We Will End the Fed?

November 27th, 2008

I returned from the “End the Fed” rally at the Federal Reserve Bank of Atlanta, and zapped on the news to hear the tag end of a story on enormous nationwide protests (about Prop 8).

If thirty word columns ever got published, it’d be tempting to leave it there, with the quick ironic reflection of an obvious key question– just how memetically challenging is the eradication of a central bank?

That was already an expected theme as I approached the Atlanta Fed on 11/28/08 (End the Fed protest day), and (rather unexpectedly), started to hear demonstrators from almost two blocks away.

What would I pick, if the chant was up to me?  “Down with artificial credit created entrepreneurial error?”  Or maybe, “Hey, hey, ho, ho, negative real interest rates have got to go?”

Again, not an easy handle.  Most demonstrators went with, “End the Fed!”, and sometimes optimistically, “We Will End the Fed!”

I asked a Campaign for Liberty coordinator what organizations were represented.  Other than Campaign for Liberty, he didn’t seem too sure.  “We tend to be individualists here,” he concluded pleasantly.

End the Fed has a website, but apparently not a formal structure.  (Restore the Republic and Campaign for Liberty appear to be providing some organization for the demonstrations.)  An End the Fed pamphlet starts out, “The Federal Reserve Bank is the Cause of our Economic Crisis”.  Pithy, true, and getting remarkably little traction so far.

From demonstrator signs, the story emerges a little more: “No fiat currencies”; “Lawful money is only gold and silver”; “No more banker bailouts”.  And a couple of my favorites: “Irony is Andrew Jackson on a c-note”  (I think that’s giving him a promotion, but either way it is ironic); and Ben Bernanke quoted saying, “Inflation is a tax.”  (The sign maker explained that Rep. Ron Paul got this admission from Fed Chairman Bernanke during congressional testimony.)

There’s also a sign with a picture of Bernanke and Paulson, apparently only one sign but it seems to be everywhere, which says, “Wanted for Treason”.  (I might have found a less patriotically charged way of putting it, perhaps only, “Wanted for first degree criminal tunnel vision”, but I may not be asked to take charge either of a future demonstration signage team, or a Bernanke/Paulson defense team.)

Georgia End the Fed organizer Michael Frisbee talked to me for a few minutes on clearly one of his favorite topics– Federal Reserve history.  I get a little nervous about histories of the Fed, turning squeamish if the discussion gets too Bilderbergish.  But no, just a nice conversation about history.  Another demonstrator, joined to note that he’d heard that President Woodrow Wilson had expressed regret that he’d enabled the “Creature from Jekyll Island”, and we tried to figure out if, what, when.  (A Woodrow Wilson quote of regret over the Fed’s creation appears to be at least partly apocryphal, if I’m understanding what I see now on Wikiquote.)

(With the next pass of the Bernanke/Paulson treason sign, someone has drawn devil horns, Hitler mustaches, and dollar signs in the eyes of the principals.  In my non-existent capacity as Future Imaginary Protest Sign Team Leader, the horns and mustaches seem a little over the top, and the dollar signs spot on.)

At a little after the 1 p.m. scheduled mid-point, I got a head count just shy of a hundred demonstrators.

Michael Frisbee does an interview with Atlanta Channel 5. It’s the only media I see (I’m told that Atlanta Channel 2 was by earlier).

I later looked for the piece on Channel 5 News, but never saw it.  (I did see a good place for it, right between the spot on another in the string of Georgia bank closures, and a piece about strapped consumers and economic malaise.)  Maybe End the Fed will be on the late edition (which I intend to sleep through).

No presence or thoughts about local police, except once when a police car stops to tell pamphleteers to stick to the sidewalk, and once when Mr. Frisbee notices that the ubiquitous dollar-signs-in-their-eyes wanted poster of Bernanke and Paulson has now been propped under the eagle, well onto Atlanta Fed territory, and thus as Frisbee explains, demonstrationally incorrect as far as the police would be concerned.  The wanted poster is forced to retreat.

Overall though, Atlanta Police must have been unconcerned that the Fed might be literally toppled today.  A proper assessment– the demonstrators generally seem a nice (and in my biased opinion, smart) bunch of people.

Ike Hall, a state coordinator for Campaign for Liberty says, “It may not end until people look at their dollar bills and realize it’s garbage.  I just hope it’s peaceful, and nobody starves.”

