Steve Forbes: Conspiracy Theorist

Steve Forbes sees in Cyprus the seeds of multiple conspiracies.  Welcome to the club, Steve. 

Forbes asks: “Can a Cyprus-Like Seizure of Your Money Happen Here?”  Before moving on to his numerous other conspiratorial views, I will answer this question.

Yes.

Your bank deposits do not belong to you, but to the bank.  In case of bank default, the deposits belong to other senior creditors until various debts of the bank have been satisfied.  Your only salvation is in government insurance, to the extent this is honored.

Lew Rockwell offers the following advice.  It should be heeded:

After Cyprus, if you or your business has more than $250,000 in a fractional-reserve bank, get the "non-insured" portion out. Put it in another bank, or buy gold, or do something else good with it. This is the least radical move you can make as a bank-denier, but surely the beginning of prudence.

Forbes also answers his own question affirmatively:

Don’t put it past our politicians to try it in a financial emergency. The breaking of contracts by the U.S. government, unfortunately, has happened before….

It is difficult to use the term “contracts” when the US government is involved.  Consider the structure: the government is a) one of the parties to the agreement, b) the adjudicator of disputes regarding the agreement, c) the writer of the rules to the agreement, and d) the modifier of previously written rules regarding the agreement. 

If a stranger walked up to you and offered to play this role, would you voluntarily agree?

Consider all of the financial aspects of our lives where this is the case: retirements plans, trusts, banking arrangements, brokerage accounts, real estate holdings, tax policies, etc.  To varying degrees, there is no security in any of our financial positions, or legal strategies designed to protect or enhance our financial positions.  The government controls the terms and adjudicates the disputes to agreements of which it is a party.

Forbes goes on to list a few of the US government transgressions of the past; conspiracy facts, as these are historically known events:

In 1933–34, amid the depths of the Great Depression, the U.S. government seized the American people’s gold holdings.

In the early 1970s President Richard Nixon annulled contracts selling soybeans to Japan.

For this one, Forbes goes on to note the blowback: “(Japan responded by investing in Brazil, which became one of our major soybean competitors.)”

In 2009 the Obama Administration pushed through a brazenly political restructuring of bankrupt General Motors and Chrysler, and huge payoffs were made to the United Auto Workers, a pro-Obama union, at the expense of bondholders.

Forbes doesn’t list the famous act of Nixon in 1971, but any attempt to compile a complete list would be futile.

Forbes moves on to conspiracy theory.  Many of these have been floating around the hidden corners of the internet since the early days of the crisis, but now, with Forbes’ blessing, one can certainly say these have gone mainstream:

There have been rumblings from some revenue-hungry Democrats about finding ways to tap into individuals’ retirement accounts.

Some form of this will happen; I suspect the legislation is already written.  I think all it will take is another bear-market disaster, similar to 2008 – early 2009.  The government will promise a “make-whole” transfer, offering to credit to the individual the high-water mark of his retirement account if he transfers the assets to a government-approved account.

Most of the money in 401(k)s is pretax dollars and grows tax free, depriving the government of needed revenue. Why not integrate them with Social Security and then means-test the benefits?

Yes, why not?  The government writes the rules; the government can change the rules.

Holders of Roth IRAs may be in for a rude shock. Their contributions have been made with aftertax dollars, with the promise that the ensuing benefits would be exempt from federal income tax. Slapping a special “emergency” levy on these assets will become an irresistible temptation for politicians as the pot of assets gets bigger.

Isn’t it interesting that recent tax law allowed the conversion from traditional IRAs to Roth IRAs.  This accelerated tax receipts to the government, as the tax had to be paid on the previously deferred amounts at the time of conversion as opposed to in the future, coincident with standard withdrawals.  If Forbes is correct, the government will take two bites at this apple.

Forbes offers an example from history of a similar action:

Your Social Security “contributions” are made with aftertax dollars, and it was promised that those benefits would be tax free, but Washington started chipping away at that vow back in the 1980s. Today millions of Social Security recipients find a portion of their benefits subject to the IRS.

Forbes notes the stupidity of this Cyprus plan; any hint of a crisis in another state will send depositors scurrying to withdraw cash, furthering the banking crisis.  He is right, but anyone not insuring against this risk today, anywhere in the world, is already playing with fire.

In fact, that the technocrats first proposed taking a haircut from all accounts was somewhat baffling to me.  I have only recently written that the elite (the inner circle well hidden from even many senior-technocrats) desire to defend regulatory democracy over all else as the economic crisis is managed.  This will ultimately lead to sovereign defaults if this is what is necessary to maintain the people’s faith.  They will not allow insured deposits to fail. 

Allowing the banking system to fail the masses is a sure way to have the general population turn against the system.  I couldn’t believe that insured deposits would take a hit, as initially proposed in the Cyprus plan.  In the final plan, Cyprus chose to keep whole the insured deposits –perhaps someone took a phone call.  My theory has survived. Three weeks and counting! 

In the meantime, I welcome Steve Forbes to the club of conspiracy theorists.

Steve Forbes at The Daily Bell

DB: Please be civil in the feedbacks.

