Next time you hear Tom Friedman or some other supposed ‘sophisticate’ praising China’s enlightened, technocratic government or it’s vaunted economic wisdom, remind them of these prisons and prisoners. This is an ongoing human rights violation and a crime against humanity. Friedman once longed for the U.S. to be “China for a day” so the U.S. president could just order the policies he knows that would be best for the U.S. How delusional!

Watch the video and weep for these poor souls.

Technorati Tags: china, prison labor, slavery

Adbusters, an anarcho-communist activist group, is the organizing force behind ‘Occupy’. Adbusters and their fellow travelers subscribe to a political philosophy called anarcho-communism. This letter is an attempt to take you folks and your ideas seriously, and to respond to you.

I know your ideas come from Kropotkin, Baikunin and Proudhon, and that you believe they saw through this corrupt system of control we idiots call freedom and capitalism. But you see, just like all other communist/collectivist ideologies, that worldview is only interesting as criticism. It doesn’t possess a stitch of real world applicability, and I think we see this reflected in the ‘Occupy’ movement in the sense that you hear complaints informed by this view ‘it’s our park’, ‘it’s our street’ etc., as a fundamental precept of this philosophy is that property per se should be eliminated. (I’m also writing for people who know nothing about you). Anarcho-communists should also be aware that this entire line of thinking was debunked a long time ago – here’s an article from 1970 that will straighten out anyone confused enough to be anarcho-communist  http://www.lewrockwell.com/rothbard/rothbard122.html .

You see, there is no way to replicate the information transmission system of free markets. Economists and political philosophers had this debate for the most of the 20th century, and even Robert Heilbronner finally gave up the ghost in 1989. There is no effective way to replicate the wealth producing effects of private markets. The mechanics of price, profits and property in conjunction with free people trading in that system, with recourse to state enforcement of contracts unleashed a wave of wealth creation that is simply unprecedented in the history of human civilization.  Any data driven analysis shows this is true to a shocking scale, it’s not subtle, it’s revolutionary. The adoption of what is referred to as ‘classical liberal’ political system utterly changed the world in a way that nobody predicted. It was a step function – unprecedented and responsible for the explosion of wealth in the world.

Your critique of capitalism and property neglects to properly weight the huge, unequivocal benefits to mankind in lifespan, health, wealth and other real measures of human quality of life that this flawed version of capitalism and liberty has delivered.  Societies that haven’t adopted this classically liberal system have been left to suffer unnecessarily, almost always under the jackboot of some thuggish dictator who claimed to stand for ‘the people’. And please don’t go on about the exploitative nature of wage labor – the data doesn’t support that either. and you should know that the labor theory of value was also disproved (a long time ago, all economists agree). That pesky, wealthy middle class just keeps slowing down the revolution, I know. How can you folks believe such disproved ideas in 2011?  You have to ignore huge amounts of data and create “facts” from whole cloth to miss what’s really going on in the world, but it’s you who call us delusional? What a galling combination of arrogance and naivete.

I know, I know, you are just bubbling with anger and readiness to explain how “property is theft” and the exploitative nature of “wage labor” as part of you conspiracy narrative, but your arguments don’t pass muster. The part that is missing in the west is the large cabal controlling the financial  conspiracy you think exists, when in fact the root problem is an over- encroaching state informed by such collectivist philosophies as Social Justice Theory, Marxism and socialism in the first place. The problem is an unlimited, busy body state that destroys virtually everything it touches.

Take your view of the banking/monetary system – it only gets the powers it holds over our destiny by government. We don’t have a free market banking/securities/insurance market, so any critique of  it should start with the fact that it’s not a free market. Also, you shouldn’t be surprised that government controlled banks et al seek to affect the actions of those regulatory bodies that govern them. We have a fundamental right to petition our government and whether you like it or not, corporations are collections of people – collectivist in fact, just voluntary – and yes, hierarchical and wage based. I know you object to these things but your opinion doesn’t reduce the rights of people in corporations to express their interests collectively . Why should folks who work in such settings lose their rights to free speech and to petition their government on behalf of their interests? Are trade unions the only collectivist groups that are allowed a voice in your worldview?

There is no evil cabal of wealthy people conspiring to manipulate the global financial system to keep exploiting the people. Rather, there is a very imperfect financial marketplace that is intervened in by governments in absurd ways all around the world, mostly without regard to the unintended consequences of their actions. Fyi, this is why bankers/securities industry collect so much wealth. They are able to tilt the field to their favor via government protection, but they don’t  don’t do so by breaking the law. Rather, they simply try to influence the politicians and regulators to make decisions in their interests via legal means. Please  understand this. When you assign our difficulties to a conspiracy of evil rich people or criminal acts this causes you to miss the real problem in the first place – state intervention to try and “protect” us.

