Rational Conduct

A letter I wrote to the Midland Daily News (Friday October, 9th).

In a recent letter Susan Gessford stated, “If you are not bought and paid for by the insurance companies, you will agree with this and fight with me” (The only way, Sept. 29) in referencing the apparent need for single payer health care.

I do not support single payer health care, so therefore I am bought and paid for by insurance industry? This is news to me. But by this logic it would appear that I am bought and paid for by the agriculture industry as I do not support a single payer meals program. I am bought and paid for by the apparel companies because I do not support a single payer clothing program. I surely must be bought and paid for by the home builders association since I do not support a single payer home program.

In this debate, let us please stop with the ad hominems. Like any other good or service health care reacts to supply and demand.

How is the demand for health care insurance any different? Instead what politicians have done is institute policies that have altered the supply and demand structure of this industry and have put into place barriers of entry that disallow people to come in and give care for cheaper (across state lines for example). If we wish to make health care cheaper, further distortions of supply and demand and creating a monopoly (read, further barriers to entry) is not the way toward real reform and cheaper health care.

The below text is from a paper I wrote for the Philosophy of American Life and Business I attend at Northwood.  I got the maximum allowed points for the paper.

In 1848 Frédéric Bastiat had written in his essay The State, “The State is the great fiction through which everybody endeavors to live at the expense of everybody.” The most common retort to this allegation against government is that a limited or equitable government would help alleviate such pressures to use The State for an individual’s own personal gains in disregard of the well-being of those individuals for which The State is to serve. Alas, we run head on into our main problem; who shall restrain and how shall The State be restrained from infringing on the rights of the individual?

In the Constitutional government the United States possesses today it is supposedly the Constitution itself that is thought to limit our government along with the populous who elects their various officials to do the deeds of The State. The idea behind the checks and balances within the Constitution is that government will allow maximum human Liberty to the individual while granting protections to ensure Liberty. So how on earth did the Takings Clause, the clause that legalizes eminent domain—the confiscation of an individual’s property for public use as long as “just compensation” is offered, make its way into a document which is supposed to limit government and maximize Liberty? For me it’s something so far distant and disconnected from Liberty that it is beyond any conceptual vision of Liberty at all.

Eminent domain is a far cry from the Lockean labor theory of property, put into text in Locke’s Second Treatise of Government, which had established that it was an individual’s labor which “put a distinction between them and the commons.” According to Locke individuals have an inherent property right to themselves which no other individual has a right to. While the “earth and all inferior creature” is to be of common ownership of everyone it is the individual’s labor which adds value and an ownership title to the property, as an individual’s labor is a direct extension of the individual.

In the Supreme Court Case Kelo v The City of New London there was an attempt to check the power of the government to limit or cease this infringement of Liberty. This case is a classic example of the earlier Bastiat quote I used that referenced how everyone uses government power to live at the expense of everyone else. Here, Pfizer, a profit seeking firm, wanted to develop some land for some activity other than the rightful property owners had in mind for the property. Pfizer could have used the market’s price mechanisms to determine the worth of the property and obtained through a voluntary exchange; however, Pfizer decided to go the rent seeking route and urged the government to step in and obtain the land for them. The government, seemingly ever so happy to oblige because of the assumed increase of tax revenue, used the New London Development Corporation to condemn and remove the property from the owners who had already been in possession of the bettered property. Even when challenged all the way up to the Supreme Court the court ruled in favor of the government economic development project rather than the original property owners. If one is to assume the Lockean theory of property it is then safe to say that the government infringed on the most important human right; the right to oneself.

This brings me to my next point; why was government, limited in size and scope to protect Liberty, unable to protect it at all but rather infringe upon it? Many have come to believe what Hobbes wrote about in the Leviathan; human nature was not of a peaceful persuasion, but it would lead to a perpetual war amongst everybody. Hobbes thought that people’s self interests would violently take over society causing any invention and industry to cease; art, culture, and knowledge to die; and society to crumble. For these reasons Hobbes had believed that government must exist to ensure these circumstances didn’t take place. In order for peace and Justice to flourish we need to allow government the monopolistic power on force and fear it in risk of death. According to Hobbes it then seems to follow that if we put these self interested individuals in charge of everyone else they will have purer intentions than individuals left to anarchistic machinations. I have to take disagreement with Hobbes on this particular issue. Trust and fear of government would rather lead to further egregious examples of government abuse on industry, invention, culture, and individual rights. The Kelo case being a perfect example in that the politicians were the ones who forced people out of their homes and property which they held a rightful deed, stripping them forcefully from their right to be left alone, all the while the plunder being shared by corporations and the government plunderers. This was not done irrationally mind you. The coercive parties were allowed under the law to serve their own rational self-interests at the expense of others—therein lay the problem of collectivist government.

Indeed, the very nature of government allows the process of “reciprocal plunder,” as Bastiat labeled it, to take place. In a world of civilized humans without government intervention the reality would have been that the profit seeking firm would have had to find some other way to obtain this property. In human history there have been two ways of obtaining another individual’s property. There is the uncivilized method; through coercion, force, violence, and war, and the civilized method; through voluntary contracts and the pricing mechanisms of the marketplace. Pfizer, as a profit seeking firm, would have recognized the positive cost of obtaining the property through force and defending that property from the rightful owners and would generally seek the latter route. Hobbes puts little faith into civilized human nature. Though it is quite possible that Hobbes thought logically having known the conditions of human nature prior to civilization; however, the reality is people have evolved into civilized beings from our barbaric brethren of the distant past with the ability to recognize the gains from peaceful and voluntary interaction.

