Fannie Mae reports third quarter loss of $18.9 billion and requests another $15 billion in taxpayer funds.
Another government enterprise comes back to the well for more, with no end in sight. Bloomberg has a summary of the results here. FNM
was the organization that couldn’t do accounting properly several years
back. Based on inaccurate numbers, they paid government-hired cronies
huge bonuses. There is little doubt in my mind that this accounting is
also wrong, but for different purposes. The government cannot release
the real numbers. I believe they would be terrifying. As Joe Weisenthal
states: “Just to be clear, Fannie Mae (FNM) is still a total sinkhole.”
Unfortunately this coverup, along with other policies, will result in
much larger taxpayer losses.
One of the other policies was announced yesterday. Fannie intends
Continue reading Enron was an Ethical Angel compared to our Government
Twilight Eclipse. We've all heard about it by now. The Vampire love story by Stephanie Meyer as retold on the silver screen, smashing all records with a take of over $140 million on its opening weekend. And not only is it wooing middle school girls in bows and lipgloss, but apparently their silicon-enhanced mothers are falling for the sexy blood-suckers. Indeed, a vertiable rash of fan sites run by older women, for older women, have bubbled up on the web. According to a USA Today article just one of these, Twilightmoms.com, has more than 34,000 members 21 and older.
While this is great for Stephanie Meyer, squeeling girls, and their moaning moms, at the same time it exposes the tip of an iceberg few of us see - an ominous shift in control of perhaps the most important industry in the western world. For as Aristotle observed twenty-three hundred years ago, and which has been validated over the ensuing centuries, when storytelling goes bad, the result is decadence.
Something dangerous has happened in American literature. I would like to say "is happening" but it isn't happening. It has already happened. Go to a bookstore. Visit the teen section. Count the number of books for girls. Then count the number of books for boys. You get a ratio something like 20:1 . Twenty books for girls for every one book for boys. Do a survey of literary agents. Over 90% are female. And most of them state specifically that they are looking for stories about women or girls. Unfortunately the few male agents are guys who wouldn't have lasted long in the locker rooms I grew up in - they're looking for chick-lit too. And there are virtually no male editors being hired by publishing houses. (One wonders if they are even applying for the jobs.) I went to a writing convention recently at which writers were given the opportunity to pitch their work to editors and agents (4 young women and 1 older guy). The first question asked by all of them: "Is the main character female?"
Yeah, yeah, yeah, I know that girls are the ones doing the reading. And that boy books don't sell. And that the market is what the market is. Oh really? So boys aren't reading Lord of the Rings? Boys aren't reading the HALO books? Boys don't read Star Wars? Boys didn't read Harry Potter? With the exception of Twilight, which most boys don't care care for, the biggest sellers are the boy books. Or rather, books that appeal to both male and female whether young or old. So what is happening?
Modern publishing is run by agents. Agents are the gate keepers to the industry. Without an agent an aspiring author has no real hope. And most of the agents are women. Editors acquire books for publishing houses. And most of them are women, too. This wasn't true thrity years ago. Or even twenty years ago. And for the most part, both agents and editors only acquire books they 'like'. This is especially true of agents. In other words, despite the quality or subject, if an editor or agent doesn't 'like' a book, it is very unlikely that book, or the author who penned it, will ever see the light of day. Now I understand that books must fit the market, but in this case the market is being shaped and controlled entirely by the agents and editors to reflect what they 'like'. And what they 'like' is girl books. So when you waltz into a bookstore what you see more than any other thing are the literaty tastes of a few hundred women in New York City.
This is even more shocking in light of the fact that most of those girl books on the shelf are going to lose money. That's right. Most books don't make any money. (Neither do authors for that matter.) Same for the boy books. Most will lose money. The difference today over thirty years ago, is that agents and editors aren't willing to lose money on boy books anymore. Losing money on a girl book is forgivable by an editor who likes girl books. But losing money on a boy book by an editor who only likes girl books? The ultimate sin, and enough to see your job disappear. So it isn't even about money anymore.
