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

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

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

The Collectivist-Utopians (my new name for Progressives) lament the current economic environment as something that the government must ‘fix’, we must ‘do stimulus’ (a statement that only a breathless policy wonk who hasn’t had a real job in their life can say), we must prevent economic contractions at all costs. The Libertarians (me, for example) say leave it alone, you caused the problems in the first place. But really, what makes sense? I’m sure many of you are honestly trying to understand what’s what, but are overwhelmed.  Look, I’m just a regular guy, sort of smart and with some real world economic experience (market and credit risk management/capital markets). I’m not a great seer like the supposed geniuses babbling away 24/7 about the economy, but I do think I understand a few basic things that you might benefit from thinking about, so here goes.

A recession occurs when a simultaneous drop in demand in enough segments of our economy causes aggregate GDP to contract from previous levels. In a growing economy, there are always ups and downs in various segments, say steel sales fall, but software sales increase or resorts have a tough time but pharmaeceuticals have a banner year – you get the point. It’s the benefit of diversification. Countries that don’t have diverse economies are very risky, witness the boom/bust economies of oil producing nations, with little other industry. Okay, are you with me so far? So what happens in recession is that aggregate demand in one or many economic sectors is reduced so dramatically that other sectors can’t make up for it. That’s why some people still do well in a recession because their sector (sometimes a sector is just geographic or demographic) still has good demand characteristics. Health care would be one of those sectors in our country, for example.

Pretty simple, right? No need for oracles speaking theoretical mumbo-jumbo to understand that. Now, on to a longer view of this. Industrial sectors and the overall economy grow and contract over time, but our hope is that the overall economic pie gets bigger. Now this is where the magic comes in. Think about it, why does our overall economy get bigger? Well it could be inflation, population growth or our exports increasing, but let’s say we adjust for all the externalities and still find our economy growing, what causes that? Well, it’s productivity growth. What is productivity growth? It’s essentially increasing output without increasing capital or labor. Okay, you still with me? I promise, I’m trying to take you somewhere worth going.

How does this miraculous productivity growth occur? Innovation and efficiency improvements. We’re either able to produce more goods with the same cost or produce the same goods with less cost. This occurs in a free market economy continuously, and can be described by the following ideas:

1. Comparative advantage/specialization – This concept essentially observes that some producers are more productive producing a specific good than others in a given marketplace.

2. Mutually beneficial, free exchange of goods/property – In a free market, producers and buyers are  free to buy/sell from each other or not, pursuing their own interests, namely profit or other forms of self-interest.

3. Creative destruction – Given the above, the free market grinds away, continuously rewarding and punishing participants with either profit or loss. Inefficient producers are forced out and efficient producers grow. This machine runs all by itself, with a little lubrication from the rule of law and at least somewhat stable money, being the byproduct of zillions of little decisions that we all make every day, without the guidance of government, I might add (I have to get my Libertarian thought in there).

Okay, so what’s my point? Well the segments of our economy that are contracting perhaps need to in order to grow again someday. Without going into abstruse theories, let’s just summarize the problem by saying that the production in these sectors outstripped demand. Well how did that happen? In our case, there is ample evidence that both inflationary and loose credit policiea (one in the same in many ways) by our government essentially subsidized demand in a number of industries. What happens when these subsidies (and that’s what these policies are) are added to the equation? Well one outcome that’s certain is that the normal competitive pressures relax a bit, as both producers and buyers, buoyed by free cash, do some pretty stupid things. The buyers buy stuff they can’t afford, meaning they pay prices that otherwise wouldn’t be competitive and producers get excess profits. In our case the government encouraged this, but it couldn’t go on forever, and it didn’t. This is, essentially, the boom bust cycle of rigged monetary policy and government intervention.