Jeffrey Friedman and Wladimir Kraus’s Engineering the Financial Crisis explains the nature of this problem, particularly with respect to the perverse incentives of the institutional structure of global financial regulation, very clearly. They provide a much more evidence based and coherent explanation of our economic crisis than any conspiracy theory you folks have ever dreamed up. A video summarizing this view can be seen here http://www.cato.org/multimedia/events/engineering-financial-crisis-systemic-risk-failure-regulation

Worse yet, your incomplete, Utopian prescriptions for a collectivist, anarchic society based on fanciful views of human nature’s propensity for mutual aid ignore the fact that I don’t need protection from mankind’s good impulses, I need protection from mankind’s bad impulses (like your’s). The entire classical liberal vision can be explained as a desire to protect the “people” from exploitation by ‘bad’ people taking power in government. Even more to the point, your anarchic beliefs simply don’t prescribe a workable institutional structure or really any kind of implementation vision. In my opinion, they are very likely to result in chaos and then totalitarian government if one examines history for the results of similar Utopian efforts

In closing, I do want to say that I  understand your anger. The current combination of crony capitalism and out of control local, state and federal governments that are destroying our liberty and prosperity is unworkable and crumbling before our eyes. It’s also true that the current crop of political choices are mostly unappealing to anyone seriously wanting to improve our society. However, proscriptions for more government intervention and more handouts (wiping out student loan debt, for example) are the kind of policies that created this mess in the first place. Rolling back government to its role of protecting individual rights and delivering some public good and protecting us from dangerous externalities is the solution that will deliver higher levels of prosperity – not anarchy or a larger state.

Technorati Tags: adbusters, anarcho communism, anarchy, free banking, kropotkin, liberty, occupy wall street, proudon

A friend of mine recently asked me to comment on some investment advice from Robert Anorth, commented on by Jonathan Burton, at Marketwatch (here)in a recent article. I think he’s spot on in many respects, but I also took the opportunity to write down how I see our current problems and my assessment was indeed bleek. I thought you might enjoy my economic perspective.

I think Burton is laying out some very good advice. I’m not so sure about his last point on junk bonds as rising interest rates make existing bonds trade at discounts. I may misunderstand something about what he’s recommending, as he otherwise seems like a smart guy for sure. Emerging markets, played selectively, should be part of your game too, maybe the recent pullback is a dip you can buy into? Not sure, but overall his thesis makes sense.

I do have a view of my own which coincides with Mr. Burton’s but I diagnose and describe the problems a bit differently.

1. Debt Crisis – U.S. federal, state and local govts, consumer debt at 130% of gdp, banks still with very high degrees of leverage and massive exposure to decreasing real estate values, and many corporates leveraged like crazy ends up in catastrophe. Bernanke referred to the necessary “deleveraging” in his remarks yesterday. It is a huge drag on our economy now, and it is unsustainable. We will have to let the rest of the credit crisis occur. The fed has said, we’ve done all we can do. Real estate is plummeting again. The readjustment left to happen is huge, it’s in the trillions. This alone could throw us into 20% unemployment, with massive dislocations of people from their homes, and disruptions to governmental functions. I mean, when your cops aren’t getting paid, what do you do then?

2. Currency Crisis – The inflationary actions of the fed to the tune of several trillion dollars to date are already showing up in some commodity prices and a weird bubble in Iowa farmland due to 7 dollar a bushel corn. Gold is at historic levels against the dollar, the dollar is at or has recently met new historic lows against the swiss franc, the aussie dollar and other currencies. The fed is trying to inflate it’s way out debt, but it’s doing so at the price of the value of the dollar.

3. Governmental fiscal crisis – I’m sure you are hearing it in your local politics in NJ. I see it up here, hard choices are being made, big “cuts” are happening. Although I have to say some of the “cuts” are really just slowing down the projected growth of programs, not absolute year over year cuts to funding, while others are pretty serious. And I think you are just seeing the start. Over 200 billion of the stimulus program was aid to states and localities. The money flow is: 30% of state budgets come from the feds now, 25% of local budgets come from states now. What happens when that money stops flowing? Can you imagine what happens when the first state pension fund collapses? What if it’s CalPers? The results of these set events alone could put society on its ass.

My forecast? I think that we’re all screwed. If you have wealth, you will lose it. If broke, like me, you are incredibly vulnerable. It’s a pretty scary picture out there. I don’t think it ends well. If we have the same constitution and form of government without armed insurrection having occurred 20 years from now, I’d be shocked. This issue of the proper role and size of government has to addressed, but we are at a standoff with each other. The Republicans just walked away from the table on the budget negotiations. It’s all coming to a head. There is way too much disagreement in society on some very basic things and it’s tearing our government, politics and society apart at the seams. Did you see that 54% want us completely out of Afghanistan? Have you noticed that each side is becoming more strident, more shrill and, dare I say, aggressive or even militant?

