Nassim Nicholas Taleb: not as powerful in prognosting the crisis as people think

My comments over at Three Sources about an interview with him:

All right, I finally read the interview. His powers of prediction are...overrated. He's correct about economists' and financiers' inability to predict the future, correct about debt, wrong about Iceland, incorrect about Canadian self-sufficiency, wrong about "developing a system," very wrong about the nature of human information, and utterly wrong about actively preventing "too big to fail."

"For the past decade, he's been warning that the global economy has become far more vulnerable to unpredictable events that can cause vast disruption."

That was no prediction, because such a "warning" is completely meaningless. What does it mean, exactly? He says economists as "no more reliable than astrologers," which is true, but his own "predictions" have all the precision of fortune cookies. When something happens to ripple through international financial markets, he pats himself on the back. That's a bunch of bull.

Of course the world economy, having grown so complex, is susceptible to "unforeseeable events that can cause vast disruption." Anyone can see that. But his prediction lacked any specifics

He was simply a stopped clock that was eventually right. Similarly, don't believe all this hype about Nouriel Roubini, who also didn't have these amazing powers of prognostication that the media would have you think. Mark Zandi of Moody's frequently provides soundbites, and too many in a way. He's made a career of predicting a recession every year since at least 1997, maybe before then. Of course these two would eventually be right if they keep predicting the same thing over and over.

As I said, he's correct that "Central bankers have no clue" and about economists' ability to predict the future. Anyone familiar with Hayek knows that, and why.

The Internet did not "bankrupt" Iceland, no more than it caused the tech bubble. The Internet was merely the conduit for information, not a cause. The British and Dutch governments were wondering as early as 2006 what would happen if Iceland's major banks couldn't cover British and Dutch citizens' deposits in Icelandic banks, because it was clear Iceland's equivalent of the FDIC, or the Icelander taxpayer, couldn't cover the deposits. If you want to talk about causes, William Butler and Anne Seibert released a paper in October 2008, originally done in April 2008 but kept secret, that explained Iceland's problems. They were already very well known. In short, its banking sector was simply too extended for the size of its economy, and policymakers tried to sustain the unsustainable.

He says Canada has "energy and minerals," is "not overspecialized" and "is self-sufficient." These could easily apply to the United States; why is Canada any better? Now, Canada, or any other nation, cannot be insulated from the world, nor should it want to be. Self-sufficiency is the road to ruin, as the Hawley-Smoot Tariff showed us. It's good to have a fallback position so you can have another way to trade your goods and services with others, like a trader who can switch to driving taxis, not to provide everything for yourself.

But if we get hyperinflation and Canada will be the best place to be, how much more overloaded will its socialized health care system be? As the signs say, where will Canadians go for health care if they don't want to die waiting in line?

He's wrong about "developing a system." Anyone familiar with Hayek (namely the concepts of spontaneous order and knowledge being distributed throughout society) will understand why this line of thinking is as bad as central planners' belief that they can steer an economy in the right direction. It's flatly impossible for him, or any group of people, no matter how smart, to regulate things as he dreams.

For all his well-regarded philosophy, he doesn't understand that human information, as a whole, is imperfect. That's the nature of our existence, and unavoidable. Austrian economics explains that market processes exist as the mechanism by which we eliminate errors (q.v. Hayek's "Competition as a Discovery Procedure") and approach the harmony of supply with demand. Some people will have better information, not necessarily scientific facts as Hayek explained, but knowledge of time and place. Israel Kirzner developed his concept of the entrepreneur as someone who has better information and will put it to use, expanding on Schumpeter's concept of the risk-bearer.

And how does he plan to prevent things from becoming "too big to fail"? The free market tempers the size of a firm by allowing it to fail when overextended, which then becomes a warning to others. But he's talking about an active regulation, which is done only through government -- which would rely on imperfect bureaucrats and economists whose track record is abysmal.

I'm not impressed.

Nationalizing the banking industry: don't say I didn't warn you

Americans are more likely to listen to the likes of George Stephanopoulos analyzing Obama's style and glossing over the typical lack of substance, ignorant of what Obama and Geithner are actually proposing.

The bottom line: the Treasury wants the power to take over any non-bank "financial institution" that it says is in need of saving. With this power, it can renegotiate and even nullify contracts (not just with employees, but business partners, so who will want to enter into contracts anymore?). The feds can also seize any and all assets to sell to competitors. Think of how dangerous this tyranny is. Remember how Chuck Schumer caused a bank run on IndyMac with comments he sent out one Friday afternoon? That will pale in comparison to what will be possible. Nothing will stand in the way of a federal bureaucrat at the Treasury who has a beef with a financial institution, or who wants to punish a single shareholder. Nothing will stand in the way of the feds keeping "we the people" in line.

I wrote on February 19th, talking about those liars Greenspan and Bernanke: "Mark my words here: as bad as it is now, we haven't yet seen how finance will become politicians' ultimate weapon to stifle dissent and ensure obedience. Under such a system, much like in African dictatorships, any suspicion that you're not loyal, have mocked or derided a politician, etc., means blacklisting. Financial blacklisting. That means an inability to deposit savings, get a loan, or transmit money electronically. It's not impossible to live that way, but most people don't have the stomach and would rather lick the hands that feed them. Be watchful, for I believe in the coming years we'll see (and most won't realize until too late) what "the mark of the beast" is. Without control of the financial infrastructure, how else could the tyranny of the last days prevent (most) people from engaging in commerce sans the mark?"

I started warning shortly after AIG was taken over by the feds that this was a prelude to nationalization. I also explained how a country can be taken over, quietly and from the inside, as the feds are doing now.

I've warned about Tim Geithner from the beginning.

I warned that, after Hank Paulson said the Treasury was dropping plans to buy "toxic assets" in favor of "injecting capital" into banks in exchange for direct equity stakes, the feds' goal all along was nationalization.

I've exposed the feds' lies and hypocrisy in using certain accounting trickery, which in the private sector would be fraud.

