Power & Market

Is Twitter Violating Contractual Agreements When It Expels Users?

02/15/2021Lipton Matthews

Liberals rarely defend the property rights of corporations, so it is quite amusing that scores of them are arguing that social media companies have the right to deplatform rogue actors. Unfortunately, by making free speech the crux of the argument libertarians have ceded the debate to liberals. Instead, we should be asking ourselves if companies can arbitrarily violate contractual agreements. When the average person signs up to become a member of Twitter, he does not view his actions as constituting a contract, but nonetheless, a binding agreement exists.

If the contract is breached by either party, then the aggrieved party is entitled to remedies. Although the terms of service agreement created by Twitter allows the platform to expel users for engaging in unlawful conduct or harassing others, it also explicitly notes that Twitter will not be responsible for tweets that offend viewers: “ You understand that by using the Services, you may be exposed to Content that might be offensive, harmful, inaccurate or otherwise inappropriate, or in some cases, postings that have been mislabeled or are otherwise deceptive.” By joining Twitter, one consents to peruse hostile content. Twitter is not obliged to protect users from controversial ideas. Using Twitter, like navigating life in general is risky. As such, people assuming that Twitter ought to be a safe place should just exit the platform.1

Twitter is a social media platform enabling different groups to share a wide variety of experiences. It does not exist to solely promote the viewpoints of liberals. Eccentric characters are free to express inaccurate positions—they may even spread dubious conspiracy theories—none of these actions are impermissible under their contract with Twitter. One expects users to exercise judgement when consuming information. Therefore, they must hold themselves accountable for failing to properly assess posts on the platform. Based on its terms of service Twitter cannot be held liable if users fail to exert due diligence. Here is an excerpt: “All Content is the sole responsibility of the person who originated such Content. We may not monitor or control the Content posted via the Services and, we cannot take responsibility for such Content.”

By genuflecting to the liberal mob, Twitter is violating agreements with conservative users, when they are expelled for not conforming to the worldview of liberals. Obviously, we can understand Twitter removing a Neo-Nazi with a criminal history from the platform, if he wants to use it as a base to organize a violent rally. But to cancel an account because the user has espoused opinions that some liberals deem to be incendiary is downright unjust. The truth is that Twitter must be sued for violating its contractual obligations to defenestrated users.

Unsurprisingly, the latest victim of Twitter is Donald Trump. Although Twitter can make an account redundant, if the user willfully advocates violence, but this does not apply to Trump. His critics clearly lack an understanding of metaphors. Many on the left have argued that Trump’s invocation of the word “fight” reflects incitement. A close reading of the text, however, indicates that his language is metaphorical: “Republicans are constantly fighting like a boxer with his hands tied behind his back. It's like a boxer. And we want to be so nice. We want to be so respectful of everybody, including bad people. And we're going to have to fight much harder. And Mike Pence is going to have to come through for us. And if he doesn't, that will be a sad day for our country because you're sworn to uphold our constitution…if you don't fight like hell, you're not going to have a country anymore.”

In this context, fight does not represent a physical battle, Trump is merely instructing his supporters to protest a perceived injustice. For example, they may challenge what right wingers refer to as the “deep state” by filing lawsuits to contest the election results. Trump had no intention to encourage violence even in his speech he implores his supporters to oppose the political establishment peacefully: “I know that everyone here will soon be marching over to the Capitol building to peacefully and patriotically make your voices heard.”

Trump is a tainted character, so liberals often use his clumsy speeches as an opportunity to guilt people into accepting their sentiments. Defending Trump automatically makes one a deplorable personality. Since most people fear social stigma, they often agree with liberals out of desperation. Though the decision to ban Trump is widely celebrated, Twitter is guilty of misconduct. As we have shown Twitter has no authority to deplatform Trump based on his speech. This entire fiasco reveals Twitter’s contempt for contractual agreements. Politically correct libertarians who argue that the First Amendment only protects citizens from the power of government are missing the point. At the heart of the saga is Big Tech’s disdain for contractual rights when users who do not subscribe to a liberal outlook are removed from social media. Libertarians must never allow their hatred for Trump to prevent them from defending the cause of liberty.

Twitter’s rules against hateful conduct are quite specific. Tweets can be removed for expressing statements construed as dehumanizing individuals based on race, ethnicity, gender, religion, national origin etc. If this threshold is not met then Twitter is in violation of its policy. It must also be stated that although such tweets may provide justification for removal, Twitter does not clearly state that users will be expelled for espousing said views. Furthermore, Twitter’s policy on misinformation addresses specific issues pertaining to misleading statements that seek to cause harm. However, if an opinion is perceived as misleading, but the evidence indicates that it is true, then twitter has no authority to deplatform users and doing otherwise would be an arbitrary violation of contractual rights.

  • 1. Twitter’s rules against hateful conduct are quite specific. Tweets can be removed for expressing statements construed as dehumanizing individuals based on race, ethnicity, gender, religion, national origin etc. If this threshold is not met then Twitter is in violation of its policy. It must also be stated that although such tweets may provide justification for removal, Twitter does not clearly state that users will be expelled for espousing said views. Furthermore, Twitter’s policy on misinformation  addresses specific issues pertaining to misleading statements that seek to cause harm. However, if an opinion is perceived as misleading, but the evidence indicates that it is true, then twitter has no authority to deplatform users and doing otherwise would be an arbitrary violation of contractual rights.
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If Congress Were Genuinely Interested in Democracy, They Would Welcome an Election Commission

01/05/2021Tho Bishop

Listen to the Audio Mises Wire version of this article.