There are zillions of folks in the blogosphere would grab their guns and go where Ron Paul or Glenn Beck or Keith Olberman or Hilary Clinton or Barack Oama told them to, for real. All it needs is a spark, like a stumble by the economy? I think we are in for tumultuous times, my friends. It’s interesting being in the company of lots of the “have nots” in society, as a roamer of the earth while other people are in offices. The level of hopelessness and resignation some kid making eight bucks an hour feels, having to still live with parents after college, and with no job to even interview for in or out of their fields if they went to college, is palpable.

There are a lot of young people in that boat for whom the American dream isn’t available. I mean, they can’t even buy cars. None of the ten other kids in my daughter’s graduating design class got jobs in their field (my daughter did, but she is extraordinarily talented and ambitious) and this is the third year in a row of the same outcomes. It’s unprecedented and it’s only gotten a little better, but not by much. Young men are the tinder of revolution, and there are a lot of them who don’t see much in this world for themselves, nor do they feel like anybody cares about them. Try to get a kid of 25 to talk about how they feel about our generation, say financially, or on the environment or Iraq. They think we are a bunch of screw-ups. They hear the medicare/social security stuff and gulp thinking, I’ve got to pay my student loans and for my mom and dad’s retirement too?

In that case, you”ll want to be able to get away from civilization for a while. You might be best advised to buy some cheap cabin way up in the middle of nowhere and provision it up so you can go there in the worst case, and live off the grid for a while. I’m not kidding, actually. All kinds of bad stuff could happen to you in densely populated areas. You also might want to consider buying some physical gold (bullion, not pnumismatic coins). I know this sounds crazy, but really, it could go all Greek style pretty quickly. One quick law of survival. It only takes 3 days for people to start killing each other? Why? Water. People die from dehydration in 3-4 days, and when it’s die or bash someone’s door down, or their head in, to get water, they will generally will bash away.

The Cut, Cap and Balance program proposed in the WSJ today is interesting, but it has a big problem.. There isn’t enough support from the American people, or the Republican party for that matter, for such a draconian move. Do you see the poll numbers on cutting individual programs? I mean, why do you think the hucksters who get elected got there? It was by promising goodies, not responsibility.
It’s the weakness of a democracy with an out of control state that has lead us to such a precarious position.  Small minorities will manipulate the system to gain significant advantages for themselves at a cost that is virtually unnoticeable when diffused across the tax paying population. The problem is that we now have hundreds of such groups feeding at the teat of government largesse greedily. In fact they are righteously guzzling down the earnings of their fellow citizens, and mostly despise us to boot, while dismissing us as stupid.  These groups are brought together in solidarity by the left/democrats/progressives/socialists/NeoConGelical/ConCon or whatever they are calling themselves at the moment and motivate their bases to resist all compromise. That’s how we got here. We are now at the inevitable showdown.

I’m a libertarian, but I have to ask those on the right a simple question. Do you really think this is the way to govern? I mean, this is the definition of brinksmanship. I know this is a very unpopular view for a libertarian, but I think that our political process matters and that the rule of law means something. All of the spending that the Republicans are now objecting to is stuff that was voted through the Congress. It’s spending that already has statutory mandate. It isn’t discretionary – we’ve already had a political process to come up with the taxing and spending on the table. That was the irresponsible act, that is why we are in the mess we are in.

On the other side of that coin are our liabilities. Paying our debt is a statutory obligation as well. We risk our high credit standing in the world at our own peril. While I don’t think that anyone who understands this debate seriously doubts that the outcome will be a debt increase vote without much spending cuts, I think there are lots of Americans who think that not raising the debt ceiling would be a good idea. I worry about such people being pandered to.

What we need is real and principled policy debates in the congress. We should engage the entire nation in a dialog about the nature of our government, it’s extent and ultimate authority over our lives. It’s time to have it out. We should recognize that we are at an impasse because we aren’t resolving our differences. One thing we can learn from some of our European friends like Germany is that responsible government can emerge from politically divided government. This process can only happen by the normal budget making process. It is designed to support such important public debates. Using one vote on the debt ceiling to try and accomplish what it couldn’t at the voting box isn’t laudatory, it’s a shortcut, and a craven one at that.
Silly brinksmanship won’t get us anywhere, you crazy right-winger know-nothings get that, yes? The right’s negotiating position is awful.  Just like last time on the CR, Obama will look at Boehner and say “No.” And that will be that. Boehner will not be responsible for us not voting the debt ceiling up. Anyone with a brain knows this. In other words, the GOP has no leverage. And remember, the GOP only has the House. What makes anyone think it represents a majority of Americans? How can it not see that compromise is necessary?

Here’s an even crazier question. GOP, if you think the problem is so severe, why wouldn’t you accept some revenue increases? I mean, if it’s the planet ending crisis you seem to say it is, why wouldn’t you be willing to accept that which is unacceptable to you normally, for the greater good? That is the very nature of compromise. It makes you resolve and prioritize your values. If not going under financially is more important than cutting spending, well there you have it. But I hear no such reasoning from the GOP. I don’t even see any real desire to cut back big areas of spending like the warfare and police state that we have developed. And even when you get to welfare, like medicare, social security and medicaid, there is little appetite in the GOP base to cut these programs meaningfully enough to make a real difference soon enough. I’m not even sure most of them would cut farm price supports.