Now I'm not saying that girl books are bad. Not at all. Books for females, about females, and by females, can be excellent works of literature and there are numerous literary masterpieces out there that attest to the brilliance of female writers and the magic of female charcters. I even applaud Stephanie Meyer and Twilight for what it is. The danger is the increasingly one-sided slant of modern literature as a result of sexism by industry professionals. For whatever reason the written word has the power to inspire, reflect, change, and shape culture like no other medium. Lord of the Rings, Harry Potter, Twilight, Star Wars, and many others either began as books or have enjoyed widespread success as books. Their impact on society has been, and will continue to be, incalculable. And to starve half the population based on their gender is no less wrong than making blacks ride in the back of the bus. And just as institutionalized racism bred a host of social ills, institutionalized sexism will do the same thing. Count on it. Reading may be recreational, but anyone with the power to influence social behavior and cultural evolution has a responsibility beyond mere entertainment. And certainly beyond the bottom line. Gladiators were entertainment, too. And so are whore houses. Even pushers deal in entertainment. So if you are going to publish only what you like, you better be prepared for the consequences. If boys have nothing to read they will turn to other pastimes.
It is perhaps illuminating to note that while Twilight has done well at the box office it lags far, far behind the entertainment of choice for boys. While $140 mil is a pretty good haul it pales in comparison to the $550,000,000 raked in by Call of Duty: Modern Warfare II just a week before. No other movie, book, or video game has come close on an opening weekend; not even Mr. Potter. And it should be noted as well that COD4-2 is three times the cost of a respectable hard-cover.
Boys will spend money on entertainment. But instead of reading they'll go for headshots. And as this increasingly violent choice is reflected back into society over the coming years you chicks in NYC will have the distinction of knowing that you helped bring it about. But at least you published what you 'like', huh?
Futbol Guru, www.not-a-lemming.com
Although the past week did not seem to show a fair amount of important trading or direction, I think that it was a relevant week nevertheless. Monetary authorities and government have made it very clear, if there ever were any hesitations, that at least in the US the accommodating policies will stay in place for as long as needed. In addition to this, over the weekend, a major hurdle to the collectivization of the US health care infrastructure was removed.
The natural winning choice here seems to be gold. However, over the long term, it doesn't seem right to me. Call it a hunch. Indeed, the world is struggling to come up with a reserve asset, on the prospect that the USD may fail to work as one. But, does anyone doubt for a moment that liquidity will eventually be drained out of the market? To be honest, I do. The issue is that what we call liquidity today, may only be so at a diminished value tomorrow. Let's see...
Everything may seem a challenge these days, but Keynes foresaw decades ago the dilemma we currently have in front of us. We, at "A View from the Trenches", also suggested this approach, in our letter of April 28th (www.sibileau.com/martin/2009/04/28 "A Keynesian Perspective"). In April, I quoted Chapter 13 of the General Theory, writing that:
"...Keynes says something rather ominous: "…if employment increases, prices will rise in a degree partly governed by the shapes of the physical supply functions, and partly by the liability of the wage-unit to rise in terms of money…". Essentially, the final rise in prices that we may expect will depend on how we address productivity issues today (i.e. physical supply functions...) and how our current politicians reshape the labour market today (i.e. contract negotiations with unions, etc. that determine the liability of the wage-unit to rise in terms of money).
