America's Financial Crisis

[Anonymouse]

Re: America's Financial Crisis

Bailout Hall of Shame

September 20, 2008 11:40 AM by J. Henderson | Other posts by J. Henderson | Comments (1)

The Wall Street Journal editorial page's Stephen Moore supports the trillion dollar bailout of investment banks. Stephen is the alleged champion of free markets and was formerly with Club For Growth and was a federal budget policy director at the Cato Institute. His reasoning? Taxpayers must be made to subsidize an industry to avoid a "meltdown." Wrong! The meltdown, caused by the deflation of a Fed-created bubble, cannot be avoided. The bailout is merely transferring the costs to taxpayers.

http://blog.mises.org/archives/008561.asp

Bailouts and Economic Calculation

September 20, 2008 4:15 PM by Robert Blumen | Other posts by Robert Blumen | Comments (1)

In his seminal article on economic calculation under central planning, Mises showed that a central planner cannot allocate productive factors in a manner consistent with consumer demand because the planner does not have the ability to calculate in terms of market prices. Market prices come about as the result of a competitive bidding process among decentralized private property owners who are seeking to earn profits.

In some cases, firms are not just being bailed out, they are being nationalized. Nationalization means that the ownership of the firm changes from the private sector to the government. This puts the Fed, or the Treasury, or whoever becomes the de-facto owner of these firms, in charge of them.

While the nationalization of the health care sector, the coal industry, the airlines, or any other industry would be bad enough, the nationalization of a single industry mainly destroys the ability of that industry to allocate capital rationally. But even within that industry, they have access to external market prices for their inputs and their outputs. And nationalized firms can still adopt technological advances that are generated by the competitive part of the economy.

The role of financial institutions within a market economy is to allocate capital. Banks, for example, borrow from small depositors and lend to home buyers or small businesses. Investment banks invest the equity of the share holders in asset markets, facilitate the issuance of new securities, and manage the capital of private investors.

This is why the recent round of bailouts of financial institutions is so damaging. The impact of these nationalizations is multiplied compared to the takeover of an industrial sector because the capital allocation function is so critical to a market economy. Financial institutions do not produce a physical good, they act entrepreneurially within the total capital structure of the economy to allocate productive factors. In no sense can this entrepreneurial function be replicated by a central planner operating outside of the profit and loss system.

I usually try to link to a news story at the start of a blog post, but for this point, any of the hundreds of articles archived by GATA would serve just as well.

http://blog.mises.org/archives/008563.asp

[Armenian]

Re: America's Financial Crisis

When it comes to economics there is only one site I trust.

Thank you for the site. It looks like a very reputable and prestigious institute. How were you introduced to it?

[Anoush]

Re: America's Financial Crisis

Thanks for the info above Anonymouse.

I would like to add to the informative essay above that if we use the analogy of the individual consumer; I see similarities. Meaning the babyboomers in this country have lived above their means by living off credit cards and where did it get them? More and more into debt while the institutions who gave the credits lived it off of the poor individuals who got sucked in and into more and more into deficit for themselves and it's inevitable that such individuals finally went into bankcruptsy. But of course in the case of a huge and powerful country such as ours, the case becomes much more complicated and even more disastrous for the country and the taxpayers.

[Anonymouse]

Re: America's Financial Crisis

I completely agree with this. My position thus far which seems to have resulted in me being labeled a "red neck" is my inherent optimism in the outcome.



But doesn't history repeat itself? Isn't that the whole premis behind why so many like to repeat this cliche about empires eventually "falling"?

For the 5-year revisiting sake, there is no doubt Globalism is a reality ... China and India will continue to force huge shifts in how things are done. But in the long run, it is going to come down to the old producer/consumer factor. If you produce more than you consume, you'll probably be in a better shape than the reverse ... and in US's case, no doubt the consumption has been blowing out of proportion but it does have the ability to catch up in terms of production (in the broad sense of the term). Of course cutting back on consumption (again broad sense of the word) wouldn't hurt at this point.

The U.S. has to go more than cut back on consumption. It is consuming more than it is producing and it is consuming more than it can afford to consume. The problem with the consumption and production point is that American economics ever since World War II has been heavily influenced by Keynesianism which assumes (incorrectly) that consumption is what drives and fuels the economy and not saving.

When a society becomes consumption whorres as is the case with America, due to faulty economic logic (Keynesianism), they begin to spend and consume more than they produce and live beyond their means and in our case, supported by the good credit of Japanese and Chinese who continue to finance our extravagant lifestyle.

In other words this confuses cause and effect. Establishment economists believe that lower consumer spending causes recession. They do not realize that lower consumer spending is a result and effect of the economic phenomena, not a cause of it.