We sold ourselves down the river 100 years ago with the likes of Teddy Roosevelt and Woodrow Wilson. I mean, how do you think Obama got elected? A lot of people want him to take from the rich and give to them (even if they aren’t poor). Begger thy neighbor is a way of life in our country, and this vote isn’t about to change it. Smarter people have said it better than I could ever do:

“The problem with socialism is that eventually you run out of other people’s money” – Margaret Thatcher.

It is best coupled by the prescient observation of Friederich Hayek: “Once politics become a tug-of-war for shares in the income pie, decent government is impossible.”

We have far bigger problems than this vote, folks.The only way forward for such a state is collapse. I’d prepare yourselves, I see reason nowhere.

Alan Blinder, Ph.D. of Princeton, laid out the case for not cutting government spending right now due to it’s economic impact in today’s Wall Street Journal. In this article, he posits such half-truths and simplistic questions as the following:

“The generic conservative view that government is “too big” in some abstract sense leads to a strong predisposition against spending. OK. But the question remains: How can the government destroy jobs by either hiring people directly or buying things from private companies? For example, how is it that public purchases of computers destroy jobs but private purchases of computers create them?” Alan Blinder, WSJ 6/21/11

This the worst kind of  dissembling, and doesn’t withstand the slightest scrutiny. A few points to refute his quisling-like defense of the indefensible.

1. Creating jobs – As Bastiat said, he is focusing on the ‘seen’, not the ‘unseen effects’ of government spending. Every tax dollar the govt spends it is taken from an individual who would have otherwise saved, invested or spent it. So, there is no new economic activity created when the govt spends tax revenue, it is merely shifting it elsewhere. Every study of the “velocity” of govt spending shows that a dollar of govt spending has far less impact on GDP growth than private spending due to the vastly greater efficiency of markets allocating resources. This last bit was proven despite decades of socialists trying to develop models for centralized control of resources, but even the hardiest leftist economists gave  up, such as Robert Heilbronner did in 1989. Govt spending is never better for the economy than private spending in any real, fully accounted for sense. It’s necessary for certain things we want the govt to do, but every dollar it spends is reducing our GDP, not increasing it based simply on its proven lower velocity. Game, set, match, dipstick.

2. Borrowed money – When we are spending borrowed money, all we are doing is borrowing future economic activity as real dollars need to be taken from tax payers to pay that debt off. There is no free lunch. Since we are now borrowing so much, yes, in the very short term, we would see some reduction in economic activity from reduced spending, but contnued borrowing is also a very real threat to our economy in other ways. By manipulating interest rates to keep them low so we can afford all this debt, the Fed has distorted our savings and investment rate, leading to malinvestments and real problems in capital formation. And since capital isn’t homogeneous, it’s isn’t fungible, so govt tricks to try and spur capital formation such as pouring liquidity into the system don’t work. Free market economists in the Austrian and Chicago school, so derided by the simpering sophisticates at places like Princeton, seem to be able to ignore all these facts and just land on the current moment. with a very narrow view to correctly state that cutting federal govt spending dramatically would impact economic growth, while ignoring the very real problems with deficit spending. As well, as soon as interest rates rise, the servicing of this debt will consume huge amounts of our federal budget every year, crippling govts ability to do what it was tasked to do by our constitution.
3. GOP claims – It is technically correct that money left in private hands will create more GDP growth than when spent by the government because of the universally agreed to superior efficiency of free markets versus central planning. It is also true that significant cuts to spending of borrowed money will cause some short term pain, but is much better for us in the long run. If Blinder tells the whole truth, he’s really saying. screw your children and grandchildren, we want to party now!

I’m no fan of the GOP, but if Blinder thinks making simplistic, populist points is helpful, people should know he’s just prattling the monetary and fiscal voodoo of the left/Progressives. The cause he’s flacking for is the school of economics that got us in this mess in the first place.

Technorati Tags: alan blinder, deficit spending

President’s don’t create jobs. Jobs are created as a consequence of wealth creation, so if the country begins to create more wealth, it will create more jobs. The question then becomes, how is wealth created? Go back to Econ 101 folks – but I bet most of you can’t even answer this most basic question (I don’t think Obama can either).

Wealth is created via voluntary, mutually beneficial exchanges between private parties in the economy. The wealth in those exchanges is created due to the comparative advantage of each participant in their field of specialization. A simple example of comparative advantage would be the apple grower who exchanges with the tractor builder versus building his own tractor, and the tractor builder wants apples but doesn’t have the resources or knowledge to grow apples and each of them do their specialized task more efficiently than the other so the exchange creates more wealth for each of them.

