Chief Justice John Marshall said it all in one sentence: "The power to tax is the power to destroy."
It is not the money that is taxed away that is destroyed. What is destroyed is the wealth that does not get produced in the first place, because high taxes make its production not worthwhile.
Both presidential candidates are attacking the foundations of our prosperity.
In the United States today, there is approximately $10 trillion in outstanding mortgages, and of these, about one-quarter are subprime and Alt-A loans. (Subprime loans are made to borrowers with little or no credit, while Alt-A loans are made to borrowers with better credit but who are not considered prime.) Individuals who access such loans often pay a below-market interest rate, or an interest-only mortgage payment, for the first few years of the mortgage. But after that, mortgage payments are adjusted to reflect prevailing market rates. If 40 percent of the Alt-A market fails this year (as many estimate), financial markets will be looking at $1 trillion in defaults.
That's a lot of defaults, especially when you consider that the 1980s S&L crisis cost, by comparison, $150 billion (about $240 billion in today's dollars) and is partly blamed for the 1990-91 recession. Does today's mortgage market promise a similar result today, on the eve of the baby boomers' retirement? If so, the sound that defines 2007 may not be that of Beyonce or Bell but of air seeping from the housing bubble. Though unpleasant, it is a sound much to be preferred, since it reflects a housing market returning to fundamental levels, as well as one that will offer buying opportunities to many who currently cannot afford housing. But still, $1 trillion dollars makes for a lot of failed loans that were issued over the last few years. Surely, this is a clear example of market failure. Right?
Well, no, because when hyper-regulated markets fail, you can't blame market forces. In this case, rising real estate prices were forcing many low and middle class households out of the housing market well before the most recent recession. When that happened, home buyers had few options — either relocate to another part of the country and start over, or finance with a subprime or Alt-A loan and wait the bubble out. That's what many did, and it quelled genuine political revolts in bubble-plagued markets in the early 2000s, especially in California and the Northeast.
The situation reminds us that bad things happen when pols manipulate markets to achieve their ends. In this case, there was a recession that resulted from an inflationary boom that they created. What do you do when housing market malinvestments, spurred by Alan Greenspan's cheap-money policies of the 1990s, pushes housing prices out of reach to the middle class?
Option 1: Say mea culpa and cease policies that create bubbles in the first place (and pay a political price at the polls).
Option 2: Give those placed in such positions a short-term solution that allows them a way out, even if you are simply postponing the day of reckoning by a few years.These two options reflect an important point made in Henry Hazlitt's classic book, Economics in One Lesson. Economic policy options often have either positive short-term effects and negative long-term effects, or negative short-term effects and positive long-term effects. It's obvious which option is favored in today's mass democracy, since politicians are extremely short-term oriented — indeed, their focus is about as long as the next election.
Presidential candidates this year will wax ad nauseam that home ownership is the American Dream and that this dream is now too expensive for average Americans. What they won't talk about is how government policies, and specifically monetary policies, help bring this situation about...Housing was the middle class's best hedge against a growing government intent on expanding its scope and power by inflating the money supply.
“I made a mistake in presuming that the self-interests o f organizations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms.” Referring to his free-market ideology, Mr. Greenspan added: “I have found a flaw. I don’t know how significant or permanent it is. But I have been very distressed by that fact.”But, as economist, Dr. George Resiman points out, it is not the free market that is to blame.
Mr. Waxman pressed the former Fed chair to clarify his words. “In other words, you found that your view of the world, your ideology, was not right, it was not working,” Mr. Waxman said.
“Absolutely, precisely,” Mr. Greenspan replied.
The actual responsibility for our financial crisis lies precisely with massive government intervention, above all the intervention of the Federal Reserve System in attempting to create capital out of thin air, in the belief that the mere creation of money and its being made available in the loan market is a substitute for capital created by producing and saving. This is a policy it has pursued since its founding, but with exceptional vigor since 2001, in its efforts to over come the collapse of the stock market bubble whose creation it had previously inspired...
In doing this, the Federal Reserve’s ultimate purpose was to stimulate both investment and consumer spending. It wanted the cost of obtaining capital to be minimal so that it would be invested on the greatest possible scale and for people to regard the holding of money as a losing proposition, which would stimulate them to spend it faster. More spending, ever more spending was its concern, in the belief that that is what is required to avoid large scale unemployment.
All this additional money is actually fictitious capital, leading people to believe they have more resources than they do. This causes investments and spending in areas which would not have occurred if the availability of money reflected the true state of wealth. Over-investment in a market sector not supported by real demand (which in economics is defined as the willingness and the ability to pay for something) is what creates a bubble. It’s called a bubble because it pops.