The concepts of individual Liberty, especially the ownership of property, should not be left to collectivist or utilitarian concepts—or worse, the whims of politicians or political expediency—but rather the individuals themselves through voluntary association and contract. It is, after all, the individual who knows what is best for him or herself and not some politician, judge, bureaucrat, or even a majority.

Yesterday and today the Federal Reserve chairman Ben Bernanke was on Capital Hill trying to argue for an expansion of powers for the Federal Reserve.  These expanded powers would be new oversight powers to financial and non-financial firms making sure they don’t reach the ominous “too big to fail” stage, along with the power of “consumer protection” by ensuring low inflation and full unemployment.

At the same time Ben was also fighting against more Federal Reserve oversight–that is, oversight on the Federal Reserve.  The Fed must keep its independence lest monetary policy be politicized, as if it has not already.  The bail outs, lending money to the big financial firms, and lending money to banks overseas by billions all seem to be political to me.

Yesterday Bernanke wrote had an Op-Ed peice in the Wall Street Journal laying out the Fed’s exit strategy.  I think Mike Shedlock’s comments are on the mark, so no use rehashing something that has already been commented on.  To this:

“Overall, the Federal Reserve has many effective tools to tighten monetary policy when the economic outlook requires us to do so. As my colleagues and I have stated, however, economic conditions are not likely to warrant tighter monetary policy for an extended period. We will calibrate the timing and pace of any future tightening, together with the mix of tools to best foster our dual objectives of maximum employment and price stability.”

I would add Professor Rizzo’s comment, “How good are Bernanke’s abilities as a forecaster?”  Video proof.

See also:
Ron Paul’s introductory remarks and questioning of Bernanke.
Ron Paul’s media rounds (FOX, FOX Business 1 and 2, MSNBC, CNBC, Bloomberg).
Bill Posey questioning Bernanke.
Alan Grayson questioning Bernanke.

Dr. Richard Ebeling is one of the leading professors in the Austrian economic tradition and former president of Foundation for Economic Education.  Linked below he is interviewed by The Daily Bell.  What’s exciting is the quote below.  He will be a professor at Northwood University, where I attend school.  This isn’t the first time I had heard this, but the second time I heard it confirmed.  Last time was by Sheldon Richman at a FEE seminar a couple weeks back.  Very exciting, indeed.

Check it out:

Daily Bell: Why did you decide to return to teaching?

Dr. Ebeling: Teaching in the classroom has always been my first love. I more or less set for myself a five-year horizon to work at FEE, and then see about returning to higher education. So this past academic year, 2008-2009, I have been a visiting professor at Trinity College in Hartford, Connecticut. I’ve also been serving as a senior fellow at the American Institute for Economic Research in Great Barrington, Massachusetts, for which I’ve written a variety of commentaries about the causes of the current economic crisis, and the wrongheadedness of many of the government policies implemented to supposedly end it.

This coming autumn of 2009, I take up a new, permanent position as a professor of economics at Northwood University in Midland, Michigan. Northwood is a serious and well-respected business school devoted to the principles of freedom and the free market [emphasis mine]. They have a fine faculty and excellent students. I’m looking forward to joining their very worthwhile mission of helping to train and prepare the next generation of entrepreneurs and businessmen, all of whom are introduced to the ideas of individual freedom, free markets, the rule of law, and limited, constitutional government. Among the courses I’ve been asked to teach each year is Austrian Economics, which I will very much enjoy.

The video below is a fantastic version of one of my favorite anti-war songs. Originally by Dire Straits, this composition is done by the bands’ lead singer, Mark Knopfler.

Now the suns gone to hell
And the moons riding high
Let me bid you farewell
Every man has to die
But its written in the starlight
And every line on your palm
Were fools to make war
On our brothers in arms

Powerful stuff. Enjoy.

Mike Shedlock points to more central banking idiocy displayed this time by the Swedish Central Bank, Riksbank.  By cutting the deposit rate by a NEGATIVE .25% the bank is essentially charging people for depositing money into their bank.  During a time when our economic woes, which Mike rightly points out, were due to our lack fo savings and the loose monetary policy of central banks we should rather encourage savings.

However, it’s that old Keynesian “paradox of thrift” fallacy all over again.  It never occurs to our central planners that the reason people are holding back and saving is because this is correcting the overconsumption, mis-allocations of capital, malinvestment of the past.  Instead the same old snake oil continues to be what is on the menu.

Will there be a run on deposits? If so, what then will Sweden do? It certainly will be interesting to see if there will be any runs on these banks or if there are any other immediate and long-term consequences which arise from this ill thought policy. Will Bernanke and other central bankers around the world follow? I certainly hope not, but I wouldn’t bet against it.

The ASCAP wants you to pay money every time your phone rings and it plays a protected tune even if you purchased the ring tone.  Why?  Because every time your phone rings you are publicly performing the tune.

