[Money: Fractional Reserve Banking Is Fraudulent]

so are you saying that fractional reserve banking is what takes place now...with the federal reserve and commercial banking system??

There is a clear distinction between actions by the government and actions by private individuals. While there are similarities between what the Fed is doing and what a private bank could do, the cause and the consequences are different. I assume that you know what the Fed is doing, at least in general terms.

A private bank might offer part of its demand deposit accounts (checking account deposits) as loans. Effectrively, it would increace its demand deposits by loaning money. It would thus have only a fraction of its total demand deposits as deposits of gold. There is still a limit on the amount of funds that can be in the system, the total amount of gold. A bank loaning out part of its demand deposits would need to make clear to all what it was doing, to avoid acting fraudulantly.

That is the effective difference with the current system, in which there is no limit on the amount of made-up money that the Fed can create, which it has done for decades.

[Oil, commodities, asset boom, then bust]

If you think they have a plan to unroll everything for a soft landing, just watch the fireworks that are already starting in White House discussions on the economy and banks. Giethner is in revolt over the new bank policies, and Bernanke is close to getting the boot. Who do you think Obama will nominate in his place? Paul Krugman, maybe?

Some suggested Reicht (sp?). Whoever BO comes up with, he will be bad, worse than what we have, which is already pretty bad.

I agree that the "unwinding" is going to be anything but soft, not even the make-believe god could effect a soft landing. The question is what is going to happen afterwards. We need to be ready, because the people in office are going to again blame capitalism and we could have a even stronger government in place in no time.

[Government "Production"]

I was reading my economics book and it says that production can be done by the government. Which got me thinking that the claim is often made that government can stimulate the economy by creating jobs (that is, producing something). More specifically, I often hear people say/argue that if the government builds roads, it both produces something and creates jobs. Why are these claims false? Or are they true, but just immoral?

Thanks

Whenever the government does "produce" something, the reason is that it believes that the market will not, and that the government's judgment is better in some respect. But when resources are diverted, necessarily, the consumer's interests are ignored and negated, and thus the standard of living declines. The government has no capability to make better decisions than the market. That is why, for all of the pretense, building roads, bridges, etc., is not production but consumption, maybe distruction. If the economy was free, roads would be built, and bridges, too, but the ones that were built would be chosen because they were meeting consumer interests, not what the government, and ultimately the politician chose. The politician made his choice based on his own political or personal interest.

A good source for the history of all of this is How Capitalism Saved America by Thomas J. DiLorenzo.

[Minimum Wage]

This might be a little bit off topic for this, but I am going to go ahead and ask it here.

Currently in US History we are learning about the construction of the first transcontinental railroad and the creation of what was deemed the first "monopoly" under these railroad companies. Basically long range trips were subject to transportation and short range trips were not, therefore there was a travel monopoly.

Now, my teacher is actually a capitalist, but he claims that this is the issue with the free market, aka that is lets monopolies form unchecked, and therefore requires regulation.

After reading Capitalism TUI and other various Rand excerpts on monopolies, I am not really sure how to explain that he is wrong to people in layman terms.

There are so many myths about capitalism, many of them accepted by people who regard themselves as proponents of capitalism, that are not true. False. In fact they were made up specifically to attack capitalism. This is one of the examples. There was no monopoly in trans-continental railroads. There were several. Most were supported by government subsidies which basically killed them. They all went bankrupt. The owners and managers did not feel it necessary to concern themselves with costs and legislators smothered them in regulations and requirements. J.J. Hill built a railroad without subsidy, concentrated on costs and good management and succeeded. He worked on providing service and making money.

If you are going to talk about the history of U.S. capitalism, do not rely on standard sources or college courses. You need to look at writers who go back and look at original material. One great book is Capitalism and the Historians. I had a copy at one time. It was a well researched account of the biases and lack of scholarship in the historians of the 19C. A very good recent book for U.S. economic history is How Capitalism Saved America by Thomas J. DiLorenzo. It discusses many of the myths of capitalism.

Regarding your example of the company town, again, I think that if you look at actual history, the factor owner wants to be successful. He wants the best employees he can get and he wants them to be as productive as they can. His cost is not his per hour wage, it is the cost per unit sold. Your problem here is that you are unfortunately thinking like a liberal, not a businessman, not like a real businessman, as opposed to someone who wants Washington to do everything for him.

The charges against capitalists from the 19C, monopolistic pricing, driving people out of business, making people, including children, work in health-destroying conditions, have never been supported by evidence. Do not accept arguments based on "everybody knows that". They don't.

[Fed bashing: a waste of time, contexually]

I do agree that attacking the Fed directly is not the best use our time. The thing I found most frightening about Bernanke's speech on the 2nd was the reasoning methods he used to defend himself. They are expressly designed to ignore and obfuscate reality. He couldn't find today temperature with them.

Understanding the Fed helps you understand the world in which you live. It gives you an idea as to what is going to happen to you and your family. Most of the reason to watch the Fed is self-protection.

Knowing what the Fed is doing and being able to express it also helps stop the politicians and regulators when they attempt to expand their power. They blame capitalism. Each of the last two asset balloons and busts have been used as excuses to expand regulation and market restrictions. You can't argue successfully against them if you do not clearly understand what happened. Knowing U.S. economic history also helps, which is why I keep pushing How Capitalism Saved America by Thomas J. DiLorenzo.

So, I agree, Fed bashing isn't real helpful. Pointing at reality always is.

[Stuart Hayashi vs. Peter Schiff on US manufacturing]

I think we can agree with much of Schiff's message, e.g. that govt stimulus creates manufacturing in areas where the market would not necessarily have created manufacturing, and that the market may inevitably shut those sectors down on the road to true recovery. Until I see him elaborate on what he means by the need for more manufacturing, I will withhold judgment, since it's not vital to his argument. I have too often seen the govt numbers turn out to be manipulated or otherwise inaccurate, so while Stuart's argument is compelling, I must wait to see the strength of the counterarguments, if any.