The final sentence is perhaps the most relevant. Keynes wrote that "…when output has increased and prices have risen, the effect of this on liquidity-preference will be to increase the quantity of money necessary to maintain a given rate of interest…". This strongly suggests that an exit strategy by the Fed may be counterproductive. Inflation may be high enough for us to need today's increase in the quantity of money, to maintain the rate of interest at the end of this experiment"
The discussion above is more relevant after the events of last week. Strategists worldwide are writing research on how to hedge against upcoming inflation, the initial consequences in the credit markets (spread tightening in 2010 will continue) and the evolution of the global monetary system as the US may be too focused in trying to orchestrate a joint exit program with China only. Thus the degree of productivity increases (= strength of the recovery), which we check every quarter, as earnings are released, becomes critical. Unemployment, which so many an analyst sees as a burden for growth in consumption is, in my view and following Keynes' comments, a plus. With a 10%+ unemployment rate (i.e. the liability of the wage-unit to rise in terms of money), prices will rise slower than otherwise. Thus, is there a role for gold? Unfortunately, even as this commodity will certainly continue to rise, unless something more fundamental takes place, gold has limited chances of becoming a true reserve asset. But this does not mean, at all, that gold's chances to outperform in the near term are compromised.
Lastly, as I read the news last week, it seemed to me that we were closing on many questions that we had had since the beginning of the year. Will the Treasury be able to place its debt? Will the Fed indicate a path on rates? Will the US have a collective social health care system? Will there be enough demand for corporate credit? Will we see a clear inflationary reading in the Consumer Price Index? Will we see a clear trend in the reduction of unemployment claims?"
Thus, on this note, I think a comment about Method can be suggested. Thomas Bayes (London, 1701-1761) became posthumously famous thanks to his paper titled "An essay toward solving a problem in the Doctrine of Chances", published in the Royal Society's Philosophical Transactions, in 1764. Bayes had elaborated conditional probability, to be able to answer this question: "How can we infer underlying probability from observation"? (refer L. Mlodinow's "The Drunkard's Walk", Ch. 6").
It is very tempting, as questions become certainty, to infer what will happen in 2010. In the past weeks, I have read a lot of economic and financial research that is nothing else than inferences made on conditional probability (i.e. if the Fed leaves rates unchanged in 2010, what are the chances that investing in corporate credit outperforms investing in equity or gold?) But here's the trick: In conditional probability, once you identify and quantify your sample space, you have to prune it, to adjust it for the conditions you already know. Can we do this in a global multi-currency world, where the unemployment rate that is assumed to delay consumption growth is not in the country that produces most of the goods sold worlwide? I think the answer is negative. But it is also negative because money is non-neutral, which means that it affects assets prices at different stages in an inflationary process and in different degrees. Therefore, I believe that we are not even able to work with a specific sample space, let alone prune it.
The comments expressed in this website and daily letters are my own personal opinions only and do not necessarily reflect the positions or opinions of my employer or its affiliates. All comments are based upon my current knowledge and my own personal experiences. You should conduct independent research to verify the validity of any statements made in this website before basing any decisions upon those statements. In addition, any views or opinions expressed by visitors to this website are theirs and do not necessarily reflect mine. My comments provide general information only. Neither the information nor any opinion expressed constitutes a solicitation, an offer or an invitation to make an offer, to buy or sell any securities or other financial instrument or any derivative related to such securities or instruments (e.g., options, futures, warrants, and contracts for differences). My comments are not intended to provide personal investment advice and they do not take into account the specific investment objectives, financial situation and the particular needs of any specific person.
Por Robert M. Thornton. (Publicado el 23 de noviembre de
2009)
Traducido del inglés. El artículo original se encuentra
aquí: http://mises.org/daily/3875.
[The Freeman. 1972]
Estos libros se publicaron por primera vez hace casi
cuarenta años cuando Laura Ingalls Wilder estaba en sus sesenta. La décimo
octava edición en tela se publicó en 1970 y ahora tenemos la primera edición en
rústica. Laura (no consigo llamarla Sra. Wilder) escribió el primer libro de la
serie sin plan de continuarla, pero la respuesta entusiasta de los jóvenes
lectores le impulsó a seguir hasta que las historias llegaron al mimento de su
matrimonio con Almanzo Wilder, el 23 de agosto de 1885, ¡ocho volúmenes de una
mujer que cuando era niña le dijo a su papá que nunca podría escribir un
libro!
