This Is Some Rescue

“This is some rescue. When you came in here didn’t you have a plan for getting out?”
– Princess Leia, Star Wars (1978)

And what a rescue it is. What started as a three-page plan to buy troubled assets has grown to a 451 page mess that includes everything from Indian Employment Credits to adding a Seven-Year Cost Recovery Period for Motorsports Racing Track Facility. I guess in the future we know how to get recalcitrant Republican Congressman to reverse course- include more pork. We should all remember for future reference that the government rides to our rescue by way of hurriedly passing a bill no one had a chance to read that includes more spending of money they don’t have.

I’m not sure if this was the kind of rescue that the American people were counting on, but given how they were reacting to this plan (about 90 to 1 against judging from people calling in), it was probably the one that they were expecting. And the thing that no one seems to want to being up is that the government caused this problem to begin with. If not for the government created entities of Fannie Mae and Freddie Mac, we would not have had so extreme a credit explosion in the housing market. If not for the government created entity of the Federal Reserve and it’s nasty habit of keeping interest rates low and solving every problem by throwing more fiat paper at it we would not have had this orgy of credit and speculation to begin with.

Each of these entities was created by the government to rescue the free market:

– the Federal Reserve was created by the government in response to the Panic of 1907 and the desire to have a “lender of last resort” with an “elastic currency” that could bailout any troubled bank.

– Fannie Mae was created by the Roosevelt Administration in an effort to provide credit to the housing market to stimulate the economy. Except that now that had created a government sponsored monopoly of sorts. So in order to fix the situation, they created yet another entity, Freddie Mac, in 1970. 

And here we are, now having to create more programs in order to save our would-be rescuers. Can there be any doubt of the wisdom of Ludwig von Mises in his Critique of Interventionism where he argues that all government interference in the operations of the free market will merely lead to bigger problems later, which the government must then solve with even more interference. According to Mises, all attempts at intervention lead to the same place, Socialism. And here we are.  Watching the Republicans, the champions of the “free market”, back the biggest interventionist step ever proposed. 

Life is full of ironies, but not greater than the ironies of the public sphere. Some hypocrisies are to be expected. After all, this is politics. But I’m sure that the Japanese, who were advised by the Americans to just let the chips fall where they may when their crisis hit, are noticing that we don’t take out own advice very well. But for me it goes beyond irony and hypocrisy that the Republicans continually berate the Democrat’s for being Socialist as they aggressively expand the size and scope of the federal government. To me it proves that the American people have lost the political will to force their politicians to own up to their promises. Thus we are left with people’s perceptions of their government and its actions determined not by the actions themselves but rather what the politicians tell the people their actions mean. According to the Republicans, bailing out a failure caused by three government created entities is merely what must be done to save the “free market” from itself. 

I started this piece with a quote from Star Wars. As a science fiction person I would like to close it with a quote from another piece of SciFi, George Orwell’s 1984. Orwell, like Mises, foresaw the government’s continual encroachment into our lives, just as he foresaw that the government would shape people’s perceptions by telling them that something was it’s opposite. And so I want you to keep in mind our “free market” Republicans, their “War on Terror”, and their often trumpeted habit of being fiscally responsible when you hear that:


The Republicans Find Religion

A lot of my friends get all bent out of shape when it comes time to elect the President. They act as though it were a matter of life or death to make sure that the next President is the one they happen to be supporting. And, of course, they are correct. The President will have to make many life or death decisions. Still, I can’t seem to get all worked up about who gets elected. In part that’s because I’m a Libertarian. Being a Libertarian means that regardless of who designs the ballots in Florida, or whether we have gone from punch card to electronic voting, my candidate is not going to win. Ever. 

In many ways that’s a relief. I have made peace with the notion that I will never be on the winning side of a Presidential election, and so I experience neither joys nor sorrows come election night. More typically I just get a few chuckles. For the vast majority of voting Americans, however, elections do not seem to bring any peace. Politicians have been studying how to get elected so long that it would seem that they have discovered that the voters seldom if ever hold them accountable to the political promises they made when they were last running for election. And so politics operates like a strange kind of job where you have to continually reapply for the same job you already hold, but no one actually pays much attention to what you say during the interview; if you just promise to be a star performer you’ll keep getting the job because no one really seems to care whether you ever even show up once you have actually gotten the job.

I am reminded of the old Peanuts gag where Lucy holds the ball out for Charlie and pulls it away when he goes to kick it. Lucy has done this to Charlie countless times, but still somehow manages to convince Charlie that this time she really means it. But she always pulls the ball away and then ridicules Charlie with “You Blockhead.” 

