Free Market?

There is no such thing as a true "free market" and who would want it anyway. A lawless, unregulated, and volatile "free market" would be disastrous from a social standpoint.

Laws and regulations that protect possessions and their value create incentive to work for those possessions (and the "Invisible Hand" brings the whole economy up). When the ability to hold on to your possessions or to value them (through a stable-ish currency) ceases to exist, you have no incentive other than to fight for shelter and food (Maslow stuff).

Maintaining a stable-ish "value" of possessions (assuming the legal ability to protect possessions) is done by managing their demand, right? Increasing demand (by interest rates or quantitative measures) has proved to be fairly useful over the course of time, no? Also, decreasing demand through the same tactics has been useful too, though the political implications of doing so have left the practice used all too infrequently.

Let's throw away the "free market" discussion in lieu of something more practical. Societies need to ensure safety and relative stability of the value of possessions. To do this, economies need some "tinkering" to ensure possessions maintain their value to avoid "adjustments" that are too painful for modern societies to bear.

Bush and his team are doing the right things. Flooding the markets with cash (among other tactics) to increase demand at a time the taxpayer can get paid to do so (borrowing at negative real interest rates) is a no brainer tactic to protect price stability. Let's not overthink this!

I'll take orderly over free any day!

Bush "Saves" The "Free Market"

This is the best transcript I could find so far - go about 1/3 or 1/2 way down to get Bush's comments.

I feel a sense of obligation to my successor to make sure there is not a, you know, a huge economic crisis. Look, we're in a crisis now. I mean, we're in a huge recession, but I don't want to make it even worse and on the other hand, I'm mindful of not putting good money after bad so we're working through some options.

I've abandoned free market principles to save the free market system. I think when people review what has taken place in the last six months and put it all in one package, they'll realize how significantly we have moved.

I'm almost at a loss for words. First off, anyone who describes our existing system as a free market system is fooling themselves. I know, I know... "this is the most free market system in the world." Well, perhaps. I really don't know how we could objectively go about measuring that.

But,
a system where a central bank can manipulate interest rates by means of fiat currency is not free market;
a system where legislators can manipulate investment decisions by providing tax subsidies is not a free market;
a system where legislators can modify tax policies on income, consumption and imports which are de facto subsidies to other activities is not a free market;
a system where private property is only protected when it is convenient as the judiciary has ruled that the government has almost complete authority in eminent domain is not a free market;
a system where the executive branch is asleep at the wheel by not enforcing regulations - despite the inherent validity of the regulations - is not a free market.

This is not a free market system. I'm not calling it socialism. I'm not exactly calling it fascism or corporatism. But, central planning is a key component of our system.

The free market is not failing. Our hybrid system which uses central planning to intervene in the free market based on the whims of Washington is failing.

FED Drops Rates Again

The FED announced today that it would lower its target for the federal funds rate to a range of 0-0.25%. This unprecedented move allegedly was the catalyst for a 359 point gain for the Dow Jones. It was also the catalyst for a 2.7% drop in the U.S. Dollar Index. However, the effective funds rate has been in this range for a while now. More on this in the coming weeks...

This is, of course, short-term noise - so what will the longer-term impacts be? I still don't know. I've been worried about hyperinflation for some time, but have read some things lately which make a decent argument for deflation. If I had to bet today, I'd bet on deflation for luxury goods and investment assets such as homes, cars and stocks. On the other hand, I'd be on inflation for commodities and basic staples.

At some point, I'll dig deeper and provide my final analysis.

Ponzi Schemes and Social Security

In light of the recent Bernard Madoff investment scandal, I wanted to investigate the definition and structure of a Ponzi scheme. Ponzi schemes and pyramid schemes are similar in that new investments of money are used to pay other investors. However, Ponzi schemes are generally positioned as investments in a central fund where pyramid schemes pay investors who recruit new investors.

Here's a simple example. Let's say there is a fund which touts the high yield return of 5% per month by some sophisticated and complex investment techniques. This initially attracts 10 investors with $100 each. At the end of one month, the fund shows growth for each account to $105. Realizing that this type of return yields almost 80% annually, it attracts more investors. So, 10 more investors each invest $100. Let's say this continues for one year without any sign of problems.

