tell us crap about crap.”

Great bubbles aren’t arithmetic sequences.  They need pyramids of money, to enrich early speculators and stimulate the fantasies of growing numbers of newbies.  Whatever any politician or central banker (or non-central banker) says, we need to keep track of this fact– it’s not possible to come by these pyramids honestly– an honest society with honest institutions would never be able to keep these pyramids marching.

In The Theory of Money and Credit Ludwig von Mises said, “It is impossible to grasp the meaning of sound money, if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments.  Ideologically it belongs in the same class with political constitutions and bills of rights.”

We could hardly be further away from such a concept.  In fact (as some have recently pointed out), it’s more like we’re living in Atlas Shrugged, with very unsound money “solutions” that cause problems which appear to need more problem causing solutions.  No where on the horizon is there any Atlas capable of shrugging.  (At this point, I think most tax payers would settle for an Atlas with any capability to restrain himself from whimpering behind an outstretched begging hand.)


By Les Lafave

Abolish The Federal Reserve –

Originally Published at Strike The Root – 01/20/09 

Environmental Banking

Saturday, December 6th, 2008

When someone runs for office under a promise of fiscal reform, the office seeker may try to grab some press by throwing out big budget cut numbers.

Once the numbers make a big splash, the cuts may turn out to be in the category of “waste, fraud, and abuse”, whereupon everybody rolls their eyes.  We’ve heard this one before.

No doubt there’s plenty of waste, fraud and abuse, but is this genius who’s just discovered the concept of cutting it from government budgets really going to out do the hundreds of predecessor geniuses who said the same thing, and then watched it all grow again while nurturing their own pet budget items?  It’s not that easy.

As a matter of fact, it is that easy.  There’s a simple, structural way to cut waste, fraud and abuse, not just at every level of government, but in every corporation, big or small, in every industry, politically connected or otherwise, and indeed, in the budget of every individual person, rich or poor.

The magic bullet is bank reform, and the beast to be slain is artificial credit creation (artificial in that it’s created wholly from bookkeeping entries of central banks and commercial banks, not from real savings).

Take a look at a couple of modern day financial bubbles– always credit fueled– Japan real estate, the Internet bubble, the U.S. housing bubble.  We’re clearly talking about trillions of dollars of wasted resources (with plentiful enablement of fraud and abuse built in).

If this credit had never been born, we could almost picture the environmental backwards film: Strip mines filling themselves in, forests jumping back to life, smokestacks sucking back pollutants.

Think of the fuel that was used for billions of trips and commutes, the electricity, office supplies, computers, communication equipment, new constructions, building customizations, and trash haul aways, the unneeded businesses, to support other businesses that support businesses, and all, in the iconic Internet bubble example of, amounting only to the fruitless, temporary support of a sock puppet.

To all the above, staggering as it is, we need to add another layer from decades of excessive consumer credit, and the consequent misjudgment of the level of consumerism that society can currently support– again an illusion that would not have been possible without artificially created credit.

I was struck by this vignette of excess from Satyajit Das’s “Traders, Guns, and Money”: “A colleague – Chris, the head of hedge fund sales – was recently divorced.  He began to travel frequently to Paris for business meetings.  It turned out he travelled to have his laundry done.  He did not know how to use the washing machine and liked the way the Hôtel Plaza Athénée in Paris did his shirts.”

Any society with division of labor will have parallel stories of excess, but usually limited to a handful of those directly in the ruling class, or perhaps in the actual owners of large businesses, not in the upper echelons of the “laborers”, as in this story.  (It seems telling that in contemporary America we get stories like this exactly where the credit creation rubber meets the economic road.)

And of course, there really is such a thing as trickle down.  If you’ve taken a recent look (like I have), at your personal budget and purchasing patterns in light of the seemingly unstoppable march of economic uncertainty, you may be wishing (as I do), that you could have back some of the purchasing power you took for granted in past years– money used to replace a cool item with a slightly cooler item, an extra purchase of this or that because the price seemed right, the little luxuries that you deserved, because you work hard.