What nonsense so-called “intellectual property” has become.  By protecting other peoples ideas and arrangements from the rigors of the free market through copyright and patent law the government has essentially created a monopolistic monster that seeks  to endlessly unleash itself against consumers that do no harm to their actual property or their name.  Rather than being grateful there are people out there promoting their work the production companies who license artists’ material pursue actions which intend to harm the consumer.  To me this seems like a terrible business model.  In fact it is and it’s why they are becoming so ruthless.  It’s an irrational, yet predictable, reaction from a government protected industry being forced to find alternative ways to make money that include “adding value and connecting with fans” that would encourage the consumers to spend their hard earned cash on something that actually provides value.

Fortunately, there are artists like Coldplay and Trent Rezor who are trailblazers for alternative business models to these old and decrepit ways of doing business.  As the business models that do not include filing lawsuits that burden single mothers millions of dollars in legal bounties become more rewarding for those pursuing them the more the industry as a whole will catch on and realize that harassing their customers is no longer the best way to approach this so-called “problem”.  Unfortunately, it will probably take a long time for these companies to realize before they finally have a change of heart, but it will no doubt crumble upon itself in time.

The answer is an uneqivocal and resounding no.

Two U.S. Democratic lawmakers want Fannie Mae and Freddie Mac to relax recently tightened standards for mortgages on new condominiums, saying they could threaten the viability of some developments and slow the housing-market recovery, the Wall Street Journal said.

One of those Democratic congressmen is Barney Frank, of course.

You know, the same Barney Frank who said about Fannie and Freddie, “These two entities—Fannie Mae and Freddie Mac—are not facing any kind of financial crisis,” back in 2003 before the two organizations imploded on themselves once many of those securitized mortgages which it held were found out to be “toxic”.

These mortgages were “toxic” because the government forced loosened standards for people to get those mortgages and the banks, especially the central bank, opened the money spigot for people who are highly risky.  Barney’s brilliant idea is essentially the same thing that lead up to the mortgage crisis, but instead with condos as opposed to houses.

Good thing he’s not chairman of the House Financial Services Committee… oh wait.

Okay, so I haven’t blogged in some time.  My bad.

What have I been doing, though?  Mostly the usual.  The final few weeks of the final term of the year were hectic with final projects, presentations, papers, and exams that had me stressed and kept me extremely busy (thankfully I made the presidents list for the third term in a row, woot!).

The very next week I had a Business Law class in a type of format that I don’t think many schools offer.  They call it a “mini.”  Basically, you sit in a classroom for eight hours a day and learn the subject then you go home and spend the rest of the night reading and studying the material trying to soak up as much information as possible.  Again, very stressful and kept me very busy.

THEN, I took a summer session.  Much less hectic, and it was a subject I am good at and enjoy:  Principles of Accounting III.  For two weeks, five days a week, four hours a day, you learn the basics of managerial accounting.  In my first two accounting classes I have realized I actually somewhat enjoy it and have decided that next year I will officially make it my minor.

Wait.  I’m not done yet.  Last week I was in Detroit at the Detroit Economic Club’s National Summit.  I actually took it as a substitute for one of my classes (Ethics, who needs ‘em in this market anyways?  Of course, I kid).  I’m glad I was able to go.  There were a lot of interesting and very innovative ideas and you could tell the entrepreneurial spirit was with many of these people.  I got to see people from Google, the CEO of Microsoft Steve Balmer, CEOs from both Ford and GM, among many other CEOs from FedEx, Research in Motion, etc, with about 60 CEOs from some of the biggest companies in the nation attending and speaking.  Also academics and politicians like the Secretary of Commerce, a senator from Michigan, Jennifer Granholm governor of Michigan, and Obama’s Chief Technology Officer.  I could probably go on and on with the list to be quite honest.  Many speeches were fascinating and you can really tell why these people are leaders, they really have a gift for speaking and getting ideas across to your average person.

However, I kept getting the feeling I was not at an economic conference but rather a lobbying conference.  It was very evident with so many influential eyes of the nation watching them they felt the need to advocate whatever their pet project was.  The energy companies were advocating more energy subsidies and regulation.  The manufacturing companies were advocating more money toward manufacturing subsidies.  The education companies (and really everyone else) was advocating throwing more money toward education.  It just seemed like everyone was out to get “theirs” and everyone else seemed to be drinking the kool-aid being served.

The ideological or even academic arguments for many of the policies they were advocated either were completely absent or lacking substance.  For example, Senator Debbie Stabenow was asked about protectionism and the first thing she said was “I’m against protectionism,” followed by the caveat, “BUT,” and then went into a long diatribe about how we need to, quote, “level the playing field” listing several protectionist policies.  Ugh.  I guess I expected it from the politicians, but the CEOs were just as bad in most cases (there was actually a many decent arguments against protectionism from the CEOs, however, their other policies were just as bad in other areas).

It wasn’t too bad though.  Once we got back to our hotel each of the three nights we got more free market speakers.  Lawrence Reed the first night, Terry L. Anderson the second night, and Peter Schiff the last night.  Larry gave a fascinating speech on the parallels of the current state of the U.S. with the ancient Roman Republic and how it fell into the Roman Empire.  Mr. Anderson gave a speech about how environmental issues would be better served if instead of reaching for government solutions first thing we rather looked to private property rights which made for another fascinating speech.  And Peter Schiff gave his speech I have heard so many times before, but was great to finally get to watch in person.  Peter is actually one of the reasons I’m back at school studying economics, banking and finance, so that was definitely the highlight of my week.  Next week I will be busy writing a research paper for a large chunk of my grade for the Ethics substitute for this seminar.