BM: And hopefully respectful….  I find Steve Forbes about as good as it gets on the political economy when it comes to mainstream writers.  The economic world he suggests is preferable to the one we live in (if you can divorce the economy from his views about national defense….).

SF: [regarding competitive currencies in the US] You should not face the prospect of jail if you decide to issue a piece of paper that is backed by gold and if people want to do contracts they should be free to do so. Let it go from there. I don't think it's going to be easy to do but the barriers need to be removed, meaning the tax barriers. As it stands now, if I sell a dollar for four quarters that's considered a tax-free exchange but if I buy an ounce of gold, that is considered a taxable event. So we should remove all taxes on transactions of gold and silver.

BM: He gets this one quite right.  This is the most non-mainstream, free-market position he takes – and he says it well (assuming he also advocates for removal of taxes from any currency exchange, not just gold and silver).

SF: …instituting a sound money policy including a re-link to gold…Well, if you do the gold standard right, you can keep the central bank so they can have a place to show up for work and not do too much harm, as long as it's clearly defined that gold is fixed to a certain price and the value of the dollar is fixed to gold. I think it was Robert Mundell, Nobel prize-winning economist, who said, "When you do it right a monkey could run the system." I would be gentler and say that a high school student could do it. As for the Ph.D.s, I would take pity on them and let them play with their models during the day.

BM:  Why should “money” have a “policy”?  Why don’t (nominally) free-marketadvocates see this as central planning?  This, I believe, is the litmus test for free market advocates – a free market in money, banking, credit and currencies.  In other words, End the Fed.  It separates the wheat from the chaff.

SF: [Obama will] do what he can to gut national security.

BM: What has he done so far to cause concern here?

SF: [regarding the Democratic agenda] Making big government bigger and raising taxes in the process.

BM: Is this different than the Republican agenda?  Look at Romney, McCain, Bush II, Dole, Bush I, Reagan, Ford, Nixon – the Republican nominees for the last 45 years.  Which one proposed, or if elected actually enacted, a shrinking state?

SF: I think the Republicans need to get a Reaganist candidate. I think we have a very good bench now. We have Rand Paul coming along…

This has been obvious to me for some time – Rand Paul is being positioned as the next Reagan, and he will run this way in four years, likely winning the nomination:

SF: That was settled in the War of 1812.

BM: US Imperialism was born with the Constitution – this was the Founders’ generation, for goodness sakes!  Madison, the “Father of the Constitution,” was President when the US launched this invasion of Canada.  Yet somehow returning to the Constitution is a good idea?

SF: The only way a political union can be effected is with the consent of the governed…

BM: I will suggest asking the people in Europe if this is true…or the people in South Carolina in 1865….

What if some of the governed don’t consent to the current political union any longer?  Would secession be supported by Mr. Forbes?  He has a chance to advocate for this today.  As I have not heard his views either way, I will not presuppose his answer.

SF: It's incredible that students don't get an understanding of what makes this country unique.

BM: Even if one believes the US is in some way “unique,” it is not incredible.  The state educates the children.  What else should be expected other than a rotten education?

SF: [regarding the Patriot Act] So far its role has been constitutional but the assault is now going on in all sorts of areas.

BM: It was cited by Clark below, I do so again here for completeness.

Every act IS constitutional.  The government says so.

Steve Forbes: An Advocate of Free Markets?

Zero Hedge linked to this interview of Steve Forbes.  The interview was conducted by Hera Research Newsletter (HRN).  A link to the HRN page is provided at the Zero Hedge post.

For a mainstream analyst, Steve Forbes is about as good as you can get for a free-market perspective.  Many of his positions represent improvements over the current situation in the U.S. and world economy, and also represent improvements over current U.S. Government policy.  However, like virtually all mainstream critiques and analysis, he falls short on the critical issue – the one issue that separates the chaff from the wheat, so to speak.

But I will come to this later.  I would first focus on the positive aspects of this interview.  Early on, Forbes presents his advocacy for many smaller-government, freer-market positions, including a return to the gold standard:

HRN: Thank you for joining us today.  With the U.S. economy struggling to recover from recession and financial crisis, what policies would you recommend?

Steve Forbes: The only way to recover is to stabilize our money, have a gold backed dollar, simplified tax code and return to a free market.

Regarding a gold standard, he is dealt several of the usual fallacious arguments and issues against such a position.  He addresses these quite well, especially considering the overall tone of the interview.  Following are some of the questions addressed by Forbes regarding monetary policy and the gold standard:

HRN: Don’t we need a flexible money supply?

HRN: Doesn’t increasing the money supply help to stimulate the economy?

HRN: Wouldn’t the gold standard prevent financial innovation?

HRN: Doesn’t government deficit spending smooth over recessions?

HRN: Isn’t the gold standard deflationary?

Again, Forbes handles these quite well – if you are interested in his answers, I will suggest a visit to the original interview. 

However, Forbes, like all mainstream commentators, ignores the elephant in the room when it comes to today’s economy – the one position that ensures all of his other positions cannot be implemented, or if implemented, cannot be sustained.  He does not question the existence of a central bank, nor does he question the government’s control over money:

HRN: How would re-linking the U.S. dollar to gold work?

