An Age of Paradox

We live in an age of paradoxes of which we never speak:

• The best example of free market capitalism in the world today is in China, corruption notwithstanding, where the government long ago exchanged its murderous Maoist philosophy for Deng Xiaoping’s version of Adam Smith. They’ve driven the world economy ever since. Meanwhile OECD countries, espousing free markets, rely heavily on a cartelization of government and big business to manage the ‘competitive’ economy.
• Socialism has been attempted in virtually every country in the western hemisphere and in less than a hundred years is bringing every one of them to a crashing economic failure not seen in a thousand years, yet even in the USA it remains an ever tempting idea we are bound and determined to try.
• Americans take great pride in their belief in ‘free markets’ and yet think nothing of the idea that a group of bankers and economists can manage interest rates and the economy. Worse, when the economy fails, we blame the markets.
• As we stand in the trough of what is already the worst recession since the 1930s, when the Government / Fed / banking cartel has failed us the most, we are considering an even higher level of regulation and government intervention as the answer, instituted by the very people who built the cartel in the first place. The mind boggles.
• It remains beyond comprehension that believers in evolution do not condone or nurture the benefits of competition. What a strange predicament that religious espousers of intelligent design tend to be the last bastion for free markets.
• Amid these strange days, it is probably not so surprising that the triumvirate of bankers, economists, and government have brought us to our knees once again. Although we scoff at the idea that Russian central planning could never work, we still tend to think that politicians can deliver us to the promised land of economic well being and that the brilliant duo of Clinton and Greenspan were responsible for our past glory days. If our failure is due to markets, how is it possible to believe the success of the other?

The Failure of Economists

Only a very small percentage of economists predicted the collapse of the global financial markets. It is noteworthy that they are all shunned by mainstream government employed economic theorists. Notice none of them are consulted on fixing the mess.

Likewise, no one is talking institutional measurement and delivery structure failure. The Fed and government spend hundreds of millions of dollars per annum predicting economic risk yet missed the largest collapse since the Great Depression. Bernanke was minimizing the fallout even while the whole house burned. Doesn’t that mean the underlying theory is foundationally incorrect? For it is also true that despite the increasing complexity of the economy, there are relatively few variables which can plunge the economic engine into recession, and these variables remain at the heart of each and every economic collapse; monetary policy and government distortion of fractional reserve banking risk. These are the only two. No industry in a free market can cause a recession. Period.

Now we are told that adjustments to the banking engine will soon begin yielding the soft, rich earth of a vibrant economy.

We Can’t Understand the Financials

But the actual economic risk is almost impossible to estimate partly because hundreds of trillions of dollars of derivatives aren’t even on Bank Balance Sheets. The FASB has long ago abdicated its fiduciary duty. Current derivative contracts equal approximately $590 trillion (down from $690 trillion before the collapse), with a net total exposure of about $60 trillion, which equals world GDP. Goldman Sachs, JP Morgan, Bank of America and WTC hold about $200 trillion. We won’t be seeing any of those banks fail.

The government has an unfunded liability of $65 trillion and rising. The Fed has injected $12 trillion into the economy since the crisis began. And the ARM and commercial real estate markets have yet to reset and each are larger markets than the sub-prime fiasco.

Somewhere in here we must question whether transnational standards are a good idea at all.  Surely if everyone follows the Basil Accords, its weakness (and every regulation has weakness) is transmitted across the whole G20.  It is interesting to note that Canada, which retained its own more stringent regulation in the midst of Basil, didn’t require any bail-outs.  Their banks came through the mess relatively unscathed, and somehow predominantly chose not to play in the mortgage backed securities markets.  How did they come to that conclusion?  Some American banks like BB&T (America’s ninth largest bank) also chose not to play.  Strangely, none of them were consulted on remedies; only the failing banks got in on the discussion, and some of their managers, like Paulson and Geithner, are key political appointees.

The Over Worked Engine

We know some things which are ultimately unsustainable; the government is attempting to run a $15T economy on a Ponzi scheme of taxes without saving for a rainy day even their Keynesian socialist icon postulates. And the Fed backed GSE / banking industry is inherently ignoring market risk by calculating inter-bank loans as capital on an already over leveraged deposit base. No amount of assurance by the bankrupt FDIC can make us depositors feel better about that. That the IMF considers Pigouvian taxes a ‘fix’ is absurd.

There is a growing sense that our banking and monetary policies have exacted a terrible cost on America’s and the world’s poor. Maybe the political and powerful are much more inept holding the economy’s tail than previously considered. Perhaps it is impossible to fix the engine by playing with its parts. Perhaps leveraged central planning can’t work after all, just as our Founding Fathers warned.

The American dollar has been the world’s de facto gold replacement since 1971. You can still walk down a dog track to a small village in Bolivia, Thailand or Moldova, and purchase lunch in American dollars.  And except for these foreigners holding our currency, our dollar would have crashed long ago.

It appears the world is waking up; India just purchased 200 tons of gold from the IMF, and other governments are lining up behind them. Who can blame them for being a little worried as we decimate every market we see? We know one thing; if the implosion of commercial real estate collapses the banks again in the next year or two, we’ll have 35% unemployment and looting in the streets no matter what the economists think.

References

Kling, Arnold. “The Root of the Financial Crisis.” The Hoover Institution, December 1, 2009. http://www.hoover.org/publications/policyreview/72903637.html.

Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse Thomas E. Woods Jr.

End the Fed Ron Paul