Let’s look at this in the real estate sector. When, for example, the Feds implicitly guarantee Fannie Mae’s securities, allowing it to take risks which if it were owned by private interests would never be allowed. If at the same time the Feds don’t put any money aside to account for these risks (as in this case), essentially we’ve given free money to the real estate market. The real difficulty of this example is that the benefit is so widespread, it’s hard for any single interest to say no. Think about it, the homebuyer benefits, the real estate brokers benefit, construction benefits, the banks benefit, Fannie Mae benefits by growing and paying its execs millions and the politicians benefit by promising housing to people who couldn’t otherwise afford it, thereby gaining their political support. The only problems is it’s a Ponzi scheme, where the last few players at the table get left holding the bag, and then the whole system just stops. No more buyers because as a result of all the frenzied buying, the prices have been bid up to a level where even the most clever banker can’t make up a plausible excuse for how the buyer might ever pay back the mortgage. This is the demand side of the equation, and once it slows down, the entire system built to serve it collapses. As an aside, I’ve just read that the 400 billion that we’ve given to Fannie and Freddie isn’t enough to cover their losses – I wonder what would have happened if the Federal government had to set aside these reserves from current accounts back when they created these uneconomic incentives? Perhaps they would have had a hardrt time getting their destructive policies passed.

So, now what? Well, what should happen is that prices decline until new buyers are brought into the market. Real estate is just one example of this, you see it very clearly in business products/services all the time. Oversupply leads to falling prices until there are buyers. Along the way all the inefficient suppliers who gained excess profits from this bubble are forced out, and what little capital they have left is invested elsewhere. The labor in the space finds other gainful employment, in businesses that are growing by being more productive – hopefully not in another industry being pumped up artificially by government. The remaining players in the space are leaner, better producers and gain market share as the sector recovers, but increase the productivity of the space. Maybe technology plays a part. Look at web based sales tools for owner based listing in real estate. For a few hundred bucks you can list your house online with a virtual tour, cutting down the real estate commissions on a given transaction. Real estate brokers become less necessary and that’s one of a zillion ways that the market becomes more efficient. The same happens in construction, where perhaps the use of plastic plumbing or more energy efficient design is now rewarded by more cost conscious buyers, and so on. It’s brutal and painful, but left to itself, as long as the forces mentioned above are allowed to work, the sector comes out stronger and resumes growing. Free market economics fixes the problem, and Libertarians cheer!

The grown-up reality is that a recession is really just a bunch of sectors that have seen demand drop at the same time (whether via govt meddling or not, but it’s more likely if it is). The worst thing we can do is stop these sectors from righting themselves because that’s the only way that they can start growing again. When you hear government officials and politicians talk about ‘creating jobs’ and ‘growing the economy’ like it’s a garden in their backyard, remember what I’ve said here. It really isn’t that complicated – but it pays for them to have you think it is. That way they can continue to favor their pets, whether it’s the ‘ownership society’ or ethanol – the government only disrupts the functioning of the market in these sectors. They can’t create real demand where it doesn’t exist, rather they just disrupt markets even further, no matter how much money they dump from the skies – and oh yeah, that money is either borrowed money or money taken from someone else’s pocket which would have been used more efficiently if it hadn’t been confiscated.

One final word. I’m sure more academic readers of this article will skewer me for this simplistic exposition of ideas, because that’s what happens on the internet. Some guy who’s filled his head with arcane muck will dump pages of dreck on me that inevitably turn out to be nonsense (sadly it often takes me hours to get through their uniformly long and overly complex arguments). Don’t bother – this article isn’t for you. Keep up your Keynesian fantasies, or arcane socialist-mutualist or ‘luxury economy’ theories – I’ve already read it all and it’s all garbage. I also know that we have imperfect markets – so really, don’t bother.

For the rest of you, most of market economics is readily understood if you just look at your own economic decisions, and those of the companies/institutions you work for. Most of you already are practitioners of Libertarian free market economics, so when you hear people talk about recession like a bogey man, think again. It’s really just our economic ship righting itself.

Technorati Tags: libertarian, libertarian economics, libertarianism

It’s all a bit much too take if you have even a whiff of understanding about free markets and wealth creation (as any good libertarian must). Earnest pols run confabs with policy wonks and leaders of industry to ‘do jobs’ (as the breathless DC insiders like to say), all gladhanding each other for the cameras and political satisfaction, but when you look at what they are actually doing it’s either tax breaks or grants of our cash to favored causes. Whether it’s ‘cash for clunkers’, or the prospective ‘cash for caulkers’, the politics of who gets what goodies is always colored by political calculations. Oh yeah, they’re doing all this with tax money they’ve confiscated from the private sector to begin with, which is money that might have otherwise gone to productive uses, so who really thinks the government can ‘create jobs’?

