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.

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

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 breathless policy wonks who haven’t had a real job in their lives can say) or 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

It’s really just too much to get my head around, but you have to read this article about the U.S. economy headed for another crash – in the Russian newspaper Pravda! The Russian word for “truth”,  it was synonymous with Soviet state run media and propaganda back in the bad old days. But it seems that they get us just about right. If only an American newspaper had the courage to speak do boldly. Here’s the link.

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