Monday, October 27, 2008

Approaching the Abyss

“A piece of paper will not feed you, when there is no bread to eat…money can function only so long as it represents actual goods…” –Ayn Rand, Egalitarianism and Inflation, 1974.


From A Professor and a Banker Bury Old Dogma on Markets


" 'There are no atheists in foxholes and no ideologues in financial crises,' [Fed chairman] Mr. Bernanke told colleagues last week, according to one meeting participant."


Cable News program, as reported on Rush Limbaugh show, approximately 9/22/08;

CNBCs Larry Kudlow; Tries to explain government's role in imposing low mortgage lending standards on banks via Community Reinvestment Act.

Liberal apologists; (Interupting Kudlow, with anger) “So now you're going to blame poor people!?!”


Via private e-mail, I came across this incident involving a college student;

“My professor is an economist, and although the class supposedly focuses on development, recently we have been discussing the current economic situation. When he asked us if we had any questions for him, I asked him what role he thought the CRA had in creating this situation, since I've heard the act being tossed around as one cause of many. His response was essentially 'none', and later he sent me a private email. This is his email…

From my professor:
I really had a hard time understanding why you would think that the CRA was a factor in the current financial crisis.
Until I saw this was a creation of Fox news and National Review
I realize now this is part of a disinformation campaign and not so subtle racist strategy.' "


Exchange between Fox New's Neil Cavuto and Jack Welsh, former General Electric CEO;

Cavuto; Explains connection between government bailouts of large financial institutions and how one may lead to another. Reports Fed statistics that commercial lending for last four weeks had risen steadily from about $6.1 T to $7.1 T. Expresses concern about overreaction and tries to touch on the causes.

Welsh; “Now is not the time for ideology, but for action.”


From How to Recapitalize the Financial System, by Greg Mankiw

"Essentially, it was a result of poor judgment among various private decisionmakers, encouraged by equally poor judgment of various public policymakers, many of whom were more interested in promoting homeownership among questionable borrowers than in the preserving the safety and soundness of the financial system. But this is not the time for recriminations. We have to face up to the problem sitting in our laps.) "[Emphasis added.]

These five separate episodes have something crucial in common. Kudlow and Megan were confronted with opponents who attempted to frame the subprime crisis in emotional terms. Welsh, Bernanke and Mankiw were calling for a concrete-bound focus on the immediate moment, in defiance of cause and effect, history, or potential future consequences of the policies they were advocating. President Bush set the tone of the flailing moves to come as he announced his bailout plan in September when he said that this is not the time for finger-pointing…there would be time for that later.

The common denominator here is the abandonment of ideas, logic, principles, historical perspective, and the kind of ideological analysis that enables one to predict the likely outcome of legislative proposals. In other words, the current debacle is marked by a triumph of pragmatism over reason. Don’t think…act! Such is the nature of the way in which our political “leadership” is going about “solving” the crisis.

Without a perspective that goes beyond “the problem sitting in our laps,” how are we to judge the longer term efficacy of anything we do, or if we will be doing more harm than good? Without “recriminations,” how are we to figure out how this crisis came about? If this is not the time for “recriminations”…a time when our government is taking draconian steps that will have profound implications for our economic and political freedoms…then when is?

The current crisis has deep roots. Understanding of money and credit is crucial here. As Rand puts it, wealth “represents goods which have been produced, but not consumed.” Money is not wealth, but only a representation of actual wealth. Money is also a means of exchange…a facilitation of the trading of real wealth (i.e., of unconsumed goods) between productive people. Money has value only to the extent that it is backed up by unconsumed goods.

Credit is made possible only by grace of productive people, on any level of income, who consume less than they produce (people who save some of the money that they earn). Credit requires peoples’ savings, in other words. Credit is not created by a government printing press. When government creates money beyond what the productive members of society require, it is in effect creating counterfeit money…money not backed by actual wealth (unconsumed goods)…but which is then used to purchase that actual wealth. It is a hidden tax on savings…i.e., it is theft.