That’s how I see the US political system. Every two to six years, the major political parties hold out footballs for the American people to try to kick. The American public has been here before. It knows that every time it goes to kick the ball and elect someone, that the person they elect will unfailingly pull the ball away and not live up to the promises made. I think it’d be a refreshing change if political victory speeches were reduced to the victorious candidate coming before the public and saying, “You Blockhead.”

That’s what makes this current crisis so interesting. There is actually a very short span of time between the actions taken now and the next election, which puts politicians in the very unusual situation of having their recent performance considered by people going to the polls. And this is perhaps why the House Republicans recently took the very unusual action of defying their Republican President’s wishes and voting down his bill. Republicans have traditionally kept a very disciplined core of elected officials. You never see a high profile Republican going to speak at the Democratic National Convention, for instance. And, yet, they may as well have as they gave not only George Bush but John McCain his walking papers and voted down the bill they both vocally supported. Even weirder, Bill O’Reilly recently attacked right-wing “Kool-Aid drinking idiots” in calling for this bailout and attempting to blame Clinton when, according to O’Reilly, it was clearly “Bush’s fault.”

Sacre Bleu! What in the world has gotten into them? Are these the same people who reauthorized the Patriot Act to keep us all safe from terrorism? Or told us how necessary it was that the President conduct illegal wire-tapping surveillance? I mean how is it possible that the Republicans gave Bush Carte Blanche to carry out whatever policies he asks for but suddenly shoot him down on a bailout of Wall Street?

If I didn’t know better, I’d say they suddenly “found religion” and started comparing their actions against the rhetoric. Suddenly the free market, an intangible entity that doesn’t vote and no one really seems to want anyway went from stale talking point to more important than party loyalty.  How on Earth did that happen?Well, I hope the Republicans stop messing with my head, because I’m not used to them actually honoring their free market rhetoric. When there is an unflinching faith in the power of people to decide value in the marketplace, can you then long ignore that the marketplace can’t really function well without an honest money such as gold to go along with it? Am I to hear House Republicans tomorrow call for the abolishment of the Federal Reserve? If they keep it up I’d have to start actually questioning whether I should become a Republican myself!

But then, lest I forget, this is simply politics right before an election. I suspect the Republicans’ sudden “come to Jesus” moment may have more to do with the November elections than with a sudden discovered passion for free market forces. Time will tell, I suppose, but I’m not one to say that that many leopards can change their spots that darn quickly. Still, it was good while it lasted.

Peter Bernstein Admits He Had No Answer to Current Crisis

For those of you who haven’t read it in the New York Times, it would seem that Peter Bernstein has added his voice to Ben Stein in saying that he’s not really sure what is to be done. Bernstein is a writer I respect, for he is one of the few people who talk about the economy today who has knowledge of the history that has come before it. I find that most economists or economic pundits seem to have no knowledge of history whatsoever, and thus have no means with which to test their theoretical knowledge (much of which came from Keynes) against actual historical events. Given that you can easily find many historical refutations of many aspects of macroeconomic theory, I can’t say it’s surprising that economics and history are treated as two separate disciplines with no actual overlap by most people.

Bernstein is an exception to all this. His books, such as Against the Gods are almost nothing but history. However, despite his historical frame of reference, Bernstein still marvels as the modern wonders of macroeconomic theory as though it were the culmination of all the experience gained from all prior events that he talks about in his books. Like virtually all people today, we have a bias towards are modern ways; surely they must be superior to the archaic way that people used to do things. This bias seems to have convinced Bernstein that the bailout plan that Congress is putting together is the correct thing to do. As far as he is concerned, it must happen, else we will revisit the times of the Great Depression when the streets of Manhattan were “filled with unshaven men in threadbare clothes, their coat collars turned up against the cold, their shoes stuffed with newspaper to plug holes in the soles.”

It seems clear to me that despite Bernstein’s historical knoweldge, he has not read any of the great works of the Economic Historian Murray Rothbard. Anyone reading America’s Great Depression would know that is was precisely these types of bailouts that President Herbert Hoover tried at the very outset. Dr. Rothbard clearly shows how the price support mechanisms that President Hoover put into place to maintain the prices of everything from wages to wheat all failed miserably and merely exacerbated the economic downturn and that the “banking holidays”, gold confiscation, and deficit spending of FDR also simply made things worse. After all was said and done in regards to The Great Depression, all that had been accomplished was to for the government to claim responsibility for the economy and to adopt previously unheard of authority to achieve a promised ends that it never could. Thus what we are seeing today is more of the same of what we have already seen before. It didn’t work then, and it won’t work now. 

But Bernstein seems oblivious to all of this, which is tragic given his historical knowledge. But he does analyze where today’s situation could lead if it should succeed- to an even more pronounced level of risk in the economy. You see when you provide insurance for something, you often provide an incentive to do the very thing you are insuring against. It’s called “moral hazard” in the insurance industry. For example, if you take out a insurance policy safeguarding your house against fire, you now have a motive to burn your house down and claim the cash reward.

