They Didn't See it Coming

The Federal Reserve recently released transcripts of its meetings in 2007.  This was during the time of the first visible signs of the ongoing financial calamity.  I say the first visible signs, because there were a few economists and investors who understood this issue well before 2007, most of these students of the Austrian Business Cycle Theory.

But none were to be found at the Fed.  The New York Daily News summarizes the transcripts:

They didn't see it coming.

Federal Reserve officials were largely blindsided as the financial crisis hurtled toward the U.S. economy like a freight train in 2007, according to newly released transcripts. [1]

The Wall Street Journal is slightly less blunt:

Federal Reserve officials in 2007 appeared to underestimate the sickly condition of U.S. financial markets before shifting to a state of growing alarm, according to 1,566 pages of newly released transcripts from the central bank's meetings that year.

During most of the year, Fed Chairman Ben Bernanke embraced only reluctantly the interventionist stance that has defined his stewardship of the central bank. [2]

Yes, Bernanke really didn’t want to intervene.  The markets made him do it.

I am quite certain Bernanke’s reluctance was never a concern to those who placed him at the helm.  They knew he was “Helicopter Ben,” and they knew where his instincts would lead him when the time was right.

The whirlwind that hit the global economy in late 2008 outstripped even the direst forecasts in the transcripts. The new record provides ammunition for the Fed's critics—both those who say it was too slow to act and those who say it was too aggressive in intervening in financial markets. [2]

It gives the most ammunition to those who say the Fed shouldn’t even exist.  There is no economically rational argument for central planning of any commodity (meaning any good or service); why is this ignored when it comes to the most important commodity in a sophisticated division-of-labor economy?

The Washington Post chimes in:

It was December 2007, and officials at the Federal Reserve were torn between two visions of what was in store for the nation’s economy: a mild slowdown or outright recession.

I guess they didn’t consider a third possibility.

They opted to believe in a slowdown. They were wrong. [3]

They weren’t just wrong in their choice; they were wrong by limiting themselves to these two possibilities.  It seems they didn’t even consider the third possibility, and the one that actually came to pass: the most severe economic catastrophe since the Great Depression, one that has lasted for five years with few signs of abating, and no signs of return to anything approaching pre-catastrophe levels.

A staff presentation described a highly unlikely, worst-case scenario that included a 10 percent drop in the stock market. [3]

They missed that forecast by just a bit, as the S&P 500 would fall more than 50%, from above 1500 in the summer of 2007 to below 700 by March 2009.

The transcripts mention the word “recession” four times in January, three times in June, once in August, and 27 times in December. [4]

According to the National Bureau of Economic Research (NBER), the recession began in December, 2007.  Good catch there by the Fed, to even begin to seriously discuss the possibility of recession all the way back in…wait a minute, let me double-check that…December, 2007.  Way to look out into the future and guide the ship.  The best macro-economists money can buy.

Central banking, like all macro-economic disciplines based on math and formulas (as opposed to human action) is quackery, and these transcripts demonstrate this unavoidable fact once again – as if we need more evidence.

Here are some of the lowlights of the minutes, gleaned from several sources that have reported on the subject:

The Market Provision of Social Services

The Market Provision of Social Services

The title of this post is taken from the book “Public Goods and Private Communities: The Market Provision of Social Services,” by Fred Foldvary.

Who is Fred Foldvary?

Fred Emanuel Foldvary (born May 11, 1946) is a lecturer in economics at Santa Clara University, California, and a research fellow at The Independent Institute. He is also a commentator and senior editor for the online journal The Progress Report and an associate editor of the online journal Econ Journal Watch. He lives in Berkeley, California.

In his PhD dissertation (George Mason University, 1992), "Public Goods and Private Communities", he applied the theory of Public goods and Industrial organization to refute the concept of market failure, including case studies of several types of private communities. His research interests include ethics, governance, land economics and public finance.

His support of geoanarchism (a kind of Georgist economics) and his advocacy of civil liberties, anarchy and free markets have gained him a place of high visibility in the geolibertarian movement. [1] In 2000, he ran for Congress in California's 9th District as a Libertarian. [2] He received 3.3% of the total vote to finish third among the four candidates on the ballot.