Laura nació en 1867 y vivió noventa años, la mayor parte de
ellos con su marido en su granja cerca de Mansfield, Missouri. Su hija, Rose Wilder
Lane, que murió en 1968, es bien conocida entre los liberales como autora de The
Discovery of Freedom [El descubrimiento de la libertad], un
libro que inspiró The Mainspring of Human Progress [El motivo
principal del progreso humano], de Henry Grady Weaver. Rose mostró su recia
estirpe de pionera cuando con 78 años fue enviada a Vietnam como corresponsal.
¿Qué hace tan buenos y entretenidos estos libros de “La casa
de la pradera”? Primero, sacan al lector de su propio mundo y le llevan a
distintos lugares y tiempos pasados, a la vida de los pioneros de las praderas
en los años 1870 y 1880. Lo que emociona aquí es leer acerca del lechero o el
tendero del barrio. Segundo, hacen que el lector reflexivo agradecido por los
beneficios de que disfrutamos hoy en Estados Unidos. Laura escribe sobre las
diversiones de su niñez en la pradera y los buenos ratos con su familia, pero
no idealiza sus experiencias. La vida era entonces dura en un territorio
agreste.
Había estómagos vacíos cuando las cosechas se destruían por
fuego, sequías, plagas de langosta o tormentas. La enfermedad podía significar
la muerte porque doctores y medicinas eran escasos en la frontera. Todos,
excepto los muy viejos y muy jóvenes tenían que trabajar. Los placeres eran
sencillos, no había radios ni automóviles o televisores. Había poco dinero, así
que los regalos de Navidad para los niños podían ser un penique y una barra de
caramelo. Había momentos felices y terribles, cada uno era parte de la vida.
Tercero, y más importante, estos libros pueden ayudarnos a
recuperar el espíritu de los peregrinos, los patriotas y pioneros que fundaron
esta nación y la hicieron grande. Parte de ese espíritu es el gusto por la
independencia y un sentido de la responsabilidad individual.
La familia de Laura no espera que nadie cuide de ellos. Se
preocupan de sí mismos y saben que tener libertad significa la libertad de
fracasar o de tener éxito. Otra parte de este gran espíritu es no quejarse de
su fortuna o de no obtener la “parte justa” de los bienes del mundo. Otro es el
sentido de comunidad donde se consigue mucho voluntariamente, todos tratando de
ayudar siempre que tengan tiempo, talento y dinero.
En respuesta a preguntas sobre ella y sus libros, Laura
escribió:
“Los libros de La casa de la
pradera son historias de hace mucho tiempo. Nuestro actual modo de vivir y
nuestras escuelas son muy diferentes: muchas cosas han hecho que la vida y el
aprendizaje sean más fáciles. Pero las cosas reales no han cambiado. Sigue
siendo mejor ser honrado y sincero, aprovechar al máximo lo que tenemos, ser
felices con placeres sencillos y ser alegres y tener coraje cuando las cosas
van mal. Las grandes mejoras en la vida se han producido porque cada
estadounidense ha sido siempre libre de buscar su felicidad y mientras los
estadounidenses sean libres continuarán haciendo nuestro país aún más
maravilloso”.
No es fácil para los niños de hoy en día aprender estas
verdades, pero mientras se lean estos libros las lecciones no se perderán.
-------------------------------------------------
Robert Thornton fue un empresario de Kentucky y crítico de
libros para The Freeman durante muchos años.
Esta crítica apareció originalmente en The Freeman, 1972, Vol.
22, pp. 62-63.
“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”
Friedrich Hayek
The economic programs and policies currently in place are truly
astounding. I don’t think I have ever seen a more harmful economic
environment for the country. While some of these programs started with
Bush, the Obama Administration has advanced them to insane levels.
Logic, economics, common sense and history must be defied to believe a
recovery is possible in this environment. The nation’s standard of
living will be substantially lowered unless changes in policies are
forthcoming.
To understand why this economy cannot recover under these policies,
it is necessary to differentiate between the macroeconomic and
microeconomic approach. Arguably, macroeconomics is not economics, but
that topic cannot be fully explored today.