If you accept the above, then what becomes immediately obvious is that the government should do everything it can to get out of the way of mutual, voluntary exchanges. Every regulation, tax, tariff and other barrier or interference in these exchanges causes what’s referred to as “malinvestment” of capital, which results in lower economic growth because less wealth is created since the transactions aren’t strictly driven by voluntary exchanges.

Another problem government causes for wealth creation is the debasement of our currency via inflationary actions. Again, basic economics reminder: Inflation is a monetary phenomena – it occurs when govts create currency faster than their productivity is growing (this isn’t disputable, all economists agree that inflation is a monetary phenomenon, but how many politicians even understand that?). Part of the reason our economy is becoming a scraped out husk, filled primarily with marketeers and bankers/brokers is due to govt manipulation of the economy, driving trillions of capital into bubble after bubble – first the stock market, then the real estate market and now the stock market again. That is a macro economic problem that destroys wealth, and undermines every economic actor relying on U.S. dollars both domestically and globally. It also is the cause of our boom-bust economy. Fyi, the boom is the problem in the first place, the bust is inevitable and we are still in the midst of the bust – it’s only been forestalled by the Fed and Treasury pumping trillions of dollars into the ether and propping up failed banks, businesses and institutions like Fannie/Freddie.

The last part of the equation is the overall government take from the economy. In 2010, local, state and federal govt spending was 42% of our GDP. As this number goes up (and it’s been doing so steadily for some time) the private economy will of course have less capital and any transactions with the govt as party in them are inherently less ‘wealth-creating’ because the profit motive is absent. So the bigger this number gets, the less growth will occur. It’s axiomatic.

I guess the question becomes why anyone thinks the government or POTUS can drive job creation in the first place? All they can do is get out of the way, and in our current society, most folks don’t even understand the basic, simple economic concept described above, despite the fact that this very idea is what has driven our economy to such heights to begin with. So, I think if you want to see your government get out of the way of the private sector in meaningful ways, first learn something about economics and then vote for folks who will support those policies that will lead to more wealth creation. You will quickly find that both the Republicans and Democrats have little understanding or respect for market economics. Maybe then you might vote for a candidate/party that understands market economics – like the Libertarian Party. For a refresher on the economic of wealth creation and comparative advantage, click http://libertariancomment.com/libertarian-education/

Technorati Tags: comparative advantage, job creation, libertarian economics, libertarian party, wealth creation

I love this video! It uses the hip-hop genre, in a kind of ‘battle’ set up between Maynard Keynes and F. A. Hayek. Each present their theory and you are left to choose (but i guess it’s  biased towards Hayek). I you ever really wanted to know the difference between free market economics and Keynesianism – but were afraid to ask, this is perfect for you. Click and enjoy.

For those of you who don’t know, Libertarians are in principled alignment with the so called ‘Austrian School of Economics’ and F. A. Hayek was an Austrian School Economist who made major contributions to our understanding of free enterprise. Okay, bye for now – I hope you all like this.

Technorati Tags: Hayek, Keynes

As a libertarian, I’m convinced that most people act in their own self-interest, both individually and collectively, quite effectively without external coercion. In social science circles, this is a fundamental question which informs the various schools of governing philosophies that drive our ideological disagreements.  Collectivist and big-state solutions fundamentally assume that individuals left to their own devices will destroy each other and themselves, unless they are forced to behave differently. Essentially, they think that most human beings (except for themselves, of course) are Troglodytes,  consumed by selfishness and greed. This line of reasoning underlies much of the rationale of the Left and may be the reason why they just look at libertarians like we’re crazy when we talk about minimal state or – heaven forbid – non-state approaches to organizing society.

I think that one of the problems which pervades the social sciences is the lack of valid testbeds for their theories, and the fact that they don’t often like to digest negative results. Take Marx, who is held as one of the three fathers of the field of sociology; despite the observable fact that dialectical materialism doesn’t predict outcomes in the real world or that the “Proletariat” hasn’t risen up in revolution, Marxism still holds great sway in leftists political circles. These are two central tenets of Marxism that most honest adherents of Marxism has admitted are not valid. It’s like believing the world is flat after it’s been proved otherwise, but that doesn’t stop them.

The internet is uniquely able to connect us, both individually and collectively.  I think it provides great insights about our nature which do real damage to the assumption that people aren’t well equipped to run their own affairs much more readily than the average leftist would have you believe. Lets take two examples that just scream out for notice. eBay and Craigslist. eBay is an absurd business, if you just stop to think about it. You bid on stuff that you can’t physically see and send the person money, hoping they send the stuff you bought, and that the stuff actually works. When eBay was going public, it had real difficulty convincing investors that the business model could scale because many investors reacted with real doubt that people would trade with each other fairly. Yet look at the reality, eBay is a multi-billion dollar business in which millions of buyers and sellers continuously do just that, with very low levels of fraud. eBay does some policing of the site, but in fact has a predisposition against overly regulating buyer and sellers, leaving it to the community to police itself in many regards. I have to note that there is bad behavior, but as both buyers and sellers adapt to this new model of transacting with each other, they have developed habits to protect themselves.