A healthy society probably has no way to avoid some small percent of conspicuous consumers, and perhaps a little envy and modest emulation from many of those quite humanly wishing to join the fortunate few.  If this “waste” comes from real savings, then any harm will be less than what society would get from a habit of trying to make subjective top down judgements to force people away from their personal assessments of what is or is not an acceptable level of profligacy.

However, we’ve had very significant waste that’s risen above the level of any possible subjectivity, and with a clear first cause of artificial credit “created out of thin air”.

The efforts of policymakers, and particularly of the Federal Reserve, to give businesses and consumers a positive economic outlook and keep them borrowing and spending have, in the past, worked, but only as the confidence game that they always were– ultimately these careless policies had to get to where they were always headed, to the destruction, not the creation, of wealth.

Corporations spent their potential, not on creating real efficiencies and innovations, but on frantically buying each other up and financial engineering– neglecting core business in favor of debt enabled breadth and mass in preparation for imaginary future growth.

And at least some of us who’ve been buying a new luxury car every other year, should (in the absence of excessive credit), have been duct taping patches on the tail lights of our ten year old sub-compacts instead.

All of this may sound like just a little too much dismalness from the dismal science, but if we could decide to refrain from ramping the leverage back up again, I think that most of us would handle it with a sense of relief.

Leverage is a giant fog.  Who knows what we actually have or can actually do with this kind of borrowing? It makes it impossible for us to talk to each other about anything– certainly not subjects like entitlements or sustainability or taxes.

If we decide to get rid of central banking altogether, and replace it with a simple system of 100% bank reserving, where every loan must come from the use of someone’s real savings, then the “small footprints” that environmentalists have vainly exhorted us toward could get a second channel of support.

And who knows?  Maybe if we can clear away the fog of debt to sensibly concentrate on real business and science, we’ll find that we can sustainably afford medium size footprints after all.

By Les Lafave

Abolish the Federal Reserve –

Originally Published at Strike The Root – 12/5/08

Paul Krugman’s Circular Reasoning Returns

Saturday, November 15th, 2008

There was a Paul Krugman Op-Ed in The New York Times November 14, 2008 titled, “Depression Economics Returns”.

I’m not sure that I’ve ever met a pure Swede, and if I do I may not be offered a prize, but to me the title of the Nobel laureate’s editorial was the last part of the piece that made any sense.

Professor Krugman’s argument is that the character of policy action in “normal times” shouldn’t be repeated in an economic crisis like this.  Now before anyone shouts, “At last, someone sensible!”, and leaps to his or her feet to applaud, I should clarify what these characteristics of past political policies are according to Krugman.  Have you guessed them yet? They are: modesty, prudence, caution, fear of “doing too much”, “fear of red ink”, … is there anyone who isn’t laughing yet?

It’s quickly rather sobering to see Krugman write that, “… in normal times modesty and prudence in policy goals are good things”, if you consider that it’s possible that some policy makers might read the New York Times.  One can almost hear the cheer going up in the beltway, “Hurray! Finally we’ve got some abnormal times, and can let go of all that egomaniacal imprudence we’ve kept bottled up for so long!”

The irony is, that Professor Krugman’s life can’t have allowed him much conception of normalcy.  A person living a normal American life can instantly see that there’s no modesty or prudence in Washington (and will have unfortunately had to instantly see it incessantly for their entire life).  Krugman must indeed be living in a rarified, insular, policy making zone.

Since the things that Professor Krugman describe as virtuous economic policies in “normal” times haven’t been tried for about a century, and all of his recommendations are exactly what has been tried, I believe he would have been more descriptive to title his Op-Ed, “I’m a Nobel Prize Winning Economic Dinosaur; Don’t Listen to Me”.

