Monday, September 22, 2008

Ticking Time Bomb Explodes, Everyone Surprised

It's no fun saying I told you so, not when what you told us of was a disaster which is now upon us. That's why you don't see Ron Paul gloating about the current financial meltdown.

I suppose ultimately it is probably very difficult for a democracy to have a sensible financial system, once we have made the Faustian bargain of having an institution like the Federal Reserve Bank in the first place. The central bank is both an economic institution and a political one. For political reasons (ie., the continuing power of the politicians now holding power) it will tend to expand credit by artificially lowering interest rates -- especially if there is a war on and the politicians want to "give" the people both guns and butter. This makes debt (eg., bonds) a relatively poor investment, driving money into the stock market. This causes prices to rise, and rise, until people notice that the underlying value is not there, and it collapses. It also inflates the housing market, which is driven by easy credit, until it too collapses. These collapses in turn rock the banking community.

Then the rich and powerful try to force the rest of us to pay for it, and if we do so, they have no reason to avoid doing all the same things all over again.

At this point, there is a glimmer of hope. The proposed Paulson financial institution bailout must represent the largest short-term transfer of wealth (excepting military conquests) in the history of the world. It is, worse yet, a transfer from the relatively poor to the relatively rich. It is just the sort of thing the Democrats should oppose. They control both houses of congress now -- we can hope they will grow a spine and oppose it. Of course, they were well positioned to see the flaws in the Iraq war as well, and you know what they did about that. Still, one can hope.

[Hat-tip to Lew Rockwell for the title of this post. I swiped it.]


Peter L. Winkler said...

Libertarians and Objectivistst are the greatest proponents of deregulation, and it is deregulation such as vitiating the Glass-Steagall Act that allowed the banks to engage in the tactics that led to the current situation. Quoting Ron Paul as the visionary whose policies would have prevented this is therefore laughable, given his libertarianism.

Lester Hunt said...

Well, you are right about one thing: the Financial Services Modernization Act of 1999, which lifted restrictions from the the New Deal era Glass-Steagall Act, was a disastrous mistake and one of the causes of the current horrors. But it was not disastrous because it was deregulation but because it occurred in the context of a system in which the feds insure these institutions against their mistakes. Telling them that they can do what they want with their assets, plus telling them the the taxpayer will clean up resulting messes is a recipe for catastrophe. Its a situation where profit is private and risk is socialized. You might was well command them, "Go thou and be wreckless." Note that Paul did not say to lift just any old restriction. He said "reform the system." The key word of course is system.

The myth that this was caused by "deregulation" if it persists is bound to cause yet more mischief in the long run.

Lester Hunt said...

As to whether Ron Paul is a "visionary" or not, here is what he said about the housing market almost exactly five years ago:

"Despite the long-term damage to the economy inflicted by the government's interference in the housing market, the government's policy of diverting capital to other uses creates a short-term boom in housing. Like all artificially-created bubbles, the boom in housing prices cannot last forever. When housing prices fall, homeowners will experience difficulty as their equity is wiped out. Furthermore, the holders of the mortgage debt will also have a loss. These losses will be greater than they would have otherwise been had government policy not actively encouraged over-investment in housing. Perhaps the Federal Reserve can stave off the day of reckoning by purchasing GSE debt and pumping liquidity into the housing market, but this cannot hold off the inevitable drop in the housing market forever. In fact, postponing the necessary, but painful market corrections will only deepen the inevitable fall. The more people invested in the market, the greater the effects across the economy when the bubble bursts."