My Take on the Bailout
Posted by mariasman on Sun, 10/05/2008 - 6:50pm inIf the United States had a moral money and banking system, then Americans would not be experiencing many of the problems that are seen today. The only moral (and economically sound) money and banking system so far devised is a gold or silver standard where fractional reserve banking is outlawed, the only way to bring additional money into the system is to mine gold or silver, and the only money available for lending purposes is derived through saving. Certainly this line of thinking is considered primitive today. There are sophisticated arguments against hard money and in favor of fiat credit expansion (monetary inflation), and there is almost universal deprecation among modern economists of saving (underconsumption). But the Keynesian fallacies, as Henry Hazlitt referred to them, are precisely that... fallacious reasoning at its most dangerous. Economics present the student with inherent difficulties that alone would tend to cause fallacies to infect its structure. But Hazlitt warned that "the special pleading of selfish interests" tend to multiply these fallacies many fold. We must be particularly cautious in remaining objective in our investigation of the cause of our current economic hardships. That said, here's my take on what this bailout means to us, and more importantly the basics of how we got into this mess in the first place.
Credit has been so plentiful for so many years that many businesses have become dependent on it (much like a heroin addict). The market most severely affected recently has been the housing market. But it's important to note that the expansion in the housing industry has resulted in the expansion of a whole host of complementary industries. Think about this for a moment. When a family buys a new home all sorts of additional purchases are made. Not only that, but with home prices rising so rapidly and to such absurdly high levels in some parts of the country because of the rapid credit expansion, many unwisely chose to tap into home equity by taking out equity lines of credit. Of course, all of this was not sustainable.
There is much talk in Washington D.C. and by the pundits on the radio about the cause of our economic woes. But not one person in a hundred recognizes that we must ultimately attribute the lax lending standards in the home mortgage market, the corruption, and resulting subprime debacle to the fiat credit expansion itself. You see, after everyone who could reasonably be expected to pay off a home mortgage loan had been serviced, the only other place to put all the new money made available by our inherently corrupt financial system was into loans made to those who could not legitimately afford to own a home under traditional standards. So, starting in about 2003 the lending standards began to decline markedly. We saw zero down payments, interest only mortgage payments, "stated income" documentation, and adjustable rate mortgages. If you recall, it was about this time when home prices around the country really began to accelerate upward.
Now, all this credit expansion has a way of making its way through the economy and bidding up the prices of not only real estate but all other resources. Naturally, general prices started to rise. People found during about 2005/2006 that it started to get a little harder to make ends meet. Home prices were approaching their peak about this time, but most relevant is that about this time interest rates started to rise. As expected, the home mortgage market collapsed shortly thereafter, and home prices began a precipitous decline. But the lesson to understand is that attempting to grow an economy through a credit expansion that is not derived from savings (in this case it was derived from borrowing from abroad, and by expanding the money supply through fractional reserve banking) always sows the seeds of its own destruction. We simply cannot have our cake and eat it too. Today our financial system has become dependent on a continual high rate of fiat credit expansion and the malinvestment it encourages. When business expansions are financed by this means, then the resulting expansion must be met with insufficient consumer demand. When one thinks about this for a moment it becomes obvious. You see, the only way to make additional scarce resources available for expanding an industry is to first reduce consumption of said resources elsewhere. If this is not done, then the result is entirely predictable. Trying to grow an economy through phony credit expansion (by not saving) must always hit a wall and result in a bust.
The business cycle caused by this process is a source of upheaval and misery to the average American. But the financial system in place will always work in the favor of its benefactors... namely, the banking industry itself and the federal government that protects it through force of law. They can never lose. The federal government needs the central bank (the Fed) to finance its expanding operations through deficit spending, and the Fed needs the federal government to give its currency (Federal Reserve Notes) legal tender status and to bailout the banks when they become insolvent.
