The Crisis of Global Statism

A Crisis of Global Statism

Daily Article by Pierre Lemieux | Posted on 9/25/2008

The current financial turmoil is a "crisis of capitalism," said a spokesman for Britain's Socialist Workers Party, as good Marxists have been repeating for more than a century. "[A]n unregulated financial system is a disaster," echoed Sheila Rowbotham, professor of gender and labor history at Manchester University. Added a leftist London mayoral candidate, "Capitalism has had its chance and failed; now it's socialism's turn."

I wonder what they have been smoking.

Remember that the financial crisis opened last year with the meltdown of the American subprime mortgage market. At that time, half of the residential mortgages in the United States were already held or guaranteed by Fannie Mae and Freddy Mac, two so-called "government sponsored enterprises" (GSE). Over the past year, the two GSEs have financed four out of five mortgages. Fannie May was created in the wake of the Great Depression by Franklin D. Roosevelt; Freddy Mac by Congress in 1970. Private investors happily bought securities issued by the two GSEs because they knew the federal government would never let these companies fail — which proved true last week when they were entirely taken over by Washington. Before the crisis started, the American mortgage market was a paragon of socialism, unparalleled in any other Western country.

The 1997 Community Reinvestment Act, which prevents mortgage lenders from "discriminating" against minority applicants, did not help sound financial decisions. At every turn of a financial decision, some regulator is lurking.

The American financial system is tightly regulated. Created in 1934, the powerful Securities and Exchange Commission (SEC) enforces regulations on all kinds of financial transactions, from registration of securities to disclosure of corporate information. The 2002 Sarbanes-Oxley Act further extended the intervention domain of the SEC. The US Department of Justice prosecutes CEOs and entrepreneurs, and the convicted targets are often given long jail sentences. On Thursday, the New York attorney general — a would-be Elliot Spitzer or Patrick Fitzgerald — announced that he has started a "wide-ranging investigation into short selling in the financial market."

When Treasury Secretary Hank Paulson says, "I don't believe in raw capitalism without regulation," he is not revealing a scoop. He is reiterating what has been official American policy for the last century. Whether the result is financial socialism with a human capitalist face, or state capitalism with a strong socialist flavor, it is a matter of choosing between a half-empty and a half-full glass.

The partial exportation of American regulation to other countries has led to a sort of global financial statism.

Another source of financial turmoil has been the brisk increase in the money supply by the American central bank, the Federal Reserve System, as indicated in higher inflation and low interest rates. For many years, economists of the so-called "Austrian" school of economics (in the wake of late Nobel prizewinner Friedrich Hayek and Ludwig von Mises) have warned us of an impending disaster if money is pumped into the economy to prevent necessary adjustments. This, they claimed, will ultimately bring a worse crisis.

There is no inherent reason to trust the state to regulate efficiently. The state is made of men (politicians and bureaucrats) who respond to their own incentives and interests. If there is a political gain to be made from expanding mortgages and postponing a crisis for future politicians to deal with, it will be pursued.

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Despite this, a false confidence in the power of the state to guarantee stability has developed. Some investors have come to believe that, whatever mistake they make, they have a right to their profits, and the authorities will enforce it. The rescue of Bear Stearns, the two GSEs and AIG will only fuel this belief. But if some people have made bad investments and are relieved from their responsibility for their own mistakes, it only means that the cost will be transferred to others, probably through a worse crisis.

Moreover, as many commentators have remarked, guaranteeing large financial firms from failure will bring calls for regulating them still more tightly. This is an old story: past political interventions create the reasons for new ones.

The present financial turmoil is really a failure of global statism. Socialism has failed once again. Let's try capitalism.

Alejandro Beeche Van der Laat

Understanding the Crisis

Daily Article by Llewellyn H. Rockwell, Jr. | Posted on 9/20/2008

"The core issue is that there is nothing to restrain money creation."

What caused this? It is a simple question, and yet answers are all over the map, as you might expect. Here's mine in two words: fiat money.