Macroeconomics deals with aggregates, statistics and mathematical
models. Macroeconomics purports to describe and explain the behavior
Continue reading Why Obamanomics Will Not Improve The Economy
“By one measure, the government already plays an outsize role in our so-called free-market economy—and it has little to do with the recession. Economist Gary Shilling has calculated that 58 percent of the population
is dependent on the government for “major parts of their income”
including teachers, soldiers, bureaucrats, and other government
employees; welfare and Social Security recipients; government pensioners; public housing
beneficiaries; and people who work for government contractors. By 2018,
Shilling estimates, an astounding 67 percent of Americans could be
dependent on the government for their livelihood. The implications
aren’t comforting.”
The shocking quote above is from an article by Rick Newman.
“We stand on the brink of a financial challenge of unprecedented
magnitude in the history of this state,” he added. “This is a historic
moment. We’re going to have to make historic decisions.”
This language could have come from the most of the leaders of state
and/or local governments in this country. This quote comes from
Governor David Patterson of NY state. The story is detailed in a NY
Times article here.
What is going on in NY is going on in California and other
governments around the country. The blunt fact is that governments at
all levels are going to have to shrink. Government may be the last
bubble of this economic cycle. It has grown faster than the general
economy for multiple decades. It has done so in both good and bad
times. It has raised taxes on its citizens when times
Continue reading Political Turnaround Specialists Needed
David Rosenberg posted on unemployment, estimating it going up
to 12 – 13%, as measured by U3. It is currently 10.2%. Another rate,
more reflective of actual unemployment is U6. It is currently at 17.5%.
A third measurement, offered by John Williams at Shadowstats.com,
comes in around 22%. (As an aside, Williams is a diligent statistician
who has been tracking government statistics for years. He restates them
to reflect methodological changes over the years. It is really quite
striking the differences between Williams’ figures and “official”
statistics in key areas such as unemployment, GDP etc. It is worth
taking a look at his site if you are not familiar with it.)
I think Rosenberg will be low in his estimates. He uses the current underemployed and the record-low work week statistic as
Continue reading Unemployment 12 – 13% PLUS
Stocks are off about 80% from their peak, at least as measured in ounces of gold.
This chart shows the Dow priced in ounces of gold. Currently, it takes just under 10 ounces of gold to “buy” the Dow. Over time, this ratio has ranged from 1 to over 40. Some investors use this relationship to determine the relative attractiveness of stocks versus gold.
Others believe that measuring things in gold is a better reflection of inflation than deflating nominal prices by the CPI index. Unfortunately, both methods have deficiencies. Using gold as the deflator, investors who held stock since the 1920s would have lost money, at least in terms of gold. While this might seem unlikely, remember that the value of the dollar today is only worth about 4 cents when compared to
Continue reading Stocks Down About 80% from Peak
My recent post on the US Hyperinflation Coming ties in nicely with the note provided below by Chris Coyne. He quotes Beaulier and Boettke who argue (along with Adam Smith) that facing up to our debt problems now is the proper course. In effect, they argue for the Zimbabwe solution now as opposed to waiting until things get much worse. However they are economists and not seated politicians. It is highly unlikely that such an approach will be taken, given the spineless, whining wimps that pass for legislators. Certainly not before the end becomes obvious to the mass citizenry. Until then, the pols will use smoke and mirrors to claim that all is well. When the obvious becomes so obvious, inflation will be well along, probably having an insurmountable lead over what the Fed will then be able
Continue reading Hyperinflation Redux
There is little doubt in my mind that we are heading for a train wreck. The timing and catalyst that trigger this reaction are much more difficult to determine. The potential catalysts are many, any one of which would trigger the wreck. A dollar crisis or a Treasury fund-raising crisis (likely to appear simultaneously) are probable. Or, it could come via an unexpected, virulent outbreak of inflation from all the dry tinder the Fed has injected into the system. Just the opposite of that, a deflationary collapse, could occur although I think this scenario less likely. (It is likely that the real economy will continue to decline, however, perhaps even violently.)