Finally, I get to this week.  This week I’m attending a superb seminar sponsored by the Foundation for Economic Education and its wonderful donors!  History and Liberty is the topic of the seminar.  This, thus far and by far, has been the highlight of my summer.  I have got to meet and have breakfast with Lawrence Reed, Sheldon Richman, Robert Higgs (one of favorite, if not favorite, economic historians!), Brad Birzer, Burt Folsom and the rest of the wonderful speakers.  This morning I got to talk about the Grateful Dead and other folk and bluegrass bands with Sheldon (little known fact (or at least I didn’t know), he plays the mandolin and bass guitar) and also got into a fascinating discussion about intellectual property rights  with him over breakfast.  The speeches are superb and far surpass my expectations, and I can’t wait for the other two FEE seminars I plan to attend this summer!

Later on this summer, as I just said, I have two more FEE seminars, and then an International Trade summer session class.  Should be exciting.  After that, it will be August which I plan to go back to my home state, Minnesota, for a couple weeks and visit friends and family.  Then to Montana to visit my Mom, Sister, and Nephew for another couple weeks.  I’m excited to see those familiar faces, but probably before I know it it will time to head back to Michigan and back to my studies.  It’s okay though, I love what I’m doing here.

The post started being just a quick update and ended up being much longer than I intended.  But, I’m not entirely sure how much blogging I will be getting into this summer.  Hopefully more than as of late.  I really do enjoy it, and I think it has refined my skills as a writer which I think have gotten rusty since I slowed down as I’m sure is noticable by the jumbled, random, and poorly organized post this has become.  I’ve just been so damned busy.  Anyways, I will try and get back in a groove and get more regular.  I just wouldn’t count on it being anytime really soon.   I hope you all, the few who read my blog, are having a good summer.

Well, no.  Not quite.  However, he did give a shout out to the Austrian Business Cycle Theory.

“I would say there were three types of broad errors of policy and policy both here and around the world. One was that monetary policy around the world was too loose too long. And that created this just huge boom in asset prices, money chasing risk.”

So, what’s Geithner or the Obama administration doing to pressure the Fed to fix this problem?  My guess is nothing.  We’ll continue to follow the same loose money policies.

Hat tip: Gene Callahan

It has been a while since I’ve published anything to my blog for various reasons; been busy with school work, projects, papers,  exams, upcoming finals, econ and finance association meetings, and working out summer plans.  For the few who may have missed my writings, I sincerely apologize for not being as consistent as I once was.  The plan is to become more consistent, but I’ve been saying that for a couple months now.

Anyways, on to the point of this post.

A Young Hayek

Today was the 110th birthday of one of the intellectual giants of history: Friedrich August von Hayek.  One who has had a great deal of influence on me personally.  A truly great economist, philosopher, and overall thinker and teacher to many.  His book, The Road to Serfdom, has had an intellectual influence and introduced people, including myself, to the ideas of classical liberalism and the perils of central planning.  With every word I read of Hayek I become more and more amazed at the depth of his thought and the strengths of his arguments.

Unfortunately, I never had the opportunity to meet him as he passed away when I was a mere eight years old.  Everything I have learned about and from him has been from his writings.  If there was one person I could bring back for one night, Hayek would be high up on that list.  I would love to discuss his theories with him, debate some of the theories I have disagreed with him on, and hear about what he feels about today’s current events, especially today’s political and economic enviroment.

Speaking of today’s political and economic environment, if only we had politicians that admire and followed someone who understood markets as well as Hayek.  We are seeing many parallels to The Road to Serfdom, but I’m optimistic the ideas of freedom will continue as long as Hayek’s writings and teachings continue to get passed on through the ages.

To the man who has influenced so many I wish Friedrich August von Hayek a Happy Birthday.

Yesterday Forbes ran a truly fascinating story about a college drop out turned Texas banker named Andrew Beal that puts a gigantic smile from ear to ear on this capitalist’s face.  From 2004 to 2007 Beal saw the irrationality going on in the marketplace and hunkered down, shrank his balance sheet, and laid most of his employees off.  All the while being ridiculed by other bankers, his board members, employees, credit rating agencies, and government regulators.  Yes, the same government regulators who ignored the insane goings ons that went on at Fannie Mae, Freddie Mac, Citigroup, Lehman, Bear Sterns, AIG, BoA, Merill Lynch, ad nauseum, were nagging the lone banker making intelligent business decisions.

Now after many years of belt tightening and playing it smart, despite being called insane, he is buying up assets on fractions of the dollar that were only a couple years ago being bought for a premium.  With an ever expanding balance sheet he has now had doubled his employee workforce and plans to expand even more recognizing the firesales are far from over.  It just goes to show there are people out there who made the right choices and are actually hiring.  These are the people who should be working at building this economy’s foundations, but instead are being crowded out by government regulators and companies on the government dole.

But, Mr. Beal is still managing to expand his business and did I mention he’s doing it without a dime of help from the government?  Yep, the true sentiment of the free-market entrepreneur.  While all the tax eaters are out and about sucking up all of someone else’s money they can, he’s out there making the buys legitimately and using his own capital to do so.  Along the way he’s making all the government enemies he can.  Good on him.

There are too many juicy quotes to add here, so read the entire story as it’s well worth the read.