The word "fiat" here means by order of the state, which is to say that it has no independent worth and is eventually worth nothing. The possibility of precisely that happening emerged in August 15, 1971. Since Nixon severed the last tie of the dollar to gold, the world's monetary system has not been restrained by anything physical. We've depended on the discretion of central bankers. We can't trust that, and this crisis shows precisely why.

Of course there are subsidiary factors: the lifting of restrictions on Freddie and Fannie; subsidized lending; the Fed's artificially low interest rates; the Community Reinvestment Act; financial "deregulation"; the war; Bush profligacy; debt. There is much more besides. But fighting each of these forces individually is like battling down flies at the garbage dump. The core issue is that there is nothing to restrain money creation.

The first time that people hear this, they find their minds rather boggled, and they want to know more. My whole experience in this area is that once people start digging around the area of monetary theory, they find that (1) it is not as difficult a subject as it seems, (2) it is endlessly fascinating, and (3) it explains far more than they realized before.

It was F.A. Hayek who bore this burden most directly for those in the English-speaking world. His books on the source of the business cycle and what to do about it appeared in the late 1920s and throughout the 1930s. These works were cited by the Nobel Prize Committee in 1974 as his most important contribution to economic thought. His ideas are directly applicable to our current plight.

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Part of the Crisis Book Kit

It has been a real tragedy that these works have been out of print. But this year, the Mises Institute made a hard push to get this book out in time for the current financial calamity. We set other projects aside and worked all hours to bring out the definitive collection. Here it is: Prices and Production and Other Works on Money, the Business Cycle and the Gold Standard, by F.A. Hayek.

The book is priceless in its content and presentation. Specifically, Hayek explains the mechanism by which loose credit generates false signals to investors, leading them to chase fads all over the market, and ending in sector-wide failures. He was writing at a time when the gold standard provided partial restraint on the government and the central bank. No more. So Hayek's analysis of all of this is more penetrating than ever. The book also contains the complete text of his many battles with Keynes.

At this link, you can buy what we are calling the Crisis Book Kit at a deep discount. Just click the books you want and the discount happens.

At the same time he was writing, his mentor Ludwig von Mises was battling it out in Austria and the German-speaking world. He became the great opponent of not only inflationary finance but also the Continent's version of the New Deal. The remarkable thing is that these essays were not translated until the 1980s and even then remained obscure. This book is really their first major debut, and it appeared only last year: The Causes of the Economic Crisis. You will see his expository virtuosity at work and also his amazing courage and passion.

It has been a major task of the Austrian school since 1912 to explain to people what money is, how it works, and how its corruption and distortion by the state is the source of both inflation and business cycles. The core book here is Mises's own 1912 classic called The Theory of Money and Credit, written at the dawn of the central banking age. The prose is still crystal clear, and it continues to be the best textbook on money ever written.

In the American context of the Great Depression, one book captures the whole onset and response. It is Murray Rothbard's America's Great Depression. He shows that it wasn't the 1929 crash that was the problem; it was the response to the crash that created the Depression. Bailouts. Price controls. Wage controls. Government programs. Trade restrictions. Crackdowns on the capital markets. And who did all this? It originated not with FDR but with Herbert Hoover — clear echoes of today. There is no understanding the present crisis without this book.

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"When the money goes bad, everything goes bad."

Finally we need to realize the problem of loose money and its effects are not new and not necessarily 20th century. The whole history of the American economy is littered with banking panics, bailouts, business cycles, and chaos, each with the same root. When the money goes bad, everything goes bad. Rothbard chronicles the long history of this in his marvelous book: History of Money and Banking in the United States.

The Mises Institute has sponsored research on this topic since it was created in 1982. Our first conference was on the gold standard. We've suffered for this choice. The best way to fall out of favor with the regime — or its libertarian and neocon supporters — is to question its central bankers. We've done that. But now, the work is done. It is available. The truth is out there. You only need to grab it, comprehend it, and spread it.

Please help. History hangs in the balance.

P.S. For those who want a more extensive collection, see our complete Money and Banking Collection, at an even deeper discount.

Alejandro Beeche Van der Laat