This not really an area for argument but for fact. I suggested to one of the Schiff supporters that they get a copy of Thomas Register where they live and look up the manufacturers. Go see what is happening. The Chamber of Commerce and other organizations could help. The people on this forum arguing for Schiff talked about what they could think of, which is not providing the evidence.

A very large percentage of U.S. exports are manufactured goods, with a large percentage of that being capital goods, which is one of America's fortes. Many of Schiff's arguments are, as noted by sNurd, exaggerations, e.g., the only example of a service job that he provided in his book was the burger flipper. He seems to jump to conclusions. I reviewed both his books and did a commentary on both.

There are several places in his books that he says that we need more manufacturing. One place he says that we need more manufacturing for export, which I still can't figure out. Each spot was an excellent opportunity to at least give some idea of why he wrote what he did, but there was nothing. This unwillingness or inability to offer explanations or evidence seems to be Schiff's standard approach. It was frustrating. It is one reason that I doubt that he understands Objectivism and what reason means. Since he hasn't offered support for his positions yet, brian, I wouldn't hold my breath. On the other hand, if you see something from him that does explain these positions, be sure and share them.

[Objective Money]

Interestingly enough, in the 18 pages of threads returned on 'Dollar Definition' - and I admit, I have not waded thru the volume of posts here, surprisingly enough in an Objectivist community I have yet to run across the definition of a dollar. It appears to be a 'floating abstraction' having it ties back to reality severed back in 1913, and once set adrift, has been floating off higher up into the ether.

Philosophic versus Economic issue - does the dollar definition fall on the line bordering the two sciences much like Dr. Harriman suggest that the definition of space is a philosophic point in the science of Physics?

Good point, Dream Weaver. I hate it when someone doesn't offer definitions, especially an Obj. writer.

There are two ways that your question can be considered, I will talk about the one I don't think you meant first.

A currency (real or fiat) is specifically the promise to redeam the money for goods. A currency has no meaning without the ability to buy stuff (which is a technical term, really, I think). So, a definition of a specific currency like the dollar would be the amount of stuff it can buy. But for any specific currency that is a fiat currency, that meaning is going to change, decline, continuously, and thus has no real identity. When I used to give seminars I told people that when they think of their finances overtime they needed to think in terms of stuff, like bread or tires or something that they were familiar with or interested in.

The second, more fundemental meaning, which I mixed in above, has to do with money as a meduim of exchange. Whatever the medium of exchange is, and whatever the ratios between it and the goods in the economy are, it functions the same way in all circumstances. So it isn't the "dollar" per se that you want to think about, it is currency in general. The definition is then that substance which participants in an economy are willing to accept as a medium to be used for exchange, indirectly, instead of the immediate, direct exchange of goods (barter).

Since economics does need to consider barter as part of its domain, currency, that is, money, is not a starting point, unlike the concept "space" that you referenced. Economics doesn't start with money, but with human needs and the process in which people organize to meet those needs, e.g., through production, etc. Money, once it is introduced into an economy, then becomes central to the science.

[Fed bashing: a waste of time, contexually]

Political activism in general is a waste of time. What fundamentally decides a country's direction is the way people think, hence the focus of ARI and other Objectivist organizations on academia. It's a total waste of time getting a bunch of pro free market, pro individual rights politicians elected if the people can change their mind in 8 years and roll it all back again.

I agree with you, philosopher, in every fundamental way, that to achieve our freedom we need a philosophical revolution. We will not be safe until that happiness.

I do see two lesser roles for political activism, which are worth pursuing in our context. One, if there is momentum on the philosophical side, some political arguments will help concretize the points. I don't think that we are there exactly, but there is some momentum for us, why not push it as much as we can.

Second, and more personally important, is that we need to keep the country alive in working at least moderately well while we work on our philosophical battle. I think that is what is happening now. Unless we want to let it all go down hill and Shrug, we need to keep the thing from sinking to far down. It will also make living less hard as well.

[Fed bashing: a waste of time, contexually]

The housing "crisis*" in the US has directed a more popular anger toward the Federal Reserve and had even popularized (relatively speaking) the notion of curtailing or even eliminating it's presence. Ron Paul, people say, is looking a little less loony because of his years-long crusade against the Fed.

The popular tag-line being circulated is, "the Fed caused the housing crisis" and/or "if we return to a gold standard we won't have asset bubbles or (whatever else you don't like)".

This has in turn prompted a lot of very useful energy to be directed against the notion of the Fed as intellectuals pile on, hoping to achieve a long-awaited agenda wherein we all start speaking Austrian when we attend economics class.

What a waste of time.

While it might be true that Fed policies surely lowered interest rates, which in turn might have helped speed the housing bubble's inflation somewhat, there is nothing to support that the Fed or its policies created the crisis. If you understand the root causes of the housing bubble, you can see that it would have happened just the same in a Fed-less country on a gold standard given the same conditions elsewhere (viz. congress and the realtor-banker industrial-complex).

OP

I find there is maybe something of value in your post, but minimally. Certainly, if there is an issue that is something that you wish to expend your efforts upon and have the knowledge, time, and, energy to do so, go for it. We would help where we can, I am sure.

However, your comments about the Federal Reserve Board and it Chairman, are not accurate.

For example, I did read that speech by Ben Bernanke on the 2nd, closely. I must have missed his argument about other parts of the economy and the interest rate, so I would appreciate your showing us the quotation. However, if he did mention that point, he would have been wrong. Completely, utterly, morally, economically, concretely wrong. Low interest rates were bad for everyone. As Yaron Brook said on PJTV last week, the Fed’s effort to pick interest rates is always wrong, and Dr. Brook meant that it was wrong for everyone.

Speaking of Dr. Brook, he suggested that if you wanted to understand the mess surrounding the house prices, you should read Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse by Thomas Woods. I can say, having read the book, that it is worth the time.