Many factors went into making the housing market the sector which experienced the bubble (Fannie, Freddie and their securitization schemes, the CRA, desire for a “real” investment following the dot-com crash, and more) but what made the bubble possible to the scale in which it occurred can be directly traced back to 2 major things (1) the infinite manipulability of fiat money, and (2) the failed central planning of the central bank system. Not until we return to the honest money system of the gold standard and the market discipline found in a free banking system will we be able to avoid the huge boom-bust swings of the past century, and the financial destruction they bring with them.
Greenspan is right to admit his system doesn't work, but it's ridiculously wrong to equate his system with a free market.
(*) In Capitalism: The Unknown Ideal by Ayn Rand
"Historically, the United States has been a hard money country. Only [since 1913] has the United States operated on a fiat money system. During this period, paper money has depreciated over 87%. During the preceding 140 year period, the hard currency of the United States had actually maintained its value. Wholesale prices in 1913... were the same as in 1787."-- Kenneth Gerbino, former chairman of the American Economic Council
Jastrum (1977) analyzed more than 4 centuries of gold and price data from Great Britain and the United States in order to measure gold's real purchasing power.... Remarkably, Jastrum found that gold's purchasing power was relatively constant through more than 4 centuries.Refers to Jastrum, Roy W., The Golden Constant: the English and american experience 1560-1976, New york: John Wiley 7 Sons, 1977
The cause of generally rising prices is an increase in the quantity of money. More specifically…the cause is an increase in the quantity of money at a rate more rapid than the increase in the supply of gold and silver... [S]ince government intervention into the monetary system is what has been responsible for the quantity of money being able to increase more rapidly than the increase in the supply of gold and silver...what is responsible for the problem of a persistent significant rise in prices is an increase in the quantity of money caused by the government.--George Resiman, Capitalism: A Treatise on Economics, pg 895
Peter Fitzgerald, chairman of Chain Bridge Bank in McLean, said he was "much chagrined that we will be punished for behaving prudently by now having to face reckless competitors who all of a sudden are subsidized by the federal government."At Evergreen Federal Bank in Grants Pass, Ore., chief executive Brady Adams said he has more than 2,000 loans outstanding and only three borrowers behind on payments. "We don't need a bailout, and if other banks had run their banks like we ran our bank, they wouldn't have needed a bailout, either," Adams said.
And from John Allison, President and CEO of BB&T in an open letter to members of Congress:
While all financial intermediaries are being impacted by liquidity issues, this is primarily a bailout of poorly run financial institutions. It is extremely important that the bailout not damage well run companies.
Corrections are not all bad. The market correction process eliminates irrational competitors. There were a number of poorly managed institutions and poorly made financial decisions during the real estate boom. It is important that any rules post “rescue” punish the poorly run institutions and not punish the well run companies.
Most people now living have never seen a credit crunch like the one we are currently enduring. Ms. Schwartz, 92 years old, is one of the exceptions. She's not only old enough to remember the period from 1929 to 1933, she may know more about monetary history and banking than anyone alive. She co-authored, with Milton Friedman, "A Monetary History of the United States" (1963). It's the definitive account of how misguided monetary policy turned the stock-market crash of 1929 into the Great Depression.
Here is some of what she had to say:
This is not due to a lack of money available to lend, Ms. Schwartz says, but to a lack of faith in the ability of borrowers to repay their debts. "The Fed," she argues, "has gone about as if the problem is a shortage of liquidity. That is not the basic problem. The basic problem for the markets is that [uncertainty] that the balance sheets of financial firms are credible."
So even though the Fed has flooded the credit markets with cash, spreads haven't budged because banks don't know who is still solvent and who is not. This uncertainty, says Ms. Schwartz, is "the basic problem in the credit market. Lending freezes up when lenders are uncertain that would-be borrowers have the resources to repay them. So to assume that the whole problem is inadequate liquidity bypasses the real issue."
Today, the banks have a problem on the asset side of their ledgers -- "all these exotic securities that the market does not know how to value…"
"Why are they 'toxic'?" Ms. Schwartz asks. "They're toxic because you cannot sell them, you don't know what they're worth, your balance sheet is not credible and the whole market freezes up. We don't know whom to lend to because we don't know who is sound. So if you could get rid of them, that would be an improvement." The only way to "get rid of them" is to sell them…
How did we get into this mess in the first place? As in the 1920s, the current "disturbance" started with a "mania." But manias always have a cause. "If you investigate individually the manias that the market has so dubbed over the years, in every case, it was expansive monetary policy that generated the boom in an asset.