The only rational course of action is to accept a severe and protracted recession gracefully. We have to put a stop to the credit expansion. We have to collectively start saving again. But that cannot be allowed to happen by the political class in D.C. Recessions are unpopular, and politicians tend to lose their jobs under these conditions. So the solution that is proposed is to make our bankrupt financial institutions whole again by buying up all of their bad paper. The U.S. gov't will effectively print 700 billion dollars and put it into the banking system in exchange for the bad paper (most of it mortgage securities). Don't fall for all the talk on the radio that the government can eventually sell these later and gain a profit. You see, even IF they can the damage will already be done. What this bailout will do is delay the much needed recession by allowing banks to continue loaning out the money that our distorted economy is now so dependent on (effectively warping the economy further). The U.S. gov't is the enabler, the banks are the pushers, and the American people are the heroin addicts. This bailout will give us all only one thing in the long run, and that's the certainty that the value of the dollar will continue to fall. It will not solve the underlying problem. At best we may delay some hard times in the short run through these measures, but our continued interventions guarantee a more severe economic upheavel in our future.
NOTE: It is a dark irony that so many see the bailout as a troubling sign that our economic system is breaking down. But the sad truth is that the system is working today just as it was originally designed, as a means to concentrate power to the political and financial elites. Politically, by far the most dangerous implications of this process is the widespread misrepresentation of the U.S. financial system as "capitalism". The "Left" argues that we need "regulation" to reign in "capitalism". The "Right" plays lip service to "the free market". But much like the Ministry of Truth in Orwell's book "1984" taught that freedom is slavery, today we are taught that our markets are free. The people of Orwell's totalitarian society lost the concept of freedom through the corruption of language. Americans today are well advanced upon a similar path. We've been taught that the "Left" is ideologically opposed to the "Right", but the reality is that they occupy the same side of the true political spectrum. Individual liberty is all but forgotten.
Mark Goodson
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There is no such thing as "moral banking" in our current system. The control of the money system is equal to or even greater than the power of the government. As we have seen, the bankers call the shots, and the government makes it law (See the bailout of '08).
The root of the problem is fractional reserve banking, or what you (and Hazlet) refer to as credit expansion. The creation of money from thin air, coupled with a limitless supply of paper dollars, is the root cause of ALL our financial woes, as well as the economic shortcomings of the entire world.
The answer? We cannot simply go back to a hard money standard and expect it all to miraculously be fixed. We cannot simply use gold and silver, etc. and expect the problem to go away. Credit expansion still happens with a hard money system: banks just hold 10% of their gold reserves and create 90% of their credit to loan out to you and I.
So, in actuality, the current fiat money system *could* work, if only the fractional reserve system of banking was abolished, and the number of dollars in circulation was fixed. This would return us to a savings-based economy instead of a credit-expansion economy. We would still have to endure a recession, but at the end, we will have prepared our economy for slow, steady, meaningful growth.
A return to the gold standard would help, yes. It would be a big step in the right direction, but in the end, only the destruction of the fractional reserve system, ending the FED, will correct our problems. The limitless spending will not be stopped by changing out politicians every 2, 4 and 6 years. Only instituting a hard cap in the amount of money they can spend (read: Constitutional Ammendment enforcing a balanced budget) will fix the problem. As long as the FED can print dollars ad infinitum, and the banks can just loan out money from thin air, we will have fiscal irresponsibility.
Keynsian Economics is dieing. The financial ripples we are seeing are the death throes of that failed system. The free market, like gravity, is a force that cannot be resisted indefinatly. Logic dictates that a system that ignores economic law will fail.
Keynsians call freshly printed fiat money "capitol", but only savings is true capitol; easy money creates a moral hazard to an entrepaneur; only savings capitol, and the inherrant scarcity it creates, can be called true capitol.
Keynsians call government spending "investment" and claim it will bolster a floundering economy; The Great Depression disproves this theory.
Keynsians call private hoarding of money "savings" and villify it, calling it immoral. However, only savings can provide entrepaneurs with the true capitol they require for growing business.