The reason why Dr. Brook and the Austrian School of Economics (and I) focus on the Fed is that it is the most powerful actor in the economy precisely because of the Fed’s role in causing inflation and the business cycle, which is the cause of the most recent push to expand government power.

I wonder, OP, if you can clearly state the reasons why these people are concerned with the Fed? The reason I ask is that so few people these days think that it is necessary to understand what they are criticizing. I don’t know you or your background. You say things that you would know are blatantly not true if you knew what the arguments were. What is blatantly not true? “…there is nothing to support that the Fed or its policies created the crisis.” There is lots to support the claim. Where did you look to see if there was support?

There are two primary factors that gave rise to the rise in house prices, in addition to the apparatus set up to securitize the mortgages and leverage their acquisition. Woods goes into all of the history in detail, including several secondary issues, but I will mention the primary two.

For more than two decades the federal government, in many different capacities, has waged a campaign to expand home ownership. One of their themes was that the credit requirements for mortgages should be lowered. The Fed participated in this campaign to lower credit standards with jawboning and literature aimed at their member banks. For Bernanke, in his speech on the 2nd, to criticize the banks for following through with what they were told to do by the government is shameful.

But most important, and my entire reason for writing, is the role of the Fed as a creator of inflation. If you have any background in Austrian economics, including the economists influenced by Objectivism, you know that inflation is the major, underlying problem with government interference in the economy. The rest of the wrongs they do couldn’t get far without the control of the money supply. In our country, the money supply is controlled by the Fed.

You mentioned interest rates, OP, and that the Fed kept them low, as if this were a minor thing. This is what Bernanke did in his speech and does in his standard set of comments. These people do not refer to money or money supply. They want you to think of interest rates. But, OP, how does the Fed maintain low interest rates? There is only one way. They do not pass an ordinance declaring anyone who charges a higher rate to be guilty of a crime. They decide that they have a goal for their short-term overnight federal funds rate. It is a goal that they instruct the trading desk of the New York Fed to work to achieve and maintain. Right now that goal is between zero and ¼ of one percent.

The trading desk then must do what it can to keep the overnight rate low. How does it do that? Everytime the rate begins to go up, the trading desk, through transactions, purchases in this case, put money into the accounts of the member banks. Where does this money come from? The Fed makes it up, creates it out of thin air.

For the period of time, from 9/11 to today, the Fed has kept interest rates below market level. All of that time (and before, too, really) the Fed has been putting money into the member deposit accounts at the Fed. These are special accounts. The law requires every Fed member bank to have (the current rate of) 10% or its demand deposits in its Fed account. Or conversely, the member bank can have as demand deposits a ratio of 9:1 of its Fed deposit. The Fed puts money into a bank’s member account, the bank has more reserves, it can loan out more money. It doesn’t work out exactly that way in practice. But this is in principle the process that the money supply has been expanded from $1 T in 1982 to nearly $10 T today (MZM). The money the Fed creates gets into the credit system and lowers all rates, including longer term ones, like house mortgages. The only thing that might counteract the increase in the number of dollars floating around would be an inflation premium on longer-term loans. That premium wasn’t there over most of the last decade. It is now to some extent.

The question to you, OP, is, how did the prices of houses increase year after year without the Fed? It is only through inflation that prices in any sector can expand continuously, year after year. Such a series of rises is the hallmark of inflation, of additional amounts of money being created regularly.

In his speech Bernanke suggested that the money came from developing countries, which he did not support with evidence. No evidence has been provided for such a claim that I have seen. But, you know, even if it were shown that dollars had come back from overseas into our capital markets (at very low interest rates? really?), the question would still be where did that money come from. The nearly $11 T in dollars held overseas, an increase of $10 T since 1982, is made up money, by the Fed. We have been exporting our inflation like crazy.

The point that Woods makes in Meltdown is that the expansion of bank credit, which goes directly to businesses or assets (like stocks or houses) is the beginning of the business cycle, and begins the distortion in pricing and asset allocation that inevitably leads to the bust, and thus the calls to further regulation. Woods refers to this as the Austrian Theory of the Business Cycle. The Fed, as the source of inflating bank credit, is the primary source of difficulties in our economy, and thus a natural target of people who wish to win back their freedom.

[Healthcare and Life-span/life-expectancy]

How would you guys argue against this claim: Countries with single payer systems are more efficient. People living in Australia, Canada, France, Germany, Japan, Norway Sweden, England etc. have a life expectancy that is about 3 year higher than in the U.S. However, these countries spend half as much of their GDP on healthcare as compared to the U.S. Their per capita expenditure is also about half that of the U.S."

I tried to point out that those countries ration healthcare considerably, violate individual rights, and that anytime the government gets involved in an industry it becomes hugely less efficient, but the person I'm argueing against ignores these points. Are there better ways I could present my argument to make it clearer/stronger?

Thanks

The idea that government bureaucrats can be more efficient than the market has been argued for more than a century, but every, repeat, every such effort has failed, and failed badly.

"Efficiency" is what they mean by central planning, planned economies, socialism, communism. "Efficiency" was what was admired in Soviet Russia for many years.

The criticism of central planners is one of von Mises' many achievements, read Socialism or Planning for Freedom. I am sure that Andrew Bernstein and George Reisman have good passages as well. I recently finished How Capitalism Saved America. It has many examples of attempts to establish central planning for the purpose of "efficiency" in the United States, and their utter failure.

As von Mises pointed out, a "planner" is not any more intelligent than anyone else. He is (or they are) incapable of determining what to provide to whom at what price thousands of times a day. The result will be exactly like the Soviet experience of having plenty of brown left shoes, but no right ones. The market looks inefficient because it has many actors. To the person who wants power it looks like chaos. But is people acting on their own behalf, seeking their own values, cooperating with others. It is very efficient.