However, since he did mention depression economics, I should mention that there was one-twelfth of a sentence (yes, I measured it) in the body of the editorial that made sense.  The phrase, with the inanities about “stimulus” on either side of it removed, was, “…greater aid to those in distress…”

(So the final version of the professor’s editorial if I’d been his editor, leaving dinosaurism aside, would be:

Depression Economics Returns

Greater aid to those in distress.”

I’d have to admit that Times circulation could slide under my charge.)

While “greater aid to those in distress” is something for good societies to do, it isn’t directly a matter of economics.  It should be done with the “aid” and the “distress” in mind, not with any imaginary “stimulus” goals layered on top.  To pick up Professor Krugman’s normal times theme– in normal times, delusions of stimulus merely politisize the provision of aid to those in need– the aid, the politics, and the supposed stimulus are casually absorbed by economic vibrancy that has little to do with any of these other things.

In these abnormal and less than economically vibrant times, actually helping people, rather than helping economies, ideologies, corporations, houses or jobs, could provide easy policy guidance for modest government action (modest at least, by the nation busting standards of even just the current bailouts).  Too easy for Professor Krugman.  He’d rather help politicians do what they’ve always done, but with a firm warning not to be timid this time.

Why is Professor Krugman so sure that the “normal times” economic policies aren’t the cause of the abnormal economic times?  After all, those were the policies that were used, and here we are.

The radically different policies that we should try involve honest money and credit, with not only individuals, but also societies earning what they spend.

As long as it’s earned, it can probably be spent either timidly or boldly without the country crashing down on our heads.

By Les Lafave

Banking Reform –

Globalization: Spreading the Wealth (of Mistakes)

Monday, November 10th, 2008

What would the U.S. be doing now if the rest of the world wasn’t infected by our credit collapse?

Probably a good imitation of an old fashioned emerging market collapse, which is a good imitation of a fire in an over-crowded roller skating arena, just after the concession has spilled a vat of popcorn machine butter in front of the only unblocked exit.

Right now the U.S. economy is getting an odd, two pronged support from the export of the credit crisis– demand for dollars from foreigners struggling to support and pay down dollar denominated debt, plus foreign central banks throwing up their hands and cutting interest rates, narrowing the differential with U.S. rates.  (I recently saw business analysts debate whether the Bank of England would cut a half point or three-quarters of a point– they cut one and a half points.)

If not for the remnants of the dollar’s reserve currency status, the credit collapse in the U.S. would have much more of that emerging market bubble flavor (possibly without the imitation butter)– among the primary features, a crashing currency and soaring interest rates.

The circulation of the credit collapse has to seem pretty sickening overseas, but the apparent high dollar, low interest boon for the U.S. is in fact a slow motion tragedy.  Our leaders are grabbing the wrong signals with desperate enthusiasm, trying to recover the past and oblivious to the future.

As bailout and stimulus trial balloons expand absurdly, but with little or no reaction yet from the U.S. dollar and interest rates, a new level of hubris sets in.  Astoundingly (or perhaps typically, it’s hard to choose), most politicians and market players are again getting trapped by a perception of limitless American government power.

Charts of the U.S. monetary base at this point basically show a line going straight up– disinflationary head winds better not let up for a second, or we’ll need Zimbabwean advisors at the U.S. Bureau of Engraving and Printing.

On the subject of U.S. interest rates, Michael Pento from Delta Global Advisors says, “One of the major ramifications of having our national debt move above the $10 trillion mark is that the sustainability of the government, consumer spending and the economy rests on the continuation of artificially low interest rates. In fact, low rates that are the result of money printing have become our addiction… it is only because interest rates are at record lows that the debt service is still manageable.”  Pento doesn’t believe this can last.

The temporary artificial strength from U.S. dollars and bonds means that these key yardsticks are being misread by our leaders.  There should be huge storms smashing these markets every time there’s a prominent discussion of another hundred billion of stimulus or bailout– dramatic signals that even politicians and Wall Street bankers could understand. Instead, by the standards of the times, these markets remain placid.