[Anonymouse]

Re: America's Financial Crisis

When it comes to economics there is only one site I trust.

What's Behind the Financial Market Crisis?

by Antony Mueller | Posted on 9/18/2008

The financial crisis is not over. Neither tax rebates nor low interest rates nor higher or lower exchange rates can do the job of reviving an economy that is burdened by debt loads that are too high. On the contrary: the policy measures that the US authorities have been applying will prolong the agony. Be prepared for the challenges of extended financial turmoil and economic stagnation.

Early this year, the US central bank decided to manage the debt crisis in the light-hearted belief that a few aggressive rate cuts would "unfreeze" the banking system. Yet as of the end of the third quarter of 2008, the arteries of the financial system are still cluttered, and the financial system has moved even closer to total collapse.

Those banks and brokerages that haven't yet failed have been kept alive by emergency monetary transfusions from the US central bank. The Fed has cast away all restraints of economic rationality and is acting in a purely political way. The Board of Governors of the US Federal Reserve System is pursuing the goal of getting the financial system through the mess — at least until the end of the year, no matter how high the costs will be thereafter.

The American central bank has adopted the financial equivalent of the military strategy of scorched earth. The economic philosophy of the current chairman of the US Federal Reserve System can be summarized in the slogan, "No depression under my rule!" He resembles a military leader who stubbornly declares, "No defeat under my rule!" the more the chance of victory is slipping away, and defeat can be denied no longer.

The current economic disaster is the result of the combination of negligence, hubris, and wrong economic theory. For decades, an economic and monetary policy has been practiced based on the illusion of, "It doesn't matter." At first it was, "Deficits don't matter." From that, the policy of "it doesn't matter" got extended to money creation, the credit expansion, the stock-market bubble, and the housing boom. Now, we're being told that buying financial junk by the central bank to beef up banks and brokerages also doesn't matter.

As a byproduct of this mindless economic and monetary policy, financial market operators, too, have lost their heads. Trusting the official cheerleaders, investors hold on in the trenches until they will have lost their last shirt. Economic weakness is spreading around the globe. There is no new spurt of economic growth in sight. Yet many investors stay put because they have been conditioned to believe that government will bail them out.

The current financial crisis is not of a cyclical nature. The financial turmoil is the symptom of the structural imbalances in the real economy. Over decades, expansive monetary policy has gone hand in hand with implicit and explicit bailout guarantees, and this has distorted the process of capital allocation. Under such perverted conditions, those investors will win most who cast away the restraints of prudence. It is a game that can go on for a long time — up to the point when the irrationality has become systemic.

The behavior of the investment community reflects the incentive structure that has been put in place by the authorities. Investors have learnt to dance to the tunes of the pied pipers at high places. After all, the individual market player could see from those who were ahead of him in the abandonment of prudence how money is being made. In the wake of this, financial companies have become overextended and are now in need of deleveraging. Yet the core problem lies in the imbalances of the real economy.

In the Austrian theory of the business cycle, the distinction is made between the "primary" and "secondary" depression. The secondary depression is what catches the eye: the turmoil in the financial markets. Yet the underlying cause is the distortion of the economy's capital structure: the primary depression.

The simple fact is that the US economy is burdened with a highly lopsided capital structure as the consequence of a wide discrepancy between consumption and production, which, in turn, is the result of monetary policy. Persistent trade imbalances are the symptoms of this discrepancy. This means for the US economy that lower interest rates and government incentives aimed at boosting consumption work as pure poison. Instead of more consumption, more savings, less consumption and fewer imports are needed.

The current financial crisis reflects that many debtors have reached their debt limit and that creditors are lowering that limit. From now on, business and consumers, governments and investors must work under the restraints of lowered debt ceilings.

Economic policy as it is currently practiced is in a fix: lower interest rates may temporarily help to alleviate the financial crisis, but they exacerbate the fundamentals that are the cause of the financial crisis. Equally, a lower dollar would make imports costlier for the United States, while a strong dollar comes with lower import prices. But while a low dollar would help to expand exports, a strong dollar impedes export growth. Therefore, the United States will have high trade deficits as long as the economy does not fall deeper into recession.

Without an adaptation that would increase savings, decrease consumption, and reduce imports, the US economy can only go on in the old fashion with ever more debt accumulation. But the limit of debt expansion has been reached. The financial crisis has reduced the willingness of domestic and foreign creditors to extend loans.