Keynsian economics has been favored by governments because Keynsian economics favored government spending. It gave them a rational argument for the massive growth of state that government desperately desire.
It seems that we are in agreement. But understand that I'm not looking for solutions here, but rather to first encourage a better understanding of the problems.
I would like to differ with you on one point. Your comment that a fiat currency system could work is a bit naive in my estimation. Sure, it could work in world where men do not behave as men. The beauty of a commodity money is that the money supply is never in central control. As long as money may be created whimsically, then it will be done and will be justified by most any rationalization. I'm sure that you understand and agree with me here, but I couldn't help but to emphasize the point. Based on what you've written here, I tend to believe that we are in agreement with the fundamentals.
Furthermore, I would like to emphasize my understanding that as long as the money supply is in central control the economy is effectively in central control. In other words, there will never be a free market as long as man's single greatest invention, money, is manipulated.
Solutions? Well, that's open for discussion.
Here's one I love.
"Revenue is calculated by multiplying the price at which goods or services are sold by the number of units or amount sold." Now one may wonder, bearing in mind the double speak of the state, just what the f--- does the Internal Revenue Service (IRS) have to do with "the price at which goods and services are sold" in our mixed economy. Unbelievable distortions of the English language for the purposes of deceit!!
Loans made by banks are carried as assets on their books and represent a major component of fractional reserve banking. Not a bad gig if you can get the suckers to buy it, eh.
Check this; sorry if you already seen it:
http://brasschecktv.com/page/135.html
I am of the opinion that most of us agree on one basic issue. "We all got screwed by the bailout". As many will want to take this or that approach. It is a different story when writing on such a system we find ourselves on as "Break the Matrix" the goal it seems would be that the sincere find where they agree. Not so much where they disagree. To me, that would be the whole point of the freedom movement.
I have made a significant finding in understanding how our so called United States is really a corporation. And you will find at this post:
How much does the government have to do with the problem of the bailout?
http://milestonesforlife.com/TheTaxiStand/Forum/mbbs2/forums/thread-view...
The trickle down effect of converting from common law to maritime law that is basically, "Banking Law" has created a frieight train of corruption. Knowing that every Senator has some form of money in the bailout gamble, seems to make this a bit more clear. Since every state, city, county & school system has bargined with the devil. We now see the result. The documents called the CAFR reports will reveal how that whole story works. We need to bring this fight into the courtroom.
Even though the entire answer is not in the above link. It gives you an idea of what they have been doing with all the money we have been giving to them over the last 90 odd years. Including an analogy of what occured before, during and after 9-11 in the stock market.
At the "Phoenix Project", I have put in the fifth video slot, a person that uses Dun & BradStreet web site to feret out the knowledge that judicial systems have sold their revenue streams on the international market. So in essence, every time a new state statue is passed, the number crunchers will provide the numbers of the possible revenue streams preparing for the sale of additional revenue streams. I am assuming the person giving this information in the video uses a mask for a reason.
It is ironic that I have not had a lot of time to talk to very many people about this. If you understood the, "Comprehensive Annual Financial Reports" and the secrets they hold. We could solve a great many issues that would effectively, "Break The Matrix".
I can site many issues from car insurance, school systems ect. ect. There are trillions of dollars that can be taken back and given to the American people.
WIth this knowledge is it not hard to get everyone on the same page. Each city, county, state and school systems having there own backroom marketing program and not having to tell the public about these levels of income because of keeping them secret is much more profitable.
There are over 85,000 different venues listed. If anyone wants more information then please contact me at this site.
We can break the matrix. The Fire is Coming, The End is Near. Check out the "Phoenix Project".
Its refreshing to read writing with sound logical thinking with a dash of passion.