The same problem is at work in today’s markets. By way of this bailout, the government is adopting what Bernstein terms a policy of “Thou Shall Not Fail” regarding the banking industry. So, by the logic of moral hazard, the banking industry now hse incentive to take even bigger risks because the government will always be there to bail them out should they go wrong. Much like the “Greenspan Put”, today’s bailouts done for market stability will lead to an ever increasing amount of risk and instability in the future. Anyone can see that this process can only continue until, inevitably, the entire system fails. Bernstein himself declares the absolute necessity of the bailout, but sees the moral hazard implications. Thus, he ends his NY Times piece by saying “As we move into the future, and as the crisis finally passes into history, how will we deal with this earth-shaking blow to the most basic principle of our economic system? I do not know how to answer that question. But we need to ask it.”

You can ask all you want Bernstein, it won’t change a thing. Markets will take on increasing risk until they exceed the guardian’s ability to stabilize it. When that point it reached, the collapse takes down the whole system with it. This points to why the bailout is merely an exercise in folly. History tells us it will do nothing but prolong the crisis and, should it actually succeed, it will only manage to insure that the next crisis is even more pronounced.

Bush’s Plea for $700 Billion

I’ve often considered George W. Bush to be one of the most arrogant Presidents of my lifetime. A Republican friend of mine argues that it was William Clinton, and I do have to concede that Clinton certainly had his arrogant moments, but he came off humble when he had to be. By comparison, Bush has always seemed to me to be someone who was reveling in the fact that people intensely disliked him. Maybe it was the way he would tend to give a half-smile to his own jokes when he thought he had told a zinger, or maybe it was the way he won by both of his elections by very thin electoral margins yet seemed convinced that he had a mandate from the people in favor of what he was doing. Whenever I hear him speak, I feel I can hear him telling me that he doesn’t care whether he’s popular with the people or not, he’s going to do with this country whatever he and his cronies decide and the rest of us will just have to live with it. 

Consequentially, on occasions like last night where he comes on national TV to convince us all that *gasp* the economy’s not going so well and desperately needs a bailout, I really wish there was a service that could show me the speech complete with those robots from Mystery Science Theater at the bottom to make snaky comments. President Bush’s speech included a description of exactly how our economy got in such dire circumstances to begin with- that cheap credit caused a housing boom and that now both the loans made to the homeowners as well as the value of the underlying real estate are all in question. As I read his description, the feeling I get must be the same as a parent who is listening to his teenager tell him that somehow the idea to sneak out, go to a friends house, and get hammered somehow didn’t turn out so well. I mean, if it really is as simple as credit inducing a inflationary boom which later came crashing down, why didn’t President Bush call a halt to the easy credit terms that lead to the inflationary boom to begin with?

It’s not like he didn’t know it was going on. In fact, it was a point of pride for the President who in 2003 crowed that low interest rates had given rise to a record level of home ownership in the United States. In fact, President Bush went on to say that he goal was to increase home ownership further by reducing the purchasing price of the home via tax credit, the interest rates one would have to pay, and the amount of paperwork one would need to go through to get approved for a mortgage. Looks like all those chickens are coming home to roost, eh George?

That’s the real kicker about macroeconomists and politicians; when the economy is booming because it’s being force feed credit like a goose being fattened for a French delicacy, they want to talk about how amazingly healthy the economy is. When it finally all comes crashing down, they act as though they had nothing to do with it. It’s strange, but of all the individuals involved in the current Presidential race, I think I agree with Sarah Palin the most when she said that America was facing “another Great Depression.”  Although it’s hard for me to admit that, because she’s probably my least favorite person of the four, but I think she may have accidentally nailed it. We’re not just talking about a recession anymore, we’re talking about a depression. And it’s probably not going to be the complete slow down of commerce that the 1930s was, but instead the Japanese type of downturn that never seems to end. America is about to have it’s own “lost decade” or two, and that’s unfortunately turn regardless of which party you vote in for President. 

As I council my friends, there’s nothing that can be done to stop the fall of the Pax Americana, nor is there anything that can be done to stop the oncoming depression. Perhaps certain politicians can help to make it a harder or softer depression, but it’s going to come. Make yourself ready.

Waiting for the bailout shoe to drop

The markets started this week with quite a fall on Monday with the Dow down over 4% and gold up strongly. Tuesday and Wednesday have been a good bit more calm with stock prices falling slightly along with gold. It seems investors want to hold onto cash until things become more certain. Everyone seems certain that the government will bail out Wall Street from this situation, but there seems to be some disagreement about the details. 