Or, it could come, once again, from the financial sector. Banks and other financial institutions are nowhere near healthy. The housing crisis hasn’t ended and bank collateral against mortgages continues to deflate. We do not know how bad this
Continue reading Train Wreck on the Way
WHY THE FALLING DOLLAR IS HARMFUL There are several reasons for foreign investors to stop buying Federal Government debt. One is merely the diversification motive. They already hold too many denominated assets. Second is the risk of default which grows along with our deficit. Third is the lack of returns or actual losses they incur as a result of the depreciation of the dollar.
The third effect is clearly illustrated in the chart below. It shows what what Americans earned (actually lost) with the 10-yr Treasury Bond (shown in red) versus what Europeans (shown in blue) lost.
Source: StockCharts.com
The disparity in returns (a loss of about 3% for US investors and a lost of about 18% for European investors) results solely from the deteriorating value of the dollar. This differential developed over just 8 months, which is indicative of the rapid decline in the dollar. For US investors, investing overseas this
Continue reading Falling Dollar, Foolish Foreigners and Blanche Du Bois
The (usually) transparent process of inter-bank lending works so well that most of the time we don't even think about it. This process has largely weaned the public away from physical paper money. Note that most money (about 90%) now exists only as entries on bank ledgers, backed by loans (debt). Also, note that possessing physical paper dollars is like having equity in the economic output of the United States of America, and has no credit risk associated to it. Physical paper money is not anyone's liability.
Bank deposit money, on the other hand, does have credit risk associated to it. That risk consists of the liability of the bank in which the deposit resides. Strangely enough, most of the time the credit risk of bank deposit money is lower than the theft and physical-loss risk of physical paper money.
That is why we use bank deposit money more than physical money. Through this (normally) transparent process of inter-bank lending, the banking system acts like a huge clearinghouse (essentially a giant ledger) which clears payments between its customers without the physical transfer of cash, and keeps track of who has how much money. Most money in the world economy is not physical (paper cash or gold) but logical (ledger entries).
To summarize: physical paper money is equity. Bank deposit money is backed by debt (actually that's not 100% true--reserves at the federal reserve system are also equity, essentially an electronic version of physical paper cash).
That difference -- that physical paper money = equity in the nation's economy, and that a bank deposit = debt (a bank obligation) causes great confusion.
We have become very comfortable with bank deposit money, without thinking much about the credit risk we are taking. Bank failures, when they happen, create confusion and chaos because the vast majority of businesses and individuals use checking accounts for convenience (they can write checks rather than handling physical paper cash) and they don't really think much about the credit risk that is normally associated with keeping their money (their most liquid capital) in a bank in a checking account. In fact, in most cases users of checking accounts do not want to take a credit risk. But in the current banking system there are no alternatives.
Is There a Better Way?
Consider the banking industry's contribution to society. The banking industry provides three major services to the public:
- It provides a "safe" place to hold the public's most liquid assets (cash).
- It acts like a giant clearinghouse (settling checks without physical paper cash transfer).
- It is a source of loan money (banks evaluate the credit worthiness of borrowers). Think of "credit worthiness evaluation" as a service to society. If bankers do a poor job at evaluating credit worthiness they will end up mis-allocating economic resources.
What I am asserting is that it is possible to have a banking system where a customer would get benefits 1 and 2 described above without taking a credit risk, if banks gave people a choice between a regular account and a special "100% reserve account."
These special accounts, which are not available to the public today, would have no credit risk. The money in such accounts would not be lendable. There would still be fraud risk, of course. A bank desperate for cash might be tempted to "dip" into the reserves allocated to their 100% reserve accounts. Of course we would make such "dipping" illegal. The 100% accounts would be the electronic equivalent of storing physical paper bills in a safe deposit box at the bank. The total reserves of a bank would be "safely electronically stored" at a central bank (much like reserves at the FED).
