Saturday, May 9, 2009

Mises on the nature of pure capitalism

From Money, Method, and the Market Process, Chapter 15, by Ludwig von Mises:
In a capitalist society the proprietary class is formed of people who have well succeeded in serving the needs of the consumers and of the heirs of such people. However, past merit and success give them only a temporary and continually contested advantage over other people. They are not only continually competing with one another, they have daily to defend their eminent position against newcomers aiming at their elimination. The operation of the market steadily removes incapable capitalists and entrepreneurs and replaces them by parvenus. It again and again makes poor men rich and rich men poor. The characteristic features of the proprietary class are that the composition of its membership is continually changing, that entrance into it is open to everybody, that continuance in membership requires an uninterrupted sequence of successful business operations, and that the membership is divided against itself by competition. The successful businessman is not interested in a policy of sheltering the unable capitalists and entrepreneurs against the vicissitudes of the market. Only the incompetent capitalists and entrepreneurs (mostly later generations) have a selfish interest in such "stabilizing" measures. However, within a world of pure capitalism, committed to the principles of a consumers' policy, they have no chance to secure such privileges.

Friday, May 8, 2009

The Fed as regulator/protector of its kin

Sheldon Richman's The Bankers' Bank provides a clear explanation of what the Fed is, along with how and why it was created.

Drawing on Murray Rothbard's The Mystery of Banking, Richman writes:

The problem, Rothbard explained, was that when an inflationary boom went bust, the banks “were forced to contract and deflate to save themselves.” This was a problem of “inelasticity” of the money supply. “Translated into plain English, ‘inelasticity’ meant the inability of the banking system to inflate money and credit, especially during recessions.”

So, concerned about “inelasticity” and the rivalry of state and private banks and private trust companies, the national banks (Wall Street), led by J. P Morgan, turned their attention at the end of the nineteenth century to the establishment of a central bank.

To make a long story short, Rothbard writes in The Mystery of Banking: “The growing consensus among the bankers was to transform the American banking system by establishing a central bank. That bank would have an absolute monopoly of note issue and reserve requirements and would then insure a multilayered pyramiding on top of its notes. The Central Bank could bail out banks in trouble and inflate the currency in a smooth, controlled, and uniform manner throughout the nation.”

Essentially it would be a cartel that would allow concerted action free from competition. A cartel unsupported by government is vulnerable to independent competitors. To succeed in defiance of market forces, a cartel needs government help, either to force everyone into it or to hamper outsiders.

My emphasis.

Free markets are unacceptable to the state

Mark Thornton tells us, "for bureaucrats and left-wing ideologues, no private solution is praiseworthy." One could go further and substitute "acceptable" for "praiseworthy." This is why in Washington, D.C., should anyone show interest in the theory underlying the bailouts and power-grabs, the ideological plate has room for only state-centered entrees. Market-based solutions are toxic to the state. People are embracing the free-market perspectives of Tom Woods' Meltdown and the commentaries of Peter Schiff, Jim Rogers, and Ron Paul. But in D.C., none of it matters. What matters is power, and free markets shift power to the individual.

Ayn Rand had a profound insight on this phenomenon. In a 1946 letter to Leonard Read, the founder of the Foundation for Economic Education, she said:
You imply that the cause of the world’s troubles lies solely in people’s ignorance of economics and that the way to cure the world is to teach it the proper economic knowledge. This is not true—therefore your program will not work. …

People are not embracing collectivism because they have accepted bad economics. They are accepting bad economics because they have embraced collectivism. …

The moral and social idea preached by everybody today (and by the conservatives louder than all) is the idea of collectivism. Men are told that man exists only to serve others…
My emphasis.

Saturday, May 2, 2009

Karen De Coster on the Fed

I loved Karen De Coster's use of the verb "baiting," below. Very precise description of what the Fed does, not just to pension funds but to almost every participant in the economy. The rest of her post is outstanding, as well.

The Federal Reserve's Victims

The Federal Reserve, with its money-pumping machine distorting credit markets and interest rates, along with creating piles of debt among the citizenry, is a totalitarian and destructive force. The Fed destroys time preferences because it turns people into consumption-oriented, gotta-have-it-now debt addicts. The Fed has wrecked the housing market and turned homes into leveraged bets. The Fed has sucked people into revolving debt, student loan debt, and miscellaneous personal debt, all with the promise that the boom was never going to end. The Fed perverted the stock market, baiting pension funds, 401k funds, and personal investments, and thus has wiped out much of the wealth of American retirees and the middle class. The Fed has turned the latest generation of children into a consumption-only class who do not know of the production side of the market, nor do they care. The Fed has established a financial dependency on government that has destroyed the self-sufficiency of an entire generation. Today's bread and circuses is tomorrow's lack of saving, invention, and production. The Federal Reserve is a criminal organization and the destroyer of lives.

The latest victim of this system that takes Americans captive is the man who shot his wife and three children to death before committing suicide in Middletown, Maryland. He was $460k in debt on a mortgage and credit cards on a salary of less than $100k per year. The debt, dependency, and financial disintegration drove him insane. Here is Guido Hulsmann from one of my all-time favorite articles, "The Cultural and Spiritual Legacy of Fiat Inflation."
The net effect of the recent surge in household debt is therefore to throw entire populations into financial dependency. The moral implications are clear. Towering debts are incompatible with financial self-reliance and thus they tend to weaken self-reliance also in all other spheres. The debt-ridden individual eventually adopts the habit of turning to others for help, rather than maturing into an economic and moral anchor of his family, and of his wider community. Wishful thinking and submissiveness replace soberness and independent judgement. And what about the many cases in which families can no longer shoulder the debt load? Then the result is either despair or, on the contrary, scorn for all standards of financial sanity.