America stands over two months after Election Day, and yet tension remains in the air over the outcome of the presidential race. Legally, little has changed. The full expectation should be—as it has from the start—that Joe Biden will end up being inaugurated later this month. Appropriately, the event will be very limited for the public.

Even still, in spite of the clear legal advantage Joe Biden has, the behavior of various institutions of power is one of growing unease. This is understandable, Donald Trump remains a populist political figure willing to take down any political leader—regardless of party—who does not remain loyal to his convictions that he was the victim of a fraudulent election. As a result, an impressive number of elected Republican officials have remained in lockstep with the president and his team on challenging the results. We are witnessing an unprecedented breakdown in political norms, and those who have long enjoyed true, unquestioned power are not reacting well to even a modicum of uncertainty.

The response to all of this is predictable. The corporate press has been firm on the line that any skepticism about the legitimacy of this election is beyond the realms of acceptable opinion. They have drawn direct connections between questioning the election and their current go-to boogeyman QAnon. Democratic politicians are calling for treating any Republican colleagues loyal to Trump on par with members of the Confederacy during the Civil War. Establishment Republicans whose political relevance has long since passed are trying to remind those still in positions of power that the proper role of political conservatives is to politely surrender to their ideological enemies or else risk the GOP losing the approval of voters who are increasingly beyond persuasion.

While it is fair to question what significant dents the Trump administration has left on policy, the significance of this backlash is worth noting. What we are seeing is a major shift of power within the GOP in which elected Republicans in Washington actually fear the Trump base more than they fear names like McConnell, Ryan, and Cheney. While this has long been clear during the theater of primaries, it has been less so in terms of votes within Washington. It took less than two years for a large class of Tea Party freshman to bend the knee to many of these same types of actors.

What is amusing is that the go-to criticism waged by Very Serious People is that the actions of Trump’s Republican Party represent some grave threat to American democracy. In reality, what we are seeing is just the opposite. Elected Republican officials are choosing to place greater value in the demands of their own constituents, over abstract concepts like the “national interest.” The process is messy, but it gives American voters the illusion of representation and self-governance.

Given that the American empire has long enjoyed democracy as a purely ceremonial act, it is not surprising that the Beltway is not well adjusted to seeing it in action. As a result, the arrogance of Washington politicians may end up doing more to undermine the perceived legitimacy of DC than any legal option that Trump ever had on the table.

For example, one option that has been proposed by Senator Ted Cruz is the creation of a commission dedicated to looking into the 2020 election and proposing steps to improve election security in the future. Historically, commissions into national controversies have been an obvious step. By their nature, the political powers that be ultimately get to decide what is and is not written, and so in practice, they effectively serve to bolster—rather than undermine—the official narrative. This is true even if you have individual investigators genuinely interested in the truth.

As such, Cruz’s proposal should be seen as an obvious and moderate position. Instead, it has been portrayed as a radical attack on democracy.

The reason is simple. Elections have become a part of our civil religion, and the “popular will” has been increasingly held up as more important than pesky inconveniences like constitutionally protected rights. To allow for a commission about the election results is to normalize questions about how our politicians are chosen in general.

So, instead of trying to treat the concerns of tens of millions of American voters with respect and empath, tomorrow we will see a bipartisan effort to dismiss these concerns entirely.

The consequences of this could end up having a remarkable impact on politics for the rest of the decade. We have seen the difficulty Congress can have in the face of simple political polarization. What happens when the federal government tries to govern a country with tens of millions of people knowing it to lack any legitimate democratic mandate?

More interesting still, what happens when the federal government tries to intervene in a state where a majority does not believe it has any democratic legitimacy?

Once upon a time, those in power were smart enough to recognize the importance of popular support and went to great lengths to help ensure a level of general consensus. While technology has made the manufacturing of consent more difficult now than ever before, it is ultimately the arrogant behavior of those in power that is sowing the seeds of true subversion of federal authority. Washington today is an increasingly isolated, imperial city, occupied by legions of mediocre and arrogant dunces who are incapable of empathizing with the sincere concerns of average Americans. Ultimately, this is a recipe for political instability and decline. 

At a time where there are many reasons to predict a lot of dire economic outcomes in the coming years, this is a political development that should be cheered on.

Just as Murray Rothbard understood.

Image source:
Ted Eytan
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In Praise of the Cynical Voter

11/04/2020Ryan McMaken

I don’t subscribe to the rather strained arguments some libertarians make about voting. I don’t think casting a vote implies the voter is tacitly endorsing the political system. I don’t think a vote means the voter implicitly agrees to blithely accept the outcome.  I don’t even think a voter necessarily likes the candidate for which he or she has voted.

Many of these ideas date back to the libertarian anarchists of the late nineteenth century, during which Benjamin Tucker, for example, wrote “[e]very man who casts a ballot necessarily uses it in offense against American liberty, it being the chief instrument of American slavery.”

And then there was Francis D. Tandy, who concluded, "Political methods must be condemned without even these qualifications. The ballot is only a bullet in another form."

The problem with these claims is that they tend to rest on the assumption that the voter and the regime both agree on what a vote means.

As far as the regime is concerned, of course, a vote should mean the voter agrees to peacefully abide by the result of a free election. The regime also believes a vote means the voter endorses whatever laws or policies are adopted by the voter's “representative.” This is why the regime wants high voter turnout and why it claims that democratic elections provide the regime with a voter “mandate.” 