Craigslist is an even more extreme example. My first real experiences buying and selling over Craigslist were tentative, but I quickly became a fan. The first thing you notice is that it’s so simple to buy and sell. Either browse for what you want without any registration, or simply write your ad, upload your photograph and you’re off. You choose how you want to be contacted, there are no bidding rules and nothing is binding. Typically you meet the buyer after having negotiated over the phone or on email, in many cases they come to your home to pick up the goods. My experience was nothing more than shocking. Having sold  and bought motorcycles, guitars, electronics, furniture and household goods on CL, I have yet to have a single bad experience. I’ve never been ripped off or been misrepresented to. Never, and this experience is common (at least to the people I’ve asked about it). eBay itself records ridiculously low levels of fraud, one tenth of one percent, while other studies put it higher with broader definitions of fraud, but still they are low enough where users make wide use of these exchanges, indicating that the risk reward is favorable.

This is shocking to those who make their living based on telling us we can’t look after ourselves. But they control most of the media and virtually all of educational apparatus, so is it any surprise that after, say, a government caused financial meltdown (predicted by Austrian economics) people would look to the government for solutions? In the case of the economy, it’s even more bizarre because Keynesian economics was disproven in the late ’70s, but many still cling to it. For those of you who don’t know much about economics, the stagflation of the late ’70s isn’t a condition that the Keynesian model would allow to exist. This hasn’t dampened the current crowd’s enthusiasm in claiming its authority, howeve. Btw, a better explanation for their failure to adapt to the facts on the ground is that all they really seek is to be seen ‘doing something’ about our problems and unfortunately, the politicians don’t know enough about economics to understand how bankrupt their theories are. But I digress…

What conclusions can be drawn from these experiences and phenomena?

1. Trustworthiness is common  – People are much more trustworthy than we think, at least in our society. Even more to the point, individuals and private institutions are quite capable of optimizing all of the trade-offs involved to maximize security and trust, with no governmental involvement other than the normal enforcement of laws that preserve our security and property.

2. Cooperation is innate in us – The emails that go back and forth between buyers in these systems are instructive. Both parties inform themselves directly and indirectly about each other via overt communications and signals drawn from the interaction by the participants. The quality of the ad language, the pictures and one’s responsiveness to an email question all say something about the sellers and buyers, and new participants quickly pick up on it. How many pictures are optimal? What kind of language is attractive? All of the behaviors and communication evolve to help buyers and sellers manage their interests quite effectively, with various levels of oversight. eBay has much more structure, whereas CL is a free for all. Amazon is a third model which is really oriented as a web based storefront versus a pure auction site, and represents yet another private take on the approach. All of this evolves without any coercion from the state, and works very well. This is a key point: it doesn’t just work, it works incredibly well. If you use one of these sites, I’m sure you can attest to it. People are generally very accommodating and a pleasure to deal with.

3. Bottom up innovation works best – Both CL and eBay let their community drive how it evolves. They are fanatical about understanding what their customers want and when they develop a new feature or policy, often it is an option, not something that is uniformly imposed. Customers are free to use them if they want to. When they don’t want to, if those policies don’t work well for them, customers can go elsewhere. My experience, for example, using eBay’s auction structure is not particularly attractive for me. I also think they charge too much. Taking into consideration that I negotiate for a living, I’m much more likely to sell or buy a product on CL than eBay. But that doesn’t mean its right for everyone. The person who doesn’t trust their negotiating skills or doesn’t ever want to meet the person they’re buying from may like what eBay does (and apparently do). This is the exact opposite of how the federal government attacks problems. It coerces participation, and its instruments are rules and bureaucracies which have no chance of matching the efficiency of free exchanges, open communication, trust, price signaling and provider competition – all of which run without any supervision from government.

What is most amazing about all this is how many people go around believing that the first place we should go for solving societal problems is the government. In fact, if you look at the biggest problem areas in society, for example, education and health care, you see that these areas are flooded with governmental regulation, institutions and money. But if you look at the areas where government isn’t that active – say food distribution or personal computers, those marketplaces of individuals acting freely without coercion are working so much better. Put plainly, I can get thirty different brands of toothpaste twenty four hours a day within a fifteen minute drive from my house, and can get a laptop that has the power of a twenty year old multi-million dollar supercomputer for six hundred dollars, but still, I’m continuously met with the a priori assumption that government is the answer to our disastrous health care system.

This view simply doesn’t comport with the observable facts and it needs to be treated with incredulity by those of us who believe in free markets and free people. One of the most endearing and frustrating aspects of being human is our ability to confuse ourselves, but knowing this only places a greater burden upon us to examine our beliefs and compare them with the available facts. Sadly, I’m not at all sure most people actually want to figure things out as much as they just want their side to win.

