Temperance, anyone? Not on the government's watch!

It seems odd to me that fiscal and monetary policy are designed to encourage spending at every turn. There is something like $50 trillion in credit debt outstanding right now in America. Are we to believe that the way to prosperity for the masses is to spend even more money from an empty Treasury vault?

I would love to see a true accounting of the Federal Reserve System actions of the past and all future actions as well. Not just the already GAO-approved audit of the checking receipts - I would like to know which foreign central banks and other entities are the beneficiaries of the largess; details of the Open Market Committee operations which serve to inject 'liquidity' into the fractional reserve system by purchasing bonds, mortgages, commercial paper, etc., at the whim of a few very powerful people. All these actions are geared toward creating more credit (that is, more debt on top of the $50 trillion outstanding debt already on the economy).

I would also like to see the over 260 million ounces of gold that are supposedly on hand according to the FED balance sheet ($11 billion gold stock at a severely under-market valuation of $42.20/oz). If our dollars were once again backed by gold (there are over $2 trillion in circulation), a sound money value of dollars to gold would be somewhere around $7000/oz or $8000/oz. The market has it now at nearly $1200/oz. A thought question: Why does our government insist on valuing gold at $42.20/oz when the whole world is purchasing it at a higher price measured in dollars?

Along these lines, I would like to know what Mr. Bernanke's exit plan is to get out of the trap of 0.00% to 0.25 % federal funds rates for the foreseeable future. This low rate influences market interest rates and forces them to artificially lower levels. This stimulates yet more debt! The only thing keeping housing prices up and consumers making purchases right now is the relentless stream of this nearly free credit (at such low rates, the real rate of interest is negative) and myriad giveaways such as the recently extended $8000 (and $6500) tax credits for home buyers, cash for clunkers, energy efficient window credits, appliance stimulus and the like.

If interest rates rise and giveaways cease, the flow of consumerism will stop. All the purchases of homes in the last quarter that drove the GDP up a few percent were based on the housing tax credit; when that credit expires (it has been extended into early next year) , the consumerism goes away and we are right back where the government does not want us (with inventories on hand that cannot be sold for the inflated prices which have been attained).

A clear example of this was the development of a major spike in car buying as a result of the cash for clunkers giveaway. See for yourself:





Does it not seem odd that there was a precipitous spike in purchasing which bumped vehicle sales up corresponding to the timing of the cash for clunkers stimulus? The "accomplishment" was short-lived; the boon for dealers and manufacturers was a bust for a working person who wanted to buy a functioning $3000 to $5000 automobile. Those went to the scrapyard with an engine block full of molten glass. The previous owners "bought" new vehicles on credit with $4500 in pseudo-free money and when the program stopped, the purchases went right back down to where they were previously. Instead of automatically assuming that demand must be stimulated, why is it so hard to contemplate that demand was artificially high to begin with and that the new (albeit lower) level was more indicative of the true nature of the market?

It seems that the government thinks of the economy as a binge-drinker in need of protection from a nasty hangover. So, instead of allowing some temperance, the magnanimous government tips a glass permanently to the lips of the drunk in the form of nearly-free credit and various giveaway schemes. Continually drinking that glass will bring about a painful end to the overindulged economy.

Wisdom of Sound Economics

I was re-reading the first economics book I ever read this evening, and I came across a particularly insightful paragraph that I want to share, if for no other reason than to marvel at the beauty of sound logic and sound economic reasoning. Notice, I say sound economic reasoning instead of sound economic calculation or prediction; I am not a believer that a system of literally hundreds of billions of independent actions carried out by billions of actors can be modeled via any extensive calculus.

So, without delay here is the insightful paragraph I mentioned for your amazement and enjoyment!