Another point to remember in these discussions is that what we have now is not a free market. It is terribly regulated. Further, the inflationary effect of the Medicare expenditures has distorted the medical sector. That has gone on for over 40 years. Anyone born after 1950 has no idea what a fairly free market for medicine might look like. Regaining freedom for medicine will require ripping out an amazing amount of garbage. If you haven't read Dr. Peikoff's "Medicine: The Death of a Profession", do so. It has a wealth of background and ammunition.

["Freedom is Overrated"]

Agreed.

From Capitalism, The Unknown Ideal:

Most people believe that free enterprise is a controlled economy allegedly serving the interests of the industrialists—as opposed to the welfare state, which is a controlled economy allegedly serving the interests of the workers. The idea or possibility of an

uncontrolled economy

has been entirely forgotten and is now being deliberately ignored.

-Ayn Rand, NOTES ON THE HISTORY OF AMERICAN FREE ENTERPRISE

It is why it is the "unknown" ideal... Good observations about the internet btw, I hadn't thought about it that way before.

Well, slap me silly. One of my most favorite books and the title, or for that matter the concept, just didn't connect. If I have an excuse, which I don't, it would be the passage of time. Thank you, freestyle, for giving me the slap. I do appreciate it. It's now back to by blog and doing a little update/change/wipe-egg-off-my-face kind of thing.

What I can say for myself is that I am emphasizing the importance of telling people what it is, in addition to disseminating the vital knowledge that capitalism is moral.

[Possiblity of hyper inflation / economic collapse]

What do you guys make of the possibility of hyper-inflation in the US?

Worrying about hyper-inflation is not really the question that we should be concerned with here. In fact, worrying about consumer goods prices takes your eyes off the ball and plays into Bernanke's hands.

I will say that the quotation from Schiff about the Fed is spot on. Schiff has major problems with many issues, but he has the Fed nailed. His recent blog post about Bernanke's Jan. 2 speech was also excellent. My point here is that the Fed and the Treasury, with the Obama programs coming on line are going to soak every available real bit of savings that we may have into the government and you will see that we did have manufacturing capacity, because it will go belly up in many significant ways. Manufacturing is where most of the job losses have been. (The thing that bothers me most about those who are ardent Schiff followers is that you do not demand that he prove his claims. That he claims something seems to be enough. It is as if you haven't learned anything from Ayn Rand. Insist that anyone who wants to convince you connect his claim to reality.)

The economy was severely damaged with this last "business cycle" and it is offering a major opportunity for more and wider regulation in the economy and our lives. Here's the deal, it was all caused by inflation, made-up money. One of the major lessons from von Mises and the Austrians is that the impact of inflation begins where it is introduced into the economy. In our economy, inflation is introduced via credit expansion, primarily to businesses (some consumer credit, too), and thus the "business-cycle". To get a very good idea of this last one, involving house prices, read Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse by Thomas Woods (my review). You Schiff people will like it because he positively mentions Schiff three times, for good reasons, too, I think. Inflation does a lot of bad things besides run up consumer goods prices.

If you want to look further down the road, we have guaranteed problems coming with social security and medicare. Those demands upon the federal budget make our current (justified) worries about Obama's spending look small and insignificant. That is why John Lewis sent out his warning. I will take John Lewis over Schiff any day.

Bankers aren't loaning money because they are being bankers. It is necessary to know something about a subject in order to understand it. I don't know everything, but I do know some. I can say that bankers want to build up their capital and loan-loss reserves before lending much again. They want to not just survive, but make profits. They are also skiddish about other banks, and are not willing to accept other bank's paper and guarantees as they did two years ago. Banks are also having trouble finding people to loan to who meet the credit standards that banks want today, which are much more strict than they were just a couple years ago. Those standards do not expect the rosy picture that Obama wants them to assume. Finally, banks are getting interest paid on their fed member reserves. A guaranteed, albeit low, interest rate, guaranteed by the people who can make up money, is a far better deal than loaning the money to some business that has to work to make a profit. To the banker, it is a very risky world out there, especially when everyone, including the government is yelling at them for being too risk-taking at the same time they are being yelled at for not taking enough risk today and make loans.

I read Bernanke's speech and wrote about it. I thought that he was out of touch with reality and power hungery before. Now, however, I am almost frightened. There was the attempt to absolve himself of responsibility for the rise in house prices and his call for more regulation, all of which I expected. But what I was amazed about and what convinced me that he is completely cut off from reality is the "scientific" evidence he used to justify his positions. Those techniques would never permit a mind to find the causes for events. They are designed to do the opposite. Well, I read the speech so you don't have to. I am sure that eventually I will heal .

["Freedom is Overrated"]

"Freedom is Overrated"

This is a statement I am hearing more and more from people, some of them even people I like.

It really never occurred to me that otherwise rational people could believe such a thing.

When I question them about their statement what I get tends to be something along the lines of:

"I would rather be fed, clothed, housed and happy than be free"

To me, this statement puts a person on par with.. say... a house pet.

How does one respond to such a fundementally twisted view?

I, too, was somewhat confounded by the fact that someone, someone in the United States, would say that freedom is overrated. The idea is preposterous.

Then, today, I was reading How Capitalism Saved America by Thomas J. DiLorenzo (which I highly recommend). The section I was reading concerned the oil industry and how extraordinarily regulated it is, the fullness of which I hadn’t known. My mind went to other highly regulated industries, including the medical sector of the economy, and it hit me that few people know how regulated the economy is (and then I thought of this thread).

Actually, people are told that they live in freedom. They think that we are free, that our economy is free and it's the market, the free market that's producing the messes we see. No wonder that they think that freedom is overrated. What they and we live in is overrated. They just don’t know that it isn’t freedom. Who is going to tell them? Not the government, not the “media”, not (most) college professors, not their kindergarten teachers. Who is going to tell them? There is only us.

There are some successes today. I thought of the internet.