If American politicians were giving any consideration to what could happen if foreigners turn away from the U.S. dollar, they couldn’t possibly contemplate any more “stimulus” or bailout packages.  The mind set of American leaders is that of complacently snooty parents; the U.S. dollar their sheltered spoiled brat who’s about to launch into real world competition brimful of bratty misplaced confidence.

Sometime soon there won’t be enough economic actors able to suspend disbelief at the mismatch between the fatuous talk of ever expanding bailouts and stimulus plans, and the reality of destroyed real capital and already unmanageable (to say the least) debt.  We’re looking at another pop, and as scary as a stock market collapse or even a credit collapse can be, a currency collapse can be worse.

Politicians have been saying that “of course” the current economic crisis is not analogous to America’s Great Depression.  I think that secretly most now believe that this crisis is like the Great Depression, but they’re actually taking a kind of comfort from it– to many of them, the New Deal is familiar ground.

Certainly if we’re talking about its expansionary credit causes, this crisis is indeed analogous to the Great Depression.

While there are some ways in which this situation is better thus far than the Great Depression (not exactly a point of pride), there’s at least one potentially scary difference.  The New Deal programs that didn’t work the first time when government was smaller, “only” causing an unprecedented “double dip”, will not work when tried the second time, but with our enormous indebted government, will gift us a black box launcher of waves of venomous black swans (a weapon that the Pentagon may have actually been working on, but it looks like other Feds are working overtime with the mixed economy to beat them to it).

If a black box launcher of waves of venomous black swans sounds worse than a double dip, it may well be (depending on the venom of the swans).  A possible next salvo is a crack in the dollar or a spike in interest rates.  Only the box and the swans know for sure.

By Les Lafave

Banking Reform –

A Central Bank of the World (As if Central Banking Errors Aren’t Already Global Enough)

Tuesday, October 28th, 2008

An October 25, 2008 Newsweek article by Jeffrey E. Garten is titled, “We Need a Bank Of the World.”

What I need is some sort of keystroke to represent spluttering astonishment.  There can only be a few things on the list of what we need less than a World Central Bank (a planet busting asteroid might be a tie— other than that I can’t think of much).

Central Banks have been error making machines.  They never have and never will accomplish anything else, because they’ve been given (or have taken) an impossible task— money and credit expansion in a fiat currency system along with (rather laughably), maintaining economic stability.

A Global Central Bank’s most likely accomplishment would be to ensure that any nation that ever has second thoughts and wants to leave the fiat currency and credit creation rat race, is instead trapped.  From there the World Central Bank can move on to booming and busting us all, with no escape in any global nook or cranny, until every person, place and thing in the world is exhausted.

Mostly lost in the recent credit follies with it’s nexus in the credit creation and credit collapse from the Federal Reserve Bank of the United States (which admittedly has been so egregious it needs the invention of another computer short cut key— maybe one that rolls all the world’s expletives into some kind of text and graphics ball), are the multi-decade errors of the Bank of Japan.

Financial analysts are casual about the ripples from the Yen Carry Trade (borrowing in Yen at low interest to invest, or speculate, in vehicles under a higher interest currency), as if it’s just something that randomly happened.  But the Yen Carry Trade has been classic market disruption and unintended consequences from central bank force feeding of credit into a system that would desperately prefer to puke it back.  Instead of looking for opportunities for stable production, Japanese money and credit has been stampeding all over the globe for years, looking for arbitrage opportunities.

Japan’s Central Bank started with a real estate bubble, moved on to the “zombification” of it’s supposedly private sector banking, and then, with rates near (or even at) zero, has now clearly enabled a speculative emphasis in global finance and the era of the hedge fund, the last chapter of which is being written now (and looks to deserve a pretty poor review).

