And then there's this:
Bailout marks Karl Marx's comeback
Posted: September 29, 2008, 8:03 PM by Jeff White Martin Masse, mortgage crisis
Marx’s Proposal Number Five seems to be the leading motivation for those backing the Wall Street bailout
By Martin MasseIn his Communist Manifesto, published in 1848, Karl Marx proposed 10 measures to be implemented after the proletariat takes power, with the aim of centralizing all instruments of production in the hands of the state. Proposal Number Five was to bring about the “centralization of credit in the banks of the state, by means of a national bank with state capital and an exclusive monopoly.”
If he were to rise from the dead today, Marx might be delighted to discover that most economists and financial commentators, including many who claim to favour the free market, agree with him.
Indeed, analysts at the Heritage and Cato Ins ute, and commentators in The Wall Street Journal and on this very page, have made declarations in favour of the massive “injection of liquidities” engineered by central banks in recent months, the government takeover of giant financial ins utions, as well as the still stalled US$700-billion bailout package.Some of the same voices were calling for similar interventions following the burst of the dot-com bubble in 2001.
“Whatever happened to the modern followers of my free-market opponents?” Marx would likely wonder.
At first glance, anyone who understands economics can see that there is something wrong with this picture. The taxes that will need to be levied to finance this package may keep some firms alive, but they will siphon off capital, kill jobs and make businesses less productive elsewhere. Increasing the money supply is no different. It is an invisible tax that redistributes resources to debtors and those who made unwise investments.
So why throw this sound free-market analysis overboard as soon as there is some downturn in the markets?
The rationale for intervening always seems to centre on the fear of reliving the Great Depression. If we let too many ins utions fail because of insolvency, we are being told, there is a risk of a general collapse of financial markets, with the subsequent drying up of credit and the catastrophic effects this would have on all sectors of production. This opinion, shared by Ben Bernanke, Henry Paulson and most of the right-wing political and financial establishments, is based on Milton Friedman’s thesis that the Fed aggravated the Depression by not pumping enough money into the financial system following the market crash of 1929.
It sounds libertarian enough. The misguided policies of the Fed, a government creature, and bad government regulation are held responsible for the crisis. The need to respond to this emergency and keep markets running overrides concerns about taxing and inflating the money supply. This is supposed to contrast with the left-wing Keynesian approach, whose solutions are strangely very similar despite a different view of the causes.
But there is another approach that doesn’t compromise with free-market principles and coherently explains why we constantly get into these bubble situations followed by a crash. It is centered on Marx’s Proposal Number Five: government control of capital.
For decades, Austrian School economists have warned against the dire consequences of having a central banking system based on fiat money, money that is not grounded on any commodity like gold and can easily be manipulated. In addition to its obvious disadvantages (price inflation, debasement of the currency, etc.), easy credit and artificially low interest rates send wrong signals to investors and exacerbate business cycles.
Not only is the central bank constantly creating money out of thin air, but the fractional reserve system allows financial ins utions to increase credit many times over. When money creation is sustained, a financial bubble begins to feed on itself, higher prices allowing the owners of inflated les to spend and borrow more, leading to more credit creation and to even higher prices.
As prices get distorted, malinvestments, or investments that should not have been made under normal market conditions, ac ulate. Despite this, financial ins utions have an incentive to join this frenzy of irresponsible lending, or else they will lose market shares to compe ors. With “liquidities” in overabundance, more and more risky decisions are made to increase yields and leveraging reaches dangerous levels.
During that manic phase, everybody seems to believe that the boom will go on. Only the Austrians warn that it cannot last forever, as Friedrich Hayek and Ludwig von Mises did before the 1929 crash, and as their followers have done for the past several years.
Now, what should be done when that pyramidal scheme starts crashing to the floor, because of a series of cascading failures or concern from the central bank that inflation is getting out of control? It’s obvious that credit will shrink, because everyone will want to get out of risky businesses, to call back loans and to put their money in safe places. Malinvestments have to be liquidated; prices have to come down to realistic levels; and resources stuck in unproductive uses have to be freed and moved to sectors that have real demand. Only then will capital again become available for productive investments.