During times of universal deceit, telling the truth is a revolutionary act. G. Orwell
The Eye of G_d is watching us
Orwell certainly captured the deepest primordial emotions of people paralyzed by fear and too stupid to recognize the truth they could not...would not accept. Words matter and Orwell, a consumate purveyor of the truth, summed it up well is this essay:
http://www.george-orwell.org/Politics_and_the_English_Language/0.html
Say what you mean and mean what you say. It really is that simple. While I admire Orwell's "1984" immensely, Huxley's "Brave New World" rings a little truer for me. Lots of folks out there eating the SOMA and accepting a grand plan for their lives, over which they have absolutely no control. Not for me.
Never submit!!!!
For a little more scholarly take on the morass we find ourselves in try this:
http://www.iea.org.uk/files/upld-publication43pdf?.pdf
Take your time. This is not an easy read. I guarantee you will see things much more clearly if you will but commit to reading this piece.
For the short attention span theater folks, try this version:
http://mises.org/books/TRTS/
http://georgereisman.com/blog/2008/10/myth-that-laissez-faire-is-respons...
Here's the problem: How can potential representatives get elected if they speak these truths? Americans don't want to hear that they are doing anything wrong-- in fact, the trend now is to cast the average American as a victim (of the banks, of the current administration, etc...). Of course, for people used to being "taken care of" by the state, the victim mentality will come naturally.
I wonder if it would be possible to appeal to people's pride, to get them to stop allowing themselves to be treated like children? Or is it too late for that? If it is too late, if we really are a childlike, addicted, dependent population, what hope will there ever be for liberty?
Sorry to be so negative; I am feeling very discouraged at the moment, what with the bailout passing, and people appearing to be leaning to the left in response to the crisis... I really did like your article.
Claire
Hello Claire. I'm not active on these forums, so the first reply to my comments were less than encouraging (to say the least). Your reply has done well to dispose of the cynicism (or was it nausea?) induced by the other remarks. Needless to say, I was not encouraged to learn that Nader is defended in these forums. ;-(
The only hope of ever having representatives that understand and advocate for the principles of individual liberty is to first educate those who vote for the representatives. This is why I am currently pursuing a B.A. in economics with the intent of teaching. I believe that more people will defend libertarian principles once they understand them. Ron Paul has done some great work during his life and particularly during these last couple of year in helping to educate the general public. But it remains true that the vast majority of Americans are woefully ignorant of the most basic economic principles, particularly money and credit. This is not new of course... consider the popular quote by John Adams (made in a letter to Jefferson):
"All the perplexities, confusion and distress in America
arise not from defects in their Constitution or Confederation,
nor from want of honor or virtue, so much as downright ignorance
of the nature of coin, credit, and circulation." John Adams
I must say that I agree completely with his statement here.
I try to emphasize most the following principles: how fiat credit expansion causes the business cycle, how democracy is not a permanent nor desirable form of government, and how the economic system in place today is NOT capitalism. This last point I consider to be supremely important. If it does not soon become widely understood that we do not have capitalism, that this is NOT a free market, that this is NOT "deregulation", then the false dichotomy in place must lead to accepting what is believed to be the antithesis of the status quo. That is, it will lead us directly to fascism just as Mises predicted.
Mark
This is a very libertarian view. Where'd you get it? Ron Paul or Bob Barr?
I'm not saying that it is not a good system because it, in my opinion, is. I'm just getting tired of libertarians spouting this junk out as if it were an original thought.
So you've complained about it on the web. What are you going to do about it? Instead of writing empty threads, you should write to whomever is needed to be reached in order to make a change. Make an email bomb. I'd join.
That is why I like Nader's strategy to things. It's nice to point out what went wrong but apparently our congress does not care. So we have to form civic communities and complain at town halls/forums where people will listen. Start something up in school if you are in school. Organize a march. The worst thing you could do is write something that millions have probably already wrote and then go "meh, that's just my take on things." I might even march if you can get something going.
I'm not trying to be a butthead, btw. Just don't waste your breath. For a post that long, you could have actually hand-wrote your Congressman/woman a letter (which they will tend to read more than an e-mail).
