Wednesday, November 26, 2008

The Reichstag fire of the financial world, part II: scapegoats and a bait-and-switch

The original Reichstag fire needed a scapegoat, and today's financial Reichstag fire is no different. The scapegoat needs to be an innocent party who was found there. He doesn't even need to be plausibly guilty, only that the public will accept whatever story the government feeds them.

Capitalism was "there" in this financial Reichstag fire, and it was "guilty" in that investors and investment managers made bad decisions, but it's hardly plausible guilt once you investigate and realize that everything happened because of deeper causes than those bad decisions. Capitalism is merely taking the blame for the "financial crisis" that government engendered and fueled.

As I explained in a comment over at Cafe Hayek,
muirgeo, I'd like you to explain how the creation of GSEs, which then "recycle" money back into lending markets and subsequently, which were THE culprits in using securitization to disguise bad assets, is "laissez-faire."

When the government is involved, there's no free market: *someone* is being pushed or pulled. You've argued otherwise around here for a long time, but that does not change the fact that any "bubbles" were purely the result of government interference in natural market happenings. If you think what's happened is the result of laissez-faire, I'd hate to see what your idea of interventionism is.

"Speculate don't produce" is what government encourages everyone to do when it gets involved in investments, whether the Mississippi Scheme of 18th century France, the South Sea Bubble of 18th century England, or the latest American "crisis."


So at what point do you think something goes from being private to being government? The answer is easy, actually: zero. Once government is involved, there's no more free market, and no more private control. "Some" private ownership doesn't count; it's still a government operation.

If Fannie and Freddie had been fully private corporations, investors would have never had the confidence they once did, and the GSEs consequently would have never gotten to this level. But investors had far more faith than was warranted, because there was always, always the implicit promise of a federal bailout. No matter how "privatized" they were on paper, the feds would never let them fail. That moral hazard prevented rational decision-making by both investors and Fannie and Freddie's executives.
But for decades we'll assuredly hear continuously that "capitalism failed, just like it failed in the late 1920s" -- except that then, as now, it was government intervention in markets that created a bubble, caused a crash, and made the crash worse. Even today, many of our children are taught the myth that "FDR saved capitalism" when the New Deal only made things worse, and not even World War II spurring manufacturing output could pull the U.S. back into prosperity.

I've tried explaining to a certain state-worshipping twit that the New Deal didn't work, for if it did, why was there a "Roosevelt recession"? All he could do was point to GDP, which was an artificial increase. When you look at other indicators that Keynesian policies cannot inflate, like unemployment, business investment, and unemployment, the New Deal didn't exactly put people to work like it's believed today. I disagree with Boudreaux on one thing: I still maintain FDR did indeed make things worse, not just prolonged. But don't take my word for it. The Treasury Secretary at the time, Henry Morgenthau, himself admitted unemployment was still bad -- back to square one with a much greater national debt (which is what I mean by "worse"). Tyler Cowen explained why the New Deal didn't work (quite an amazing thing to be published in the NY Times!), and he previously linked to papers explaining why World War II didn't help the economy, either. Robert Higgs in October had provided his own explanation of why the war did nothing.

It still doesn't matter how much we debunk flawed history and historical interpretations. People are so brainwashed that the vast majority of future Americans will readily swallow the "Capitalism failed!" mythos about the current government-manufactured crisis, as most Americans do today about the government-manufactured Great Depression. Capitalism has been the easy scapegoat for at least 80 years (a century if you want to count the events behind the creation of the Federal Reserve). Even government isn't stupid enough to deviate from a winning strategy.

What makes current circumstances a little different is that we've just seen one of the most devious bait-and-switch schemes ever played.

At first George W. Bush, Hank Paulson, et al, decided that the Treasury would buy up several hundred billions dollars worth of "distressed securities" -- which private investors correctly wouldn't dare sink money into, at least not at what the federal government is offering. To paraphrase Milton Friedman, isn't it amazing how you're willing to offer so much more, and take a huge risk, when you're spending other people's money? The feds could offer far more on the dollar than private investors would risk, and we should see warning signs when even Warren Buffett, a proponent of the bailout, was putting $5 billion into Goldman Sachs instead of these bad assets.

Oh, but not only mortgage-backed securities, it was quickly decided, but maybe the bailout could extend to bad credit card loans, student loans and auto loans! By this point, you couldn't even call it a "farce" -- it was not just absurdly beyond "bailout," but starting to dwarf any other federal giveaway, ever.

But then Hank Paulson announced, no, they won't buy these assets after all. What's the catch? No catch, just that the federal government will continue with buying up stakes in the top nine U.S. banks.

You have to hand it to him: that was one hell of a bait-and-switch. McQ understands that much, but he just needs to connect the dots. After observing what's really happening, we must ask ourselves the real question: why?

As I said before, it's about controlling the U.S. financial system. Not regulation, not "helping," not "ensuring fairness," but outright control. Control money, and you have the greatest control of the people. Simply put, there was never intent to buy up the "distressed securities," whether to prop up their values for investors or to "take these toxic assets off banks' balance sheets to improve their liquidity." That was all a smokescreen. The real plan all along was to start nationalizing the banking industry. It isn't just the top nine banks who received federal funds, but plenty of regional banks too.

Why the elaborate game, though? Because Americans needed to be softened up to the notion of the federal government buying up stakes in banks. They'd otherwise balk at it: it would smack too much of "socialism" to conservatives, and "fascism" to liberals. If government creates a crisis, however, or just the specter of one, its officials and allied pundits can blabber economic malarkey for weeks until the people nod their heads and say,"Uh huh, that sounds good." Most people don't have the intelligence or learning to comprehend all these grand plans, even if they'd work, and in the end they're so numb to it all that the powers of darkness can alter or drop the original plans, revealing what their true intentions were all along.

And we're constantly being told it's all for our benefit:

The actual headline reads, "Massive new programs aimed at loosening credit." But wait a minute, a bailout for whom, paid for by whom? Where is the money coming from?

This time it's from the Federal Reserve, not the Treasury, so it's not a matter of our tax dollars, right? Of course, we'll have to worry about a pesky thing called inflation, produced by central banks and central banks alone, as the Federal Reserve pumps many more hundreds of billions of dollars into the global economy.

Here's some food for thought. I was recently telling a friend that the last time the euro was under $1.30 was mid-2006, when gold was still in the $600 dollar range. So while the dollar has strengthened vis-à-vis the euro, we can still look at gold prices to see the inflation. By this particular measurement, and it's not absolute since there are others, I'm figuring about 15% inflation in the last couple of years. That doesn't affect everything, e.g. oil and gasoline prices which are falling rapidly because of expectations that demand will continue to decrease, but forget the babble about unsustainable trade deficits: inflation is never sustainable, but inflation at this high rate will produce very bad results sooner rather than later.

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