Let’s start with some basics. First, job creation is a not the objective of any entrepreneur, investor or corporate executive; wealth creation is. Jobs are created in order to realize the end state desired; i.e. to build and deliver a product that can be sold competitively so the owners can profit. Nobody starts a company saying, wow, let’s create some jobs.

Second, how is wealth created? What we’re really after is creating wealth, right? Jobs are created in order to support wealth creation, not the reverse, so perhaps looking at how this happens might be helpful? It’s very simple actually. For those of you who took economics, remember the concepts of comparative advantage and mutually beneficial exchanges? (for those who need a primer, click here ) Simply put, one person/company exchanges with another person/company based on the perceived value of their offerings.

Simple example. I’m an apple grower and I can grow apple’s cheaper than my neighbor who mows lawns. It turns out he can mow lawns faster and better than me because he has the equipment, technique and motivation to do so. So we exchange with each other, using money, and each of ends up with more than if we each tried to grow apples and mow lawns. Each party actually ends up with more in this exchange.

Our economy creates wealth via these exchanges all the time. That’s how we’ve become the wealthiest nation in the history of civilization, by creating a society where this happens freely and fairly (via contract laws, property rights, civil rights etc). It wasn’t through government programs or central planning – in fact it was because of the lack of all that claptrap that we’ve boomed the way we have. Simply put, the U.S. was the premier free market in the world with great protections for property and contracts, sound money and a society that valued individual initiative and innovation. The result was that our economy grew like no other.

Does anyone disagree with this line of thinking? I mean, it’s actually pretty simple to see. If you have even the faintest idea about economics, you already know this. If you don’t get this, I encourage you to go back to the link I inserted earlier and watch the educational videos. It’s all basic free markets stuff, but nobody in the mainstream media spends much time on it. But wait, there is more.

There is another aspect of freedom that we don’t often talk about because it’s not fun, but it goes on continuously in the U.S. economy and that is the freedom to fail. Millions of businesses start and fail each year. Only a small percentage make it to five years and a tiny fraction make it to become large corporations. The reality of this process is lots of failure for most endeavours. It’s very risky and the process of competition punishes the losers brutally with losses, and in some cases bankruptcy. Another way to put it is that most businesses fail, and yet it’s this very failure that, in a process not so different from Darwin’s natural selection, drives us forward. We abandon that which doesn’t work and try again with something better. Producers who don’t provide that ‘comparative advantage’ we discussed above get pushed out, ensuring that the best wealth creators survive. This is the process of creative destruction, and it’s been this ability to fail that allows us to succeed as a nation.

What’s critical to note is that there isn’t some referree out there declaring the winners and losers. No, the market does that very well on it’s own. So, if you really believe in free markets and wanted to see more jobs created, what would you do? Well, it seems to me that creating the best conditions for wealth creation and the free exchange of goods would be best. The government has never been able to pick the winners and losers in our economy well. In fact the businesses where we dominate have been largely free of government intervention (technology, life sciences, media/entertainment). It’s really crazy to think that the answer to creating jobs is some government tax credit or handout. All that will do is encourage a producer to do things that are uneconomic. In fact, to not let the market sort it out is to handicap that producer from receiving the inputs they need from the market to correct/improve their actions so that they can actually succeed in the market.

This ain’t brain surgery folks. As a libertarian, these facts are plain to see. With our current interventionist government, splashing capital all over the place, we are sure to see less wealth creation than we would normally see. These interventions provide an incentive for uneconomic behavior and inevitably hamper wealth creation, and hence job creation. Sadly, our current policy makers believe in the power of bureaucracy and think they can pick the winners and losers out, so I’m afraid we are in for a long haul of lower than possible wealth creation.