The main contention of Garten’s World Central Bank article is that “the Fed no longer has the capability to lead singlehandedly”, a contention that would be perfectly true if he would have substituted the words “never had” for “no longer has”— it’s the exact same capability that a Global Central Bank would continue the tradition of never having.

“To give it legitimacy” Garten continues, “a global central bank would have to be governed in light of political realities.” Well that should be easy— fortunately, political realities are always simple and helpful.  (As Garten is able to demonstrate concretely in his nimble salvation of the world in a thousand words, even while reassuring us that we won’t have to give up the political realities that have been serving us so well.)

It makes sense though that we’ll never have to give up our cherished political realities if Garten has his way— a World Central Bank is a logical step in our main political reality— the steady march of centralized decision making to higher and higher levels, so that we guarantee that decisions are aggregated above the level at which it’s possible for any individual or structured group to make them.  No doubt someday we’ll have an international organization to tell your local T-Ball team what position your 5 year old should play, and at that point, all our dreams will come true (except maybe for a few confused kids and cancelled T-Ball leagues.)

It appears that in the United States we’re comfortably adjusting our expectations as economic hybridization ratchets to a level where we can no longer pretend that “fascist” is just an insult to be sprayed around by radicals.  But at least we could refrain from demanding that everyone else must wade around with us in the same knee deep glue.  Let’s let other countries make, or perhaps even not make, their own mistakes.

I’d suggest that any nation interested in financial stability and fair opportunity should ignore this call to global credit creation arms, eliminate its own central bank, and raise banking reserve requirements to a sane level as a simple fixed matter of law.

By Les Lafave 

Banking Reform –

Alan Greenspan Isn’t a Libertarian, Complacency Isn’t Stability, and Debt Isn’t Wealth

Wednesday, October 15th, 2008

A recent New York Times article “Taking a Hard New Look at Alan Greenspan’s Legacy” (Peter S. Goodman), did an entertaining job of slamming former Federal Reserve Chairman Alan Greenspan, and for that, I’d gratefully subscribe (if I could afford it).

But there was a pigeon sized fly in the Timesian ointment– the article calls Greenspan a libertarian with a straight face, and blames the financial crisis, not on Chairman Greenspan’s monetary policy lead foot, but on his “faith” in “free markets”.

Anyone who spends his entire (much too long) career horsing interest rates up and down according to his own bad forecasts can’t possibly be a libertarian, no matter if he once knew Ayn Rand (who said she wasn’t a libertarian anyway), and no matter how many times he may have said the words “free market” (undoubtedly with his fingers crossed).

It doesn’t matter anyway what ideology Greenspan (or anyone else) may say that he has– he’s betrayed them all, or any combination of them all.  Alan Greenspan has always readily taken on or cast off whatever belief best suited his unquenchable narcissism.

Goodman’s Times article focuses on credit derivatives, and makes a convincing case that when they explode, they aren’t very helpful.

But if former Fed Chairman Greenspan et al weren’t continuously stuffing credit into every possible economic crevasse, there wouldn’t have been either a need or a mechanism for the derivatives market to come into existence in the first place.

The most entertaining part of the Times piece is the description of the confrontation of Fed Chairman Greenspan and Treasury allies Robert Rubin and Lawrence Summers with then CFTC Chairman Brooksley E. Born.  She wanted to review the derivatives market, while this triumvirate instead made the argument that even talking about derivatives regulation could trigger a financial crisis.

The Greenspan/Rubin/Summers argument appears appropriately ludicrous in current light, yet their viewpoint remains prevalent in government, Wall Street, and banking circles.  This mental map, which absurdly gets called “free market” is based on:

Assumption #1.  Markets are delicately balanced, and the upside down pyramid can get harpooned and yanked over randomly (like by a suddenly uppity CFTC Chairman).  This is true, but it’s manufactured truth– the pyramid could balance nicely on its base; we choose to stand it on its tip.