Steve Forbes: You simply peg the value of the dollar to gold.  Let’s say, for argument’s sake, you peg the dollar to gold at $1,600 per ounce.  If gold goes above $1,600, you tighten up on money creation.  If it goes below $1,600, you ease up.  You keep it around $1,600 by tightening or easing up on money creation.  The gold standard doesn’t preclude a booming economy having more money or a stagnant economy having less money.

Who would “peg” the dollar to a certain gold price?  The only way in which this can be achieved is for the government to grant a monopoly power of currency and banking to a centralized institution – an institution whose function is to manage the nation’s money supply.  Call it a central bank…or the Federal Reserve.

A central bank created by congress is a central bank that is controlled by congress – money, banking, credit and currency become political and not economic.  A granted monopoly enforced by the power of the state is not a market enhancing entity.  As money is one side of every transaction in a modern economy, it seems impossible to truly advocate for free-markets without calling into question the underlying inconsistency of a centrally planned and managed money supply.  Forbes is the mainstream champion of free-markets, yet he does not call into question the idea that money must be centrally planned and managed.

How will market forces be brought to bear to ensure that this institution with such power will act credibly?  Will congress enforce the rules?  The money center banks?  If the entity cannot be disciplined by the market, it will not be disciplined.

This is the failing of Steve Forbes, and the failing of all so-called advocates of freedom.  You will know them by their words and deeds – if they do not call for money and banking to be a function of the free market they are not advocates of freedom, regardless of the annual festivals they host.

HRN: Do competing currencies make sense?

Steve Forbes: The idea of a parallel currency is a perfectly good one.  People would come to prefer a dollar based on gold rather than a dollar based on politicians.

Why is it a dollar in either case?  Why can’t an American use Swissies, or Yen, or “Joe’s Gold Backed Buckeroos”?  Competing currencies should mean competing currencies – anyone can bring to market his own forms of money, banking, credit, and currencies.  The market will decide on the most honest and trustworthy means.  The market will develop its own standards.

HRN: What should Chairman Bernanke do instead?

Steve Forbes: Other than resign, Chairman Bernanke should realize that the gold standard works and that when you deviate from it, you create more and more uncertainty.  He should re-link the dollar to gold.  Doctors used to treat patients by bleeding them.  Bernanke just keeps bleeding the economy.

No, Bernanke should not re-link the dollar to gold.  Leaving a central bank in place is a guarantee of no freedom for the people.  The free market should determine all issues around money and credit. Why do so many so-called free-market advocates go blind when it comes to this topic?

On to other topics:

HRN: How could the U.S. transition to a flat-tax system?

Steve Forbes: Since people get hung up on their deductions, we would institute a flat tax and give people the option of filing either under the new, simple system or the old, horrific system.  If you’re a masochist and want to punish yourself, you can file under the old income tax system.  If you want the simplified one, you can go with that.  I think 99% of Americans, out of sheer convenience, would quickly switch to the new system.

Here again, I would take a flat tax over the current system.  However, the issue of individual income taxes cannot be understood as long as it is viewed from the perspective of generating “revenue” for the government.  Personal income taxes have one purpose only, and that is for control.  The reporting ensures that the government knows all aspects of one’s financial life, and with this knowledge the government has significant control over the taxpayer.  A flat tax will not change this.

HRN: How would you go about deregulating health care?

Steve Forbes: First, we should repeal the Patient Protection and Affordable Care Act—Obamacare—which is an abomination.  Patients should have more choice.  The insurance companies don’t compete freely for business.  We should allow people to shop nationwide for health insurance.  I live in New Jersey, which has a lot of senseless regulations.  Why can’t I buy a health insurance policy in Pennsylvania that costs less?  We should equalize the tax treatment of health care expenses.  If you’re a business or are self-employed, you should be able to deduct the expense.  And individuals should be free to go into the market and pay with after-tax dollars.  We should make it easier for small businesses to form a collective to buy health insurance.  There are a lot of simple things that could be done.

How about just getting government out of the health-care business?  Don’t “equalize the tax treatment” (how would this work in a simplified flat tax anyway?), don’t get rid of the “senseless regulations” (everyone has their own opinion of “senseless” - get rid of them all).  Just get the government out of the relationship between doctor and patient.

HRN: Do free markets really work?

Steve Forbes: Free markets, with sensible rules of the road, can do all the things that big government advocates say the government does but that it really can’t do.

Who will define the “sensible rules”?  Either the market will, or a central planner will.  One cannot truly advocate for free markets and also advocate for central planning.

Again, I would take the world Steve Forbes portrays over the one we have today.  There is a small portion of the path we can walk together.  However, to believe his path will lead to the outcomes he suggests is folly- leave an entity in place to define the “sensible rules of the road” leave a central bank in place to manage the price of the dollar to gold, and you will end up right where we are today.

If you advocate free markets, then advocate free markets.  If you advocate free markets while ignoring the elephant in the room, then you remain an acceptable mainstream voice.