One of the things I hope to discover as I further my reading of Foldvary’s volume is to what extent Foldvary associates with at least some aspects of what is attributed to “Georgist economics.” 

In his publication Progress and Poverty [Henry] George argued that: "We must make land common property."[4] Although this could be done by nationalizing land and then leasing it to private parties, George preferred taxing unimproved land value. A land value tax would not overly penalize those who had already bought and improved land, and would also be less disruptive and controversial in a country where land titles have already been granted.

By the term “taxing unimproved property,” it is meant to tax all land as if it was unimproved – unlike the typical real-estate property tax of today, which taxes both land and improvements.  In other words, the economic benefits of the improvement would belong to the property owner, while the economic benefits of the improvement in land value would belong to the state to spend or otherwise distribute.

However, the term “taxing” suggests coercion in the relationship.  I don’t believe Foldvary envisions this as a system to be administered by a coercive state agent:

The real world distinction is not community organization versus lack of organization, but what kind of governance or organization an enterprise or a community has, for example consensual governance versus imposed governance.

It is this bent of Foldvary’s – that the relationships must be consensual – and that I could envision the entire process (from street-sweeping all the way up to the big bogeyman of national defense) as being formed in the free market by enterprises driven and disciplined by profit and loss that I chose to look into his work in more detail: a form of homeowners association, acting independent of other like organizations for certain matters and cooperating with other similar organizations for others.

Libertarians and Abortion

This post is a summary of my thoughts as presented in my earlier three posts on this topic.  In addition to consolidating the material, I have incorporated additional contractual concepts as well as included some information from a paper on the subject written by Ron Paul.

Introduction

There are a handful of thorny issues for libertarians – in some cases, significant issues on which there is significant disagreement.  One such issue is that of abortion.

My journey and reasoning on abortion begins and ends with the view that it is the taking of an innocent life. Whatever the cause of the pregnancy – chosen or not – the unborn child was innocent of causing the pregnancy and therefore not justifiably subject to aggression in the so-called self-defense of the mother.

However, for my purpose here, I will approach this issue via the positions of two of the staunchest libertarians of recent times – Murray Rothbard and Walter Block, and primarily Block.  Although I believe it to be a moral issue, I will approach it here on their terms.  Both have written in favor of abortion (although Block uses the term “evictionism”), and both have defended their respective positions from what they consider to be a libertarian viewpoint: a trespass by the unborn child and the property rights of the mother.

With this in mind, I will present the case that it is the unborn child, and not the mother, that has the right of use of the womb for the term of the pregnancy.  I base this on causation, reasonable reliance, unilateral contract, and, as Block has introduced the language of landlord and tenant, a lease and the covenant of quiet enjoyment.

As mentioned, there are many libertarians that also hold the view that abortion is aggression, and that abortion is counter to libertarian principle.  I will lean on one of these champions, Dr. Ron Paul, to buttress conclusions that I have independently reached on this matter. 

Independent of the arguments I will make here, I conclude abortion is the initiation of the most grievous aggression: murder.  I hold to this view so strongly that I am quite sure that no argument – libertarian or other – could sway me.  Forewarned is forearmed – while I intend to make a libertarian case based on contract in this paper, I approach this subject with a strong bias.

I will avoid momentarily the act of rape as cause of the pregnancy, but will address this briefly toward the end of this post.

Abortion is Killing, but is it Murder?

Block and Whitehead make clear their personal view regarding abortion.  From “Compromising the Uncompromisable: A Private Property Rights Approach to Resolving the Abortion Controversy,” by Dr. Walter Block and Roy Whitehead:

…we maintain that abortion is an abomination. It is a massive killer. More people die annually as a result of it (1,591,000) than perish from heart disease (720,058), cancer (505,322), stroke (144,088), or all accidents (91,983). Adding insult to injury, death occurs in these cases because of the purposeful action of other people.

Rothbard begins by recognizing the “Catholic” side of the argument.  From “For a New Liberty: The Libertarian Manifesto,” by Murray Rothbard:

For the essence of that case – not really “Catholic” at all in a theological sense – is that abortion destroys a human life and is therefore murder, and hence cannot be condoned….Murder is not an expression of religious preference; no sect, in the name of “freedom of religion” can or should get away with committing murder with the plea that its religion so commands.  The vital question then becomes: Should abortion be considered as murder?