Which seems like a good two sentence summary of everything Fed.

By Les Lafave

Banking Reform – themaestrosrep.org

 

Originally Published at Strike The Root – 11/25/08

Paul Krugman’s Circular Reasoning Returns

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 – themaestrosrep.org

Globalization: Spreading the Wealth (of Mistakes)

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 – themaestrosrep.org

Fed Chairman Bernanke Clowns Around, Exceeds Stock Market Expectations

November 2nd, 2008

Anyone who’s watched the business channels for more than an hour or two will have been well indoctrinated in the magic thinking that is the Federal Reserve mandate.

The Fed plays “an expectations game”.  In order to maximize the impact of their manipulation, the Fed will try to “surprise” the markets, because if the markets “expect” an action, they may not react.  Often it’s market analysts explaining what the Fed could do that might or might not meet market expectations, or surprise them.  We also hear members and spokespersons for the Fed adapt this habit of speaking.  You’d think they were generals in war, analyzing enemy preparations.

But if surprises work so well in that piece of the economy, why not try them everywhere?

UPS could surprise its customers by sometimes delivering next day, sometimes putting your package in storage for six months, or perhaps even delivering something when you’ve asked for a pickup.

Burger King could sell its customers dollar burgers on Wednesday, thirty-five dollar porterhouse steaks on Thursday, and plumbing supplies on Friday.

If other economic sectors would follow suit (suits being available at garden supply stores… or are they? Maybe your expectations are being managed again… ?), then you can start to see that soon we’d have an unprecedented economic boom, since according to Fed lore, no one knowing what’s going on is a sure path to success (as long as it’s not so sure that we can’t still be surprised).

Has the Fed itself fully explored all the possibilities for surprise?

Maybe Chairman Bernanke could show up at press conferences in drag or funny costumes:

“Chairman Bernanke surprised the financial press today when he attended a briefing wearing an old raincoat and a Harpo Marx wig.  Attendees were further taken aback when the Chairman answered all questions by honking a clown horn.  Reporters quickly adapted, requesting that Bernanke answer questions with one honk for yes, and two honks for no.  All market participants were adjusting to the new conditions, but then Chairman Bernanke yanked away the coat and wig to reveal a Spiderman costume, stunning markets and precipitating an enormous rally…”

While Treasury Secretary Henry Paulson may or may not be glad to see us, but always carries a bazooka, for the Fed, the talk is of how many bullets they may have left, and how they can maximize their potential for impact on the markets.

And why use bullets on the market?  Why surprise them (us) at all? This talk is of a clear effort to take a group of actors who believe one thing, and get them to believe another.  It’s the not very disguised language (in fact pretty much says what it is) of confirmed serial bubble makers.

Yet when the bubbles inevitably occur, then the folks with the self-proclaimed power over expectations, with the bazookas and bullets, have an epiphany– it’s the market’s fault.  “Sure, we had all the advantages, privileges, power and information, but we couldn’t have foreseen that if we threw money at people, they might try to grab it.  We need more bullets to get the benighted, frightened public to trust (and borrow) again so we can re ignite the markets that we perpetually mistake for the economy.”

It should be pretty clear who provides and produces, and who makes noise and pretends.  Unsurprisingly (the actual word that the economy as a whole prefers), the people who produce goods and services are the people who produce goods and services.  It isn’t Wall Street or the banks, and it certainly isn’t the Fed or the government.

Creation of money and credit doesn’t, in the long run, produce anything except a boon for the creators and early spenders, and confusion and malinvestment for the rest of us.  Attempted management of the perceptions of the beneficiaries and victims of fiat money and credit creation may sometimes keep the game cycling a little longer— but more time spent obliviously making poor investments is a worse outcome, not a better one.

Banks and government don’t grow or manage the economy; they don’t run it, expand it, or stabilize it. What banks and government do to the economy is rape it.

And what would any rapist do to try and dodge consequences from his crime?  Blame the victim, of course.

By Les Lafave

Abolish The Federal Reserve – themaestrosrep.org

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

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 – themaestrosrep.org

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

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 – themaestrosrep.org

Treasury Secretary Henry Paulson Considers Name Change for Office of Financial Stability

October 13th, 2008

The Treasury’s newly formed Office of Financial Stability may be renamed “The Office of Financial Stability, Tee Hee Hee”.