Friedmanites, who have no conception of malinvestments and never raise any issue with the boom, also cannot understand why it inevitably leads to a crash. They only see the drying up of credit and blame the Fed for not injecting massive enough amounts of liquidities to prevent it.
But central banks and governments cannot transform unprofitable investments into profitable ones. They cannot force ins utions to increase lending when they are so exposed. This is why calls for throwing more money at the problem are so totally misguided. Injections of liquidities started more than a year ago and have had no effect in preventing the situation from getting worse. Such measures can only delay the market correction and turn what should be a quick recession into a prolonged one.
Friedman — who, contrary to popular perception, was not a foe of monetary inflation, but simply wanted to keep it under better control in normal cir stances — was wrong about the Fed not intervening during the Depression. It tried repeatedly to inflate but credit still went down for various reasons. This is a key difference in interpretation between the Austrian and Chicago schools.
As Friedrich Hayek wrote in 1932, “Instead of furthering the inevitable liquidation of the maladjustments brought about by the boom during the last three years, all conceivable means have been used to prevent that readjustment from taking place; and one of these means, which has been repeatedly tried though without success, from the earliest to the most recent stages of depression, has been this deliberate policy of credit expansion. ... To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about ...”
The confusion of Chicago school economics on monetary issues is so profound as to lead its adherents today to support the largest government grab of private capital in world history. By adding their voices to those on the left, these confused free-marketeers are not helping to “save capitalism”, but contributing to its destruction.
Why is it so easy to find reasoned, detailed explanations of why NOT to do the bailout, but very difficult to find the same FOR doing the bailout? ALL of the papers in support are full of chicken little sky is falling cliches, but very few details, and almost most no reasoned discussion. My cynic alarm is at full tilt.
Oh holy that was ignorant on so many levels. "Lecturer and NOT Professor". Do you always know this little about what the you are talking about?
Here is 2/3rds of the FIRST page of dude's TWELVE page CV:
Yeah, not that smart.
I didn't look at his CV. He has an unusual CV. Normally, lecturers in the US are underpaid, overworked teachers who are pining for a professor position, but this guy has been all over the place in all sorts of academic positions.
Paulsen framed his self-enriching solution as if it were the only solution. Gradually, his frame is being busted and alternative solutions put forward. Here's one:
http://www.cnn.com/2008/POLITICS/09/...ef=mpstoryview
Do you ever read the threads you are posting in?
IMHO, all these links prove that we all don't know much about economics on our own so we have to depend on those who apparently think they do.
Stout, I understand credit it going to get VERY tight - and banks are going to hate it; but RIGHT NOW I can get a loan for damn near anything I want; called my bank to verify. INCLUDING a short termer to mean payroll (which I don't need).
With the uncertainty being what it is, and all the banks so s -shocked; how can that be the case? People who can pay back loans will still be able to get them as long as their are people with capital to give them (which there will be) - just probably not the SAME people who screwed it up in the first place. That is a good thing.
WE'll be fine.
someone here says that's not happening anywhere. very emphatically.
I'm not buying into the Stout panic earth shattering zomie community failure scenario but if the big banks fail and can no longer supply the smaller banks with working capital your ability to make that call and secure a loan is going to be more difficult or possibly non-existent for a time. That might happen. Might. At the very least the requirement will be tougher.
Its already tight though. Way tighter than people think. The bailout won't change that. I'm tired of hearing how this bailout will free the banks up to get back into the lending game when I know this isn't going to happen because not only are they not going to make the same mistake twice they'll make damn sure to protect themselves against anything remotely questionable. Which is already happening. If anything, the banks will continue to get tighter, bail out or not. Its going to happen regardless.
I'm sure he has no issue getting a loan if he's in great standing. Its going to get tougher though. I've stated previously that prime is moving way up, as far as qualifying criteria goes. What once could be done at 680 can no longer be had. what once could be done at 620....or worse 700 can no longer be done.
Try looking a 710 in the face and tell them that no bank will buy the deal because their debt to income is sitting at 41% and their time on the job is less than 3 years. A year ago that would have locked at prime without even submitting the application.