At the end of the first year, the fund would have collected $12,000 (12 months * 10 investors per month * $100 per investor). Each investor would have an account balance which reflects the 5% monthly yield. The total sum of all investors' account balances would show as $16,712.98. But, since this is a fraudulent scheme, none of the extra $4,712.98 actually exists. However, as long as the investors don't "cash out", the scheme continues. Meanwhile, typically, the fund manager has probably "cashed in" some of the original $12,000 for personal purposes. This game can be played as long as new investment capital exceeds the demands for cashing out (or until the fund manager gets caught).

So, this brings me to Social Security. I have a new article this morning on United Liberty discussing this topic. I contend that Social Security is nothing more than a structured Ponzi scheme. Workers "invest" into Social Security (via forced taxation). The money from those investments are used to pay off previous investors (current retirees and beneficiaries). Today, the amount of money coming in exceeds the money going out. This excess cash is then used by the government to fund other spending, so there is no money in the investment fund. Technically, the Social Security program takes this excess cash an purchases government bonds. Today, the value of bonds held equates to over $2 trillion. This will all get interesting in the next 10-20 years when the amount of new investment is not enough to cover the money required to be paid out.

This scheme will collapse.

Loose Ends... Vol. XXI

After Thaddeus disappointing me this week, I have to say I'm a little disappointed in myself for being less than active here over the last few weeks. The Thanksgiving holiday, illness, and other excuses come to mind... but, it's time to get back to business here and help readers in their resistance to government- and media-induced soma consumption.

*****

Tonight, Nicole and I attended our first Libertarian Party event here in Indianapolis. We saw LP VP candidate, Wayne Allyn Root, speak at a dinner at the Rathskeller, a great German restaurant and bar downtown. Mr. Root gave a pretty good speech discussing libertarianism, the Libertarian Party, Barack Obama, and bailouts. It was no secret that he has already begun his campaign to become the LP candidate for President in 2012. I like Root; I'm not sure how well he'll fare, but he brings charisma to a party that desperately needs it. At times, I fear he has too much charisma and comes across as a used car salesman.

Aside from the speech, the evening went pretty well. I am still struggling with the destination (if any) of my political affiliation. At another time down the road, I will address this topic in more detail. In the meantime, I plan on assisting the local LP and keeping my options open.

*****

As I type right now, I am watching the replay of the hearing before the House Financial Services Committee earlier this week (December 10). This week's hearing starred Gene Dodaro, acting Comptroller General, and Neel Kashkari, Interim Assistant Secretary of the Treasury for Financial Stability (fit that on a business card!). Kashkari received most of the questions as he has been responsible for administering the $700B bailout under the EESA/TARP legislation. This is a popular topic.

It amazes me, at least on some level, that the members of the committee are so surprised with the program to-date. Question upon question indicate a level of shock and disappointment with the use of funds under the program. But, at the end of the day, under the legislation, there was little or no direction given nor strict oversight required in the use of funds. There are complaints that the banks are hoarding money, or using the funds "inappropriately" - what?! The legislation gave almost complete and unilateral power to the Treasury Department. Now that they have acted upon such authority, Congress is grandstanding that they are not doing what they are "supposed" to be doing. Perhaps they should have spent a little more time crafting the legislation rather than giving in to Paulson's threats of martial law. Or, perhaps they should have voted against the legislation! I guess I'm not really that amazed...

On a side note, I have to give some props to Kashkari for his ability to answer questions like a first-rate politician... "Thank you, Congressman, for that question", "I appreciate your feedback, we take it very seriously"... he bobs and weaves with the best of them.

*****

That leads me to the auto bailout. Congress, the White House, and the incoming administration need to wake up and recognize that they cannot solve this problem with legislation. They cannot solve this problem with bad loans. I truly feel bad for those who have made their livelihood in the auto industry - or, even worse, bet their futures and retirements based on the vitality of the auto industry. But, these companies need to fail. The supply chain may need to fail. Voids will be filled. Life will go on. Time heals wounds. There is not an easy answer to this issue.