Yes, this is the vital question, both from a moral standpoint and from a libertarian standpoint.

When Does Life Begin?

Rothbard suggests to not get bogged down in the “minutiae about when human life begins….”  Block and Whitehead develop this concept further, concluding that it is appropriate to consider that human life begins at conception:

At what point does human life begin?  There are really only two reasonable possibilities: at conception or at birth; all other points of development in between are merely points along a continuum which begins and ends with these two options.

So which is it? Does life begin at the beginning point of this nine-month continuum or at the end of it? We take the former position. We maintain that the fetus is an alive human being from day one onward, with all the rights pertaining to any other member of the species.

They will get no argument from me on this.  As we know the result nine months later, to suggest anything other than human life resides in the mother is folly.  To argue that the unborn child is not able to sustain itself is irrelevant.  It is also true for a one day old baby or a six month old baby, just as it is true for the vast majority of people in the developed world today.

The Cause That Shall Never Be Mentioned

John Mauldin has published a piece by George Friedman, entitled “The Crisis of the Middle Class and American Power.”   George Friedman is the Chief Executive Officer of Stratfor, providing analysis in the field of global geo-political intelligence.

In Freidman’s article, he outlines the case of the Middle Class in America (emphasis added):

The median household income of Americans in 2011 was $49,103. Adjusted for inflation, the median income is just below what it was in 1989 and is $4,000 less than it was in 2000…. It is also vital to consider not the difference between 1990 and 2011, but the difference between the 1950s and 1960s and the 21^st century. This is where the difference in the meaning of middle class becomes most apparent.

Freidman notes that it is vital to consider the time since the 1960s and the 20^th century.  Economically and politically, there was one significant event directly at the point in time Freidman suggests was vital. 

The government was fully unbound from any economic discipline by Nixon’s default as evidenced by his abandonment of backing the dollar internationally with gold.  This occurred in 1971.  This gave the federal government free-reign on spending.  It made ineffective the naturally balancing aspects of international gold flows.  Most importantly, it un-leashed the Federal Reserve from any discipline when it came to the dollar.

This doesn’t appear to be where Freidman will look.  Instead, Freidman uses as a theme the idea of the possibility of upward mobility that is part of the American dream.  He believes the reason for the real estate bubble and subsequent defaults were because of this belief in upward mobility – that incomes would catch up with debt – and when the dream didn’t pan out, the bubble burst. 

This seems a rather shallow explanation.  No central banking?  No booms and busts?  No housing policies by the government?  No Fannie Mae and Freddie Mac?  No money-center banks creating artificial demand for credit instruments due to the unlimited backstop by the Fed?

No lack of discipline brought on because of the abandonment of the (admittedly feeble) gold standard of Bretton Woods?

No.  Just that the dream failed.  Somehow.  All at once, and everywhere.

Why Aim Small

Posted at The Daily Bell

It seems clear that the government model – certainly the one practiced in the last 100 years – is an obvious failure.  Anyone living in central and eastern Europe or East Asia (as two examples) would gladly have taken much less formal government during this time.

One of the (many) interesting insights I drew from Scott’s book was the idea that where people had a choice, they stayed out of the government controlled areas and stayed in the areas of so-called anarchy.  The state never turned away willing volunteers, and few voluntarily rushed in to be co-opted by the state.  Was the purpose of the Great Wall to keep invaders out, or to keep the captured slaves (for that is, after all, one of the main methods by which such regimes were populated) in?

One other era from which I have drawn interesting insights on this matter is during the early middle ages in Germanic Europe – the dark ages, another time period we are supposed to ignore.  This time and culture offers an interesting take on the relationship of king, vassal, and law.  To make a long story short, the law was above both king and vassal, and every vassal had a veto power over the king – as long as he could show his reason for veto in the law – law being that which was “old” and “good,” custom and culture based, if you will.  If there is any interest, I offer a few posts based on the work done by Fritz Kern in Germany and published in 1914.