In his 1966 essay “Gold and Economic Freedom” a young Alan Greenspan quipped, “gold and economic freedom are inseparable,” to later in his essay recognize the fact that the Federal Reserve and fiat currencies have always allowed governments to spend its way into deficits, confiscate wealth, abate property rights, and diminishes the value of the money. He recognized the value of gold as money and, like Milton Friedman, Ludwig von Mises, and F.A. Hayek, realized that the Federal Reserve was the culprit that caused the Great Depression of the 1930s.

However, once he was appointed by Ronald Reagan to head the Federal Reserve he set out to prove himself as one of the “masters of the universe” with the power and knowledge to manage the entire economy’s money and credit. Yet he fell prey to the very problems which he pointed out in his essay when he observed, “the excess credit which the Fed pumped into the economy spilled into the stock market triggering a fantastic speculative boom,” but not only did the current crisis which former Fed chairman Greenspan help facilitate spill into the stock market but to the housing market, credit cards, student loans, financial derivative markets, ad nauseum.

In today’s Wall Street Journal Judy Shelton points out that about a year and a half ago Mr. Greenspan said on the FOX Business News network, “there are a number of us that, myself included, who strongly believe that we did very well in the 1870 to 1914 period with an international gold standard”. I tend to agree and would extend that further, to say that we were doing pretty well from the founding of this country to 1914 on a gold standard of some sort, with the obvious exceptions such as the Civil War when we temporarily went  off the gold standard and on a fiat money standard so Lincoln could fund his war efforts to prevent the South from obtaining independence. But, Mrs. Shelton asks a far more interesting question:

Why do we need a central bank?

If history shows us anything it’s that the consequences of a fiat money system have always been devastating: Wiemar Germany, Yugoslavia, Bolivia, Zimbabwe, Argentina, even the great empire of history Ancient Rome suffered from currency devaluation which many historians believe aided to the fall of its empire. So that begs even more questions.  Should we trust a central manager to set the price and value of our currency?  Would this not be any different than the Russian commissars that were appointed to manage Soviet Russia’s economy which, of course, failed? The answers to both of these questions is a resounding no.

The main problem with fiat money is that it holds no store of actual value but rather whatever government claims can be created with the creation of the money.  After all, what intrinsic value does a piece of paper with some ink slapped on it carry?  Very little, if any, value at all.  This is the reason why as goes the faith in the currency so goes the value, all the way down to the cost of producing that piece of paper and ink.

Fiat money also perverts price signals using artificial interest rates not set by markets, but rather these central planners.  Rather than sending a natural rational price signal that the market determines the price signal sent is whatever is politically expedient, often times artificially low because the Fed chairman doesn’t have the cohones to allow a much needed recession or correction on his watch until the bubble gets so big it has no choice but to burst.

The third problem is it allows for governments to be “flexible” with their deficit spending.  Some may consider this to be a good thing, but large government with the power to borrow as much as it needs by a mere transfer of wealth from future generations to current ones to fund their new entitlement program or new government power seems to me to be a dishonest and immoral way to get reelected.

Fortunately there is a way out of this debacle, but unfortunately politicians are unwilling to consider it.  This idea is not new.  Hayek introduced the idea several years ago.  That of a free market money in which the people choose what money they trust and not one which is monopolized with the authorization of our government.  This would allow the market to decide what constitutes money and what interest rates should be set to rather than some “master of the universe” such as Alan Greenspan or Ben Bernanke. It would rid us of the damaging legal tender laws and allow us to use whatever commodity the market demands without barrier. This will restore value to money, restore price signals, and limit government spending which will in turn restore our confidence in real money and would potentially restore confidence in our economy once again.

In my university’s econ association meeting today we talked about prices, knowledge, and touched a bit on morality.  The two readings the president of the association had us read was Leonard Read’s I, Pencil and Hayek’s essay that won him the Nobel Prize The Use of Knowledge in Society along with Russel Robert’s podcast the Price of Everything to get us thinking and start the conversation that ensued.

The conversation began with how the market plans itself  on a decentralized level through the division of labor and the merits of it.  The main way it does this is through prices.  Prices are the main mechanism for which people show they have goods to offer and also tells how much people are willing to pay for it, and it doesn’t seem to do this in any particular centralized manner.  It’s all just individuals free to choose.  Prices will be high when products are more scarce while products that are less scarce will be low, all depending on where demand meets supply, or equilibrium.

In Russ Roberts podcast he used a personal experience to show this.  At the time of the story he lived in St. Louis which had been hit with several floods.  Sometime after the floods he had an architect draw up some plans for a deck addition to his house and said it would cost X amount, which at the time he thought he could afford.  However, once he got the carpenter to give a proper estimate it ended up being twice the amount he had expected based on his architect’s estimate.  Mr. Roberts was taken a bit back by the estimate and decided it was not something he wanted to go through with for that price.

The question posed then, is why did this happen?  If we think about it in economic terms it was the market sending a price signal telling Mr. Roberts that his deck is not as important at this time when these resources could be much better allocated elsewhere, like rebuilding houses that were damaged in the floods leaving people homeless.  It didn’t make economic sense for him to build a deck while his neighbors needed the carpenters more and were thus willing to pay more money for the services of the carpenter to build their house than Mr. Roberts was willing to pay for his deck.