I found this article at mises.org which discusses the demise of the piano industry in the United States. It is not terribly analytical nor deeply rooted in economics, but it tells a good story that I feel is very relevant as we consider the auto industry.

*****

Finally, I'd like to (again) highlight some upcoming work that I will be posting on this blog. I'm getting closer in some of the analysis and think that I'll be able to begin providing some of it this week. My first series of articles will be a review of the financial markets, specifically the credit crisis and the effect of the EESA/TARP legislation.

Thaddeus Disappoints

On September 29, 2008, these words were spoken on the floor of the House:

I rise today not to change anyone's mind, but to express to my constituents my reasons for opposing this bill.

There will always be time and pretext enough for people to compromise their principles and put forward poor public policy that may in the short run be popular, but in the wrong run will be detrimental to the long-term interests of the American people. We learn this through history.

In the 1832 bank panics, Andrew Jackson had the question of whether he would remove the Bank of the United States' charter. The people in the bank did not like that. They threatened the prosperity of the American people. In the middle of the panic, Andrew Jackson looked at these bankers and he said, "There are no necessary evils in government. The Treasury to you, gentlemen, is closed."

This was an act of courage on the part of President Jackson, because he understood what was at stake was not merely an ephemeral prosperity or a panic caused by the very people with their handout. Andrew Jackson understood this was about majoritarian rule; it was about the faith in the people's representative institutions and those who inhabit the seats in which they are entrusted.

Today we are in a global financial bank panic. It is the first of our global economy. We are seeing a leveraged bailout of the United States Treasury. In the end, these interests that want your money are threatening your prosperity, and the choice you face is this: You will lose potentially your prosperity for a short period of time at the expense of your long-term liberty. Once the Federal Government has got you to take that risk and pass it on to you as a "moral hazard", they will be in the marketplace. And as the free market is diminished, your freedom itself is diminished, and as your Congress does not stand up to these and put forward a better plan that truly protects the taxpayers, that truly has the long-term interests of the United States at heart, you will be in jeopardy of losing both your prosperity and your liberty.

The choice is stark, and it was put forward in the book by Dostoevsky. In The Brothers Karamazov, the grand inquisitor came to Jesus and he said, "If you wish to subject the people, give them miracle, mystery and authority; but above all, give them bread."

It has always been the temptation in a crisis especially to sacrifice liberty for short-term promises of prosperity, and it was no mistake that during the 1917 Bolshevik Revolution the slogan was "peace, land and bread."

Today you are being asked to choose between bread and freedom. I suggest that the people on Main Street have said that they prefer their freedom, and I am with them.

These were the words of Thaddeus McCotter (R-MI) on the floor of the House opposing the now infamous $700B TARP/EESA bailout. That measure failed that day to the pleasant surprise of most Americans.

Tonight, McCotter led the GOP charge (it was a weak charge) in support of the emergency loans for the automotive industry. The Democrats really didn't need his help, the bill probably would have passed without any GOP support (it would have been really close).

Now, I listened to McCotter's comments at the committee hearings last week and his speech on the floor tonight. I have to say that I'm disappointed. I felt that his impassioned speech against the Wall Street bailout was the most eloquent and succinct argument given on the floor. In his support of the auto bailout, he has done a 180 on his position. At the end of the day, the argument against the auto bailout should have been the same.

He is from Michigan. He is supporting his constituents. This is nothing but a massive dose of pork. He joins the rank and file of Congress in terms of my respect.

Loose Ends... Vol. XX

Well, I didn't go out of town this week, but I have a better excuse for abandoning the blog for a full week: I was sick. I caught a "cruddy virus" (as described by my doctor) which had me in bed more this week than since I had mononucleosis.

There is a decent amount of news out there, and I have been slowly working on some of my promised research (and more). But, I have meetings in the morning and need to catch up on my rest. So, not much content tonight either.

Please visit the "Cowboy Ranch" the new blog from my friend, follower of this blog, and brand new father, "RTC". He and I are not exactly on the same page on a lot of issues, but he serves as a great sounding board for me and has greatly helped me to better understand the financial system.