[RELATED: "No, Voting Doesn't Mean You 'Support the System'" by Ryan McMaken]

But do voters agree that this is what a vote means? Perhaps some voters do. But more likely, many voters attribute no such meaning to their votes. There is no reason to assume, for example, that a voter thinks a vote for a certain candidate is an endorsement of every monstrous piece of legislation handed down by the regime. Nor can we assume voters believe their vote grants a mandate to the regime in general. This is especially true when the voter’s preferred candidate loses. Any number of  “not my president” memes in recent years would suggest this is the case.

It’s just as likely that a great many voters view voting as a means of playing defense against a state apparatus they view as threatening. That is, the voters may view the act of voting as merely one means of objecting to certain candidates or policies. Whether or not the voter’s intent is accurately interpreted by the regime, of course, is another matter.

Rather, a voter’s actions could be likened to those of prisoner who is given the option of voting on which prison guard he prefers. Prison guard A beats the inmates ten times per day. But prison guard B beats them only five times a day. Clearly, it would be a stretch to assert that a vote for prison guard B implies that the voter approves the whole prison guard apparatus and that the voter therefore endorses beatings. Rather, the situation is simply one in which the voter was given a chance to try to slightly improve his situation and acted accordingly.

[RELATED: “"The Will of the People" Is a Myth“ by Ryan McMaken]

This type of voting we might call “cynical voting.” The cynical voter casts a vote with the belief that it might improve his situation, or at least throw some obstacles in front of a regime that is bent on inflicting greater damage on the voters.  But the cynical voter also understands that his vote might do very little to change the situation and that his preferred candidates may also all lose. 

In our prisoner analogy, let’s assume a voter casts his ballot in favor of fewer beatings. But then a week later that same voter gets his hands on a contraband machine gun with enough ammo to kill every prison guard. Does an earlier vote for fewer beatings somehow preclude the voter from later using that machine gun? There’s no reason to assume so.  Nonetheless, the “voting implies consent” argument rather strangely seems to assume that the voter views his vote as the end-all be-all of political action. 

The cynical voter doesn’t believe the act of voting limits his range of options in other areas. He doesn’t think, "golly, my candidate lost, but I voted, so I guess every horrible thing the government does to me in the next two (or four or six) years is a-okay!" If other methods of fighting the regime present themselves, the cynical voter is not afraid to use them. Only someone who has fully and utterly bought into propaganda would accept the notion that a vote precludes other possibly-more-effective forms of political resistance.

Moreover, the ideal cynical voter rejects all the myths underlying the proregime philosophy of voting. The cynical voter understands, for example, that elected representatives do not actually represent the voter. Given the diversity of voters, this is an impossibility. The problem gets worse as the jurisdiction gets larger.

[RELATED: “No Matter How You Vote, Politicians Don't Represent You“ by Ryan McMaken]

The well-informed cynical voter also understands that voting does not grant a mandate to the winning side. This is especially true if the winning side wins with anything less than 100 percent. What if the winner receives only 90 percent of the vote? Does that make the wishes and preferences of the other 10 percent null and void? In reality, of course, few politicians ever win a race by 90 percent. Many of them win with less than 55 percent of the vote. Some win with only a plurality of less than 50 percent. Clearly, such a situation cannot honestly be said to provide the winner with any sort of mandate. More naïve observers—exactly the sorts of people who think a ballot is just like a bullet—may believe this, however. 

Essentially, the voting-is-violence crowd is buying into the regime's preferred view of voting. But in reality, it is likely that countless ordinary voters take a far more cynical and sophisticated view of voting than their detractors think. Many by voting are simply trying to rid themselves of the most dangerous threats they face. It's hard to fault them for this.

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Is Austrian Economics Ideological?

08/26/2020Per Bylund

A common critique, if not outright dismissal of Austrian economics, is that it is "ideological." The connotation is that it is not a reliable framework for analysis, but rather a consistently slanted worldview. What is ideological cannot be a science, because it is by definition anything but neutral to the facts.

This critique always struck me as odd considering the history and theorizing of Austrian economics.

Historically Austrian economics was one of several main streams of economic thought that emanated from the marginalist revolution in the 1870s. While Austrian economists prominently took part in or even instigated important debates in economic theory on the viability of socialism, the role and nature of capital, and on business cycles and unemployment, their arguments were taken seriously by economists and social thinkers who had different views.

Consider, for instance, how Oskar Lange, the prominent market socialist, begins his "On the Economic Theory of Socialism":

Socialists have certainly good reason to be grateful to Professor Mises, the great advocatus diaboli of their cause. For it was his powerful challenge that forced the socialists to recognise the importance of an adequate system of economic accounting to guide the allocation of resources in a socialist economy. Even more, it was chiefly due to Professor Mises' challenge that many socialists became aware of the very existence of such a problem.

If Mises's argument that socialism is not economically viable had been simply "ideological," why would Lange refer to it as a "powerful challenge"? He obviously would not, since ideological rhetoric is not an actual argument. There would have been no reason to take it seriously, even less to think of it as a challenge.

As for the theory, I want to address two separate issues. One is that Austrian economic theory is free market economics. Many misunderstand this as an ideological label, but it is in reality only descriptive of the approach. In order to study the real economy, including the impact of regulations, one must first have a theory of the economy qua economy. That is, a theory of how the market, unhampered by those effects that are to be studied, would work.