"Government-guaranteed home mortgages, especially when a negligible down payment or no down payment whatever is required, inevitably mean more bad loans than otherwise. They force the general taxpayer to subsidize the bad risks and to defray the losses. They encourage people to "buy" houses that they cannot really afford. They tend eventually to bring about an oversupply of houses as compared with other things. They temporarily overstimulate building, raise the cost of building for everybody (including the buyers of the homes with the guaranteed mortgages), and may mislead the building industry into an eventually costly overexpansion. In brief, in the long run they do not increase overall national production but encourage malinvestment."

- Henry Hazlitt, Economics in One Lesson, 1946, Chapter VI, Credit Diverts Production.

Notice, Hazlitt's paragraph could easily have been written today to describe exactly what would happen say, after the Federal Reserve sets the federal funds rate to 1.0%, then Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac provide (mandated by law) loans in large amounts to people who might have had some difficulty qualifying for a traditional private mortgage. The loans would possibly take the form of Adjustable Rate Mortgages (ARMs) with little or no down payment required, among other forms. The ARM rates were derived directly from the federal funds rate, and consequently would be awfully low because of this fact.

This type of mortgage (ARM with little or no down payment) has been implicated as a prominent factor in our recent housing boom and bust. Amazing how sound economics can generally get the story straight, eh? And from 60 years before hand, no less. The paragraph describes very well the upshot of the current situation (where we have many millions of unsold homes on the market in America, and prices still artificially high in many areas as people caught up in the malinvestment are trying to sell at an acceptable level before losing all the capital they have invested). It should sound about right to anyone who bought a house over the last few years in many places, faced with out-sized pricing for even the most modest dwelling, and potential large losses if they have been forced to sell due to unexpected circumstances such as a job loss or relocation.

In the meantime, the taxpayers are forced via taxation to pay for this in the form of subsidized low interest mortgages, tax incentives for home buyers based on the American Reinvestment and Recovery Act, and as well the implicit guarantee of nearly 65% of all mortgages through GSEs Fannie Mae and Freddie Mac. And, I will only briefly mention that the FED also works to keep interest rates artificially low through its purchase of Mortgage Backed Securities (MBSs) - packages of bad loans on banks' books which the FED is now buying to the tune of $500 billion to help clear the way for more new low-interest loans!

This short quoted paragraph is so surprising to me because with simple deductive reasoning Hazlitt explains in a nutshell the economic debacle we currently face in America, in clear language that mostly anyone could understand with some thought, including many children I know. This simple eloquence is not something we will likely ever hear from the likes of Ben Bernanke as he tries to defend his actions as Chairman of the Federal Reserve. Hazlitt was a student of the Austrian School of Economics, and refuted in a weighty tome the writings of John Maynard Keynes - the fellow who provided the groundbreaking intellectual patchwork and background in favor of heavy public deficit spending as a replacement for so-called inadequate demand from the private sector around the world in his treatise 'The General Theory of Employment, Interest and Money" (1936).

Keynes' writing was not meant to be understood by the layman and indeed was written with the intent to convince the economists of the day. Keynes himself noted this in the preface to his famous book. I would welcome a description of the fundamentals of Keynesian doctrine that can be put forth in as simple and eloquent a manner as Hazlitt's remarks on the effects of government-sponsored mortgages, that were as convincing. It seems in order to reach the maximum number of individuals and also groups in society this would be a worthy goal. Sadly, I've looked very hard for such a description and have yet to find it. I am a logical person, and the appeal of the Austrian Business Cycle Theory and of economists such as Hazlitt and Ludwig von Mises is that the thought processes prescribed simply make sense in a logical way. I must admit, I have decided that I cannot and do not believe in the system Keynes prescribes, since it makes no logical sense to me whatsoever. But, I can be hopeful for the most concise and well-stated version of those ideas in order that I more and more fully understand the position I have taken, as well as that of the alternate viewpoint.

I will close with the thought that it is also simply impossible for me to take seriously a man who thought it would be reasonable for people to have a job digging up bank notes buried in bottles by the government. Don't believe me? Look it up. Keynes thought that it wouldn't be best, but it would be better than nothing in the face of political or practical pressures. To me, that is just so much nonsense.