I've warned about scare tactics to make Americans think government intervention is necessary, like "$550 billion was pulled out money markets in just a few hours on September 18th!!!" (Paul Kanjorski, quoted in the second article I linked to, has been spreading this myth, as has conservative shill Diana West.)

Stay strong and vigilant. It's coming.

When the feds came to nationalize AIG, I was silent because they weren't my insurer.

When the feds came to nationalize the top banks, I was silent because I didn't care about Wall Street.

When the feds came to nationalize American automakers, I was silent because I drove a Japanese car.

When the feds came to drive health insurers out of business with a government-run plan, I was silent because I paid out of pocket anyway.

Now they've nationalized everything, doling out only what they say we need, and I am just a worker ant for the state whose job is to stay silent.

[edited the last line to fit better]

Obama and Geithner's "Money PPIP"

So far, it looks like the White House couldn't make up its mind what to tell Martin Crutsinger about the name of the new bureaucratic boondoggle. This version of his article calls it the "Public Investment Corp." This version calls it the "Public-Private Investment Program."

I prefer "PPIP" because it sounds like the 1986 comedy with Tom Hanks and Shelley Long, so named because the lead characters keep pouring money into a house that's falling apart. The federal government is simply pumping our money into sustaining companies that should be allowed to fail, and propping up asset values that need proper valuation. Once more, the government has been behind everything that precipitated this mess, from instituting mark-to-market accounting at the worst time possible to "rescue" efforts like TARP and PPIP that prevent us from placing true values on these assets.

Few realize how government has sparked the "crisis" and is purposely continuing it. I've written about this across many posts over several months, but I'll put it all here; just follow my explanation for each link in the chain. Right when markets panicked and CDOs and other securities plunged in value, the feds deliberately imposed mark-to-market so that banks' balance sheets would be impacted negatively -- and banks are forced to cease lending if their net assets became negative. The assets are deemed worthless, though, only because TARP and the like are discouraging people from sitting down and determining a real value (as opposed to a bureaucrat's politically motivated guess). Let's say an asset on the market is worth 1 cent on the dollar, and an investor might buy it at 10 cents in the hope it will eventually be worth 50. But the feds are talking about buying it at 70 (easy when taxes always come from other people!), so how can anyone determine the true value? Why would anyone bother?

See, it's all "legal" when the feds create a shadow holding company to hide AIG's bad assets on another ledger, the same fraudulent practice that got Enron and WorldCom in trouble. When it comes to mark-to-market, however, banks must list all assets on their balance sheets, thus assuming all liability for losses! So when one doesn't have positive net assets so it can lend under FDIC rules, the feds so graciously step in with a cash infusion (courtesy of everyone who doesn't make a living via government, in the form of taxes and inflation). Now PPIP will "help" banks by effectively whiting-out these assets, putting taxpayers even more on the hook for the initial purchase plus any future losses. The circle is complete.

I've explained before that "There's plenty of investable money around the world, but no one wants to sink it in *these* securities. They're really that bad. Even Warren Buffett wants the federal government to bail things out, instead of seizing a profit opportunity and jumping in himself. Surely he could put up a 'mere' $1 billion without blinking, but he's smart enough to recognize that the possible returns aren't worth the current asking price." Why do so few see the warning sign that when the private sector is staying away from buying these assets, maybe they're not such great deals? Now, a lot of these assets are worth next to nothing and even zero, but some still have value. Who's to say that a particular security, comprised of notes from such-and-such a neighborhood, isn't a good return in the end? Actually, none of us can -- unless you're well-connected with the government, none of us can really tell if any given neighborhood has people who will get a housing bailout!

Note that I was wrong, though, about the source of the funding for all these programs. However, last September I (and most people) just couldn't imagine the initial $750 billion TARP, then the $787 billion "stimulus," the $1.2 trillion the Fed recently announced it will create, and now the new $1 trillion so that the Treasury can buy up "toxic assets" under PPIP/PIC. Every new dollar that the feds are spending can come only from whatever new money the Fed can create. There just isn't enough of a tax base; there just isn't enough money to borrow.

Trillion, billion, the prefix to the "illion" has sadly lost all meaning. This is pure insanity, and with Obama and Geithner accelerating what GWB began, things will stop only with a disastrous crash.

Update: what irony in Christina Romer's misuse of "silver bullet." Over time, it's been twisted into the simple meaning of something that will work effectively. Proper usage refers to killing an otherwise invulnerable creature (like vampires in old pre-Stoker folklore, or Wolfman in modern monster tales). Romer said, "I don't think Wall Street is expecting the silver bullet," so Wall Street had better beware.

The truth about AIG's payments to "foreigners," and Glenn Beck is a moron

Conservatives are up in arms about AIG paying tens of billions to foreign banks. Conservatives are wont to do that when they think wealth is leaving the country. Glenn Beck blathered, in a perfect impersonation of protectionist Pat Buchanan:

GLENN: $58 billion has gone to foreign banks. Now, why isn't America outraged by that? Because America doesn't know that fact. America isn't talking about that fact. If we would have let AIG fail, then these other banks would have had to come to us and said, hey, what are you going to do on these. And we would have then had to have the discussion, do we send money over to France, do we send money over to Germany, do we send money over to England? And that we couldn't have won. The people in Washington, they would have never gotten that past you.

STU: We're not that into stimulating.

GLENN: We're not that into stimulating. We're not into shifting wealth from our continent to other continents.

STU: That's where we draw the line.

GLENN: That's where we draw the line.

STU: Of all the stuff we do, that's where we draw the line.

Beck is nothing more than a 21st century mercantilist, who thinks that keeping "wealth" within one's country is the way to prosperity. He doesn't understand that international trade, from goods to financing, allows everyone to prosper. He doesn't even understand that when he talks about "wealth," he's confusing it with "money."

As I explained first here, AIG paying foreign banks was not money laundering. Does Beck even know what money laundering is? He obviously doesn't understand what AIG was doing.