The change of name for the office made responsible for administration of the 700 billion dollar bailout fund under the Emergency Economic Stabilization Act of 2008, is being considered in view of market reaction to its creation.  Other possibilities include, “The President’s Working Group on Fubar”, “The Wall Street Employment Opportunity Commission”, “Malinvestment, Inc.”, or if a folksy sound polls best, “Paulson and Friends, We Inject the Capitul into Capitulation”.

Secretary Paulson said in a statement last week following the meeting of the G-7 nations (and o.k., now this part of my editorial is true), that “it’s naïve of the markets” to expect that different governments with different structures would all want the same solutions.  (The markets will probably apologize the only way they know, by naively plummeting in horror.)

But is the market’s wish really all that naïve?  Capitalism is capitalism, surely, and a capitalist solution might be better in the long run than a solution from someone’s secret police.  Secretary Paulson’s comment is an odd one for a capitalist to make– though it makes perfect sense as a comment from one of a gang of fascists, where after the quest for raw masses of power is taken care of, priorities may need a little fine tuning from one fascist state to the next.

Different structures aside (or not), the G7 has vowed to take action, and the G20 agreed (Gee, 20?).  If there was a G100, it probably would agree too– in government logic, the key to everything now is to “inject capital”, and portray confidence (with a confectioner’s coating of empathy for the little people they’ve screwed out of hopes and dreams.)

In the “naïve” logic of the markets however, this is no longer credible.  While spokespersons for the markets hopefully express support for the government moves (perhaps as a trial balloon for a job in government before Wall Street lays off everyone except a skeleton cleaning staff), the markets themselves are no longer clearing this disinformation.  There isn’t a reason for confidence when there’s now recognized massive malinvestment, and the government solution is to add more.

The plunging and “freezing” markets were actually trying to fix the systemic problem, in the same way that the necessary but unpleasant gag reflex would try to fix the systemic problem of a seven year old who just ate half a bag of Halloween candy.  However, the G7 (and the Gee, 20?), are offering up banana splits with chocolate sauce and pudding cake.

This is beyond Treasury Secretary Paulson’s capability to understand– not because he’s stupid, but because a lifetime of finely tuned self-serving bias (a Wall Street specialty) makes him incapable of seeing himself as not part of the solution.  Unfortunately for all of us, the markets and the economy will continue to try to teach him that his is not a creative power.

By Les Lafave

Banking Reform – themaestrosrep.org

Treasury Secretary Henry Paulson: White Queen Redux

October 9th, 2008

Treasury Secretary Henry Paulson is going to put capital in the banks.  In this concept, he shares a rich tradition with Santa Claus and the Easter Bunny.  (He leaves free presents, theoretically only to the relatively good, but realistically rather more arbitrarily with a bias toward the privileged, and lastly and most importantly– it’s all a fantasy.)

It’s true that Secretary Paulson may be able to improve bank capital, in the sense of benefiting the entries on the bank’s balance sheet, but not in the sense of giving a productive capability that didn’t exist elsewhere and now has come into being out of nothing. What Paulson can give is only a representation of real capital.

The Department of the Treasury can “inject capital” (Paulson’s words from his statement of October 8, 2008), in the same way that the Federal Reserve can increase the money supply, but can’t increase (or even maintain) the purchasing power of the new money at the same time.

There are some who’d argue that the balance sheets that Secretary Paulson can manipulate do matter– that “injecting” “capital” (it’s hard to choose which of the prior sets of quotation marks to invest with the most sneering invective; please feel free to curl your lip at both), into banks will buy time until the economy rebalances.

This can only have the appearance of truth when the economy isn’t overextended (i.e., it only works when it doesn’t matter).  The markets are “frightened” and there’s a “liquidity freeze” because of the recognition that real capital has been overextended and wasted.

The markets recognize that the only thing to do is sort through the rubble looking for salvage– that when you’re overextended you have to find a way to prioritize– while Paulson and the government are convinced that they can spin the rubble in really fast circles and make it look like something shiny.

We mistake paper money for real purchasing power and real savings, when in fact it can only potentially represent these things, and that dependent entirely on government trustworthiness.  We mistake the bank balance sheet capital (now demonstrating how real it really wasn’t with the astounding speed with which it can disappear) for actual resources and capacity to produce– again it’s only a representation (and again an unstable one, since it’s considered capable of whimsical “expansion” to “stimulate the economy”).