The internet was allowed to spring forth because it was created in a university and military-oriented environment. Think of what would have happened if it had been conceived in a private company. It would not have been allowed to exist. Government would have shut it down. Today, people think of it as free, in both senses of the word. They ignore or don’t know the fact that a multitude of private companies make the internet possible and that the companies are profitable. Funding comes from normal business activity. It may have been conceived in universities, but its success comes from private enterprise. Actually, this is a truism. It is successful. It could not be government that is operating it. Government could not, cannot operate it. The internet would fail, for so many reasons, if the government ran it.

So here is the inversion, which we shouldn’t be surprised about. If something works, the government takes credit, but they didn’t, couldn’t actually achieve success. If it fails, it is blamed on free enterprise, even though it was the government who caused the failure. That’s what people think. We have got to tell them different, don’t we?

[Federal Reserve creates Term Deposit Facility as tool for withdrawal]

On one point, I agree with you sNerd, the question is what is the Fed going to do and when. Not only will they have to have the will to see interest rates rise, they will also first have to convince themselves that taking money out of the economy is actually a good idea. Even when interest rates start rising, how high are they willing to see them go? I mean, short-term rates are next to zero. Long-term rates are higher because of inflation scares. The Fed is going to have to go a ways to break the inflation fears, but by then rates may have gone up a lot. I also don't think they have the nerve, especially when B.O. and the Congress start seeing their interest costs going up and start complaining.

Bernanke has made clear in many ways that he is a "put more money in to solve all problems" kind of guy. His take on the Great Depression, as a academic student of that period , is that it was all the Fed's fault because in 1930 and 1931 the Fed did not flood the country with money. I don't think that he really wants to take money out of the economy, no matter what he says.

He made a speech this week in which he said that the rise in house prices was just coincidental with his policy of low interest rates. Those low interest rates were necessary because of the 9/11 shock, apparently for more than 5 years. The guy just wants low interest rates and lots of money flowing which is all good. How he thought house prices rose continually as much as they did would be interesting to learn (in a purely pshchological sense).

I don't think we need to worry about the next bubble, at least not yet. We are a long way from being out of this bubble's bust: housing will still go down, unemployment is really still rising, banks are not lending, the dollar will continue to fall, the government is taking every available saved dollar out of the system, the money supply is growing fast. The only bright spot that I can see is that business are doing all they can to be profitable. We are now over a year into the recession and although the government has declared it over, the actual recovery has yet to finish. I think 2010 is going to be bumpy.

Regarding the Fed's role, I am not sure I agree with you, sNerd. I think that whether the Fed is the driver or not depends upon the chairman. Greenspan kept the money flowing while the Pres and Congress were in surplus during Clinton's second term. He fueled the tech stock boom. The problem with the Fed is that they have no constraints. It is purely rule by man, not by law. They can do whatever they want.

Brian, if Bernanke continues to throw money around has he has, you are probably right, the swings will blow us out of the water. This "recovery" and "stimulus" program is about as extreme, spur of the moment, reality defying as to be beyond what anyone could imagine. It was a set of circumstances that a somewhat unusual, but our economy is complicated enough that other industries could have similar effects if they were to blow up, too.

[The Free Market (can be) Corrupt]

I still think a lot of the failure occured on Wall Street. The fraudulent 'predatory lenders' needed capital from somewhere. Risk assessments were made that assumed an impossible and historically unprecedented growth in home values over time. These mistakes did not require distorted incentives from government intervention.

My point overall was that there shouldn't be a dichotomy between how people and economics and incentives change depending on whether a market is laissez-faire or regulated. People are people in every sector of a society.

Integrating it all, I have this to say: the free market does not guarantee prosperity. Take the example of the United States during its most free period of economic development.

There was a high level of idiocy on Wall Street. But remember, these people were trained by the same ones who trained the government leaders and regulators. They all agree on the program, in principle. They all do not realize that made-up money will have an adverse impact even if consumer prices aren't rising.

Government intervention is a wider concept than direct regulation. The Fed's activities have economy wide affects but also hit specific markets. If a market goes up 30% a year for several years, it is because of inflation. There are at least three areas of the economy that have gone up significant percentages for decades that can only do so because of inflation, but are not considered as inflation by the people you mention. (1) The trade deficit (the deficit itself is not a result of inflation, but the money accumulated overseas is, $11 T, is all inflation) and the accumateded dollars overseas, (2) annual increases in medical expenses of over 10% a year for decades; (3) annual increases of 7% a year in higher education. Without constant increases in the amount of "money" every year, these increases could not happen.

You did not mention the importance of prices in economic decisions. When the interest rates are held at a low level no one can make good decisions, even if the understood what is happening. Prices are cognitive tools. When prices are manipulated, the economic mind, if you will, is short circuited, undercut, destroyed. When interest rates are kept low, the boom will happen, and the bust will result. It is cause and effect. Von Mises was the only economist who foresaw the result of the roaring 20's.

I am confused by your statement, "Take the example of the United States during its most free period of economic development." My understanding of American history is just the opposite. Please expand your comment and tell me what period you had in mind.

For a good source to read, there are several good sources. I first read Human Action at age 18. In fact I had read it twice and much of what Objectivism had to say about economics before I went to college and got my BA in economics. I have always said that I forgot more economics in college than I learned. I would suggest starting about 150 pages into that book (really). It would be good if you can get hold of some of the works of Bastiat. If you can't easily find von Mises, read Capitalism, by George Reisman. Years ago I heard several lectures by George and he is good.

I have come to consider knowing American economic history as vital. Many of the arguments against capitalism depend upon completely wrong history. I am reading How Capital Saved America by Thomas J. DiLorenzo and can recommend it. I like that it is organized by subject. Read the articles on economics in The Objectivist Newsletter and The Objectivist.