(They appear newest to oldest, but I would suggest reading in date order).

What seems certain is the process of centralizing nation-states is failing.  The USSR, Yugoslavia, and Czechoslovakia all have broken into component parts.  The EU?  Even tiny Belgium, or Spain?  As promises of the nation-state are breaking, the faith will fall away.  Take away the faith and there will be little support.

Two authors, with infinitely better credentials than I have, see the breakup of the nation-state model coming.  Jacques Barzun, “From Dawn to Decadence” and Martin van Creveld “The Rise and Decline of the State.”  Their credentials are impeccable.  They come at this from different angles, and reach similar conclusions.  However, we see this crumbling before our eyes.  I need no further evidence.

Gary North has written a review of these two books.  They are the second and third books covered in this article (although the entire article deals with this subject).

I don’t fool myself into believing that anarchy (meaning self-rule or no-ruler) will come into being anytime soon, and likely not ever.  However, I am certain it cannot if we keep discussing “better regulation” or the possibility of choosing “good leaders” as the solution.  My view is simple: by aiming (with ideas) for the target with the least monopolized coercion as basis for organizing society, there is at least some chance of coming close to the bulls-eye.  By aiming for some muddled version of status quo, there is only the certainty of achieving some version of the status quo.

I believe I have mentioned this here previously, so apologies in advance: every major religion teaches some form of the golden rule.  It seems to me that there are billions of people who have some version of this in their DNA.  It suggests that there is, perhaps, a good foundation upon which to build.

Louisiana is Stuck

The White House has responded to the petition asking to allow the peaceful withdrawal of the State of Louisiana from the Union.

Jon Carson, Director of the Office of Public Engagement, responded.  Guess what the answer is?  I will wait…still waiting….  Have you guessed?

No.  The answer is no.

Our founding fathers established the Constitution of the United States "in order to form a more perfect union" through the hard and frustrating but necessary work of self-government.

But what if “self” doesn’t agree with this “government”?  Sorry, Charlie.  You don’t get a “get out of jail free” card:

But they did not provide a right to walk away from it.

I didn’t realize that this was a right that was the founders’ to grant.

He then follows with what could be construed as a veiled threat:

…more than 600,000 Americans died in a long and bloody civil war that vindicated the principle that the Constitution establishes a permanent union between the States.

Of course, this only vindicated the principle that might makes right, and history is written by the victors.

And shortly after the Civil War ended, the Supreme Court confirmed that "[t]he Constitution, in all its provisions, looks to an indestructible Union composed of indestructible States."

Proving the wisdom in the separation of powers.

So there you have it. 

But the best part was found in the section immediately below Mr. Carson’s response.  I have no idea if it will be there now, if you check the link – I don’t know if this is a rotating list.  Immediately below the response is a list of other related petitions.  The first one, a petition to:

Deport everyone that signed a petition to withdraw their state from the United States of America.

I imagine there would be many takers.

h/t Charles Burris

More on the Trillion Dollar Coin

Joe Weisenthal is out with another column on this issue, entitled “Why The Fight Over The $1 Trillion Coin Is The Most Important Fiscal Policy Debate You'll Ever See In Your Life.”

He might be right, but I suspect not for the reasons he believes.  He is right because there are NO important fiscal policy debates, so ANY fiscal policy debate will be the most important one.

As Jonathan Chait at NYMag observes, what's interesting is that there are very few good arguments, legal or economic, against minting the coin.

Well, there is one economic argument.  As to legal arguments, as government employees have made clear that whatever government employees do is legal, he is correct.

Most of the critics' arguments basically boil down to: It's just not serious, and it would make the US monetary and political system look like a farce.

I don’t know if it is serious or not.  And it can’t make the system look like a farce – it already is a farce.  But what it can do is make the farce evermore obvious.  This will certainly bring the farce to sooner end.

But contrary to all these people who say that this is a childish, non-adult proposal put forth by impish trolls, it's actually quite the opposite. It may be the most important fiscal policy debate you'll ever seen in your lifetime, because it gets right to the nature of what is money.

It may further expose the debate of what is money, but the debate has gone on for centuries.  On the one hand, money is a commodity with some very specific attributes, chosen in the market.  On the other hand, money can be created from nothing.