Treasury Secretary Henry Paulson has asked for patience.  He wants us to trust government, and share his confidence (his favorite word as things fall apart) that strength will be restored to the American economy.

Secretary Paulson doesn’t deserve our trust and belief; the government doesn’t deserve our trust and belief, and it’s not because they’ve asked for this all along and failed all along– it’s because they’re lost now, and can’t possibly find their way in the future since their compasses are backwards.

It’s not good for Americans to have confidence in something that’s doomed to fail– it’s better to question folly than to have confidence in it.  If for example, confidence in mortgage finance and real estate value was yet ongoing today in a continuation of yesterday’s real estate bubble, then the confidence would be moving us from stunningly stupid waste of capital and opportunity, to supersaturated thermonuclear stunningly stupid waste of capital and opportunity.  Economic confidence is very far from deserving the knighthood that government perpetually offers it.

While it’s true that economic and political systems require trust, that only works when they also require trustworthiness.  It’s not a duty for Americans to unquestioningly accept government foolishness and waste, no matter how insistently the government tells us that questions are destabilizing.  The reason our system can fall apart from too much questioning is not because it’s built on trust (which we might have a duty to maintain); it’s because it’s built on leverage (which we do not).

Now I’ll give you something to believe.  [the Queen remarked]  I’m just one hundred and one, five months and a day.’  `I can’t believe that!‘ said Alice. `Can’t you?’ the Queen said in a pitying tone.  `Try again: draw a long breath, and shut your eyes.’  Alice laughed.  `There’s no use trying,’ she said `one can’t believe impossible things.’  `I daresay you haven’t had much practice,’ said the Queen.  `When I was your age, I always did it for half-an-hour a day.  Why, sometimes I’ve believed as many as six impossible things before breakfast.’   (Lewis Carroll)By Les LafaveAbolish The Federal Reserve – themaestrosrep.org

A Credit Collapse, Not a Financial Panic

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 – themaestrosrep.org

Can’t Wait to Get My Piece of the Bailout Profits

October 2nd, 2008

The hubris of assuming that all you need to do to make a profit is find a spread between borrowed and lent funds should sound familiar– that’s how Wall Street (with a little grease from the Fed) got us into apocalyptic trouble.

So… Congress is going to take over the financial industry’s disastrous investments, and their disastrous methods, and then, being the nation’s experts on profit, quickly turn a profit.  It’s only a matter of deciding how to divvy up the loot.

Mutual fund manager John Hussman points out that if the Paulson plan means buying the distressed assets at distressed prices, then balance sheet deterioration continues: “The only way that buying the questionable assets will increase capital on the liability side of the balance sheet is if the Treasury overpays for them.”

In other words, you can’t have it both ways– will it be a bailout, and lose money, or will it fail in its purported mission, and make a profit?  (This is politics– it’ll lose money.)

But after all, there’s no other choice right?  Without money and credit created out of nothing so that we have exponentially expanding debt as a stable base for the economy, and a congress to direct it all, there’d clearly be no economic activity at all.  We’d all sit on our butts, suffering C-Span withdrawals– building, creating and doing nothing.

The few lonely voices who predicted this credit collapse years ago, are now even more lonely.  Jim Rogers and Peter Schiff, for example, say that doing nothing is indeed an option– the best of a lot of bad options.  American T.V. bookings for them appear to have actually gone down.

Producers had booked them in the past to keep panel discussions lively.  It wasn’t possible that they could actually be right (they were saying bad things about Wall Street and government).  Now it’s either too embarrassing or too scary to invite them back.  The expanded crisis coverage is dominated instead by those analysts who, with stunning brain-deadness, were forecasting even two months ago that there wouldn’t be a recession.  By and large it’s these incorrect forecasters now demanding our attention again to tell us “there’s no other choice”.

The old saw that if you’re in a hole, the first thing is to stop digging, can’t be heard over the sound of turning shovels. Congress will manage to stagger into some sort of active crisis role.  A bad bailout package is unlikely to be their last effort to throw sand in the gears, but they can always unload their failures on “the free market” (which they badly and intensively regulate).

By Les Lafave

Abolish The Federal Reserve – themaestrosrep.org