You said that a free market does not guarantee prosperity. I am not really certain what you are saying in your remark. My statement is that if prosperity can be achieved it can only be so in a free economy. Freedom allows people to pursue their own values and be creative and productive. From what I know, only catastrophic conditions will prevent mankind from achieving prosperity. I think that the history of the last century underscore my viewpoint. In spite of all of the barriers place in our way, Americans have produced prosperity. We could do so much more if we were free. The liberals have held us back. That is why my avatar is the flying car. We were promised flying cars, as my girlfriend has pointed out to me, we don't have flying cars because we have been held back. We would have so much more, and more happiness. Mainstream economists have concluded that a mature economy can achieve at best a 3% rate of growth. Just watch our mature economy when it is freed. We will blast their 3% to bits!

[The Free Market (can be) Corrupt]

Again, I use a controversial title to draw attention. But I am hardly misleading this time - the (can be) was is - before integrity called.

One very important, probably obvious, thing I learned about economics and capitalism while studying the recent world economic crisis in college this year was that the processes of the free market are no guarantee of a successful society.

While the crisis can properly be blamed on government intervention, it can also be blamed on rank irrationality on the part of the market players - in many cases you can't objectively claim that 'implicit guarantees' were the direct cause.

In a discussion about regulation and what it might have prevented - my professor kept reminding us of the all-powerful impact of 'incentives' on economic decisions - I pointed out that governments are subject to the same 'bad incentives' as private players. To his certain consternation, I brought up his earlier lament of talk of using leftover $200 billion of TARP funds for a 'jobs stimulus'. Political economy is a real thing. To lambast the free market for being too unruly and subject to forces is to pretend that governments exist in vacuums. But John Galt explained this, the reasoning is clear, you see governments are -blankout-.

My revelation was that the sword is two-edged. Governments and markets are comprised of people who may choose in either environment to act rationally or not. The free market can and often 'fails', because those in it act irrationally. 'Incentives' are chosen too.

The implications of this are as follows:

1)'The free market' is not an 'answer' to any problem. This speaks against blanket Libertarianism, but especially against those who advocate for laissez-faire with only the promise that a free market will inevitably make the world 'better'. In many cases, it might not. (Stay with me here, by 'better' I mean 'socially better', if you are familiar with that bizarre concept)

2)There is no reason why the government (in the long run) will do 'better' then the free market, because the same people are involved: society.

3)There are many reaons why the government will probably be 'worse' than the free market. See Hayek, von Mises, etc. for this sort of argument.

4)The real battleground is intellectual, philosophical, moral. A society must be convinced of the importance of reason and how to use it for that society to do 'better'. There are some free market critics that say the business cycle is caused by a pattern of ruthless competition that leads to overproduction. If so, there is no reason why industry or consumers couldn't adapt to this phenomenon or prevent it outright over time. The factor that would do this is a decision by the players to acknowledge reason, and desire to solve the problem. Government can't do that for people, though it might try to manipulate them. The market won't force people to change, no matter how many times they fail. They will change when they choose to, so they must be convinced intellectually of what changes are necessary.

5)An individual that accepts reason would categorically reject government intervention on moral grounds - that what it purports to achieve is morally fraudulent, even if it can achieve it.

This is a criticism primarily of modern economics - the concept of incentive is perverted because the assumption is that incentives just are without proper thought as to where they come from.

I also want to bring up the argument that a free market isn't good because it 'produces results'. It's good because it is moral. That is the argument that needs to win. But we know that.

ZSorenson, among the things that you did not include in your post (which is needs to be limited, I know) is why you came to the conclusions in your first paragraph. It would help to know that mental process to assist you with your errors.

There are many things to learn from Objectivism, one of the first and very important is that what passes in schools and in the culture at large for thought, isn’t. Learning that there is a proper thought process and then how to use it is very difficult and painful, but necessary. One of the clear signs that a subject is being approached from a rational perspective is the need to present definitions, often new ones, in the subject.

Fortunately, for those of us interested in economics, there is a mainly rational beginning point: Austrian Economics. To understand the reality of economics it is necessary to study their writing. Of course there are economists working today whose viewpoints benefit from both the Austrians and Objectivism, and it is vital to study them.

All of this leads to the subject that you have addressed, markets. The tendency of “modern” economics is to approach markets from the viewpoint of “perfect competition”, the idiocy of thinking that government action have no impact on markets, and from a collectivist emphases. This means that they tend to ignore the context, treat all of the participants on each side as a unit, do not believe it necessary to actually consider what the actual participants are thinking (each of them), and ignore all of the actions of government (except when they can find some result they like that they can ascribe to governmental action). All, or even only one, of these attitudes would lead to an inaccurate analysis of any market. All of these positions have to be discarded to address reality.

The market in question, the mortgage market, from the original buyer of a mortgage to the holder of a highly leveraged mortgage backed security, consists of thousands of individuals and business entities, each with its own interests, understanding, and situation. Each participant is making decisions based on its context for what it understands as its best interest. Many of the actors have years of experience and expertise in this market.

The beauty of the market is its multiplicity of participants. In any market, some, perhaps many, will make bad decisions, for different reasons, ranging from mistakes to evasions. On the whole, over time, a market will more toward results that are in accord with mankind’s interests. In a free market, this last statement is almost a truism, in that, since it is mankind making the decisions, each individually, it has to be their chosen interest. There is no other acceptable standard of success of a market, including someone’s declaration that in their opinion some other outcome would have been better. That opinion holds no concrete or moral worth. You might find a situation in which a free market “failed” because of a generally held belief that in wrong, say the success of a crucifix manufacturer, but it will be trivial.

If you find a market that has screwed up in some sense, you have found a market that a large number of the participants have made bad decisions, decisions that are not consistent with their own interests. In the mortgage market, it was not in anyone’s interest that many of these mortgages fail, that companies who offer mortgages fail (or lose money), or that the major banks lose money and fail. To find an answer you must look at what would cause many actors to make bad decisions, in this case, basically the same bad decision. It isn’t that their interests have changed. In other words, the context or a change in the contest of the mortgage lender and the bank is not what led them to make the decision they made. It was more systemic.

There are three factors that led to the bad decisions. They are all government related.