It began getting interesting when we started talking about the ethical and moral implications of price gouging.  The example used was New Orleans immediately after Hurricane Katrina when resources and services were wiped out by the hurricane causing supply to rise while the demand remained fairly stable in terms of goods such as water, food, flashlights, power provided by generators (the demand of the last two possibly went up).  These conditions caused prices to rise exorbitantly to the point that it sent signals to others to enter the market because it was beneficial to them, while at the same time beneficial to the people who desperately need these goods.

One of my colleagues believed there was a moral quagmire here.  His reasoning behind this was he believed that we must look at the demographics of the location we are attempting to serve in the time of crisis and make price judgments based on that information.  New Orleans is typically considered to have a large makeup of its population in low income minorities who may not be able to pay $10-$15 for a gallon jug of water, whereas a wealthier person may be able to.  In the case of New Orleans he believed these prices were too high using the argument of morality.  In which case he believed the government had the obligation to intervene and essentially say, “No prices above X amount,” X being the variable for whatever is considered moral or what the statistics proved the people of the region could afford to survive on.  On a purely emotional level I can see where he is coming from, but there’s two arguments I would make in this case.

First of all, morality is highly subjective.  What he may find immoral, I or someone else may not.  If we are to allow the government to intervene on mere moral arguments then it becomes a question of, well, where do we find a common moral grounds in which everyone can come to an agreement upon?  In my opinion, government should not take part in moral issues for I think the only argument in support of government is to protect one’s property.

The second issue I take with this argument is, again, morality is subjective.  What is more moral?  Letting a central body such as government tell producers and suppliers what they can produce and at what price?  Well, if we set prices at a previous equilibrium price where it was cheaper in a time of crisis, we get the problem of necessary goods such as water running out (or becoming more scarce).  If the prices are kept low people will tend to buy water when they don’t necessarily need it or hoard it, because it benefits them and their family to do so.  If you are late to get water there may be no water to be had at any price because the retailer has already run out.  In economics this is what we call a shortage.  But, what comes of that person that came late?  Do they go without water and get sick or possibly die of dehydration?  So as we can see there really is a gray line with this moral argument where it seems no matter which way you flip the coin there is an undesirable situation no matter if it lies on heads or tails.

After all, this is a crisis and most crisis’ are temporary.  Once people begin to flood the market with water after the $15 price signal is sent the price of water eventually begins to go down as supply begins to go up.  So while many are temporarily inconvenienced, the market will begin to work itself out.  Whereas if there was no price signal sent because a price was capped, if college kids, businessmen, or other ordinary people didn’t see the profit that could be had, there would have been little to no supply inconveniencing everyone whether they could afford the water or not.

Often times Herbert Hoover gets the blame for causing The Great Depression during his term.  He deserves the criticism.  However, most of the criticism is aimed at him for all the wrong reasons.  “Hoover did nothing” and he had that “laissez-faire attitude which let the markets fail” seem to be the most often the common complaints from many liberals and even some of today’s conservatives.  In making an argument for passing the TARP bill President Bush and Vice President Cheney told members of Congress they risked being labeled the party of Hoover if they did not pass the bill.  Yet Hoover made attempts at stabilizing prices, fixing wages, instituting public works programs, etc.  One of the worst things he may have done was sign the Smoot-Hawley Tariff Act despite the opposition by 1,028 economists.

It wasn’t that this act created the depression.  The Great Depression would have existed regardless of Hoover’s particular decision on this bill.  But surely, it prolonged it and lowered the living standards of the people during a depression by stifling competition, reducing supply, and raising prices on regular products–especially agriculture–which was the whole point of the Act in the first place as demonstrated from this excerpt from one of Hoover’s speeches in 1932.

Bad as our prices are… you will find that, except for the guardianship of the tariff, butter could be imported for 25 percent below your prices, pork products for 30 percent below your prices, lamb and beef products from 30 to 50 percent below, flaxseed for 35 percent below, beans for 40 percent below, and wool 30 percent below your prices.  Both corn and wheat could be sold in New York from the Argentine at prices below yours at this moment were it not for the tariff. I suppose these are ghastly jests.

Now, the removal of or reduction of the tariff on farm products means a flood of them into the United States from every direction, and either you would be forced to further reduce your prices, or your products would rot in your barns.

There you have it.  The true workings of government genius–keep prices high and living standards low.

Today it is starting to become just as bad.  The CBC reports that a Canadian citizen that sells equestrian products attempted to cross the border to go to a trade show was barred from crossing the border because, according to a U.S. border patrol tax eater, he is, and I quote, “friggin’ stealing jobs away from American citizens.”  Mind you he seems to be actually creating American jobs.  This seems reminiscent of a particular South Park episode.

But that is just one example of fervent nationalism and protectionism shown by an individual border patrol agent, surely they wouldn’t be ignorant enough to further enact more protectionist measures policy-wise, right?

I wouldn’t be so sure.

Tariffs and overall protectionism is far from dead.  The “Buy American” sentiment is in full effect with a provision in the latest stimulus bill that requires all stimulus spending (which if you haven’t noticed I oppose) to come from American manufacturers.  On Bush’s way out he raised the tariff on Roquefort Cheese from France to 300% from 100% (originally put in place by Clinton) because of “persistent sales despite the 1999 levy” (President Obama has delayed this and will hopefully repeal it).  Tariff disputes between the U.S. with China and Mexico have caused the countries to retaliate or threaten retaliation.  Russia has raised tariffs on it’s used car sales, China has tightened the food trade, India is not taking toys from China, and many other countries are pursuing the similar strategies.