Assumption #2.  Once the economy stumbles then government, having in their view not infinite power, but infinite possibilities for power and the country’s sharpest minds to develop and use it, can always push the market upright and back to “stable growth”.  This isn’t true– they mistake the market’s strong organic self-correcting predisposition (often even against the head wind of their efforts), for their self-important wish fulfillment.  (Picture a pre-historic band of sun worshipping priests, who begin to think that their pre-dawn rituals bring up the sun.  If one day they sleep in and the sun comes up anyway, do they change their minds?  Of course not– they’d say, “We sure got lucky that time.  Tomorrow, let’s do two rituals.”  The human capacity to shoehorn powerless insignificance into self-aggrandizing puffery is stunning (and I’m no longer talking about the ancient sun priests, but the modern monetary priests, who should have every advantage to know better).)

So, I’ll repeat the question that one can imagine Ms. Born asking Mr. Greenspan (and apparently Mr. Summers and maybe Mr. Rubin).  “Just what kind of “stable”, “free market” system might it be, that will collapse if it’s even discussed?”

That would of course be ours, as we’re finding out ten years later.  However, instead of not discussing it, maybe we should consider a financial system that doesn’t balance (upside down) on a pyramid of debt?

By Les Lafave 

Abolish The Federal Reserve –

A Credit Collapse, Not a Financial Panic

Sunday, October 5th, 2008

If public officials herd beach patrons into shark infested waters, and start chumming, and then after the first shark bite the patrons start to scream and flail about trying to escape, thus causing more drownings than shark bite hemorrhages– we’d properly be more apt to label this stupid or criminal, than call it “a panic” on the part of the beach goers.

Our financial crisis has a lot in common with the above shark feed.  Although the results from the credit collapse may seem insane, confusing, and scary– they’re really the normal expected result of government directed money and credit expansion.

Austrian Business Cycle Theory, which describes the reasons for the inevitable downside to artificial expansion, suggests that our benighted government’s thrashing around to try and thaw the “credit freeze” (and which seems like the real panic, if there is one), is only treatment of a symptom and can’t succeed.

This is not just about people not trusting each other– a credit freeze, or a “liquidity trap”, that makes stimulus ineffective.  This is about a growing realization that there are not enough resources available to complete or use all the unfinished and/or uneconomic projects out there over a timeframe that would make them economic– a realization that projects and their owners must now fight for their lives. Now, because of the over invested position that credit expansion has put us in, and unlike a “normal” economy, this is a zero sum game– one project or company’s life may well mean another’s death.

In other words, the “fear” and “distrust” in the markets should probably instead be called logic.  The Fed and the Treasury can do whatever they please, pump in or not pump in any amount of “liquidity”, buy or not buy any assets, whether trashy or public profit making, or both.  Restoring trust or liquidity is not the key issue, and is at any rate impossible in this environment.

The credit collapse is about too much investment, and investment in the wrong things (as Austrian Business Cycle Theory calls it, “malinvestment”).  Business has recognized the malinvestment (finally), and it can’t be unrecognized.  The Fed and the Treasury are frantically trying to throw in more resources to fog investors up again, but as the expression goes, they can only throw good money after bad, to distribute and ultimately deepen and extend the pain.

To sum it up in short, brutish nastiness: there is no fix other than time, depreciation, and failures.

It’s not likely that President Bush will call a press conference to talk about economic policy, and say, “My fellow Americans, I’m announcing today that this is not an aberration; in view of what we’ve done, this is normal.  Unfortunately, there’s too much rationality in the markets. Failures are an option.”  If he did, then after a brief stunned pause while people decide if they’re frightened because they can’t believe the statement, or because they can, everyone would of course take the only logical course, and scream and run in circles.

Whatever happens (with or without fantasy honest press conferences), panic will get an irrationally large share of blame.  In the too convenient world of ever unevolving politics, panic is an easy scapegoat.  As in, “Obviously, if it wasn’t for that darn panic, the Feds would have had everything under control the whole time, so let’s just go back to the way things were.”