The other is the nature of Austrian economic theorizing, which was formalized by Mises as praxeology. In stark contrast to modern inductive approaches, but well in line with how economic theorizing has traditionally been approached, Austrian economics is a purely deductive framework. This means that there are only two ways in which the theory can be deemed inaccurate (or ideological): either the starting point, the action axiom, is an ideological rather than true construct, or the logical derivation from it is consistently slanted to produce ideological rather than true theory.

What this means is that those claiming that Austrian economics is ideological should be able to easily show that (and how) this is the case. Either they must argue that (and how) the action axiom—that human action is purposeful—is not an accurate and true representation of the concept but, in fact, an ideological construct. Or they must point out how and where Austrians' reasoning is flawed, and specifically that the logic is abandoned for ideological reasons. Neither has, to my knowledge, been done (or even attempted).

Substantiating critique of a deductive theory is straightforward. Had Austrian economics been an inductive approach, then there would be a million ways Austrians could let their ideological biases slip into the analyses. It would be easier to do and harder to prove. But since this is not the case, and the inductive method in fact is explicitly rejected by Austrians, critics should find it easy to prove their claims.

That they have not done so suggests they are not able to.

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Interest Rates and the Demand for Money

06/15/2020Frank Shostak

According to mainstream thinking, the central bank is the key factor in interest rates. By setting short-term interest rates, it is argued that the central bank can influence the entire interest rate structure by creating expectations about the future course of its interest rate policy.

In this way of thinking interest rates are set by the central bank and the individuals plays almost no role except for mechnically forming expectations about the central bank's future policy. Individuals passively respond to the possible policy of the central bank.

But does it make much sense that central banks are the key factor in interest rate determination? What about past periods when we did not have central banks? How were interest rates determined then?

To establish whether the central bank plays any role in interest rate determination, we must define interest.

What Determines Interest Rates

Following the writings of Carl Menger and Ludwig von Mises the driving force behind interest rates is individuals' time preferences, not the central bank.

As a rule, people assign a higher valuation to present goods versus future goods. This means that present goods are valued at a premium to future goods.

Lenders and investors give up some benefits in the present. Hence, the essence of interest is the cost that a lender or an investor endures. On this Mises wrote in Human Action,

That which is abandoned is called the price paid for the attainment of the end sought. The value of the price paid is called cost. Costs are equal to the value attached to the satisfaction which one must forego in order to attain the end aimed at.

According to Carl Menger in Principles of Economics:

To the extent that the maintenance of our lives depends on the satisfaction of our needs, guaranteeing the satisfaction of earlier needs must necessarily precede attention to later ones. And even where not our lives but merely our continuing well-being (above all our health) is dependent on command of a quantity of goods, the attainment of well-being in a nearer period is, as a rule, a prerequisite of well-being in a later period….All experience teaches that a present enjoyment or one in the near future usually appears more important to men than one of equal intensity at a more remote time in the future.

Likewise, according to Mises,

Satisfaction of a want in the nearer future is, other things being equal, preferred to that in the farther distant future. Present goods are more valuable than future goods.

For instance, an individual who has just enough resources to keep himself alive is unlikely to lend or invest his paltry means. The cost of lending, or investing, to him is likely to be very high—it might even cost him his life to lend part of his means. Under these conditions he is unlikely to lend or invest, even if offered a very high interest rate in compensation.

Once his wealth starts to expand the cost of lending, or investing, starts to diminish. Allocating some of his wealth toward lending or investments is going to undermine his well-being in the present to a lesser extent.

From this we can infer, all other things being equal, that anything that leads to an expansion in the real wealth of individuals gives rise to a decline in the interest rate, i.e., to a lowering of the premium of present goods versus future goods.

Note how the essence of interest is not determined by a central bank nor by government activities. It is purely a reflection of individuals' preferences for consuming goods at present over consuming the same goods in the future.

This runs contrary to the popular expectations theory (ET), which states that the key to interest rate determination is the central bank's expected monetary policy.

Again, the heart of interest rate determination is individual time preferences. These preferences determine the underlying interest rate.

What the central bank does in all this is distort interest rates by means of its monetary policies. By falsfying market signals, it sets in motion the misallocation of resources.

The ET framework is an attempt to popularize the erroneous thinking that the central bank is at the heart of interest rate determination while ignoring the role of individuals.

Time Preference and Supply and Demand for Money

In the money economy individuals' time preferences are realized through the supply and the demand for money.

The lowering of time preferences, i.e., the lowering of the premium for present goods versus future goods, will be manifested in a greater eagerness to lend and invest money, and thus a reduction in the demand for money relative to the past. It will appear as an increase in the individuals' monetary surplus.

To reduce their increased monetary surplus, individuals will likely increase their purchases of various assets, raising asset prices and lowering their yields in the process, all other things being equal. Hence, the increase in the pool of real wealth will be associated with a lowering of the interest rate.

The converse is likely to take place with a fall in real wealth. People are likely to be less eager to lend and invest, raising their demand for money relative to the previous situation—lowering the monetary surplus that they would want to have. Consequently, all other things being equal, the demand for assets will fall, lowering asset prices and raising asset yields.

Change in Money Supply and Interest Rates

What will happen to interest rates as a result of an increase in money supply? Initially, an increase in the supply of money, all other things being equal, means that those individuals whose money stock has increased are now much wealthier. These people are now more willing to invest and lend money. Their increased willingness to lend and to invest means that lenders and investors' demand for money has fallen.