I do not doubt this is bad news as free trade has always made nations more prosperous and these tariffs do nothing more than to raise funds for governments while raising the prices on regular consumers within the countries that impose them.  If governments want to help the people within their respective nations during this economic hardship they would be wise to allow individuals from other countries to trade freely without barriers and, ideally, without treaties.  It’s unfortunate this mindset still exists in today’s global world, but as long as the people remain ignorant of the benefits of free trade, namely cheaper prices and job creation, and politicians are willing to give into the people’s populism and display their own nationalistic tendencies we will continue to see this mentality far into the future.

To send you off, I leave you a quote from Ben Stein’s character in the movie Ferris Bueller’s Day Off, “The Hawley Smoot Tariff Act … did it work? Anyone? Anyone know the effects? It did not work, and the United States sank deeper into the Great Depression.”  Gee, thinking about it I learned a lot from that movie while growing up.

The U.S. dollar has reigned supreme in the world’s market for the last several decades and has long been considered one of the most stable investments.  However, the financial crisis facilitated by the Federal Reserve and the federal government has put into question the stability of those investments over the past several months or so.  One of the things that have long scared me is when the Asian countries, specifically China, get sick and tired of holding the U.S. dollar.  Talk has been buzzing that China’s many investment firms and central bank officials have been weary of continuing investments in the U.S. dollar, and even getting out of it entirely.

It appears my fears are not unfounded according to the Financial Times:

China’s central bank on Monday proposed replacing the US dollar as the international reserve currency with a new global system controlled by the International Monetary Fund.

In an essay posted on the People’s Bank of China’s website, Zhou Xiaochuan, the central bank’s governor, said the goal would be to create a reserve currency “that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies”.

Analysts said the proposal was an indication of Beijing’s fears that actions being taken to save the domestic US economy would have a negative impact on China.

“This is a clear sign that China, as the largest holder of US dollar financial assets, is concerned about the potential inflationary risk of the US Federal Reserve printing money,” said Qu Hongbin, chief China economist for HSBC.

In a later paragraph the article implicated that China would have to continue to hold it’s two trillion dollars as reserves, but I don’t see why they would have to do anything.  They can trade for other currencies, but who would want to do that?  No one I know of.  Instead what they may do if they wanted to get out of the dollar is buy U.S. assets and companies.  I’m not a protectionist nor a fervent nationalist, so foreign countries owning U.S. based assets wouldn’t bother me.

What does bother me however, is the fact that this action would flood the domestic market with potentially two trillion U.S. dollars driving down the value of the dollar and driving up prices.  If other countries followed suit, like Japan who holds nearly as much as China in U.S. Reserve, that could only magnify the effect of the weakening dollar and could set us on the course for hyperinflation.

If we combine this with the policies in effect, and the Fed’s plan for “quantitative easing” by pumping billions, possibly trillions, more dollars into the market we are probably in for a bumpy ride.

This weekend’s edition of the Wall Street Journal has a short interesting article on the Federal Reserve titled “Fed Doesn’t Need a Press To Print Its New Money“.  In the article the author mentions how the Fed creates money with a virtual keystroke and not much else.

The Federal Reserve has been able to inflate its reserves 259% over the last seven months from $3 billion to $776 billion with very little need for the printing press. Considering the notes themselves only have risen 8% how is it possible for the Federal Reserve to do this? According to the article the Fed “purchases securities or other assets from security dealers in exchange for electronic credits that amount to cash and are deposited in banks”.

Also, the Fed also plans to purchase as much as $1.25 trillion of mortgage backed securities backed by the government owned Fannie Mae, Freddie Mac, and Ginnie Mae. Along with this it also plans to make purchases of debt issued by Fannie, Freddie, and Ginnie, along with $300 billion in long term debt issued by the federal government to the tune of $200 billion and $300 billion respectively.

It is pursuing this course in hopes to drive long-term interest rates down making mortgages cheaper. At the same time this plan will also, in theory, drive the pricing of houses and other assets up due to the cheap money altering people’s time preferences  which will create a higher demand for housing and push these asset prices up.  Higher demand is not the only force driving the prices up.  After inflating the money supply for so long there must come an eventual weakening of the dollar. 

The plan may succeed in creating a potential, but most likely, effect of higher consumer and producer prices (overall asset prices) and making our paper dollars essentially worthless while at the same time creating the moral hazards of putting people into loans with rates they can afford now but may not be able to afford when interest rates go back up and their loan terms reset.  Thus setting us on a course that can only deepen and prolong  our economic woes further.

But not to worry. Chairman Bernanke is on the case! When we start coming out of this depression the Fed will start pulling the money out of the market at that exact perfect moment before inflation does any harm. Give me a break. I’m beginning to think the Chairman is taking his market cues from Dr. Gideon Gono, the current Governor of the Reserve Bank of Zimbabwe.  Refer to the wonderful Marc Faber below.

This weekend Newsweek put up an article on their website by Daniel Gross titled “Stop Saving Now” which echoes the calls of the likes of Paul Krugman, Ben Brenanke, and the Economist that I mentioned in my earlier post on Mr. Bernankes comments to the Council on Foreign Relations.  In the article Mr. Gross makes the argument that people need to take on more risk and start spending, “otherwise we fall into what economist John Maynard Keynes called the ‘paradox of thrift.’”   The only way to get out of this economic mess, according to Gross, is for the American people to spend once again.