One, for nearly two decades the federal government, through many different agencies and channels have argued, insisted, and added force to the campaign to expand American home ownership, especially to the “lower and middle class”. They have vigorously pushed to lower lending standards. The Congress in the early 2000’s raised the percentage of the mortgages that Fannie Mae and Freddy Mac had to provide to the “lower and middle class”, resulting in a lowering of their standards.

Two, also for many years, the Fed has kept interest rates low, very low. This does two things. First, it makes available much more made-up money than the economy can support. This alone is why housing prices rose so fast for so many years. But even more important, the low interest rate completely distorts the decision making process in economic calculations. One of the most significant contributions of the Austrians is their recognition of the importance of price in economic decisions. If the price does not reflect the underlying economic reality, the decision will not be good. Artificially low interest rates distort the actual level of savings, the real things, that are available. The result cannot be different than we have seen.

Third, after a century of government interference in the banking system including the Fed, the Comptroller of the Currency, the state banking laws, all of the laws that Congress has passed, and on and on and on, the banks are in many ways not independent, but extensions of the over all governmental apparatus. Many other economic actors, like the credit rating companies are so dependent upon government approval as to be incapable of true independent judgment.

All of this is to say that the mortgage market has not been free in any sense for many years, probably since the creation of the FHA. To declare that it failed is to ignore the reality that it could not not fail.

To get a more complete rendition of the this situation, plus documentation, read Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse by Thomas Woods. I knew the basics and some of the details about the situation originally, but I learned a lot from that book.

The subject matter in this thread underscores that the supporters of capitalism are often less informed of what capitalism is than you would expect. We understand that capitalism is moral, which is a major step forward, a step that cannot be overrated. But we often do not know any more about what capitalism is than its enemies. Plus what is taught in the schools in both economics and history is corrupted by a virulent anti-capitalism. Capitalism is not only the only moral system, it is the only practical system. No other political/economic system works, only capitalism.

[Meltdown by Thomas Woods]

I have finished reading Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse and highly recommend it. I would say that without understanding the material in this book you do not know why we are in the mess we are in economically and why the recovery is as slow as it is and will be. I have reviewed the book here. I found the book because a friend mentioned that Yaron Brooke had recommended it.

There are many good reasons to read the book. It is fairly well written. It provides more than enough detail and documentation. It gives you a good idea of the theoretical basis of his analysis, which is grounded in von Mises and the Austrians.

One thing, however, several times I have written in this forum about the Fed’s actions, especially its credit expansion, as being very significant and bad for the economy. Maybe my writing isn’t very clear as few seem to understand or agree. Woods emphasizes that the Austrians consider the government expansion of credit to be the beginning of the business cycle.

I think that understanding capitalism in detail is important for it supporters. This is a good book to begin learning about the economics of capitalism.

[Oil, commodities, asset boom, then bust]

I found an article about last year's energy market and the author's expectations for 2010.

I is interesting in that he recognizes the role of made-up money on asset prices, and thinks (that is, he believes what he has been told) that it was all for the good. Then he sees a dive in prices after the flow of made-up money disappears, which will be then supported by real demand. Isn't that a lovely story!! He then sees higher prices than we see now, in about a year.

So, the question, for our assembled reality-oriented thinkers, is: can this happen? Even if Bernanke and his minions manages to sop up the excess member bank reserves in a timely manner, can the economy actually find its footing and grow?

The Austrians, of which I consider myself in a small way, would say that the liquidation of misallocated assets has not been allowed to occur. Nor have prices been allowed to drop to real levels. Misallocations have, in fact, continued. The stock market price growth is mostly inflation, too. We are continuing to buy imports with made-up money. The money supply has grown dramatically. I don't see much to suggest that real growth is going to happen. Cleaning up the mess has just been put off.

[Federal Reserve creates Term Deposit Facility as tool for withdrawal]

... but if the Fed is going to stop buying Treasuries, and then get banks to buy Fed bonds, I can't see how medium/long rates can be kept in check. (Which is not to say rates will rise, as such; but, only that they will rise in any situation where the Fed decides to use this new "tool" in a big way.)

Do you think that the Fed is getting a little worried as to how their going to get out of their mess? Everyone is saying that as soon as the Fed starts to pull out is massive funding that there will be a void and long-term rates will rise, apparently more than the Fed wants to see. I think that they are going to come up with as many little tools as they can, plus smoke and mirrors, press releases, lots of public appearences, appeals to love of country, and bake sales.

I am reading, or trying to, this crap is tough to choke down, In Fed We Trust. Aren't you happy that we have such a hero as Bernanke to rely upon!

I have finished Meltdown by Woods. I highly recommend it. I will write some about it here soon. I am also working on a review.

[Federal Reserve creates Term Deposit Facility as tool for withdrawal]

What about the repeated line in the story that, "Once lent to the central bank, the money cannot be withdrawn." Ever? So a bank deposits $100M to the Fed, and can never get it back, but after the term is up, they get the "interest" back? Am I understanding this right? How else can you interpret the sentence I quoted? If I'm right, this is simply a Ponzi scheme, no?

This is just poor reporting. They are trying to point out a difference between a CD and what the Fed wants to do. If you put your money into a bank CD, you can withdraw the money before the end of the term (maybe with a certain warning period and a penalty). What they are saying here is that the "loan" to the Fed can't be withdrawn during the term. It can be at the end of the term. That is part of the problem. This money will still be floating around and the Fed will still be trying to "sop it up".

[Feds Owe Uncle Sam $3B in Unpaid Taxes]

I read an interesting statistic recently: over 500,000 Federal employees earn over $100,000 a year. From the linked article:

To give them their very little bit of "due", no federal employee is allowed to "earn" more than the president, whatever it is at this time, somewhere around $200,000 I expect. So, there are a lot of them all stuck just under $200k. When the pres gets a raise, all the others do too.