Out of my own curiosity what was the original bill or law that was passed that allowed the big lenders to expand subprime lending guidelines? It wasn't a fearless move they had support from something.
Let me see if I have this correct. No one would suffer from this great depression because everyone would be high.
BRILLIANT.
I'm just glad I have no need for any loans right now.
Not really.
I am for the bailout/rescue
Banks stop lending then companies can't pay employees, they won't be able to buy raw materials, they cannot buy inventories. There would be massive layoffs and companies would be forced to shut their doors because of the credit crunch. Massive unemployment and the worst case would be that dollar would sink to zero anyways. At least if they do the bailout, there's a chance we can buy some time to get our fiscal house in order.
America has to get it together. A guy said it best. Imagine if you are on a desert island. Everyone has to have a job to survive. One does the fishing, one does the hunting, another gathers wood, another gathers vegetables and another one cooks. The American's job is to eat the feast. He gives just enough to everyone else so they can survive. This is the economist's dream and he will say this is great. Without the American, everyone else has to work hard to produce for the American. The reality is that without the American, the rest of the island would not have to work as hard, there would be more resources and food to go around and everyone would pull their weight.
How long will it be before all the other workers figure out they would be better off without the American and push him into the sea and feed him to the sharks?
The reason there is liquidity right now is because central banks are pumping money full-tilt into the markets. However, the economy is not at equilibrium.
According to macroeconomic theory as I understand it, financial markets have multiple equilibria. We tend to like the equilibrium where prices and investment are highest, because then the economy has lots of jobs and people are happy. However, during a panic, the markets can shift to lower equilibria because the supply/demand curve becomes inverted for a while. So rather than being a straight line, it's like a "Z." Right now, we are still on the top bar of the "Z," and desperately trying not to slide down the crossmember down to the bottom bar of the "Z." Down there, the markets will eventually settle down again, but at a low-price, low-investment equilibrium where there are a lot fewer jobs. We call that situation a "depression." We also know that once you get there, it's very difficult to get back out.
It appears right now that there might not be a stable equilibrium anywhere on the top bar of the "Z," so the idea is to artificially push the demand curve for financial assets up and to the right until we can reach an equilibrium without falling into depression. Bernanke and Paulson are guessing that buying up $700 billion in questionable MBS's will do the trick.
The problem with banks is that very little of their assets are appropriated to shareholder value. If they write down like 3%, their stock value is already at zero, and if they have to write down any more, they start cutting into bondholder equity and that means bankruptcy. The MBS exposure for most of these large banks is well in excess of that. Obviously the economists who thought they had made the system foolproof against these kinds of collapses were wrong.
The government started meddling with the market in the late 1990's to get more minorities into home ownership, and ultimately precipitated all of this.
Ultimately though, isn't the bailout just delaying the inevitable? Doesn't this piper NEED to be paid?
We cannot just print money to get out of this mess, after all. Isn't it better to fight through it before the baby boomers hit 67 and start taking SS en masse?
You can liken it to being on an airplane. You've steered the airplane into a stall. You were stupid and reckless. It is going to crash. Now, you have a choice. You can go down with the plane, or you can grab a parachute and jump.
Regardless of which you choose, your descent to the ground is inevitable. However, only with one of the choices will you have the opportunity to fly again.
The opportunity to fly a plane that will continue to crash. Perhaps a pilot death is in order to catapult change.
Not doing anything will have disastrous effects on the average American.
I'm surprised people do not see that . . .
The average American has no clue this was even voted down yesterday.
Certainly one could argue that the best outcome would simply be for the United States of America to collapse and for the world as a whole to move on without it. If I were a Russian, I might enjoy that, and I might enjoy seeing Americans go through the deprivation and chaos I went through in the 1990's.
However, barring a tremendous sense of impersonal justice and irony, it's hard to see why an American would suggest that. Unless you are very rich, the 2010's will suck for you, to a degree of severity ranging from "moderate" to "on a waiting list to get a spot under that I-37 overpass."
Are you a Russian spy?
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