This coupling of an increase in the supply of money with a fall in the demand for money results in individuals holding more money than they really want, all other things being equal. As a result, individuals will try to dispose of the increase in the monetary surplus by buying assets. In the process they bid the prices of assets higher and lower their yields. (Note that there is a time lag between changes in the monetary surplus and changes in prices and economic activity.)

As time goes by, however, the increase in money supply gives rise to price inflation, which undermines the individuals' well-being and leads to a general increase in time preferences. This change in time preferences means that individuals' willingness to invest and lend is lowered (i.e., the demand for money is raised and works to lower the monetary surplus). This puts upward pressure on interest rates. Individuals will now reduce their purchasing of assets, thereby exerting downward pressure on asset prices and lifting their yields.

We can thus conclude that a general increase in price inflation, due to an increase in money supply and its consequent negative effect on real wealth formation, sets in motion a general rise in interest rates. A general fall in price inflation, in response to a fall in money supply and a consequent salubrious effect on real wealth formation, sets in motion a general decline in interest rates.

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Is the Fed's Latest Round of Stimulus Legal?

06/05/2020Robert Aro

The Fed cites section 13(3) of the Federal Reserve Act in order to engage emergency lending programs whenever “unusual and exigent circumstances” occur. Read the legislation below and decide for yourself if the forgivable loans under the Paycheck Protection Program Lending Facility (PPP/PPPLF) are in defiance of the law.

The first dubious action occurred when the Fed-Congress symbiosis created “special purpose vehicles” (SPV) owned by the US government with appropriations from Treasury. This is important as many of the Fed loan programs would be illegal if this loophole hadn’t been created. As of the latest release, the Treasury funded $66.5 billion in equity to the Fed’s facilities.

Luckily, the act contains provisions to ensure taxpayers are protected from these lending facilities, right? It states:

Such policies and procedures shall be designed to ensure that any emergency lending program or facility is for the purpose of providing liquidity to the financial system, and not to aid a failing financial company, and that the security for emergency loans is sufficient to protect taxpayers from losses and that any such program is terminated in a timely and orderly fashion.

Surely this protects taxpayers from corporate bailouts? We can see this for the (not yet opened) Main Street Lending Program, where the term sheet says that the loans are recourse loans and are not forgivable. Meaning, the borrower will be personally liable if the money is not repaid. But what about PPP loans? How are they structured to protect taxpayers from losses?

The act goes on to say:

The policies and procedures established by the Board shall require that a Federal reserve bank assign, consistent with sound risk management practices and to ensure protection for the taxpayer, a lendable value to all collateral for a loan executed by a Federal reserve bank under this paragraph in determining whether the loan is secured satisfactorily for purposes of this paragraph.

In order to protect the taxpayer, the Fed must take “collateral” for these loans. But, this seems at odds with the US Small Business Administration (SBA) that facilitates the PPP loans, as they specify:

No collateral or personal guarantees are required.

Even more absurd, the PPP FAQ notes:

Under the Facility, the Federal Reserve Banks (“Reserve Banks”) will lend to eligible borrowers on a non-recourse basis, taking PPP Loans as collateral.

The lending facility can only lend against collateral for the purpose of protecting taxpayers, but the PPP facility will lend against zero collateral forgivable loans. Something just doesn’t add up!

The initial report to Congress regarding the PPP would be comical if it weren’t so serious. As the Fed states under the heading “Expected Cost to Taxpayers”:

PPP loans under the PPP are fully guaranteed as to principal and interest by the SBA, and these guaranteed loans will fully collateralize extensions of credit under the PPPLF. As a result, the Board does not expect that the PPPLF will result in losses to the Federal Reserve.

The act also requires the Treasury secretary’s approval for each loan facility. In a more reasonable time, the secretary would veto every facility proposed to him, citing that the act forbids taxpayer funding of these facilities for bailouts. Naturally, this didn't happen, as Secretary Mnuchin proudly declared:

We are fully prepared to take losses’ on coronavirus business bailouts.

Unfortunately for the rest of us, all losses from the PPP will be added to the mortgage that Mnuchin and friends have taken out against our future, seen by higher prices, weaker currency, and greater debt burden.

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In the Lockdown Fight for Local Control, Colorado Counties Begin to Ignore State Edicts

05/27/2020Ryan McMaken

Last month, Weld County, a Republican-dominated county in the northern part of the state, announced it would no longer be enforcing state edicts requiring the closure of businesses for purposes of government-mandated social distancing.

Specifically, the county commissioners released a statement saying that it was up to businesses to determine for themselves whether or not they could safely open:

Weld County Government is not opening any businesses, just as Weld County Government did not close any businesses. That said, each commissioner has received comments from constituents struggling to make ends meet, pay their bills, and take care of their families who have said they are going to open their businesses.

So, Weld County Government took the proactive response of preparing best practices and guidance that could be used as business owners look to reopen—whenever they feel comfortable to do so. An informed public is a strong public.

The same preventative measures need to be heeded—we’ve said that. Expectations need to be managed—we’re doing that. What we aren’t going to do is pick winners and losers as to who gets to restart their livelihoods.

And at the end of the day, everyone has freedoms: freedom to stay home, freedom to go out, and freedom to support whatever business they want to support.

Of course, the real concern is whether or not county or state bureaucrats will show up with armed police officers and shut the business down, as has happened in some cases.

On the county level, at least, it appears the commissioners have instructed county bureaucrats to not intervene. At least according to one business owner. The owner of El Charro restaurant reported earlier this month that

her husband called the Weld County Health Department and was told they would not shut them down or penalize them for re-opening.