The problem is that the second proposition – money from nothing – has already won the debate, at least in the last one hundred years and at least for a time.  There is no debate about this among “serious” economists.  The only debate is because of that Ron Paul fellow and his Australian school, or whatever.  But for some reason, Weisenthal thinks producing this coin is somehow different than the Fed producing digits.  Only in form, not in function.

Almost everyone talking about fiscal policy imagines money to be a commodity of sorts that we can "run out" of if we don't spend it carefully.

As long as money is produced in a free market, the economy will not run out of it.  supply and demand, if left free, will ensure this.  Those who recognize money is a commodity understand this.

In this sense, although we've long gotten rid of the gold standard, we're still shackled with a gold standard mentality, where we think of money as a scarce natural resource that we need to husband carefully, lest one day the bond vigilantes show up at our door, causing us to go broke.

Weisenthal will come to eat these words, with or without this trillion dollar coin.

He finds flaw with those who complain that the state is just “creating” money:

Creating money is exactly what government does. What's absurd for a private business is not absurd for the government.

As John Maynard Keynes simply put it a long time ago: "Money is the creation of the state."

That the state creates the money we use is actually known to just about everyone, but people have a hard time making the key leap, which is that once the state is in the business of creating money, then the old gold standard notions of monetary scarcity don't apply in the same way.

The issue isn’t monetary scarcity – central banking has temporarily relieved us from this reality; the issue is scarcity of goods and services.  The world is a world of scarcity, at least since Adam and Eve got the boot.  All the dreams and wishes of do-gooders, political schemers, and economic quacks cannot change this.  Have the state create all the so-called money you want – this will not end scarcity, but only further exaggerate the deterioration of wealth.  Witness the last five years.

Stephanie Kelton, an economics professor at the University of Missouri Kansas City and one of the earliest defenders of the coin, explained via email:

Until the idea of minting a $1 trillion coin became a reality, most people probably never gave much thought to the government’s financial operations.  We understood that the government spent money, and we knew the money had to come from “somewhere”, but we assumed there were limits to how much the government could afford to spend. 

Chits in one pile, the stuff the chits buy in another.  Increasing the number of chits doesn’t change the second pile.  The issue is an issue of claim on resources – real stuff.  Creating money from nothing does nothing to create the real stuff money buys.  And since government and its minions won’t be limited in this, guess who will receive the blunt end of the stick in the gut?

Enter the coin.  An idea so simple the mind recoils.  The Treasury has the power to end-run the process by cutting out the middlemen – taxpayers and bond markets –simply directing the Federal Reserve to add some numbers to its balance sheet.  Saints preserve us! 

He’s right, the mind does recoil.  The saints won’t be able to preserve us.  This is greenbacker stuff – Ellen Brown is joyful, I suppose. 

Weisenthal’s complete ignorance comes out in his conclusion:

Remember, money is a fiction. Real wealth is capital assets, our infrastructure, our cars, our houses, and most importantly the potential human ingenuity and cooperation. Money is just something that the government creates to facilitate the trade in all of those things.

Human cooperation.  Weisenthal is so close to the truth yet remains blind.  Money (to include currency and credit) is what makes possible the division of labor – this is the ultimate form of human cooperation.  This cooperation allows for the standard of living we enjoy via the resulting labor specialization. 

Debase the money by making it of no value (any good that is not scarce is not valued), and you will deteriorate the division of labor.  Deteriorate the division of labor, and real wealth – not in nominal-money terms, but as Weisenthal describes it – will be destroyed. 

Imagine a world with a much lower division of labor: it is certain that most of us will not remain alive for very long.  But those who remain will all be fully employed as farmers.  It is for this world that Weisenthal is advocating.  At minimum he is advocating for hyper-inflation.  In the worst case, he is advocating for your death.

I believe under the Fed, the US will see a high inflation but likely not hyper-inflation.  My concerns of hyper-inflation increase greatly if Congress takes over the Fed’s power.  This proposal will do that.  If this coin idea happens, be prepared, as high inflation is certain, and ultimately hyper-inflation will follow.