Like any insurer, AIG writes lots of policies. But AIG's unprecedented woes are because, unlike most insurers, it sold a lot of policies, specifically credit default swaps, that it couldn't cover. Its people knew they couldn't cover them, actually: they figured that while the economy was good, and bank revenues and tax receipts stayed high, AIG could collect nice premiums and not have to pay out relatively much. But despite their stupidity, the fact remains that AIG had to meet its contractual obligations to everyone, regardless of nationality. No money was being "hidden" at any time, so there was no money laundering done.

It's immoral to make the U.S. taxpayer pay for AIG's massive losses, but I'm putting that aside here to talk strictly about the nature of AIG's debts. AIG just happened to owe more to foreign banks than it did to American ones, that's all. If the bailout had been accomplished privately, AIG still would have had to pay foreign firms. Can you imagine if AIG had paid American creditors first, and foreign firms with whatever was left (if anything)? Any firm who does this will find its reputation quickly shot to hell, and it would soon cease doing business internationally. Foreign firms and governments would start retaliating by pulling business from the United States, exacerbating things for everybody.

Were it UBS that owed tens of billions to non-Swiss banks in a similar situation, would Beck be so adamant about defending it if it said it wouldn't pay American creditors?

I didn't think so.

Outrage over AIG: the same old hypocrisy, lies and corruption

Let it never be said that I didn't warn about this from the start. I rhetorically asked last November, "what bank would lend you money to repay debts that you owe others, when you likely can't repay that latest loan, and then the bank will loan you an additional 79.4% of the initial amount so you can sell...assets...to repay the entire loan?" In February, AIG said it won't sell any assets to repay the federal government, because it couldn't find any buyers. After announcing a $61.7 billion loss in 4th quarter 2008 (the most for any company ever), AIG simply relied on the federal government to give it another $20 billion "infusion."

And it has now given $165 million in bonuses to top executives, the first part of $450 million that it says it has to pay out. AIG claims these were "promised," "contractually obligated" and "retention bonuses," despite the fact that 11 of the recipients don't even work for AIG anymore.

Now every limelight-seeker in the federal government, from Obama to every freshman Congressman, is blue in the face from screaming about this, throwing out words like "irresponsible," "waste" and "taxpayer money." Chief among the critics is Chris Dodd, who received $103,100 in campaign bonuses from AIG during the 2008 election cycle, and snuck in an amendment into the stimulus bill that -- surprise, surprise! -- protects the AIG bonuses.

Congress is looking to institute a special tax on AIG bonuses to recover the money. CBS radio had a soundbite of Chuck "The Schmuck" Schumer saying it would be 100%. The point has already been brought up that such a tax is a bill of attainder, hence unconstitutional. But since when did that stop the federal government from doing anything else unconstitutional? Obama's former law professor has suggested how that can be done via loopholes, and this asshat Michigan Congressman proposing a "surcharge" tax that applies only to companies that are at least 79% owned by the federal government. Of course, AIG is the only such company. That's how the so-called "Amazon tax" survives here in New York state, though its exemptions clearly shows that it was aimed at Amazon.

Pure hypocrisy from the feds should never surprise us. Not to downplay that giving AIG anything is a waste of taxpayer money, but let's put things in perspective. The federal government will blow through $165 million in not even 30 minutes, $450 million in 1.3 hours, and the $170 billion guaranteed to AIG in just under three weeks. And that's going by the "mere" $3 trillion in federal spending for the 2008 fiscal year (not including what's spent on the Iraq and Afghanistan wars, which are about $200 billion more!). But why should government ever care about spending and proper record keeping when it's not its money? A "shadow holding company" was set up for AIG's toxic assets so that AIG doesn't have to list those assets on its official books. In the private sector, this is called accounting fraud.

It also turns out that for all their accusations, Obama and Co., particularly Tim Geithner, have known about the bonuses for several months but only now are trying to stop it. Let's not be the least bit shocked, though. It's more than just hypocrisy. Just as this entire crisis has been engineered by the government so it can take over major industries, it's another subtle power grab for the feds. No doubt one of the "critics" will himself say that they can't pass a bill of attainder, so this is a sneaky step on the road to a tax on bonuses regardless of company. Mark my words.

Claire McCaskill threatened, "We state the obvious in the letter, bonuses should not be given for failure." If memory serves, she's the same who said executives of companies receiving TARP funds should be compensated no more than the President, i.e. $400,000 per year, including bonus. I don't know if she's too stupid to see the simple, easy solution, or if she's so agenda-driven that she ignores it out of ideological convenience. How about, you know, not putting Americans on the hook for AIG's idiotic business decisions? Then AIG can pay whatever it wants, and drive itself into the ground for all we care. If it goes Chapter 7 or 11 with no ability to meet these bonus "obligations," then its executives can stand in front of a bankruptcy judge and explain precisely why they deserve the compensation when the company failed.

If "we the taxpayers" hadn't been forced to hand over our money, then we all wouldn't have been thrown into the same leaking lifeboat. We could have all exercised individual decisions in trusting AIG, reaping the rewards, missed opportunities or bad consequences of what was solely our choice.

Had AIG gone bankrupt, it certainly would have affected lots of other companies, but sometimes part of a forest must burn down so it can grow back fuller and with more life than before. But that isn't even an appropriate analogy: when a company goes under, its assets and infrastructure don't just disappear. The Bear Stearns and Lehman Brothers buildings and all their employees didn't just vanish from the planet; they were reabsorbed into the economy. So AIG would have been liquidated, with all its holdings and buildings distributed among creditors, who could then make use of "what's left" as they see fit.

The importance of allowing firms to go bankrupt, as Walter Williams recently said, is so that the rest of us can learn from the bad decision. AIG going under would have been a lesson to everyone else: first to those who never wondered if such a big company in precarious financial condition could have trouble fulfilling its insurance obligations, and second to other insurers who are on or thinking of going on the same path.

A friend recently got a new policy with AIG, and I pointed out the craziness of it all: his teenage daughters' future earnings are guaranteeing AIG's ability to pay out on his policy. It really is all so absurd, and it won't end.