“They didn’t say we could open," said the general manager and Kelley's son, Harrison Chagolla. "They just said we’re not going to shut you down, we won’t stop you, which as far as we’re concerned, that’s permission enough."

The restaurant has been open at limited capacity since Wednesday. Because they are seating people at every other table to continue social distancing, the Chagollas said they have had to turn customers away.

Naturally, the governor of Colorado, Jared Polis, condemned the move and threatened to withhold emergency funds from the county. In other words, in order to enforce executive orders that he claims keep people safe, Polis plan to withhold funds designed to help people cope with COVID-19. It's a rather vindictive and capricious position to take, but it may have been the only tool the governor was willing to use.

In response, the county reported that it already has the funds Polis threatened to withhold, and says it doesn't plan to seek any additional funds.

The state maintains that it still has the ability to go in and revoke state-issued business licenses, although it is unclear that this has happened in the month since the controversy first erupted. It may be that the county has called the governor's bluff.

[RELATED: "The Shutdown May Soon Collapse in Pennsylvania Thanks to Local Resistance" by Zachary Yost]

Perhaps emboldened by the Weld County refusal, Elbert County, just east of the Denver metro area, has also announced it will no longer be adhering to the state's social distancing mandates. As reported by Elbert County News:

 

The Elbert County Board of County Commissioners has voted unanimously to allow graduation ceremonies for Simla, Kiowa and Elizabeth high schools, and to allow houses of worship to resume in-person services without capping attendance.

The move on May 20 came despite county officials not yet having received approval of a partial waiver request the county had submitted to the Colorado Department of Public Health and Environment for exemptions from the state's COVID-19 guidelines.

The commissioners' vote came after repeated attempts to seek a "variance" from the governor's office allowing for greater flexibility from state mandates. The governor's office has encouraged applications of this sort, but the commissioners reported that the governor's office was apparently incapable of processing the request.

So, the county was forced to go out on its own.

In other words, the state government couldn't get its act together, so the county government had to make a judgment call. The governor's office has not threatened any action in response to Elbert County's "disobedience." And none may be coming. After all, sending state troopers to close down church services and small businesses is not necessarily a winning proposition for a governor where statewide offices are still competitive for both parties at election time.

Meanwhile, in El Paso County, home of Colorado Springs with half a million people, the district attorney and county commissioners are decidedly unenthusiastic about bringing charges against those violating state orders.

These local acts of noncooperation serve an important function in applying pressure to the governor's office, and this illustrates the difficulty in maintaining lockdown orders as time goes on. After all, the initial closures benefited from widespread public fear over the COVID-19 virus and the common perception that it could prove to be deadly on a scale similar to the 1918 flu epidemic. Thus compliance was generally voluntary and easy to maintain. It has now become clear that a chaotic and highly deadly pandemic will not play out the way many alarmist media outlets and government experts insisted it would. For example, the CDC has downgraded the disease's fatality rate, and the public has noticed that hospitals never were anywhere near exhausting capacity.

Soon, however, the county government's opposition to lockdown orders will become academic. Today, restaurants opened to dine-in service in Colorado for the first time since March. The state can either continue to soften its stance on lockdowns or risk losing credibility with the growing segment of the population which is prepared to face the risk of COVID-19 infection by participating in the regular activities of daily life.

Of course, there is political pressure coming from other corners as well. The state now is looking at the need for a 10 percent cut to spending. And that's just for starters. Much larger cuts are likely coming in the future, since restaurants and retail outlets are producing only a small fraction of former revenues. County and city governments won't be content to continue lockdowns much longer.

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Is the Main Street Lending Program a Debt Trap?

04/22/2020Robert Aro

Have you ever noticed how some countries always seem to be having debt crises? For some inexplicable reason they are often in an economic crisis and fail to meet their debt obligations. Sometimes a nation like Argentina resorts to issuing hundred-year bonds, taking on International Monetary Fund (IMF) loans or undertaking other restructuring measures that seem “designed to fail.” Such ideas still seem foreign to many living in the wealthy developed countries, but perhaps the recently announced Main Street Lending Program will change all of that.

Under this program up to $600 billion will be made available in loans to US businesses that meet either of the following conditions:

(1) the business has 10,000 employees or fewer; or (2) the business had 2019 revenues of $2.5 billion or less.

The loans have a four-year maturity and all principal and interest payments are deferred for the first year. Since the Federal Reserve is prohibited from providing small business loans to the public, it circumvents this by lending to a Special Purpose Vehicle (SPV) which will then buy 95 percent of the loans made by eligible lenders for the purpose of the program. The US Treasury will then spend $75 billion as an equity investment in this same SPV.

Each loan will be between $1 million and $25 million (unsecured under the Main Street New Loan Facility) or between $1 million and $150 million (secured under the Main Street Expanded Loan Facility) to eligible borrowers. There are only a few attestations required, such as refraining from paying back other loan balances and the provision below, which takes us to the heart of the matter:

The Eligible Borrower must attest that it requires financing due to the exigent circumstances presented by the coronavirus disease 2019 (“COVID-19”) pandemic, and that, using the proceeds of the Eligible Loan, it will make reasonable efforts to maintain its payroll and retain its employees during the term of the Eligible Loan.