To understand where Mr. Gross is wrong we must recognize two things: what caused this economic mess and what savings is.  To do this let us look at this bubble torn economy.  It has been riddled with debt for the last decade or so with the idea that mere consumption would create prosperity.  The American people took on huge loans to buy houses with the assumption that real estate created wealth and treated it as such by taking out mortgages as if their homes were ATM’s and that this money was indeed wealth created by their home as if it was magic.  What most people don’t understand is how the Federal Reserve and the government facilitated this.  Through legislation such as the Community Reinvestment Act banks were forced to give loans to people not credit worthy or they would not be allowed to expand and their business practices greatly stifled, so they complied.  Along with this the Federal Reserve had held interest rates to extremely low rates which gave even more incentive for people to take loans at these abnormally low rates before the interest rose.

These actions by the Fed and Congress forced banks to take on more risk while the low interest rates and easy money incentivized risk for home buyers.  As more people found their way into houses housing prices began skyrocketing well beyond sustainable levels, again sending abnormal signals to banks, home buyers, and homebuilders that there was real wealth in real estate.  What happens next is these low rates begin to reset, the teaser rates end, and people realize they no longer can pay for their homes.  Pop goes the bubble.

However, this does not stop just at homes.  This same situation goes for credit cards, student loans, car loans, loans to franchise owners of bubble businesses like Cold Stone Creamery and Starbucks, and the like.  The Federal Reserve’s easy money policy has extended to all debt by way of fiat and low interest.  Something that would have never happened if on a currency such as gold.

So now some people are slowly getting their sanity back and realizing the bubble mistakes were doozies.  Unsustainable lending and borrowing leads to an unsustainable consumption, seems like such a simple concept.  Regardless of all the intervention and credit the government is trying to offer markets people are finally getting their senses back and their time preference is now heading toward, while probably not quite there yet, a sustainable level.  People are now realizing that instead of putting that “next new thing” on the credit card, or taking out an eighth mortgage to pay for it, maybe they should save up instead.  People are finally saving up for future endeavors whether it be a business of their own, or education, or a home, or a car, or whatever their next big purchase may be.  This is a good thing, this is the idea of time preference after all, and is the realistic, ideal, and sustainable way of purchasing items.

What’s so bad about savings?  After all isn’t that what capitalize banks?  Why does no one realize it’s people’s savings that banks loan out to entrepreneurs and businessmen to create new businesses and expand existing businesses. It is the savings that builds up the very foundation of a stable economy, not the overwrought and irresponsble spending of consumers.  Why is Daniel Gross not praising the new found thrift of Americans?

In The Michigan Daily Vincent Patsy makes a good argument for liberals to love the free market rather than despise it as they so often seem to do.  Liberals try to use the market to make the argument that government must step in and distribute wealth rather than having the free market distribute it.  But Patsy finds that this comes in conflict with the idea that we have rights over our property, namely our body, while the ownership of our other property, whether it be money, capital, or land, is subject to the whims of government.

They seem to separate the idea of individual freedom with economic freedom as if they are two separate entities entirely.  But they are not.

If we are to believe that we can separate economic freedom from individual freedom we are no longer expected to be free individuals at all.  No longer do we have the ability to pursue our own needs, wants, and desires through the free market system.  Rather we must entrust this task with governments who have no interest in our individual goals but have an interest, at best, in the whole, and at worst, interest in interest groups which may only prove to harm individual goals and wealth.  If we are to pursue the goals of the whole we no longer respect the rights of the smallest minority, the individual.

I do not think their collectivist ideas, goals, and the means which they attempt to achieve them are all that convincing.  We’ve had liberal government since the end of World War I, and we’ve had government ever so encroaching into our business and our property, yet we have yet to eliminate poverty.  Instead we’ve created a larger gap between the rich and the poor.  Some liberals will argue that this is because we haven’t stuck to liberal policies.  But I challenge them to show me any time period since World War I we’ve ever had a free market economy or anything close to such.  It simply has never happened.

I think part of the reason why liberals shy away from the free markets is because they have this notion that capitalists, or the rich, are always trying to take from the poor or the working class through the vice of greed.  It’s the essence of class warfare that keeps them going on with their philosophy, but I think the heart of the problem is that they misunderstand the economic argument. It is the rich who employ the poor, who create the economic calculation which allows economies and peoples to prosper, and create our social structure which allows us to pursue our individual goals.  There seems to be no attempt to rationalize this on the sides of liberals.

Indeed Patsy makes a good argument for liberals to at least think about their individual ownership ideas and how it may come in conflict with their economic philosophy.  I’m hopeful he, and even myself, can get across to some liberals. He left them with this quote by Isabel Paterson: “Most of the harm in the world is done by good people, and not by accident, lapse, or omission. It is the result of their deliberate actions, long preserved in, which they hold to be motivated by high ideals toward virtuous ends.”  Like Patsy, I do not doubt liberals devotion to a higher ends, but we must remind them that their ideas come into conflict with individual liberty and the idea of self ownership if we wish to get the message across.

Watch it live at the Mises Institute’s UStream.tv channel.  The schedule is below the chat.

Someone is Twittering the conference on Mises’ Twitter account.