Dissecting James Baker

I wasn't going to comment on Baker's recent op-ed in the Financial Times, but Boulder Refugee mentioned me by name, so I felt compelled.

Unfortunately, the US may be repeating Japan’s mistake by viewing our current banking crisis as one of liquidity and not solvency. Most proposals advanced thus far assume that, once confidence in financial markets is restored, banks will recover.

Good. He seems to recognizes that there was always plenty of liquidiy.

Evidence – a mountain of toxic assets, housing market declines, a sharp economic recession, rising unemployment and increasing taxpayer exposure through guarantees, loans, and infusion of capital

Ahem, and federal laws and regulations that continue to force banks into insolvency despite having capital, and federal mucking of market forces that prevent people from determining true "fair value" of assets.

We should act decisively. First, we need to understand the scope of the problem. The Treasury department – working with the Federal Reserve – must swiftly analyse the solvency of big US banks. Treasury secretary Timothy Geithner’s proposed “stress tests” may work. Any analyses, however, should include worst-case scenarios. We can hope for the best but should be prepared for the worst.

No. It's far easier to, gee, let things fail on their own.

Next, we should divide the banks into three groups: the healthy, the hopeless and the needy. Leave the healthy alone and quickly close the hopeless.

Why bother? The healthy will succeed on their own. The hopeless will fail on their own. The needy will succeed or fail depending on what private individuals deem is better: if there's a good chance for profit, or if they're just throwing good money after bad.

Stein's law about current accounts also applies to this: if something cannot continue forever, it will stop. Despite Paul Krugman's outright misrepresentation, Stein used it to say that active steps need not be taken to stop something that will on its own.

The needy should be reorganised and recapitalised, preferably through private investment or debt-to-equity swaps but, if necessary, through public funds. It is time for triage.

Private investment only. Leave government out of it. Stop the immoral raping of taxpayers to save institutions they don't care about.

To prevent a bank run, all depositors of recapitalised banks should be fully guaranteed, even if their deposit exceeds the Federal Deposit Insurance Corporation maximum of $250,000 (€197,000, £175,000).

Actually, a bank run should be allowed to happen. If a bank has been so imprudent, it should be allowed to fail.

But bank boards of directors and senior management should be replaced and, unfortunately, shareholders will lose their investment. Optimally, bondholders would be wiped out, too. But the risk of a crash in the bond market means that bondholders may receive only a haircut. All of this is harsh, but required if we are ultimately to return market discipline to our financial sector.

Again, let them fail on their own. Failure will ensure that bad managers are fired.

This is not a call for nationalisation but rather for a temporary injection of public funds to clean up problem banks and return them to private ownership as soon as possible.

Yes, yes, and similar things "This is not what you think this is" were said about the Anschluss.

If it were the Bush 43 administration, I'd figure they'd be incompetent at worst. But the agenda of Obama's administration is nationalization, and driving our entire financial industry into the ground will soften up enough Americans into accepting a federal takeover.

As president Ronald Reagan’s secretary of the Treasury, I abhor the idea of government ownership – either partial or full – even if only temporary. Unfortunately, we may have no choice. But we must be very careful. The government should hold equity no longer than necessary to restructure the banks, resume normal lending and recoup at least a portion of taxpayer investment.

"There are no necessary evils in government. Its evils exist only in its abuses."

After replacing bank management with new private managers, the government should have no say in banks’ day-to-day operations.

Say this in your best Captain Kirk voice: "Riiiiight."

Riiiiight. Obama and his Cabinet won't try to inject "social justice" agendas into bank decisions, I'm sure.

The FDIC can assist. Just this year, it has placed more than a dozen American banks – admittedly all small – into receivership. We might also consider setting up something akin to the Resolution Trust Corporation, created in 1989 to liquidate the assets of failed savings and loans. The RTC eventually disposed of almost $400bn in assets of more than 700 insolvent thrifts.

Only a bureaucrat could propose even more bureaucracy. Liquidating a failed business needs no more than a regular bankruptcy court.

To avoid bank runs and contain market disruption, the Treasury should announce its decisions at one time.

That's just the problem: every time Obama or one of his minions opens a mouth, the stock markets tank because consumers lose even more confidence.

Washington will also need to co-ordinate its actions with other major capitals, especially in western Europe and east Asia. At best, this will encourage other countries to take similar steps with their own banking systems. At a minimum, other governments can prepare for the financial turmoil associated with the announcement.

Uh, has Baker been paying attention to the news? Europe can't even get itself together on the bailout.

This approach is not pretty or easy. It will cost a lot of money, with the lion’s share coming from US taxpayers, at least in the short to medium term. But the alternative – a piecemeal pumping of more public money into insolvent banks in the vague hope that things will improve down the road – could truly be historic folly.

Heads, the U.S. taxpayer get sodomized. Tails, the U.S. taxpayer has to perform fellatio. Yeah. Either way, the U.S. taxpayer gets screwed.

Eventually our banks and economy will start to recover. When they do, we would be wise to avoid another Japanese mistake – raising taxes. To counter mounting debt created by government stimulus packages, Japan increased taxes in 1997. Consumption dropped and the country’s economy collapsed.

This much is true at any part in any economic cycle. Raising taxes has historically not produced as much revenue as cutting them.

Our ad hoc approach to the banking crisis has helped financial institutions conceal losses, favoured shareholders over taxpayers, and protected senior bank managers from the consequences of their mistakes. Worst of all, it has crippled our credit system just at a time when the US and the world need to see it healthy.

What did you expect from government action taken to "fix" a crisis that it caused through its short-sightedness and ineptitude?

What the Federal Reserve really said

Pay attention: when Bernanke & Co. say "the economy will actually shrink and unemployment will rise higher," it's not so much a prediction as it is the Fed and feds revealing their designs on the economy -- how they will so "graciously" permit the economy to perform. Does anyone still wonder why I call this the Reichstag fire of the financial world?