If that attitude gets as much traction as it’s starting to look like it might, then the subject of real monetary reform and real banking reform will slip off the table in a puff of snake oil (the way it always does).  What a tragic missed opportunity to add to the tragedy list.

By Les Lafave

Banking Reform –

Painful Opportunity

Friday, August 22nd, 2008


The home page of the Fed says, “The Federal Reserve, the central bank of the United States, provides the nation with a safe, flexible and stable monetary and financial system.”

So you can’t say bankers don’t have a sense of humor.

However, in a more “normal” cycle, most people wouldn’t see the joke. Usually, the economy’s actors are too busy getting paid off by apparent short term benefits of fractional reserve banking for any mainstream attention to the system’s contradictions and historical failings. That’s one bright spot today in otherwise dark times– a spotlight on the Federal Reserve System while many of its defenders may be feeling ridiculous (and broke).

Economist Jesús Huerta de Soto traces the historical beginnings of fractional reserve banking to exactly that key “buying off” point where government and banks saw opportunity in partnership:

“At first the bankers did this [reduce reserves below 100% on demand deposits] guiltily and in secret, since they were still aware of the wrongful nature of their actions. Only later when they obtained the government privilege of making personal use of their depositors’ money (generally in the form of loans, which at first were often granted to government itself), did they gain permission to openly and legally violate the principle. The legal orchestration of the privilege is clumsy and usually takes the form of a simple administrative provision authorizing only bankers to maintain a reduced reserve ratio. This marks the beginning of a now traditional relationship of complicity and symbiosis between government and banks… by sacrificing traditional legal principles they could take part in an extremely lucrative financial activity…”As in any corrupt system, some of the lucrativeness needs to be shared to establish and maintain a critical mass of support.  Academics in their turn are paid off to think and promote happy, status quo thoughts (or even angry, pseudo anti-establishment status quo thoughts).  No soul searching required, since for any but the most critical thinkers who happen to be thinking about critical pieces, there’s lots of latitude for intellectual self-accommodation.  An economist for example, can say that populist programs are too big, or one is better than another; it’s only when the economist says that the whole system and the rabbit hole it rode in on is absurd that he or she will be largely cast out from opportunities touched by government or banking, (which in a kind of six degrees of Ben Bernanke, is most of them). 

With this support (and as slightly more widely noted and decried), the purchase of complacency with debt continues through the economy, in government programs, contracts, loans, speculative opportunities and tax policies, where (almost) all actors, big and small, at least appear to get their share of something for nothing.  Lately there are some folks saying “Hey, Wall Street and banks are getting special treatment!”  That’s also rather droll.  But a person ready to see that much may be a step or two from seeing that the Federal Reserve was indeed built from special treatment, among other unsavory qualities.

I recently read an article by financial analyst John Rubino at, (Time to Start Honing the Message), which I found inspiring even as it pointed out a problem: critics of money and banking have gotten used to mainstream society ignoring or even scoffing at their message.

It’s not easy to keep going when explanations of your economic worldview only cause people to call you a crackpot. To make matters worse (or at least mixed from a memetic persistency point of view), the three dimensional economic worldview of the “crackpots” quietly makes money, while the one and two dimensional views of the crackpot critics is causing them to be rather entertainingly stunned by events over and over again.

To me, this opportunity is starting to feel irresistible. It’s more melodramatic and more insulting than I’m comfortable with, but I’m finding the metaphor also hard to resist: for the moment, the lights are on and the cockroaches are scurrying. The bugs in fractional reserve banking and fiat currency systems are as nakedly apparent as they ever get. But if the past is a rough guide (as it generally is), then with even a weak recovery, myths of how we got in and out of the extra deep cycle will start to set, if not sufficiently impeded.

Rubino warns that populism will be speaking loudly, and also puts the coming battle he sees in stark terms: a fight to avoid living in a dictatorship.