Take care/be strong
Scott
>>"That is why I like Nader's strategy to things."
Nader? I am confused. You claim to be a libertarian, but of all the people you could have picked as models of fighting the powers that be in Washington, you chose an ardent collectivist. Do you want liberty, like Mark Goodson here does, or do you want the government controlling almost every aspect of our lives like Nader does?
Your reply seems quite bizarre and highly reactionary. But, I will give you the benefit of the doubt... likely more than you've offered me. So, I will address your questions and comments as if they are sincere.
YOUR QUESTION: "This is a very libertarian view. Where'd you get it? Ron Paul or Bob Barr?"
MY RESPONSE: First, I agree that my view is "libertarian" (in the generally accepted sense of the term). But you would be incorrect to conclude that I "get it" from Bob Barr or Ron Paul. In fact, my views have been forged by reading and ruminating directly on the writings of Mises, Hayek, Rand, Rothbard, and others. As far as I know Bob Barr does not share these views, but Ron Paul has also been influenced by these authors, particularly Hayek (who happens to be my personal favorite). I began my study of these authors before I became aware of Ron Paul. As you might imagine, I admire Ron Paul a great deal.
YOUR COMMENT: "I'm not saying that it is not a good system because it, in my opinion, is. I'm just getting tired of libertarians spouting this junk out as if it were an original thought."
MY REPLY: I made no claim that these thoughts of mine are original. I wonder why you would presume so? However, I do claim that my command of this subject is better than average.
YOUR COMMENT: "So you've complained about it on the web. What are you going to do about it? Instead of writing empty threads, you should write to whomever is needed to be reached in order to make a change. Make an email bomb. I'd join."
MY REPLY: Your comment here suggests that that my posting this comment is the only action I've taken!... and why would you consider my comments here an "empty thread"? But since you seem concerned, whether genuinely or through some other pathological incentive, I will describe some of the things that I am "doing about it". First, I am currently pursuing a formal education in economics. I've come to the conclusion that most of our problems stem from a widespread ignorance of this discipline. Second, I am trying to not be part of the problem by living within my means. Third, I educate my family, friends, and coworkers whenever they make a sincere inquiry.
YOUR COMMENT: "That is why I like Nader's strategy to things. It's nice to point out what went wrong but apparently our congress does not care. So we have to form civic communities and complain at town halls/forums where people will listen. Start something up in school if you are in school. Organize a march. The worst thing you could do is write something that millions have probably already wrote and then go "meh, that's just my take on things." I might even march if you can get something going."
MY REPLY: My posting comments here is a consequence of my strong belief that very few people have an inkling of understanding of the cause of the problems that we are experiencing. This included libertarians, and in particular most Ron Paul supporters. The average person hasn't a clear understanding of the fundamental problems. Likely this includes yourself. I fear that your reactionary response may suggest that your value system has been challenged. If this is the case, then I respectfully recommend that you back off a while to cool off. Perhaps you can return with a more humble and inquisitive engagement. I respectfully suggest that you and I, and any others making use of this forum, take the high road to make serious inquiries. This is an opportunity for real education... for all of us. So, with humility and respect, I must strongly suggest that you quit bitching about my post and either ignore it or let's have a sincere discussion. I also recommend that you read it several times thoroughly and make sure that you understand my position before you make any additional replies. There is a very good chance that you may learn some things if you choose to engage me civily.
YOUR COMMENT: "I'm not trying to be a butthead, btw. Just don't waste your breath. For a post that long, you could have actually hand-wrote your Congressman/woman a letter (which they will tend to read more than an e-mail)."
MY REPLY: I'm not quite convinced, but as I wrote I'll give you benefit of the doubt. BTW, my first post was an email response that I made to my father who inquired into my position on the "bailout". I hoped that some intelligent and sincere young persons might be stimulated to pursue an investigation into this topic further. Perhaps I was wrong.
Mark Goodson