Technorati Tags: free markets, individaul freedom, libertarian econo, libertarianisms

Goldman announces record profits in an economy that has been crushed and now lies bleeding, half dead, gasping for breath. Setting aside the government interventions that made this possible, this would raise some eyebrows, even if they weren’t in a government protected monopoly? I mean how can they possibly have record-breaking profits in this economy?

First, it’s a simple truth that there will always be winners and losers in a free market. So one has to be careful not to get caught up in the class-warfare rhetoric our ‘dear leader’ is spewing. I would rather provide a righteous, free market reason for disgust with Goldman and its ilk, one based on a desire for free people and free markets, which is the last thing Goldman Sachs represents. Put another way, I want you to be angry for the right reasons.

My background selling derivatives trading systems and risk management systems (I actually sold AIG trading and risk management software over a 10 yr period of time – they deserve exactly what they got, btw), as well as other technologies to Wall Street had me regularly interacting with Goldman folks over the years. One thing that is absolutely clear is that they are the A team in today’s global financial markets. They hire the best and pay the best. They do things well and are amongst the smartest folks in the business. Goldman’s business is global and diversified, participating in many businesses that would surprise you. I shared a flight with a Goldman banker once and he put it this way. “Goldman will buy anything it can sell at a profit.” This reveals what is important to Goldman – profit, no matter what. It’s their mantra and their singular focus. In and of itself, there is nothing wrong with profit, which comes from pursuing one’s self interest, and it is our right to do so as free people, but there is nothing else before or after it for these guys. They are the quintessential soulless bankers, making nothing, serving no one above themselves, dedicated only to profit. They are essentially the biggest, baddest sharks in the tanks, continuously searching for their next meal. So perhaps they are just better, right, and deserve those profits by just being the best capitalists, right?

Wrong! First, Goldman engages in what is arguably the most unethical trading practice of our time, High Frequency Trading. Reliable estimates put the profit from this activity at about four billion dollars per year. Goldman is able to take advantage of its privileged position on the New York Stock Exchange (and other exchanges) to in essence, legally  front-run customer orders. Using arcane computer algorithms, they skim very minute sums trillions of times, which add up to billions for them. Other firms do this, but Goldman is the king of this practice, running 50-60 percent of program trading on the NYSE by some estimates. This is a morally reprehensible practice and adds up to a rent Goldman et al are able to collect on all firms buying and selling securities. You know, idiots like you an me, who try and pick a stock that might be a good company or pension funds, mutual funds – any market participant. Oh yeah, did I forget to mention this practice is nearly riskless for them? Nice work if you can get it, and the idiots in our government (both on the left and the right) are bamboozled by these clowns into believing that the liquidity this activity provides is a good thing for markets. One has to ask how we got along before it? Answer, just fine. In the indictment against Goldman Sachs, this is “Count 1″. In and of itself, it should be enough to fine them, sue them and perhaps even arrest some folks who work there. Besides all that legal and regulatory stuff, lets be clear about one thing that is certain. This is not free market activity: they are leveraging a privilege they are granted by government to trade securities.  In other words, the privilege they and a small number of other firms enjoy is not something any other market participant has. This is the antithesis of free markets and is much better described as crony-capitalism. I don’t blame them for doing it – they are programmed to exploit every opportunity they find. I blame our regulators for creating this opportunity for them. There is a move afoot to end it, but they are fighting it tooth and nail.

Count 2. Goldman Sachs may very well have committed securities fraud by selling mortgage related securities to investors as sound investments while its proprietary trading operations were getting rid of its mortgage exposure in every way possible. In other words – they lied to their customers. This case is foundering around right now and may never get to a courthouse, but two facts are undeniable. One, they used an offshore entity they created to deal in the mortgage markets, selling products in a way that gave them some  legal protection from fraud, which if they had done this in their U.S. subsidiaries it would be an open and shut case. This is evidence of their consciousness of guilt. Two, their proprietary activities reflected the exact opposite view. Whether it’s ultimately found to be technically illegal or not – they are scum and deserve our moral outrage.

Count 3. Backroom deals with between the Fed and AIG hedged every penny of counterparty credit risk it had with AIG in its derivatives business, which was very significant (over ten billion usd).  Goldman Sachs (and others) were protected in a way that only privileged entities in our economy are. Separately they benefited from other government interventions, but this single action insulated them from the bad decision they made in assessing AIG’s credit worthiness, giving them something from government that very few other free market participants ever have – a free ride at the expense of the tax payers. There is ample evidence that Geithner et al connived to hide these actions, and that Goldman actively sought these protections – again, they knew exactly what they were doing. This too is morally reprehensible.

I’m trying not to be overly technical here because that is a weapon that these kinds of hucksters use to bully many folks into submission while they rob us blind. You know in your gut that this is rotten business, even in if you can’t keep track of the shell game these guys play. Trust your gut, these guys are at a minimum, morally corrupt. Whether they are criminals or not is an entirely different question because that’s the way these guys play. They use different jurisdictions, legal constructs and entities to do one thing brilliantly – create profit themselves obscenely while maintaining the pretense of complying with the rules of the road. They intentionally arbitrage regulatory authorities and structures with their business model and strategies.  They are not daring capitalists, competing on some open field and winning by dint of their innovation and efficiency, no, they are rent seeking, arbitrage playing, scalping animals who should be reviled only a little less than the feckless regulators and politicians who do their bidding.