And now Alan Greenspan is publicly supporting bank nationalization. Like all government programs, it'll start small. The bureaucrats will claim specific targets, but the language of the legislation will in no way confine them to a limited scope. Just a few of the "most troubled" banks, then a few more, and suddenly "mission creep" becomes an understatement. A formal takeover of all banks won't be necessary, anyway. De facto nationalization will come with sufficient control of the web, something like nationalizing a super-majority so that all other banks are effectively isolated from each other. At that point, the non-nationalized banks can do no business (no transfers, no borrowing, i.e. no financial conduits whatsoever) except with nationalized banks.

In the Book of Revelation it is written about the second beast, who "exerciseth all the power of the first beast before him,"

And he causeth all, both small and great, rich and poor, free and bond, to receive a mark in their right hand, or in their foreheads:

And that no man might buy or sell, save he that had the mark, or the name of the beast, or the number of his name.

This isn't just trusting an arsonist to putting out the fire he caused. This is an arsonist setting your house on fire, forcing you to trust him to put it out, forcing you to hire him to rebuild it according to his specifications, and all payable via a loan he'll so generously give you! The government created the crisis, fueled it, and now insists it alone can "fix things" (as it always does). This will involve a complete uprooting of every profit-engendering quality of the financial system, such as banks no longer lending to creditworthy people, but rather anyone "underprivileged" or "never got a fair shake in life." And the cherry on top is all the massive new federal debt that future generations will be paying.

Mark my words here: as bad as it is now, we haven't yet seen how finance will become politicians' ultimate weapon to stifle dissent and ensure obedience. Under such a system, much like in African dictatorships, any suspicion that you're not loyal, have mocked or derided a politician, etc., means blacklisting. Financial blacklisting. That means an inability to deposit savings, get a loan, or transmit money electronically. It's not impossible to live that way, but most people don't have the stomach and would rather lick the hands that feed them. Be watchful, for I believe in the coming years we'll see (and most won't realize until too late) what "the mark of the beast" is. Without control of the financial infrastructure, how else could the tyranny of the last days prevent (most) people from engaging in commerce sans the mark?

Greenspan is such a liar. There was never anything "free market" about what he did, like tightening monetary policy too much and causing the 2000-2001 downturn, and keeping interest rates too low for too long after that downturn to fuel today's housing bubble. He wants to scapegoat "the free market" when the free market wasn't even there. By definition, anything he did as a central banker was contrary to the free market, and he knows it, which is why he's flat-out lying. It's one thing for banks to pool resources voluntarily into a fund from which a troubled member can borrow, but quite another for the government to set up a central bank that devalues everyone's money in order to "save" a favored institution.

That word "favored" reminds me. I've always forgotten to mention something here that most of you didn't know. JP Morgan given a sweetheart $29 billion loan from the New York Federal Reserve Bank, but Lehman Brothers was allowed to fail. Like many, I naturally figured that it was because JPM had friends/allies at the New York Fed, and Lehman didn't.

Of course, it had nothing to do with the fact that Jamie Dimon, JPM's CEO, was sitting and still sits on the New York Fed board of directors. Nothing at all...right? Good lord, we shouldn't be surprised. Who needs a friend on the inside when your own chief is on the inside!

And where is the outcry about this blatant conflict of interest, other than a few relatively unknown bloggers? I never saw anything in the Wall Street Journal, which should have been on top of this. Geraldo Rivera didn't have a special investigation. I haven't seen a single major political columnist or blogger talk about this, even Walter Williams, Thomas Sowell, Instapundit or Michelle Malkin.

Where has JPM's General Counsel been, considering that Dimon participating in NY Fed decisions is a crime if JPM benefits? Even recusing himself can still taint any decisions. Sitting on the board of a Federal Reserve bank is something so extreme that even I, being on the compliance end and thus far from business strategy, could (and never should) get approval from my firm's Chief Compliance Officer and General Counsel. There would always be an inherent conflict of interest, and any reasonable person would have an insuperable suspicion that I was not impartial.

Dick Fuld, former CEO of Lehman, used to sit on the New York Fed board, so we can only guess that he wasn't as popular with the boys. Keeping Lehman Brothers alive just wasn't part of The Plan. On the other side of the pond, though, keeping Lloyds and Barclays was, and the latter snapped up Lehman's remains after a mere seven-hour hearing in front of an American judge. Democrats have accused Bush, Cheney and Halliburton of corruption because Halliburton got no-bid contracts. Where is their outcry about banks buying "failed" ones via government-arranged-and-approved deals, with no competitive bidding, like JPM did with Bear Stearns and Washington Mutual?

Geithner will really bring in private investment as part of the rescue plan?

Geithner Seeks Private Investment for Toxic Assets (Update3)

Feb. 9 (Bloomberg) -- Treasury Secretary Timothy Geithner is seeking to draw investors into the U.S. financial-rescue program, aiming to add private funding as a new component of proposals to address the toxic debt clogging banks’ balance sheets.

Aides worked through the weekend to complete the package that Geithner will announce tomorrow in Washington, which was delayed by a day. Aspects of the plan that have been settled include a new round of injections of taxpayer funds into banks, targeted at those identified by regulators as most in need of new capital, people briefed on the matter said.

The rest of the article doesn't mention how he plans to pull off this miracle. It's presumably the same way that Obama will make Russia, Iran and North Korea play nice: hope!

However, apply a little reasoning, and the lie becomes evident.

If there were any possibility of a decent profit for the risk, private investors would have jumped into things long before Geithner had been dreamt of as a nominee for Treasury Secretary. The fact that government must "lure" private investment means that private individuals are reluctant to jump in. Government can swear up and down the water's fine, but people are afraid the pool might really be filled with piranha or just empty.

Using simple reasoning to debunk economic lies

It is a primary purpose of this blog to debunk economic fallacies, and to expose lies wherever they may be. My friend JK fell for one, specifically the claim that on September 18, 2008, the Federal Reserve stepped in to save the collapse of the U.S. economy because they feared $5.5 trillion would eventually be pulled out of money markets.