Foreign creditors are getting ready to reduce their holding of US debt in a more drastic way. The governmental takeover of the mortgage agencies Fannie Mae and Freddie Mac bailed out the monetary authorities of China, Japan, Russia, and other foreign countries that hold agency debt. As a result of the socialization of the so-called government-sponsored enterprises, the Treasury opened a window of opportunity for these countries to unload their US assets at subsidized prices, all at the cost of the US taxpayer.

A profound restructuring of global capital has become unavoidable. Such a process is quite different from a recession in the traditional sense. In contrast to a sharp and typically short-lived recession, when, after the rupture, business as usual can go on, the restructuring of a distorted capital structure will require time to play out. Rebalancing the distorted capital structure of an economy requires enduring nitty-gritty entrepreneurial piecemeal work. This can only be done under the guidance of the discovery process of competition, as it is inherent in the workings of the price system of the unhampered market.

Anticyclical fiscal and monetary policies are of no help when it comes to the daily toil in business to work towards reestablishing a balanced capital structure. The so-called income multiplier won't work, and lower interest rates won't stimulate spending. On the contrary: these policy measures only make the task of the entrepreneur harder.

The difficulties ahead arise from the problem that business as usual cannot go on under conditions of a credit crunch, which has its roots in the distortions of the economy's capital structure. Thus, even if the financial market turmoil were to settle, there won't be the simple resumption of the old ways of doing business. The belief that, after the financial crisis is over, the real economy can reemerge unscathed, is probably the greatest error that many investors share with the policymakers.

As a result of the bailouts and the socialization of the mortgage agencies, the financial system is now fully infected with moral hazard. The disastrous effects of these government interventions will show up soon. The major task of bringing the capital structure in order is still ahead and more pain is in the waiting.

As long as governments and central banks continue to focus on the monetary symptoms of the "secondary depression" and continue to ignore the structural aspects of the "primary depression," they act like quacks. Ignorant of the lessons of the Austrian School, the authorities will most likely continue with their disastrous policies.

Antony Mueller is the founder of the Continental Economics Institute . He is an adjunct scholar of the Ludwig von Mises Institute and academic director of the Instituto Ludwig von Mises Brasil. He maintains the blog Money, Markets, and the Business Cycle. Comment on the blog.

http://www.mises.org/story/3111

[Anoush]

Re: America's Financial Crisis

Man some ppl here are amazingly simple minded. FYI we are not even in a recession yet. If you actually understand what has to take place in order for us to actually be in a recession. We will go into a recession no doubt but we are not there right now. Talking about depression like it's already happening is ignorant. Welcome to a free market society you pansies. What is happening right now is a market correction. Most of the companies that are folding are doing so because their administrative finance employees decided to invest huge amounts of money into mortgages. So the correction started when ppl decided they were not going to buy homes at the current market values. Ppl defaulted on their mortgages and now we are where we find ourselves. That coupled with this hurricane season and oil prices means our economy has been insanely unlucky lately. Watch the U.S. government come out on top after buying these companies dirt cheap. Right now is a great time to buy which is another way our economy will balance out. Ppl with the capacity to invest right now will do so and then come up BIG once the market returns to its old self.

Sheep Boy, FYI did you hear what Armenian just informed us? Read it very carefully and digest it intelligently if you understand it, that is..... I hope.....

If we aren't in a recession, I don't know than what this horrific economy is about.... it's been a year now that there's a great shortage of jobs available... people left and right are selling their houses, people now have started selling their cars in a state where cars get you around and about as buses are not the norm and far and between, soon thanks to the shortage of money and jobs people will start vandalyzing and stealing from each other, and you don't call this a recession? We are living in one silly boy. Our political immaturities by going into wars like Iraq and now they want to go into war with Iran too has double worsened the economical turmoil that we're in right now. Get up from your hibernation and smell the coffee.

[Armenian]

Re: America's Financial Crisis

But doesn't history repeat itself? Isn't that the whole premis behind why so many like to repeat this cliche about empires eventually "falling"?

Yes, silly thing, "history" repeats, not the economy's performance.

There have been economic recessions and depressions in the past. We have recovered from them just fine.

The empire has over eaten, its going into cardiac arrest. If it survives, I'm pretty sure it will, it will require longterm therapy and a drastic change of lifestyle and eating habits.

When the US went into its economic depression in the 1930s it was not as vulnerable as it is today. The US was an industrial powerhouse back then. The US government was not in deep debt. The US did not have countless serious problems around the globe. The US financial system was not as dependent on foreign exchange. It was not as dependent on foreign energy. And other than western Europe (who were close trading partners) the US did not have any serious financial or political competitors on earth. Today, the US is too fat, too bloated, too stupid, too shallow to withstand a deep and lasting recession. You must be a total 'idiot' if they think that this economic mess is simply a result of the mortgage crisis. The fundamental problems in the economy were there for may years. We saw a little introduction in the year 2000, at a time when the mortgage sector was doing very well. Then came the wars, Afghanistan and Iraq, to remedy the problems. Since the wars have not gone as planned, the situation seems to be getting worst. Today's mortgage crisis is the trigger not the cause.