Why are $600 billion in loans being given to businesses that are going through exigent circumstances, and what is the expected default risk on these loans? Without cost-cutting measures such as layoffs and salary reductions or increasing sales, there may be little prospect that the principle can be returned to the SPV and the banks. How many will default remains unknown, considering that the loans were granted not based on any merit nor metric, but based on being distressed due to the pandemic. Like any nation unable to pay back the IMF, the entrepreneur will find that he must take on a new loan in order to pay back the previous loan.

The problem is that the Fed’s intervention completely distorts the profit and loss system required to have functioning markets. Normally a lender will lend money to a business if it believes that the business can expand, innovate, or implement some other method to increase profits. However, a profit motivation on behalf of the lender does not appear to be the case here. In a press release regarding the various loan programs being offered, the Fed said that the loans will support the economy.

It’s unclear how this will support the economy, but it is clear that the Fed will potentially increase the money supply by just over half a trillion dollars. In turn, the loans received will be pyramided by commercial banks, creating a further increase in the money supply. The funds may help keep some business afloat during this crisis and may help keep staff members employed, but without reducing costs or increasing revenues many businesses may find that the only way they can continue after recovery is to take on more debt.

It was often said that during the Great Recession that main street did not receive the support that it needed; this is no longer the case, because during the Great Lockdown “support” is finally on its way!

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Is the Coronacrisis Giving the Fed Cover to Hold Corporate Debt?

03/17/2020Tho Bishop

Two weeks ago, Fed chair Jay Powell declared the “fundamentals of the U.S. economy strong,” while simultaneously announcing the largest interest rate cut since 2008 in the face of global pressures stemming from the coronavirus.

Last week, the Fed escalated its repo operations in a desperate attempt to boost short-term liquidity for large financial institutions.

But this past weekend, the Federal Reserve made its most radical moves since 2008. The headlines focused on cutting the federal funds rate back to 0–0.25 percent and a major $700 billion reboot of quantitative easing. The Fed also cut reserve requirements, maintained paying interest on excess reserves (0.1 percent), and cut its discount window down to 0.25 percent from 1.75 percent.

The discount window cut may be the biggest deal.

As Bob Murphy explained in his Money Mechanics chapter on post-2008 monetary policy, the discount window is an alternative to standard open market operations that allows banks to borrow directly from the Fed by posting collateral. Since 2008, banks have largely abandoned the discount window, opting instead to sit on excess reserves, in part to avoid the appearance of being stressed.

The Fed is now actively trying to reverse this trend. The cut brings the discount window rates down to the closest they’ve been to the federal funds rate since the 2008 crisis. In case that was too subtle, Chairman Powell also explicitly emphasized the opportunity banks have to utilize the discount window.

Discount Rate vs. Effective Fed Funds Rate, 2002–February 2020
Discount Window_Fed Funds Rate.jpg
Note: Discount rate last updated December 2019.

This may end up being the most important piece of yesterday’s historic announcement, because it may serve not only as a lifeline to banks, but as a means to prop up a dangerous corporate debt bubble.

During his press conference following yesterday’s announcement, Powell emphasized that the Fed is statutorily limited to purchases of US Treasurys and mortgage-backed securities for its balance sheets. These limits, however, do not apply to discount window loans.

According to the Fed’s website, assets that can be used for discount window collateral include:

  • US Treasury obligations
  • Obligations of US government agencies and government-sponsored enterprises
  • Obligations of states or other US political subdivisions
  • Collateralized mortgage obligations
  • Asset-backed securities
  • Corporate bonds
  • Money market instruments
  • Residential and commercial real estate loans
  • Commercial, industrial, or agricultural loans
  • Consumer loans

Perhaps most important here are corporate bonds.

One of the most significant challenges that the coronavirus has posed to global markets are major supply shocks to industries, as well as a significant decrease in oil prices as demand has dropped. Although lower oil prices can reduce costs for transportation-heavy industries, they are a major problem for American energy companies reliant upon shale oil. Although fracking has unleashed a massive oil boom in the US, it is not on an even playing field with oil operations in a country like Saudi Arabia. According to oilprice.com, only five shale drillers are profitable at $31 oil.

As a result, the drop in oil prices has caused significant dangers for banks heavily invested in energy markets—particularly regional banks.

As Vipal Monga noted in today in the Wall Street Journal:

Especially vulnerable are regional banks with big energy-lending portfolios. Larger banks also are on the hook for billions of dollars in loans to the energy industry, but they are relatively less exposed because their balance sheets are much bigger and their lending businesses more diversified. Energy accounts for 3.2% of Citigroup Inc.’s loan portfolio and 2.1% of JPMorgan Chase & Co.’s loan book, according to Goldman Sachs analysts.

But a shakeout among regional banks’ borrowers could dent their earnings this year between an average of 15% to 60%, depending on the extent of loan losses, said Keefe, Bruyette & Woods analyst Brady Gailey.

“It is a big deal for these oil-exposed banks,” he said.

Of course, the energy sector isn’t the only industry in which banks may want to offload corporate bond holdings.

A decade of global easy money policies has created a world flush with corporate debt, both due to the ease with which corporations have been able to access credit lines and to a demand for yield. This has resulted in the rise of “zombie companies,” which James Grant defines as companies “failing to generate cash flow to cover interest expense for three consecutive years.” Such firms made up almost 14 percent of S&P 1500 companies last year.

For years there have been warning signs that a recession could light the fuse on a massive corporate debt bomb, and it’s possible that the coronavirus may be the match. By explicitly pushing the use of the discount window, the Fed may be signaling acknowledgment of this problem and giving American banks the ability to borrow off their bad loans.