So in view of the above and for my own modest anti-dictatorial contribution, I intend to be better prepared for dialogue (assuming I haven’t become too geeky to be in any social settings). When someone says, “I can’t put gas in my car anymore”, or “That’s odd, trading in my bank’s stock has been halted at sixty-three cents”, I’ll forgo the smartass comment and attempt a non-patronizing, cheerful (or as appropriate, commiserative), discussion of first principles.

I intend to keep to this plan until my mother (the probable last holdout) starts calling me a crackpot, or my social calendar is permanently buried. (I hope I don’t have to report back for at least a few days.)

By Les Lafave

Banking Reform –

Bear Stearns Should Have Guessed Better

Tuesday, April 8th, 2008

There’s been a lot of commentary that the recently exploded Bear Stearns “should have known better.  “Really?  How can anyone be sure that they know better about how much leverage to use in a financial system that’s based on deliberately mysterious fluctuations in leverage?  One can certainly argue in retrospect that Bear Stearns made plenty of mistakes, but the “should have known better” comments have a strong element of whistling in the dark.  (Silly Bear, they used leverage.  Can you imagine?  Oh well, just one (cross your fingers) of those things.)

We have immense leverage in our system starting right down in our central bank bones.  We eat, drink and breathe leverage.  (And if it seems like we’re not getting enough, we cry to the market nannies in the Federal Reserve System for more.)

It’s never a steady predictable stream of leverage– that would be too easy (no pun intended).  Instead, the Fed tries to “stay ahead of the curve” and make “surprise moves” to manipulate “market expectations”.  With these Fed moves as a perpetually shifting funhouse floor on which to build our economic judgments, how confident can we be that we know better?  We’re getting an answer to that question, courtesy of the Federal Reserve (even as we’re shifting the blame to a supposed market failure.)

In our financial system, we all have to make decisions about how much leverage to take on.  Take no leverage, and you’ll fall behind and die as your money is debased right out of your hands.  It’s particularly tough on business.  You can do everything right about your core business, but misjudge your use of debt– too much or too little– and you’re toast.  If you’re in demand as a wage slave instead, then you can relax– but that’s only as long as you never retire.

I feel pretty sorry for the people at Bear Stearns.  They’ve been sacrificed twice on the Federal Reserve’s now thoroughly blood-soaked alter.  Once during the monetary policy whip-sawing (still ongoing), about which Bear supposedly should have known better, and again during the company’s forced liquidation, when to all appearances any choice to shop for a better offer were squelched by the Fed.  (Maybe that’s another area where a “knowing better” mythology helps us out– it deleverages our empathy, giving us a short-cut away from imagining the next shoe dropping smack on top of us.)

The Bear Stearns story, all whistling aside, is not very extraordinary.  Somebody has to explode in every cycle, or why would the expansionary credit good times ever end?

What is extraordinary is that even now we’re not questioning our occult, erratic (and highly leveraged) monetary system. Instead, we point to a few companies, industries, or government officials scattered here and there, who “should have known better”, or “made a mistake”, or “got behind the curve”.

There was an item on MarketWatch giving comments from Lehman Brothers’ CFO about the Fed’s new broader access policy for the Discount Window.  “I think as shareholders our ability to access that form of financing (and) to do more business for clients is incredibly interesting.  It presents a very good opportunity.”

That probably isn’t (or shouldn’t) be what the Fed had in mind, although the idea that the Federal Reserve can finely control where the credit it creates goes is a silly (if nevertheless commonly held) conceit.

The Bear Stearns folks who read those Lehman Brothers’ comments while preparing to pack up their stuff must be thinking, “It sure would have been nice to have that ‘good opportunity’ a couple of weeks ago.  Maybe we could have been offered for sale at $50 a share instead of $2, and been saved some pain”.

It just goes to show, you never know (better).

By Les Lafave

Banking Reform –