My reply:

That's a load of horse manure. Don't believe it.

Think about it for a minute. Do you realize how much $5.5 trillion is, and how much $105 billion will not stem such a tide anyway?

Do you realize that money merely doesn't disappear when it's withdrawn? It was hardly evaporating into thin air. People had started dumping money markets on September 17, ever since the Reserve Primary Fund "broke the buck" the day before, and putting into safe paper: bank CDs if the amounts were low enough for FDIC insurance, and Treasury securities otherwise. The money was simply being transferred from one form of savings to another.

"By their estimation" is no more than doom-mongering. They were merely extrapolating what was happening throughout the entire day, when it probably wouldn't have happened at all. Worse, their extrapolation was an outright lie. By 11 a.m., they had "noticed" $550 billion. Even if it had happened in one hour, how could another $5 trillion have been withdrawn in only three more hours?

How could $5.5 trillion have disappeared when the Money Fund Report reported last August that money market assets exceeded $3.5 trillion for the first time? Do you really believe that money markets surged by $2 trillion in just the following month?

Look, my friend, don't take this the wrong way, but god damn, think about things before swallowing this kind of guff. Whatever any politician tells you, even Ron Paul, be skeptical: "believe not every spirit, but try the spirits whether they are of God: because many false prophets are gone out into the world."

"The whole aim of practical politics is to keep the populace alarmed -- and hence clamorous to be led to safety -- by menacing it with an endless series of hobgoblins, all of them imaginary." - H.L. Mencken

When a non-professional economist like me can catch these lies with barely a thought, every economist who promotes these lies should burn in hellfire. And woe to those who believe the false prophets.

Let me add one last thing: motive. Why would politicians and central bankers lie about any of this? Why, indeed? The Great Depression was the first big opportunity for the dark powers to soften Americans up to the idea of government intervention to "save" the economy, notwithstanding the New Deal only made things worse. This manufactured crisis is being used to destroy all confidence in the free market, a return to which is the only thing that can save us, and to instill in people the belief that only government can save them, when in fact it only leads to economic damnation.

Lessons from Japan

As I wrote two months ago:

Real estate collapse, a stagnant economy despite the central bank lowering rates nearer and nearer to zero...God help us if we're going to spend the next two decades like Japan's spent the last two. We're already in a "liquidity trap": interest rates are so low that monetary policy just can't provide any more economic stimulus, as artificial as it would be.

On the fiscal side, Russ Roberts links to a New York Times article that admits Japan's efforts at fiscal stimulus were a failure.

Dr. Roberts was spot-on to call it "schizophrenic." What he didn't cite as a highlight is something I'd deem perfectly indicative of liberals' agenda:

"Japan spent too much on increasingly wasteful roads and bridges, and not enough in areas like education and social services, which studies show deliver more bang for the buck than infrastructure spending."

There you have it: collectivism isn't accomplished merely by directing people to build more "infrastructure" for themselves, but by converting current generations and breeding future generations to be dependent on a central authority's direction. Sprinkle some Keynesian junk science about "multipliers" so people will swallow the guff without question.

Remember that my patron saint debunked the idea 160 years ago, nearly nine full decades before Keynes, that government spending can create economic growth. It also brings us a point of simple logic: Keynesians shouldn't be in favor of any private spending at all, proceeding straight from their absurd posit that government spending has a greater multiplier than private individuals' choices. But you won't hear this at the present time. Even Western Europeans haven't been quite that softened -- yet.

Hundreds of billions of dollars more aren't enough - the feds have to use accounting trickery too

Obama's administration is looking to spend blow through hundreds of billions of dollars more than TARP's original $700 billion.

Who's surprised? Under the various guises of "ensuring liquidity," "unfreezing credit markets," "restoring confidence," "saving banks," "saving jobs" and "for the children," this is the ultimate giveaway. Everybody from union workers to preservationists to state governments is lining up with their hands out, and never forget that you are the main course.

In addition to more money, the feds' plan is to set up a bank specifically to hold bad assets, essentially a shadow holding company. This was already done with AIG. This actually wouldn't be necessary if the feds didn't impose mark-to-market accounting rules in the first place: some of a bank's assets plunge at current market prices, the bank's net assets fall below zero, and the FDIC forbids the bank from lending a penny. After all, government needs to create problems it says only it can fix, otherwise it would be out of business once people realize we can fix things our own damn selves.

Now, has it already been so long that most of us have forgotten that Enron and WorldCom engaged in the same practice of hiding liabilities on other ledgers? When they did it and were caught, no one trusted them afterward, and they went bankrupt.

When the federal government does it, few seem to bat an eye, and it's all perfectly legal. And why shouldn't it be as far as government is concerned? It wields its power purely by force, so it can make anything "legal" that it wants. When Nute Gunray asked whether something was legal, Palpatine merely replied, "I will make it legal."

As my friend Billy Beck would say, this is feasting at the cannibal pot

This shows everything that's wrong, including who's the main course.

Reason versus acting like animals, Ayn Rand over Keynes, and Robert Schiller is a fool

My friend JK noted Schiller's idiotic op-ed in today's WSJ, talking about promoting confidence, and then Greg Mankiw's wisely cautionary reply: "The sad truth is that we economists don't know very much about what drives the animal spirits of economic participants. Until we figure it out, it is best to be suspicious of any policy whose benefits are supposed to work through the amorphous channel of 'confidence.'"

My comment:

This is where Ayn Rand trumps all these morons, particularly Keynes. If you want to call it confidence, fine, call it that. But don't call it anything related to "animals."

"You keep using that word. I do not think it means what you think it does." People throw out nice-sounding words but rarely stop to think about what they're really saying.

Keynes' term is a complete misnomer because "animals" use instinct and similar non-thinking passions as the basis for their actions. Man is not an animal. Man is a thinking, reasoning being that weighs decisions on the basis of trade-offs (i.e. what is to be gained). A decision may be made quickly or "spontaneously," but that hardly means the decision was not rational. (Side note: here I speak of "man" in a general sense. There are plenty of people who act little better than animals.)

