There can be no prosperity without freedom. For now, and perhaps for decades to come, America’s best days are behind us.
For Americans who are economically literate, the events of this week are as significant as those of 9/11. The proverbial tanks have rolled in America this week in a bloodless coup. This is the end of America as we have known it. This country was built on the supremacy of rule of law, on the sanctity of contracts and property rights, on individual liberty, and on trust that most people will keep their word. For now, that America has ended.
I have told my students for years that when fears of economic troubles increase, politicians will be ready to exploit those fears. The public and the media seem collectively ready to justify the end of America that we have known; they are hypnotizing themselves with the mantra “it would have been so much worse if the Bernanke and Paulson had done nothing.”
A public that has lost touch with the principles that promote liberty and prosperity will always trade away freedom for the illusion of security. And they will wind up with neither freedom nor economic security. That day of reckoning has arrived.
Let’s make a few things very clear. The failure of the housing market, AIG, Fannie Mae, Lehman etc. is not what is damaging the economy; the damage to the economy occurred during the boom. The artificially cheap credit policy pursued by the Fed under Greenspan and Bernanke did the invisible (during the boom) damage. The failures we are experiencing today are the consequences of the distortions created in the boom.
Too many houses were built, mortgages were issued to those unqualified to receive them, housing prices were driven to unattainable levels, and Wall Street and the banks bought and sold these mortgages. Wall Street and the banks acted as if housing prices would go up forever and bailout them out of their mistakes. Cheap credit allowed Ford, GM, and Chrysler to sell enough cars to be complacent—complacent enough to not truly innovate and be competitive.
I could go on, but you get the picture. What we are now experiencing is the liquidation of damages that have already occurred—we are in the credit contraction part of the cycle. Again—the problem is not housing foreclosures, Lehman Brothers, etc. These are symptoms of what the Fed, fractional reserve banking, and out of control Congressional spending had already wrought.
The analogy of an alcohol or drug addict is helpful. The damage to the addict occurs when he is taking cocaine, heroin, or alcohol. When he is off his high he is recovering form the previous damage. No matter how much he screams for more drugs or alcohol, no reputable treatment center would supply him with more.
Those who have benefited by the past excesses are now screaming for more drugs in the form of cheap credit and bailouts. The amount of bailouts that our essentially bankrupt government is promising is staggering—it will easily run over a trillion of dollars. The productive sectors of the economy will be forced to foot the bill—we’ll be forced to throw good money after bad.
Again, let’s be clear. These bailouts will not save us from the terrible times ahead. The damage to the economy has already been done, and we are now transferring the good money of productive taxpayers into the hands of those who wrecked the economy. As Lila Rajiva, coauthor of the excellent Mobs, Messiahs and Markets, colorfully wrote, the attempt to portray the interests of Wall Street and Main Street as exactly the same is false:
We, of course, need to do nothing. There is no we here. This is a Wall Street crisis. And the usual suspects on Wall Street need to line up, bend over and get caned for their misdeeds. Barring that, they need to take the market’s medicine like men.
Instead, they were out in full therapeutic mode, pouting and whining for a change of their soggy diapers by dear Nanny Washington.
Andrew Jeffrey writing in Minyanville colorfully explains why the failures on Wall Street need to be liquidated and not subsidized:
When government invades free markets to the extent it has – specifically in the last 24 hours — the system ensuring capital gets where it needs to be breaks down. Money is instead doled out to the firms well connected enough in Washington to lobby for handouts.
Beltway bureaucrats have been trying to rewrite this country’s economic rules and protect Wall Street from its own mistakes for over a year. Still, the free market prevailed, punishing the firms that made the most egregious bets during the housing boom: Countrywide, Bear Stearns, IndyMac, Merrill Lynch (MER), AIG (AIG), Lehman Brothers, National City (NCC), Washington Mutual (WM) and Wachovia (WB).
According to our once-free market, these firms needed to be wiped out, gobbled up and liquidated, so real economic growth could take hold from a stronger foundation.
The bailouts of the incompetent and corrupt may work for a while—read “a while” as in weeks or months—but then the inevitable will begin again.
When the stock market decline resumes, the ban on short selling will cause prices to fall even more than they would have otherwise. (More on short selling in another post.) Welcome to a no growth, capital starved economy of shrinking opportunity.
Jeffrey Tucker in his excellent essay The Rich He Hath Sent Away explains why the current reprieve will be short lived:
Market conditions change. A dramatic change can blow away a company with billions in assets in a matter of days. With communication technology moving information at lightning speed every second of every day all over the world, there is nothing anyone can do to stop this from happening. The secretary of the Treasury, the heads of the Fortune 500, and the governors of the Federal Reserve can meet in rooms and hammer out deals all they want. But they are powerless to stop a market that has turned.
Mostly what the powerful attempt to do is provide more of what started this mess to begin with: floods of paper money. What is the effect of that? It can postpone the day of reckoning sometimes. But at what cost? Every dollar that the Federal Reserve prints waters down the value of the existing dollar, which means one thing: inflation. Actually, it means one more thing: distorted market signals.
Even then, the market winds blow ever stronger. The injections of credit in the past didn’t stop the present crisis; it only worsened them by creating the illusion that life could go on as usual.
From today, for how long will life go on as usual? Clearly the time between each crisis and each “solution” is shrinking, and this rally, if it continues, will soon be rudely interrupted. One day the government will run out of funds that they can confiscate from the healthy sectors of the economy, or the new drugs administered will not work at all—the economy will simply seize up just as a young drug addict sometimes dies prematurely from a heart attack.
At that point, the Fed and the Treasury department will have a choice. They will have thrown way so much good money bailing out bad assets that either they will have to allow a full-blown deflationary depression to proceed, or they will have to print so much money as to generate hyperinflation.
The political pressure by demagogues to choose hyperinflation will be enormous; we can only hope for a deflationary depression. Why? Our economy is extraordinary resilient, but only if we allow it to be. Without government intervention, the market will dismantle our failed financial institutions and transfer the remaining assets to those who are better able to manage them. A deflationary depression, if it is allowed to proceed, can end relatively quickly; and prosperity can begin again. Many of us who played no part in creating the problem will suffer greatly, but the alternative is far worse.
Let us hope we don’t choose the more dangerous path of hyperinflation. A hyperinflation, such as Zimbabwe is experiencing today or Germany did in the 20s, will essentially destroy the market economy and it will threaten the survival of the country as we currently know it.
I fear for the future of this country, and I’m not just speaking in economic terms. There are many Americans who will lose everything in the coming years. No doubt future political demagogues will feed on their anger, and far more ruthless and despotic elements than we see today will likely rise to the top.