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