What is being rushed into today…in an effort to “recapitalize banks”…is a wholesale raid on the remaining national savings in order to replace wealth already destroyed by the housing bubble. That wealth…the previously unconsumed goods…is gone, and nothing can bring it back. It can only be replaced with future savings, created by the aforementioned “productive people”, which takes time. In the meantime, the irresponsible borrowers and lenders…and the investors who purchased their mortgages…must face the consequences of their judgements. Given the magnitude of this government-facilitated “meltdown,” a serious recession may be likely. But it is a necessary adjustment, painful as it may be for many. When the government steps in with its printing press (i.e., counterfeit) money to “bail out” the irresponsible, it is forcibly and immorally diverting actual savings from eventually going to more credit-worthy borrowers. It is throwing good money after bad.

As the blind rush…i.e., to focus only on the immediate moment…continues to devour our savings, the mantra continues. Don’t attempt to learn from the past! Don’t worry about future consequences! This is no time for ideology! But how else would one learn about the silent victims of the government’s attempts to re-inflate the housing bubble? What about those prudent folks who were priced out of the market during the boom, but chose to postpone or abandon their dreams of homeownership rather than take on mortgages they couldn’t pay back? Just as prices are being brought down to their price range by the correction, the politicians step in to “rescue” the irresponsible borrowers, thus denying them the just rewards for their prudence…a chance to buy a home they can afford at a realistic price. And then there are the healthy banks that resisted the sub-prime mania that will be denied the chance to make profitable loans to those new buyers. And all of these prudent folks, including the large majority of people who continue to pay their mortgages on time, are being made to pay for this political panic attack.

And make no mistake, the mad money scramble is a real panic by politicians trying to ward off the inevitable consequences of decades of their own evasions. The closest any of them have come to an acknowledgement of their own culpability comes in the form of these amazing words by Rep. Barney Frank:

"But we have made a mistake in this society. The assumption that everybody can be a homeowner is wrong. We pushed and encouraged people into home ownership - people who, in some cases, weren't ready for it. You can't act on wishes that are unrealistic without having negative consequences." (CNN, 8/25/08)

Exactly! What is startling about this admission is that it comes from a very liberal Democratic House leader. He doesn’t specifically declare that the government’s policies caused this whole mess, but then who does he mean by we? The fact is that it was his party’s icon…FDR…who declared in his “second bill of rights” that every American has a right to a home. It was his party’s 1960 platform that reiterated that right. (For a discussion on the actual meaning of rights, see "Man's Rights".) It was his party, under President Carter, that created the Community Reinvestment Act designed to pressure banks into making loans that they otherwise would not have made. It was his party that, under President Clinton, turned that act from a relatively innocuous nuisance into a sub-prime bank shakedown scheme. And it was his party (and later the second Bush administration) that expanded Fannie and Freddie into pac-man gobblers of those loans for resale as mortgage-backed derivatives to investors. “We have made a mistake,” indeed!

But we are not to seek “recriminations.” We shouldn’t reference theories of money and credit, because we don’t need any “ideologues.” Don’t think…act! Emotion rules! Suspend the law of cause and effect. This is a financial crisis. We can’t be bothered by ideas. We must re-build confidence…by taking from the savers to give to the profligate.

Bailout after bailout after bailout were enacted to save us. And more is to come. And we continue to sink. And President Bush now pleads for patience because, he says, “it will take time to work.” Suddenly we have something we didn’t have before…time. But what we didn’t have time for before…or now…is thinking. With everyone from homebuyers to giant financial institutions knowing that the government will be there to bail them out of their risky mistakes, the seeds of an even bigger future meltdown are being sown in this crisis. With Barack “Herbert Hoover” Obama, our likely next president, planning tax increases, the unparalleled productive ability of Americans may finally be too overburdened to pull us through, this time. Someday, if current trends continue, the real wealth…our national savings…will finally be gone. Then we will be left with wheelbarrows full of worthless paper money. Just ask the Germans of 1923.

Some wise man once said, “when you’re in a hole, stop digging!” He must have been an ideologue.

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