I know that Misesians and libertarians don't like central banks and are very suspicious of them. But I wanted to write this blog and start a discussion. It seems to me that electronic version of physical paper cash (i.e., digital cash) is the next natural step. Much like airline tickets are now mostly issued as e-tickets and not as negotiable paper tickets. By its nature "digital cash" would have to be stored on some central bank on a computer hard-disk (i.e, an electronic ledger) and it would also contain the owner's identifying information (i.e., the bank account number). Such "digitial cash" would NOT be debt money (as are bank deposits today) but would be "equity" money (like physical paper cash). Ofcourse we could go a step further and back-up the "digital cash" with gold reserves in the vault (but I am NOT proposing that we do this). I am trying to understand the Misesian and libertrarian distaste for a central bank. By the way I want a central bank as a safe repository of electronic money only and nothing more. I don't think a central bank should try to influence interest rates or lend money like the current FED.
Such accounts would have no credit risk (like physical paper cash) but would have the benefit of being used in electronic transactions and be accessible by personal checks. Of course, a 100% reserve account would not earn interest but would most likely have monthly maintenance fees associated to it (similar to a safe deposit box; it would also be very much like the reserve accounts that banks have with the Fed).
Such accounts, if widely used, would lessen the impact of bank failures on the economy in terms of a contraction of the money supply, chaos and confusion--but would not completely eliminate them.
Lending involves business risks (credit risks). If a customer were to choose a non-100% reserve account then he would be subject to losing his money. This would force the public to do some homework before handing money over to a bank (in essence, customers would need to consider banks' credit ratings, quality of management, etc.).
Of course, in this type of setup, a non-100% reserve account would probably have to pay a higher interest rate than the fractional reserve accounts do today. In fact if the public had a choice of 100% reserve accounts, there would be no need to impose legal reserve requirements on non-100% reserve accounts. There would be a clear separation between accounts that have a credit risk and accounts that don't. The accounts with credit risk would need to set their interest rates high enough to attract depositors.
If our banking system were set up this way, we would avoid huge systemic risks in the future, since a major part of the money supply would likely be sitting in non-lendable accounts. Many enterprises probably should not take any credit risk with their liquid capital (utility companies, municipalities, states, hospitals, etc.). In any insolvency or bankruptcy the 100% reserve accounts would receive priority, and unless the bank was fraudulently “using” these reserves the deposit owners of such accounts would never lose their money. If an electronic deposit account with no credit risk were available, then any individual or business choosing not to use such an account would be subject to losing their at-risk deposit. If such an alternative were available, then the depositor who chose the lendable money account would be warned that he or she could lose money if the bank became insolvent.
Once this choice is given to the public, the banks can then be allowed to fail without severely impacting the payment system which is needed to conduct day-to-day commerce. The only job of the FDIC would then be to insure smooth transfer of 100% reserve accounts to another bank.
I will go a step further and state that the availability of such accounts (non-lendable, 100% reserve accounts) should be mandated by Congress through force of law. Each business and individual should be able to choose whether they want to take a credit risk or not.
Highly recommend The King Canute Economy: Governments’ Futile Attempt to Stem the Tide to understand what is happening in our country and around the world. “In the legend of King Canute on the sea shore, it is popularly represented that King Canute was so arrogant that he actually sought to hold back the tides. However, King Canute was actually demonstrating that, for all his power, there were some forces which he could not overcome. As we contemplate the actions of governments around the world, it is possible to wonder whether they have ever heard King Canute’s story.”
Monty Pelerin at www.economicnoise.com
Here is a short essay I wrote for my American Government Class on Corporate Welfare. I hope to further explore and expand on the ideas presented in the future. I always appreciate suggested sources and helpful comments. Enjoy!