I don't want people's "animal instincts" to come out or otherwise encouraged in any way. Animals' instincts are to do whatever seems right at the time, with no rational judgement, even if it means killing their own young. Do lions worry about being confident about pursuing prey? Do deer similarly worry about finding vegetation? Hardly. Animals merely do, so using the term "animal spirits" to mean confidence is completely absurd.

Contrary to what Schiller asserts, to "trust" isn't to act like an animal -- in fact, it's exactly the opposite. Animals have no sense of "trust" because their nature has no doubt to suspend. On the other hand, when humans "trust," it actually is not dismissing any fear or hesitation, but in fact making a rational judgment based on information.

What happened with the current crisis, and I'll get to this in a subsequent paragraph, is that the government created an artificial sense of "trust" in housing and other markets. People were not suspending any doubt, because government made things look better than they actually were. Schiller is correct to point out specific things like the collateralization of mortgage-backed securities, but he misses the big picture that government was the problem in everything that happened. It wasn't the case that "confidence was blind," but that people believed they saw more than they actually was. This is not mere semantics; the logical distinction is important. People were led to believe there was more reason to be confident than not confident when the former didn't really exist, not that they turned a blind eye.

Furthermore, these economists who want to promote "confidence" typically don't understand a simple point: why do we want people to have confidence when it's not necessarily warranted? Note that politicians, and most economists too, aren't even talking about making certain people more confident in a certain industry. They're talking about increasing confidence in general, but confidence for its own sake is a bad idea. Just one of many examples: I don't want banks loaning out tons of money just because, just one of many reasons TARP is a bad idea. There are plenty of would-be borrowers who don't deserve the least bit of confidence insofar as repaying the debt. It was home ownership for home ownership's sake that helped fuel the housing bubble, followed by the Fed injecting hundreds of billions of new dollars into the global economy -- liquidity for liquidity's sake.

Now, I'm on record as saying the crisis is one of confidence, not liquidity (there's plenty of the latter). But that doesn't mean we should do things to make people more confident, which is to effect confidence for its own sake. We should let market processes work on their own, unfettered by government, so that people can compete and be worthy of confidence. If people are generally not confident about something, there's a damn good reason: their information tells them not to be. There may have proper information showing its a bad company, they may not yet have enough information to be confident (but could in the future), or government skews information so that people can't make rational decisions. The third happens all the time, but so badly today that it's the direct cause of this crisis.

The one thing few people point out is that government has a monopoly on confidence. You can mistrust it, but in most cases it ultimately gets its way.

(Editor's note: corrected my inadvertent misspelling of Schiller's name.)

What could be more insane about the bailouts?

Einstein reputedly said, "Insanity is doing the same thing over and over, expecting a different result."

"Regulators scratch heads over housing crisis"

As I said to a friend last night, "Duh. Fucking duh."

We shouldn't be at all surprised that people got "help" and are still defaulting, or that "regulators" don't understand why their solutions didn't do a damn thing.

Nor should we be surprised when their solution is to throw more of other people's money at the problem: they'll tax us more (either now, or in the future to pay off debt they incur for us now) so we'll have the dubious satisfaction of paying off others' mortgages, and make us pay more for everything because the Fed will keep interest rates too low and thereby create inflation.

And what country did I compare the U.S. to last night?

Russ Roberts and Bob Higgs on similarities to Japan's economic woes. Don't you feel better now?

Will the Fed be stupid enough to lower the FFR?

Probably. (Hat tip to my friend Billy Beck.)

Tonight I don't have time to delve into the immorality of people being forced to use the government's money, so let's just play the Keynesians' own game. Even if their theories worked, and that's a big "if," look at the FFR now: go here and scroll to the bottom. What is the FFR these days? The real rate, not the intended one. (By the way, the AP writer apparently couldn't be bothered to find rates before 1990. The lazy idiot probably found this page and decided to go no further.)

So, uh, how can the Fed cut the target to 0.5% when it's already there? Does that mean we'd get an effective rate of 0%? And if it cuts it to 0%, does that mean we'd get an effective negative rate?

Anyone who understands Hayek will understand why the Fed can't even hit the target it's aiming for: there's no way such a small group, relative to the whole population, has the information necessary to control such a complex thing. Yet the Fed acts as if it can, and most people are so blind that they believe Fed officials. It's all based on Keynesians' flawed understanding of inflation, which they calculate based on prices. Milton Friedman taught us that inflation comes purely from monetary policy, so any drops in calculated CPI and PPI resulting from the recent drops in fuel prices are not in an of themselves indicative of true deflation. What we do see is that the Fed is still devaluing the dollar. The dollar hasn't "strengthened" lately because the money supply has been cut, unlike when the Fed caused the Great Depression by cutting the money supply. The dollar has been strengthening only vis-à-vis most other currencies, because other central banks are devaluing their currencies faster, and foreigners are buying dollars in massive quantities to buy U.S. Treasury securities.

The Fed is acting like a stupid doctor who worries a patient is losing too much weight, when in fact the patient is shedding obesity that resulted from the same doctor's force-feeding. The Fed has grossly inflated the dollar since 2001, and now it worries about "deflation" undoing part of it?!

Real estate collapse, a stagnant economy despite the central bank lowering rates nearer and nearer to zero...God help us if we're going to spend the next two decades like Japan's spent the last two. We're already in a "liquidity trap": interest rates are so low that monetary policy just can't provide any more economic stimulus, as artificial as it would be.

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.

Tim Geithner and Larry Summers "understand markets"?

John Batchelor, or maybe one of his guests, made a claim on the radio tonight that Tim Geithner, the presumptive nominee for Obama's Treasury Secretary, and Larry Summers, former Clinton Treasury Secretary, "understand markets." As I said the other night, this is how parents can explain the phrase "The more things change, the more things stay the same" to their children. For all his talk of "change," Obama is hell-bent on bringing aboard such insiders as Clintonistas and entrenched Fed officials.