Federal Reserve Chairman Ben Bernanke said today - the system could be days away from total collaspe.

The Fed is in essence forcing the government to somehow come up with trillions of dollars to remedy this problem. One problem, however. The US government does not have the money, it has to borrow it at the tax payers expense. And guess who it has to borrow it from? The Federal reserve, oil producing Arab states, China, Europe, Russia... America is for sale. The current national debt which will have to be payed sooner or later in one way or another is already about 10 trillion dollars. If you can't see the severity of the current crisis, you must be deaf, dumb and blind. Again, the mortgage crisis is not the problem, it's simply the trigger that set things in motion. Thus far, all the mayhem remains in the investment sector and the housing sector. If not checked properly it could get out of control like wildfire and ravage the entire country.

Listen to what the 'real' president of the US had to say today:

Bernanke Warns of 'Deep and Extensive Recession' If Feds Don't Take Action

Federal Reserve Chairman Ben Bernanke told House Republicans Friday morning that the country is facing its “most severe post-war” financial crisis, and warned of a “deep and extensive recession” if nothing is done. Sources who participated in the phone call briefing with Treasury Secretary Henry Paulson and Bernanke told FOX News that details of the federal government’s proposed rescue package are thin. But Bernanke described the situation as “quite dire,” as he suggested conditions were the worst since World War II. Sources said Paulson described stress in the financial infrastructure as "significant" and "spreading." He said that if the government doesn't act soon it would be "nothing short of a disaster" for the markets. Paulson and President Bush warned Friday morning in separate press conferences that it would take a “significant” infusion of taxpayer dollars to correct the economy. Lawmakers and members of the Bush administration are meeting over the weekend to draft a rescue plan, which Paulson says he hopes will pass through Congress next week. However, while Bernanke and Paulson briefed Republicans, there has been no such meeting with Democrats. The briefing could be indicative of complaints on the GOP side that they have not been kept in the loop on the administration’s rescue of Freddie Mac, Fannie Mae and this week American International Group.

Source: http://www.foxnews.com/printer_frien...425501,00.html

[Lamb Boy]

Re: America's Financial Crisis

Man some ppl here are amazingly simple minded. FYI we are not even in a recession yet. If you actually understand what has to take place in order for us to actually be in a recession. We will go into a recession no doubt but we are not there right now. Talking about depression like it's already happening is ignorant. Welcome to a free market society you pansies. What is happening right now is a market correction. Most of the companies that are folding are doing so because their administrative finance employees decided to invest huge amounts of money into mortgages. So the correction started when ppl decided they were not going to buy homes at the current market values. Ppl defaulted on their mortgages and now we are where we find ourselves. That coupled with this hurricane season and oil prices means our economy has been insanely unlucky lately. Watch the U.S. government come out on top after buying these companies dirt cheap. Right now is a great time to buy which is another way our economy will balance out. Ppl with the capacity to invest right now will do so and then come up BIG once the market returns to its old self.

[Sip]

Re: America's Financial Crisis

Do you think anyone was able to predict the rise of Russia during the Yeltsin years?

The requirements of the US to stabilize economically are clear, it must abandon it's empire agenda, and to do this, a political administration must steer the country in this direction, what does this have to do with predictions for 5 years down the road? We either get such an administration, or we don't, it's simple enough no?

It certainly wouldn't hurt the US to step away from the "Republican" agenda for a few years. That's for sure. I am not one to believe much in conspiracy theories but if I didn't know how dumb the general voting public in the US actually is, I would seriously have considered such a theory on how the hell Bush ended up in office for 2 terms.

[Sip]

Re: America's Financial Crisis

Sip, you are unfortunately not being realistic.

I totally agree with Armenian as I can see the market and the politics with it and where it's headed to. We are heading into depression and it is very unfortunate but it is the realistic picture. There's a full fledged recession with the housing and the realestate going bankrupt; why people in here are even selling their cars because they cannot make the payments. The market sucks and so is the world politics. We are headed into depression. It's too bad but that's what it looks like in most likelyhood.

There have been economic recessions and depressions in the past. We have recovered from them just fine. Why is this one any different? The housing market was just exploding out of control and now it has gone through a very serious correction. Of course the negative effect was highly amplified by the sub prime disaster and the severe over-lending.