May 14, 2009


How we got Here & How we continue exacerbating the underlying problem
I could honestly write a dissertation concerning the cause of this crisis, but this is my feeble attempt to explain this in mainstream terms.

1)Although the origins go much further back in history, I will choose to start when Andrew Jackson withdrew all government funds, allowing for a rare but short –lived period known as the “free banking era”(1837-1861) . Though I deem this one of the best periods in terms of banking, it had its share of shortcomings. Nonetheless, this is far better than any single banking reform following the end of this period. But it also showed the “Chaos”( aka self organizing system) underlying the free market system. A great example was the fact that 20% of all banks were allowed to fail (weeding out the weak) Well this is all a pipe dream now! This was followed by a collection of national banks which was their version of a central bank or our Federal Reserve. Skipping a detailed history from 1862-1913, the end of this period only demonstrated the fall of our national currency would come sooner than it otherwise would have.
2)1913- The Institution of the Federal Reserve- Along with Social Security, Central banking not only ensures violent business cycles and inflation (due to government monopoly of the mint + fractional reserve banking) but even a bigger threat to an already inherently weak paper money system! For those who aren’t familiar with the vast influence the Federal Reserve has on all aspects of money (credit, currency in circulation, etc). So guess was these idiot geniuses did?? They soon dropped the reserve requirement of all banks from 20% to 10%! Granted 20% is extremely reckless, but 10% is twice as reckless. To be honest, Alan Greenspan, Ben Bernanke and all others that came before, don’t even deserve to talk on monetary matters! Why? Let me see, government employees lack the necessary skill set to make it in the free market thus turn to the government seeking a free handout. Especially the chairmen of the federal reserve, which 100% of them have little to no real world experience, but somehow think they are qualified because they got a B.S and P.H.D from an Ivy League School. Sure they can get good grades which requires nothing but regurgitation of class lectures, but have a degree composed of Bull –Shit, Piled-Higher & Deeper, somehow deems them worthy. Enough with FED bashing, since it similar to making fun of the mentally handicapped, and no that isn’t a joke
3) Social Security- Sure if the income from workers was used to purchase real assets i.e gold, silver, oil, etc, instead of having it squandered inefficient government programs, we would not be dealing with trillions of unfunded liabilities we will soon have.
4) Bretton Woods- 1970-71- In short was a ploy to designate the USD as reserve currency, which then would allow government to accumulate mass debts owed to other countries while using the proceeds to funds their own initiatives. Of course like everything else we squandered the 12+ trillion to artificially stimulate our economy out of recessions, until now as the well has run dry. This also officially took us off of what was left of the gold standard.
5) The Greenspan Era- Greenspan was extremely fortunate to be chairman during a great technological revolution (for the non-Austrian, the vast increases in productivity would more than negate the inflation created during this period). But this revolution came to an end and replaced with a phony economy built upon nothing but our imaginations. Greenspan because of his monetary tinkering only prolonged what should have been a much longer recession. In doing so he also created Two bigger bubbles which eventually turned a hooker into a day trader/ house flipper (SEE INTEREST RATE MAINPULATION)
6) Interest rate manipulation- To understand the true danger of the manipulation of the FED funds rate, one needs to first understand what an interest rate is as well its effect on the market.
a. In a free market interest rates are signaling mechanism communicating if, when & how capital should be deployed. The determination of the cost of money should be determined by the market i.e supply and demand. This would not only prevent bubbles from forming but it would relay society’s time preference (whether they prefer goods more now or in the future). To expand on the latter, a low interest in a free market economy would signal to entrepreneurs to invest deep within the structure of production(technology is a good example), with the expectation for a hefty profit in the future. This of course would be a function of their forecasting ability, but that it was separates that successful from the unsuccessful.
b. So what are the consequences of artificial manipulation? Lets take present day circumstances and examine the free market’s solution as opposed to what is taking place.
i. In a free market, a recession would be characterized by higher than normal interest rates! Why? Well it doesn’t take a genius to figure this one out… but is the demand for money increases sharply ,(due to layoffs, decline in other assets, etc) as society time preference for money would drastically increase. Although this sounds rather simple, this would in turn increase savings, reduce consumption and what little capital deployed via investment would be in those stages closest to production (which avoids the massive misallocations of capital witnessed over the last deacde).
ii. Instead the government is manipulating societies perceived time preference causing continued misallocations of capital (i.e their push to get banks lending to those who will more likely than not default).
7) GreenSpan Con’t- Back to Greenspan…. This senile idiot cut interest rates from 5% to 1% after the bursting of the dot-com bubble. This inflated our way out a recession or more eloquently said, Greenspan remedied the bursting of the NASDAQ bubble by creating two new bigger bubbles. Greenspan and his successor Ben Bernanake which I will now refer to a “IVY-LEAGUE MORON” kept the FED FUNDS RATE far below the “natural rate of interest” (that which would have prevailed on the free market). This as we are now realizing, caused miss-allocations of capital on a scale unseen in U.S history. Greenspan is solely responsible for the housing boom as his action in 2001 represented the only recession in which housing prices increased! I personally hold him accountable for stock market bubble as well.
a. Holding the interest rate low allowed people to go on margin, bidding up prices most likely because the distortion society an general and the misperception of their real wealth(via distortion of time preference, cost of margin on investment accounts & people’s inaccurate value of their house).
b. Entrepreneurs overly confident on the future of their business (Las Vegas Sands) which has a cascading effect to investors
c. The other 200 reasons
8) “IVY-LEAGUE MORON”- This guy along with Geitner is the ultimate recipe for a massive economic disaster but more importantly a complete collapse of the currency. They continue to think bailouts and stimulus packages will revive this once unrivaled economic machine. NEWSFLASH “government stimulus doesn’t work (especially when the national savings rate is near 0, we can’t finance these via foreign debt, etc). I mean a monkey would realize running the printing press, bailing everyone and their mother out and government stimuli isn’t working (It has been 2+ years). Additionally, manipulating long term interest rates is far more dangerous than the aforementioned (mostly because it has great influence over the cost of loan able funds, mortgage rates, etc). To sum this paragraph up, what person with half a brain thinks you print your way back to prosperity??
9) Lets Sum Up the Damage – Trillions of unfunded healthcare liabilities that only increase for the rest of the century, bailouts totaling trillions, an exponential increase in the money supply, a 5-fold increase in the deficit, misallocations of capital that have yet to be revealed via home and personal loans, future credit card defaults, hundreds of billions to cover loan losses (as opposed to the previously mentioned newly originated loans), foreign debt payments + interest & finally less tax revenue to pay for all the additional programs in the pipeline, courtesy of our fiscally irresponsible head of state plans to enact.
How Do We Get Out?? There is only one possible outcome that will save us, though highly unlikely to be adopted until things get far worse. This of course would be the Austrian School of Thought which has a very simple solution and does not attempt to use math and economics (which have no business whatsoever being coupled together). Although I am a diehard Austro-libertarian, my formulation of this paper was such that I assumed no one reading this in the future has any prior knowledge of this school. To briefly comment, Austrian-Economics is the only free market school of thought despite the fact most others make this claim as well. It based on praxeology / Human action, therefore the inclusion of math is impossible, thus forecasting the future is likewise impossible despite the fact Keynesians claim otherwise. Those who fail to adopt the Austrian theory are nothing but mindless drones which unfortunately applies to 99% of academics in the U.S ex George Mason and a few others.
Below is brief but complete refutation of Keynesian but one of, not if the most intellectually gifted of all modern day Austrian economists: 

Click the Above name to read the PDF: "The Misesian Case Against Keynes"

No comments:

Post a Comment