I’m sure that there are a legion of Wall Street lobbyists right now working furiously to try to get Washington to pay top dollar for all of the dead assets currently sitting on so many balance sheets. And if this were anything but right before an election, they’d probably get their way. But Senators McCain and Obama are no doubt wondering how this bailout is going to look to the voters if Wall Street makes out like bandits on taxpayer money.  So now Wall Street is uncertain as to what the terms of the plan are going to be.

The American voter, much like the American consumer, is expected to have a very short attention span. They aren’t suppose to be able to really understand what’s going on for themselves, you see, so this bailout plan has to be turned by the political pundits to become something so easy that your average voter could understand it. “Wall Street is bailed out by your money after a long period of making money off of you,” is just the kind of thing to work up voter ire. It is, as Bill Bonner suggests, just one grand spectacle. 

The one question that I’m sure will never be asked by either of the candidates or anyone, is “Where is this $700 Billion supposed to come from?” Much like the war in Iraq, it’s just expected that someone will be nice enough to front us the money for us to continue down the path of spending far more than we’re making. That someone has increasingly been foreign investors, and I’m not sure how well they’re going to react to our asking for another Trillion or so. They probably think that it’s a shame that they don’t get a voice in this election, but if things keep going like this it’s a good guess that their time will come. 

After all, a politician may get elected promising to keep us safe from terrorism by “fighting them over there, so we don’t have to fight them over here”, but when the American people have to actually start paying the real bill for these military misadventures, we may suddenly find that we’ve lost our taste for blood. Let’s not forget that we asked a lot of foreign investors to buy these same toxic credit derivatives in the first place, and no government has been nice enough to step forward and bail them out.

The Week of the Bailout

Well. This certainly has proven an exciting week for anyone with money in the stock market. It started off on Sunday with the announcement that Lehman Brothers was going to declare bankruptcy. Many had thought the bank “too big to fail”, but it seems that US Treasury Secretary Hank Paulson and Fed Chair Ben Bernanke felt otherwise.

The stock market fell quite a bit on Monday, as people began to wonder if AIG was next. Then on Tuesday, Bernanke announced that there was no need to cut rates, because the US economy was strong enough to weather the current crisis.

And the result?

A rally of roughly half the losses suffered Monday as Wall Street figured that this ‘tough love’ was a good sign; then, the next day, it’s announced that Bernanke was offering a loan of $85 billion, or so, to bail out AIG and, in so doing, take over the company. So much for tough love!

What was really peculiar here was Wall Street’s reaction: a huge sell-off of all stocks across the board — and that gold rallied $89 an ounce; the biggest one-day rally ever! This bailout suddenly prompted people to lose faith in the system. The next day was more of the same as the stock market continued to rout and gold continued to rally.

That is, until President Bush announced the biggest bailout in history.

The results are still sketchy, but essentially, the government is going to “buy” all of the bad, toxic, or dubious “assets” off of everyone’s balance sheet. The details are a bit shaky at this point, but the plan sounded bold enough for the stock market to stage a huge late-day rally that’s continued on into today. It would seem the market is nothing if not confused as to whether it wants tough love, or the mother of all bailouts.

Like most bold promises made by politicians, it leaves most of the important questions unanswered:

Just how bad does an asset have to be for the government to buy it?

What price is the government going to purchase it for?

How much is itgoing to cost the US taxpayer?

And, my personal favorite:

Where exactly is the government going to get the money for all of this?

But no one seems to care about all of that right now. Wall Street traders breathe a huge sigh of relief as President Bush pledged taxpayer dollars to cover the sins of their gross excesses. It’s as if the Pope had suddenly visited a whorehouse and not only forgiven all of the sinners, but agreed to pick up the tab.

Truth, as they say, is stranger than fiction and this week proves that yet again. No work of fiction would have all of its major characters be so fickle from one day to the next. Can you imagine if Romeo and Juliet seemed to sway between all-consuming passion and a sober coolness? Or if their warring families had similarly gone from feuding one day to offering an alliance the next? I’m pretty sure that if Shakespeare had penned such a tale that it never would have made it to the big stage, much less become a timeless classic.

Yet, this week we see all the authority figures vacillate wildly between the stances of needing to be cruel to be kind, and offering outright martyrdom for the American taxpayer to cover the sins of the financier’s bad beats. And we’ve seen the market all over the place — going from hating it on Monday, to loving it on Tuesday, hating the bailout on Wednesday, to then loving it on Thursday and Friday.

What remains the biggest mystery of them all is the US Dollar is rallying today on the bailout news. Why a currency would rally when its sponsor government just pledged to spend an extra half-trillion dollars or so that it doesn’t have is truly mystifying, but it seems to go with the carnival-like insanity that we’ve seen the rest of this week.

Until next time,

Preston Poulter