Technorati Tags: crony capitalism, Federal Reserve, goldman sachs

Bernanke gave a speech this morning in which he called for more regulation to prevent prevent ‘bubbles’ from occurring. He went on to say that he didn’t believe that the Fed’s monetary policies were the cause of the recent housing bubble. For those of you who have been keeping track of this, I imagine you are as astounded by these statements as I am.

Let’s start with a reprise of other statements Ben Bernanke has made, to get a sense of how well the man who controls our monetary policy, and now also invests in private companies and securities (unlawfully), understands the economy. I know, it’s a bold statement, I mean, I’m just some blogger here, I haven’t shaved in a while, and I don’t have a degree in economics. However, I can read, which seems to give me a leg up on Bernanke.

Bernanke being questioned about the possibility of a housing bubble in July ’05

“I guess I don’t buy your premise. It’s a pretty unlikely possibility. We have never had a decline in housing prices on a national basis, so what I think is what is likely to happen is that housing prices may slow, maybe stabilize, might slow consumer spending a bit…I don’t think it’s going to drive the economy from it’s full employment path though.”

“I am confident that the bank regulators will pay close attention to the kind of loans that are being made, making sure that loan underwriting is done right.” “I do think that this a localized problem and won’t affect the national economy.”

Bernanke on mortgage secuirites market in February ’07

“There is no indication at this point that the subprime mortgage issues have seeped into the broader mortgage market which still seems to be healthy.”

Yeah, uhh, okay, well, Ben, I really think that you might just want to revisit your economic model in light of your complete failure to understand what is actually happening in our economy, but once again, what do I know?

Ben went on to say, as he often does, that predicting bubbles in the early and middle phases is hard to do (I’m paraphrasing here, but am doing so accurately). The fact is that the economists of the Austrian school (in other words, Libertarians, for those of you just joining the fray) were predicting the meltdown that occurred, so one might ask Ben to consider if his perspective is somewhat skewed. Of course, as all social scientists do these days, he has some data to support his contention that the Fed didn’t actually create the incentives for mal-investment that the Austrian’s predicted. He’s no dummy, but the analysis doesn’t seem to hold up. Click on this link to see the Austrian case, with a criticism of the technical fig leaf Ben is hiding behind. http://mises.org/story/2936

I think there is a deeper lesson here for Libertarians. No matter what happens, the current institutions we’ve created are not going to change their behaviors. Regardless how completely we expose the failed policies of politicized, fiat money and monopolistic, fractional reserve banking practices, both politicians and technocrats won’t be swayed from their beliefs in these practices. Why is that? Well, many on the right suspect a great, corrupt conspiratorial cabal of supra-national bankers, corporate titans and politicians gaming the system to their advantage, but always, somehow, they are just out of our view. Others claim vast personal corruption is occurring, which of course impugns the character of many folks in positions of power, claiming they are enriching themselves. I think both of these claims simply aren’t supported by the evidence.

Rather, I believe we live in the  ‘Age of the Social Scientist’ wherein the last one hundred years many very smart people have become convinced of the unlimited power of government as THE tool of societal management.  It’s so seductive to those who want to change or run the world to believe that the instruments of governmental power can help them achieve their goals, that along the way, somehow, the actual results of their failed policies don’t seem to dissuade them from their strongly held beliefs. Critical to this effort is the underlying weakness of the “science” being used. Economics can hardly be called a science, although many treat its aspirations to such as revealed truth. For my money, the Austrian school of economists has been correct about the current crisis and this should bolster its credibility amongst economic oracles, but sadly, this doesn’t seem to be so. If they were to admit the weakness of their models, many institutions and players in the policy making apparatus of government would cease to have value. These institutions have become so detached from reality that they now serve themselves primarily, rather than the people. I believe that this is an ideological corruption that is much more dangerous than lining one’s pockets, and is a symptom of a much greater intellectual corruption. Theoretically, I’ve seen rights/entity analysis which lay out this case very nicely, and point to its inevitability. Simply put, at a certain point, government and its attendant institutions exist to serve themselves and break loose of any constraints we try to impose on them.

I’m coming much closer to the position held by many of my Libertarian brethren that financial collapse is the only possible way we’ll rid ourselves of these horrific practices. However, I’m not at all convinced that what will replace it is desirable at all. I believe there are those on the Left, who hold much greater power than Libertarians, who are preparing for this eventuality, and that some true radicals are hastening it. Given this, I have to conclude that it’s much more likely that we’ll see a more totalitarian state emerge, not a lesser one.

Technorati Tags: ben bernanke, Federal Reserve, libertarian, libertarianism