Although this may provide short-term relief, it’s another example of the real disease that has infected global financial markets—central banks engaging in extraordinary monetary policy without any end game in place.

After all, we have seen that central banks have been unable to unwind their 2008 interventions in financial markets. In the US, minor rate hikes and a slow balance sheet roll-off sparked dangers that forced it to reverse course within a year. It has resulted in an overleveraged global economy, full of wildly mispriced debt. This has not only created significant bubbles throughout the financial system, but also an economy that is even more reliant on these volatile markets as conservative investments have been repressed in our low-interest environment.

So, although discount window operations are meant to be short-term loans to financial institutions, we’ve seen the Fed's ability to make the temporary permanent. The coronavirus has helped accelerate a global crisis, but it is having the impact it has because the economy was already sick. 

Now governments want us to believe that the ones who infected it are equipped to save it.  

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It's Easy to Believe AOC Has an Economics Degree

02/21/2020Ryan McMaken

It has become something of a tradition in the free market corners of social media to express shock and dismay over the possibility that New York congresswoman Alexandria Ocasio-Cortez (AOC)—an avowed "democratic socialist"—has an economics degree from Boston University.

This is how it works: AOC makes a statement that is notably antimarket, prosocialist, or generally clueless about general concepts from the field of economics.

Her critics then post responses questioning whether she actually has a degree, or saying that she must have not been paying attention in class, etc.

Here are a few examples:

aocec
aocec
aoc

But why is it so hard to believe that she has a degree in economics? It seems that far too many people have rather inaccurate ideas about what is taught in economics programs nowadays.

The truth is that there is little emphasis on understanding markets in economics programs, and little emphasis on the value of markets. The emphasis is now on using economics to justify state action in the economy. And any bias that may have once existed in favor of unhampered markets in these departments is vanishing.

The idea that economics is the dispassionate study of understanding how hiring is affected by an imposed price floor (i.e., a minimum wage) or how opportunity cost affects consumer choices is rapidly becoming hopelessly outdated.

Sure, twenty years ago that sort of thing could still often be observed. But microeconomics of that sort is now about as fashionable as other relics of that time, such as the Backstreet Boys.

Basic principles that were once a given—i.e., the notion that making labor more expensive means that employers buy less of it—are now out the window.

But this trend didn't start yesterday. For decades now, economics has been moving further and further away from teaching microeconomics and how firms and households work. Instead, by the late 1990s economics was well down the road of constructing elaborate and purely hypothetical mathematical models that had little bearing on everyday life. These model builders claimed they could predict the future, but of course, they completely missed the huge financial crisis of 2008.

Another trend in recent decades has been toward conducting an enormous number of studies that produce statistical correlations. But as the correlations can be interpreted any number of ways, they often end up being used to support whatever policy the researchers prefer. Out of this has come the drive to make economics into a discipline that depends on tinkering and trial and error. Some now insist we can't really guess what the results of a policy might be until we "test" it using methods from the physical sciences.

This is now what's fashionable, and a December article at Quartz tells us, "the new era of big data…has led economists to revisit the wisdom of some long held assumptions."

Those old "assumptions" are what many people wrongly think is a focus of economics instruction. Last year, for example, Vox happily reported that in a new introductory economics course at Harvard "[t]here’s little discussion of supply and demand curves, of producer or consumer surplus, or other elementary concepts." Moreover, it's getting easier to get through an economics program without any knowledge of economics because economists are increasingly less interested in economics proper.

As I noted here at mises.org last year, economists nowadays seem to spend a lot of time ripping off the insights of historians, sociologists, psychologists, and political scientists. They then slap some new labels on the research and give it names like "behavioral economics."

In the sorts of "economics" classes that focus on such topics, one learns that government planning is what gets a poor country out of poverty. They learn that people can't be trusted to make decisions for themselves. They learn that bailing out billionaires in the financial sector again and again has no real downside, morally or otherwise.

There's no reason to believe that a student with an economics degree is going to graduate with a deep understanding of how government intervention distorts markets or impoverishes consumers. The theoretical foundations behind such things are mentioned, of course, but at many institutions they are most certainly not emphasized.

Far more likely, one learns in these programs that central banks can be relied upon to fix almost any economic problem faced in the course of a business cycle. And if a certain problem becomes especially difficult, the answer surely lies in giving the central bank even more power.

Moreover, economics students believe all sorts of fantasies that most normal people would easily identify as obvious nonsense were they not told otherwise by "wise" economists. Only economics students, for example, are naive enough to think that central banks are "independent" and nonpolitical institutions. This is why the most revealing research on the Fed as a political institution is conducted primarily by political scientists. (For example, see John T. Woolley's "The U.S. Federal Reserve and the Politics of Monetary and Financial Regulatory Policy.")

So, it's entirely plausible that AOC took any number of economics courses and came out with good grades after learning virtually nothing accurate about entrepreneurship, wages, money, or consumer choice. What she did learn on these topics was likely built on the premise that the state ought to be intervening in and tinkering with all these things.

AOC appears to have the same beliefs that many economics grads do.

Meanwhile, AOC's critics make fun of her for being a bartender. But they're getting things backward. Being a bartender is possibly the best thing on her CV. These snide remarks about "the bartender AOC" seem to assume that bartending is some sort of disreputable line of work that only idiots pursue. It's not. "Serving" in Congress is much less impressive. Besides, tending bar is likely one of the more instructive things AOC has done as far as understanding markets goes. There's certainly no reason to assume that the economics faculty at BU was any help in this regard.

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