[A question about health insurance regulation]

Another reason health insurance costs so much is that medical facilites, services, and products cost so much and keep rising in cost. The government, via medicare and medicade, have been pouring an ever increacing quantity of money every year for over 40 years, driving the costs in that area up dramatically yearly. Insurance just tries to spread its costs of providing medical services to its policy holders over all of its premiums. The costs the insurance company has to pay have to be reflected in its premiums. It is a pay as you go system, that is, the payments the company makes a year have to be covered by the premiums it collects that year. You sometimes hear someone say that they have been paying premiums for so many years, implying that they should be entitled to something. They are admitting that they do not know how insurance works.

[The Morality of the Strategic Default]

Here's what I think is NOT relevant to this discussion:

1. "The government created this mess". They did, but stealing is still not selfish. Try again.

Saying that the government's actions justify your action is, of course, wrong. The government's actions do not justify stealing. However, this situation is not stealing. Defaulting on a loan with collateral, when the collateral is transferred to the lender, is not stealing. It is the selfish responsibility of the lender to require collateral that will cover the possible default. Under current law there are situations in which a resident in a property may take advantage of a lender, but that is a different issue from the mortgage default. Defaulting is not a criminal activity, per se. (If someone entered a mortgage with the intent to default, i.e., committed fraud, it would be.) Defaulting when you can continue to pay may be unjustifiable. It would be necessary to be sure you weren't rationalizing a decision to default.

OptimizedPrime has set this up with very limiting specifics, namely, the person can still meet the mortgage payments. Whatever the government did would seem to not justify walking away. Most of the people that OptimizedPrime has described would be culpable.

Yet, it must be remembered that the government's actions have a wide range of consequences. Rejecting the government and its actions as having responsibility in this case is not as solid as it would seem. The government's actions included many elements that preclude understanding the economic situation by undercutting, hiding, or completely distorting the economic information necessary to make rational decisions. This is one of the most important points made by the Austrians, especial von Mises. Bad information means bad decisions.

Both the lender and the mortgage holder are victims. You could suggest that both of them should have realized that the situation was not tenable. Perhaps. We all know reasonable people who got in over their heads and mortgage lenders that were doing what they thought was reasonable, too. There were very few who recognized that this situation could turn out as it has. This level of ignorance of economics is part and parcel of the government's and the politician's intentions.

Each individual has to look at their situation and make hard choices. Stealing is wrong. Defaulting is unfair when unnecessary. When a person puts themselves into a bad situation, they must suffer the consequences. When the government does, there is no good fairy to save us. Reality will hit us anyway, as it has. You can't sacrifice another person for your problem, even if it isn't of your making. Sitting in a situation forced on you by the government in which it is either you (and your future or long-term financial health - even if you can make the payments at this time) or the bank is closer to the life-boat context, and as Ayn Rand has said about other situations involving the government, may be impossible to untangle.

[Fractional Reserve Banking versus Ayn Rand's Ethics]

The problem with a discussion like this is the ambiguities. There are several different “gold standards”, for example. (And, when you say “inflation” do you mean prices going up or expansion of the money supply, as sNerd does.)

The gold standard most often seen in history is the “gold exchange standard” in which a note or credit instrument can be exchanged for gold at the issuing bank or a bank that is willing to accept it (in addition to gold currency and perhaps another metal for coinage). In this approach, the actual amount of gold held in banking institutions tends to be higher than the issued currency and demand deposits. Certain banks would be practicing fractional banking, with backup from other banks, as mentioned by another poster.

One to one currency to gold ratios are rare, especially when you get to periods with checking and credit instruments.

Also important to remember is that the demand for credit is not a constant but varies with changes in technology as it is applied and changes in business practices, e.g., improvements in management. Interest rate changes attract more capital and savings. Fractional banking by individual institutions can smooth out these variations.

I have seen people suggesting that the fractions that a bank would practice ranging from 90% to 500% of deposits. I think that the actual percentage would be much less, say less than 50%, maybe even 30%. (If anyone has a reference to historical practices, I would like to see them.) Bankers are conservative. The amount loaned would be greater than their capital, reserves, and deposited savings accounts. If it were double those amounts, the bank would be in a very precarious position.

If a bank did not practice fractional banking, it would have to look elsewhere for revenue and profits. In most cases it would have to charge deposit fees to store and account for the money placed with it in demand deposits. The competition in the market place with banks that practice fractional banking would cause the bank to clearly say that the reason it is charging fees is because it is “safer” since it isn’t practicing fractional banking, throwing into focus what other banks are doing (who would be advertising their feeless accounts, and why). The consumer is then offered the clear choice between paying fees with no risk and not paying fees with some risk (or maybe lots). Bank management practices are thrown into light and consumers, if they are wise, make informed decisions. I think that when considering a free market it is an error to make an argument based upon the ignorance of any actor.

[Wells Fargo prints more shares to repay TARP money]

If all companies that received TARP repaid it this way, then inflation wouldn't occur, right? But everyone of those shareholders would have less money to invest in other things. And as you said, they might pull out of the company, inducing another government bailout.

Two other problems with this issue are:

1. I read that the Fed and the Treasury gathered the bankers in a room and told them that they, the bankers, were going to take the money - they, the banker, had no choice. Plus, there is the fact that the government created the situation in the first place. Like today, when the gov is pressing the banks to loan, the gov was pressing them to "help" people get houses. Resisting that pressure in the current structure where the banks depend upon having good relations with the regulators is difficult. The best thing for an honest man to do is not be a banker/gov frontman. But that wouldn't be too good for the economy, either.

2. What happened to the TARP money? The banks didn't spend it (in spite of what the stupid media says). Basically, the TARP money for the bankers was to build back their capital and loss-reserves that had been reduced by the mortgage bond mess. Capital and loss-reserves are not spent, nor are they part of the money supply. What these banks are doing is financing their recapitalization, some of which came from the TARP money and is now being paid back. That isn't a justification of the TARP program or bailouts. Nor is this money inflation, since it wasn't spent and is being paid back. Hopefully (a weird thing to say about the Fed) the Fed will just reduce their balance sheet.