An otherwise interesting Washington Post front-pager on “What Went Wrong” claims the current situation “has erupted into the biggest economic crisis since the Great Depression.” On the contrary, that honor surely goes to 1980-82, with 1973-75 as a close runner-up.This may indeed be the biggest postwar financial crisis, but that is a very different thing.The biggest postwar financial crisis so far was the S&L collapse of the late 1980s, when nearly 3000 financial institutions were closed (see chart above). But the impact of the S&L debacle on the real economy was minor at best (the economy grew by 2.9% a year during that “crisis”). The stock market crash of 1987 inspired many hysterical predictions but no recession at all.An economic crisis implies a deep and prolonged drop in real output and employment, not just another routine recession. To describe current conditions as a worse economic crisis than 1980-82 is fanciful nonsense.Cato Institute's Alan Reynolds
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"Fascism should rightly be called Corporatism as it is a merge of state and corporate power."
-- attributed to Benito Mussolini(1883-1945),
For a discussion of the source:: http://www.publiceye.org/fascist/corporatism.html
The corporate State considers that private enterprise in the sphere of production is the most effective and usefu [sic] [typo-should be: useful] instrument in the interest of the nation. In view of the fact that private organisation of production is a function of national concern, the organiser of the enterprise is responsible to the State for the direction given to production.
State intervention in economic production arises only when private initiative is lacking or insufficient, or when the political interests of the State are involved. This intervention may take the form of control, assistance or direct management. (pp. 135-136)
--Benito Mussolini, 1935, Fascism: Doctrine and Institutions, Rome: 'Ardita' Publishers.
The above quotes help to provide the context for understanding that the following is not hyperbole.
The Road to Fascism
Washington, D.C.--The government has announced that it plans to use $250 billion to buy ownership stakes in various U.S. financial institutions. According to the New York Times, nine major U.S. banks have already been forced into the program. “The chief executives of the nine largest banks in the United States . . . were each handed a one-page document that said they agreed to sell shares to the government, then Treasury Secretary Henry M. Paulson Jr. said they must sign it before they left. . . . ‘It was a take it or take it offer,’ said one person who was briefed on the meeting, speaking on condition of anonymity because the discussions were private. ‘Everyone knew there was only one answer’”--even though at least one institution, the relatively healthy Wells Fargo, wanted to say no.
According to Yaron Brook, executive director of the Ayn Rand Center for Individual Rights, “In herding banking executives into a room and making them an offer they couldn’t refuse, the Paulson regime took its latest and most disturbing step yet on the path to state control of the economy.
“If fascism means coercive state control over nominally private property, then there is no more chilling sign of creeping fascism in America than government’s encroachment on the lifeblood of the U.S. economy--its financial institutions. While the government assures us it will be a ‘passive investor,’ merely funneling cash into the banking system rather than dictating how banks function, this is a lie. Not only does the money come with strings attached--such as restrictions on executive compensation, dividend payments, and the types of investments banks can make--but politicians are already promising a web of further controls. As John McCain recently noted, ‘We will not merely inject billions of dollars into companies and walk away hoping for the best. We will require that those companies be reformed and restructured until they are sound assets again, and can be sold at no loss--or perhaps even a profit--to the taxpayers of America.’
“The Paulson shakedown is the latest in a rapid-fire series of government bailouts and interventions over the last several months. Our leaders claim that this virtual takeover of markets is economically necessary. But it was government control of financial markets that spawned the financial meltdown in the first place: an inflationary boom brought on by the Fed’s easy-money policies, a campaign to promote home ownership that encouraged risky loans, regulations that pushed banks to become dangerously over-leveraged, etc., etc. The response to the crisis should be to restore freedom and to disentangle government from the economy. Instead, the same mentality and the same central planners that created the financial crisis are being given far wider reign to manipulate and distort markets. We must tell our government to reverse this fascist course--now.
Press Release Ayn Rand Center for Individual Rights , October 16, 2008
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Fascism, communism, and socialism have in common the failure to view private property as a fundamental, inalienable right. They also fail to understand the role of private property in the creation of peace and prosperity. These failures are key to understanding why those systems are neither moral nor practical. Capitalism, properly understood as the economic system which consistently applies individual rights to the realm of economics, is both moral and practical. Until this country and its politicians understand this, government solutions will continue to hamper our prosperity, undercut our liberty and promote dissention instead of peace.
It is a blot upon our country that both candidates for president could use this instruction on capitalism from a Frenchman.The financial crisis is not a crisis of capitalism. It is the crisis of a system that has distanced itself from the most fundamental values of capitalism, which has betrayed the spirit of capitalism.
[O]f all the means by which a government can stimulate production, there is none so powerful as the perfect security of person and property, especially from the aggressions of arbitrary power. This security is of itself a source of public prosperity that more than counteracts all the restrictions hitherto invented for checking its progress. Restrictions compress the elasticity of production; but want of security destroys it altogether.Economic freedom is an indispensable element of wealth creation; it is also indivisible from political freedom. We can not preserve one without preserving both. Just as wealth is the solution to poverty, so freedom is the solution to wealth, and wealth and freedom are the means to life.