Most Americans probably couldn't tell you who Larry Summers is, or if they can, they don't know him beyond the Harvard controversies. Geithner is even less well-known, and Americans should be truly shocked to learn how personally responsible he was for this "financial crisis." I knew nothing of the man prior to his nomination, but all I needed to know was his specific position at the Fed, and I immediately realized what the man himself has done. The New York Federal Reserve Bank is responsible for the Fed's "open market operations," which is how the Fed distorts interest rates and the dollar's exchange rate. Geithner has been its president since 2003, and he and his predecessor William McDonough bear personal responsibility for doing Alan Greenspan's bidding of low interest rates.

As I wrote last May, Congress threatened mortgage lenders with the stick of investigations and regulations, if the lenders didn't give money to unqualified applicants, and borrowers were irresponsible to take out loans they should have known (and often did know) they couldn't repay. Both of them should bear blame for the housing bust. But it was the Federal Reserve who is mostly to blame, because only it could provide the carrot that facilitated all this: interest rates far too low for far too long, anywhere from 4-plus to 6 years, depending on whether you draw the baseline at 4% or 5%.

The Fed's sudden interest rate cuts began in 2001, a quick reaction to the last year and a half of tightening interest rates. It's much like when I was 16 and first learning to drive. Traveling 55 in the center lane of a highway, the teacher warned me that I was starting to drift into the left lane. So I mindless jerked the steering wheel to the right, and quite quickly. I kid you not, we felt the left wheels go up six inches and then plop back down on the road. It scared the crap out of the teacher, who said "Goddamn it, Perry, don't ever do that again!!!" I understand he was still telling the story for years and probably still does to this day. Well, my idiotic maneuver is exactly how the Fed bankers do their own operations: they're not paying attention (Hayek would remind us it's because central planners can't possibly have all the information to determine what interest rates should be), suddenly discover they need to correct course, and then just as suddenly do something boneheaded because they never knew all along what they're doing.

So back to this thing about Geithner and Summers "understand markets." If they really understood markets, then they'd know that free markets exist only when government doesn't interfere. The moment that government does an iota in "markets," they're no longer free, and hence only a semblance of "markets." Geithner and Summers are chief proponent of government interference. Summers' very job under Clinton, by definition, was figuring out ways for the federal government to meddle with financial markets. Geithner's assuming that role after having been on the other side: as Treasury Secretary, he'll be working with his successor at the Fed about how many Treasury securities the Fed will buy or sell.

If Geithner and Summers don't really understand markets, it means they're very dangerous in their ignorance. If they do understand markets, then they're misguided or perhaps malintentioned in their jobs that subvert markets. I wouldn't doubt that they understand markets, although in the same way that Satan understands what God wants: "Thou believest that there is one God; thou doest well: the devils also believe, and tremble." One can "understand" but still not believe or heed.

How to subjugate a country, quietly and from the inside

1. Disarm the populace. Breed people to rely on law enforcement instead of their own skills and equipment to defend themselves. This is crucial so that when people realize what's going on, it's too late. For that reason, this must be done with ultimate subtlety as the first step, slowly over many years.

2. Control of the money supply is essential. Once you control it, you control the economy. Recessions and depressions can then be engineered, so that government can step in to "rescue" people from what it claims are "free market" failings.

3. Also, a government that controls the money supply can perform as much deficit spending as necessary for domestic spending and waging war, because money can be created at will, anytime, for the Treasury to borrow. For best obfuscation, claim that the central bank is a separate, "private" entity, and in fact "necessary" to ensure "monetary stability" -- which turns out to be fixing the crises that it creates in the first place.

4. Use the spectre of "crisis" -- create one if necessary (see step 2) -- as a pretext for nationalizing all the major industries. Education facilitates control of the young, allowing you to breed successive generations of obedient sheep who will fall for whatever political rhetoric you offer them. Energy facilitates control of people's transportation behavior. Insurance. Health care. And banking controls everything about people's ability to do commerce. Of the five, it's the most powerful as a weapon for punishing political dissidents.

Once you've done these, you're in control of a country. No formal conquering via military force, no revolution, and it happens so gradually that people can't pinpoint a certain time when liberty was lost.

Who has ears, let him hear. Who has eyes, let him see. Aren't the signs already so obvious?

The Reichstag fire of the financial world

Wake up, people!

I haven't seen anyone compare today to 1933 Germany, but I told a friend on Tuesday -- i.e. before the latest developments that only proved me correct -- that what we're looking at really is a Reichstag fire: an excuse for government to declare an "emergency" and assume totalitarian powers in response to the "crisis," with the vast majority of the people so blind to the real story that they wholeheartedly embrace the new tyranny.

The simple truth: there is no liquidity/credit crisis, other than what's been engineered. But the U.S. and several European governments want us to believe this myth of a "crisis," so that we'll turn to them as our saviors.

Their motive is so obvious now: the U.S. and these European governments have the ultimate goal of nationalizing their respective banking systems. Iceland has already nationalized its three largest banks, while Germany and the other major economies have already established "shields" that are ostensibly to protect account holders. And now the U.S. Treasury might start "injecting liquidity" into banks -- in exchange for ownership. This article has a nice picture of Chuck Schumer, who knows all about spreading rumors to spur the collapse of an otherwise solvent bank -- so that the feds could take it over in the name of "protecting" depositors. George W. Bush and Hank Paulson have now taken that to a new level that even FDR would envy.

As I've explained here and here in comments at friends' blogs, there is in fact no shortage of money to lend, only a lack of lenders' willingness to lend it out -- that might seem semantics, but there's a big difference!

It won't matter who wins the election. Under Bush, we've already trudged enough on the road to nationalization of education, health care, energy and now finance. Soon it will all be complete. Good heavens, people, wake up.

Sigh, sometimes I feel like the few of us who understand are Cassandras, who won't be believed until too late. But I did reach someone tonight, a friend who's been wondering about these economic happenings and asked for my opinion. Now he sees. But we aren't enough.