Technorati Tags: comparative advantage, job creation, libertarian, libertarianism

“I believe that the tools available to the banking agencies, including the ability to require adequate capital and an effective bank receivership process are sufficient to allow the agencies to minimize the systemic risks associated with large banks. Moreover, the agencies have made clear that no bank is too-big-too-fail, so that bank management, shareholders, and un-insured debt holders understand that they will not escape the consequences of excessive risk-taking. In short, although vigilance is necessary, I believe the systemic risk inherent in the banking system is well-managed and well-controlled.” Ben Bernanke – ’05 U.S. Senate confirmation hearings.

What is a good libertarian to do? This statement alone should be a sound basis for denying Ben Bernanke another term of sinecure at the Fed. Bernanke couldn’t have acted in less compliance with this statement, in fact his actions were the exact opposite of his stated position. And yet, he’s probably going to be confirmed by the majority of the senate without much difficulty.

Only a country with truly corrupt institutions could tolerate such abject dishonesty and wholesale game-rigging, only to respond by cheerfully asking for more without at least even pausing to take a breath. I mean sure, Ron Paul is out there, and now Bernie Sanders and Jim Bunning are pledging to make some waves, but really there is no head of steam building behind not reconfirming him. Here’s a question for you all to chew on, what exactly would Ben have had to do during his tenure to not get reconfirmed? Break the law by buying private securities to prop up markets and financial firms? Increase the money supply by 23% in one year, causing the real risk of severe inflation in the near term? Refuse to disclose the actual investment activities of the Fed?

I could go on, but I’m assuming that most of you (because you are reading this) already know what the Fed has been up to – and how unprecedented it all is. Yet it seems that this is going to just slip by because there is so much else going on. Don’t think this is by accident – it’s a well known strategy in Washington and other scumbag-ridden political circles to flood the system with crises and initiatives, so much so that the average person can’t possibly even keep track of seemingly minor things like Ben Bernanke’s reconfirmation hearings, but don’t let them do it! Talk this up, write your op-ed comments, and most of all, think about it. We are in big trouble folks, and starting by smacking Ben down would be a great shot across the bow of the crony-corporate-capitalists and their stooges in Washington, DC. It’s time for libertarians to stand up for libertarianism!

Technorati Tags: ben bernanke, Federal Reserve, liberatarianism

Let’s start with some basics. First, how does insurance, in  particular health insurance, work? Answer, a pool of people pay a premium to a company that will pay claims for health care services covered under a policy they’ve purchased. The assumption is that some people will use less than they pay for and some people more, and the process that comes up with the pricing and the composition of the pool of insured is based on actuarial analysis which is the study of the probability of events occurring and the cost scenarios that might emerge. This is pretty straightforward yes?

Okay, what about in the real world, how does it work if you are an insurance company in the U.S.? First of all, policies are designed with something less than the entire population of the U.S.  as the pool for a given product. Why is this? First the government requires that insurance companies operate state by state, so each policy is designed for a given state boundary. Second, you don’t have to buy health insurance, so it can build a pool of voluntary participants. Okay, so armed with your actuarial analysis, you then submit the proposed policy to your state insurance commissioner. In this submission are all the rules governing underwriting, which are the criteria for acceptance into a given risk pool. This includes the rules about pre-existing conditions. See, if too many sick people are in the pool, then the cost goes up for everyone. The insurer also projects a profit on the policy (pretty low as the health insurance is not a very profitable industry by any measure) and the state insurance commissioner evaluates the policy against all the rules in his state. Eventually, after modification and discussion, it’s approved and voila you have insurance.

My point is twofold. First, their is no magic – if you have too many sick people in a pool the pool doesn’t work. Second, all of these rules are already approved by the government. To somehow insinuate that this is inappropriate, unfair or abusive is to really just nonsense. Now, some states have “must issue” rules – and guess what? Coverage costs go through the roof? You know why? Because too many sick people apply and many healthy don’t – driving up the cost of insurance.