Corporations are firms or companies (private, publicly traded, for profit, and/or non-profit) that agree to be regulated by certain rules, corporate law, that regulates the relationships and interactions of corporate management, shareholders/owners, employees, creditors and the government. Companies agree to these rules because they provided limited liabilities to all actual persons who are a part of the corporation by creating an artificial “person hood” status for the corporation and limiting the liabilities to that entity. The government also uses its state power to protect, from competition through tariffs and regulation, and subsidize these entities. In return, the government is able to manipulate the economy through few points, they can regulate the significantly fewer large corporations easier than they could coordinate and regulate different stores on every corner, and they will be working with voluntary and cooperative participants who want the continued benefits of state power. Understanding “corporate welfare” is a bit more complex since no one wants to claim to support such measures but nearly all political parties and platforms do in some form or another. In fact, the entire concept of the “corporation” is a form of corporate welfare, or redistributing wealth or interfering in the market on behalf of companies or firms. Support for corporate welfare is never described as such but almost the entire political class does support it in its more overt forms or it's more subtle indirect forms. Libertarians, on the other hand, oppose all forms of corporate welfare when they are not being negligent or inconsistent with their principles.
The left supports several types of corporate welfare. The recent “Kelo” case involving eminent domain gave private lands to corporate interests and was decided by liberal judges. Also, many of the regulations that are supposedly done to restrict corporate actions are supported by the corporations themselves because it makes it more difficult for new competitors to enter the market. Roderick T. Long in an essay written for the Cato Institute, “Corporations versus the Market” wrote that , “the ability of colossal firms to exploit economies of scale is also limited in a free market...unless the state enables them to socialize these costs by immunizing them from competition- e.g., by imposing fees, licensure requirements, capitalisation requirements, and other regulatory burdens that disproportionately impact newer, poorer entrants as opposed to richer, more established firms.” (1)
The right also supports several types of corporate welfare, but they may be more dangerous since they shroud their policies in the cloak of the free market. For example, they advocate tax breaks for certain businesses or industries but “when a firm is exempted from taxes to which its competitors are subject, it becomes the beneficiary of state coercion directed against others, and to that extent owes its success to government intervention rather than market forces.” (1) The right's use of privatization is often of a similar nature. In free market terminology privatization would be the removal of government and its influence from an industry but the right often uses it to mean a transfer of monopoly status over an industry to some contracted firm or corporation. Thus the monopoly status is maintained and the governments involvement and influence is still present.
The right and left both justify the more overt types of corporate welfare that they end up supporting, such as TARP and the bailouts of the auto and financial industry, as necessary evils. However, necessary evil is a contradiction as if something is necessary than it must be good and not evil. Here we can apply one of Ayn Rand's famous quotes “Contradictions do not exist. Whenever you think you are facing a contradiction, check your premises. You will find that one of them is wrong.” (2) In this case, either the bailouts were necessary and good, having a positive effect, while the principle that labeled them evil must be ill founded or the principle that makes such bailouts evil is correct and they were not in fact necessary. The contradiction should force us to check the two premises “necessary” and “evil” and see which one is wrong.
Libertarians, and the position I support, holds that all corporate welfare is wrong. The current “conflation” of corporatism and capitalism is especially dangerous since it rallies and multiplies the opponents of free markets who somehow see them tied to pro-corporate policies and also allows statist policies to be sold under the mantle of the free market. The current failures of “capitalism” and the “free market” are really only failures of the current system which is often labeled capitalism but is only one step away from socialism. In socialism, the state owns industry but in our current system, often labeled capitalism, the states of privatized profits and socialized costs in exchange for regulation and influencing willing participants and created corporatism which should not be confused with real capitalism or free markets.
1. http://www.cato-unbound.org/2008/11/10/roderick-long/corporations-versus-the-market-or-whip-conflation-now/
2. http://www.brainyquote.com/quotes/authors/a/ayn_rand.html/ The quote is also found in her novel, “Atlas Shrugged.”
Another good article I read while doing my research, but did not have room to include in my post was:
http://97.74.65.51/readArticle.aspx?ARTID=22594/ An article in FrontPageMag.com
Originally posted on http://damienmanier.com
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