The bottom line is that the current health insurance system works exactly the way the government has made it work – I mean it’s regulated to death already and that’s a big part of the problem. Larger pools would make this much easier to manage, and, as well, some questions need to be asked about whether we need a mandate for coverage to ensure that enough healthy people participate to make it work. When Washington state had it’s “must issue” law in force, but no mandate, it had situations like the pregnant mother who wrote the state commissioner about how happy she was about getting insured while she was pregnant, and that she would sign up for insurance next time she got pregnant – exactly the behavior that drives up costs.

The issue of the mandate is a sticky one for a Libertarian. In a Libertarian world there would be no such need for govt involvement at all because the consequences of not having health insurance would be severe – no care or a serious encumbrance of your future earnings. But in the world we live in, we already mandate that a provider cannot refuse life saving treatment based on ability to pay, so everyone actually already operates with a government mandated catastrophic policy, we just haven’t funded it in a logical way. Do you get this? Therefore, if we are going to have this treatment mandate, then we have to have an insurance mandate. Btw, this mandate was put in place by Reagan – so those of you who love him so, chalk him up as taking a big step to state run health care.

Finally, the biggest problem in health care isn’t the insurance companies, it’s the cost of care. Anyone who actually knows where the money goes knows that the profits of the health care industry are small (3.3% on avg)  and that the real problem is the price of  and rising demand for care. A market based system has a chance of creating the right incentives, competition and pressures to bring delivery costs down: a government planned and managed system will only guarantee rationing if caps are put on costs, which is the current plan. Btw, none of this thinking is ideological – it’s fact based, but requires thoughtful reflection on how insurance actually works. If only someone would have the guts to speak up against everyone who is bashing the insurance industry, and explain to the policy makers and the American people that there is no magic pixie dust that the government can sprinkle to “give” everyone health care. It has to be paid for somehow and the only question is will we continue to let government continue to screw it up or will we actually give the free market a try? It looks like the former to me, but don’t think that after watching Colbert go on about it that you know a damn thing about the real problems we face.

One might assume that a Libertarian would be up in arms over the Obama administration’s banker pay interventions. Indeed I would be if we lived in a free society in which bankers competed without government support – but we don’t.  Let’s get into why this is so.

First, any bank that has been bailed out by TARP, the Federal Reserve, FDIC or other mechanisms for keeping the ponzi scheme called our banking system afloat have lost the right to govern their institutions independently. The government (via the taxpayer) has taken an ownership position in these entities and as such, has a right to influence all management decisions, including pay.  But what about the rest of the industry? If you go to the Wall Street Journal today, you’ll see howls about government interference in free markets – as though banks operate in a free market!

Banks operate with a very special license granted by either state or the federal governments (depending on their charter) to engage in ‘fractional reserve’ banking. Not just anyone is allowed to do this – and as such the government is granting a special privilege to banks to loan money that they don’t have. Second, the Federal Reserve (for more on it, go to this post)  loans money to banks on a regular basis via it’s discount window and open market operations (it does many other nefarious things to help them but I digress). Given these special privileges – which are essentially a ‘rent‘ on the rest of society – we should expect to exercise some control over their activities. Btw, it’s this monopolistic power (just try and open a bank – you can’t, the government won’t let you, they might not let just because you’d actually compete with another bank in the area!!) that allows bankers to pay themselves rapacious compensation. They’re a protected class, so really they are no different than the banks receiving other forms of government protection in principle (read as income transfer from citizens to them).

What’s really galling about all of this is it’s justification by Bernanke as a ‘risk management’ measure. How absurd! He’s taken away the downside risk for big banks – if a big one is going to fail, we’ll bail it out. In economics that’s called ‘moral hazard’ and these actions guarantee future out-sized risk taking by the big banks – it’s axiomatic. For those of you not in the business, banks already labored under great scrutiny from a risk standpoint – it’s not as though they didn’t have regulators all over them before this. Stating that reviewing their compensation practices will lessen systemic risk – it’s just too absurd to be tolerated. If Bernanke wanted to really do something about risk, maybe he’d stop giving bankers free money: interest rates are so low currently that bankers make money by falling out of bed.

Technorati Tags: banking, compensation practices, feeral reserve, risk management