Who cares which sock puppet is Fed chairman?

So Barbara Boxer and Russ Feingold are against Bernanke… good for them, but it doesn’t make any difference which egghead reads the February and July speeches to Congress when the very existence of a central bank is the problem.

Here’s what should be done with the Fed:

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See also: Greenspan was framed! Blame bankers’ moral hazard, not their lackey.

The Reluctant Anarchist

This old essay by columnist Joe Sobran is remarkably close to my own view of government, as is the process by which he arrived at his conclusions (I added the bold below).

…I became a philosophical conservative, with a strong libertarian streak. I believed in government, but it had to be “limited” government — confined to a few legitimate purposes, such as defense abroad and policing at home. These functions, and hardly any others, I accepted, under the influence of writers like Ayn Rand and Henry Hazlitt, whose books I read in my college years.

During the Reagan years, which I expected to find exciting, I found myself bored to death by supply-side economics, enterprise zones, “privatizing” welfare programs, and similar principle-dodging gimmickry. I failed to see that “movement” conservatives were less interested in principles than in Republican victories….

Now I began to be critical of the U.S. Government, though not very. I saw that the welfare state, chiefly the legacy of Franklin Roosevelt’s New Deal, violated the principles of limited government and would eventually have to go. But I agreed with other conservatives that in the meantime the urgent global threat of Communism had to be stopped. Since I viewed “defense” as one of the proper tasks of government, I thought of the Cold War as a necessity, the overhead, so to speak, of freedom. If the Soviet threat ever ceased (the prospect seemed remote), we could afford to slash the military budget and get back to the job of dismantling the welfare state….

Gradually I came to see that the conservative challenge to liberalism’s jurisprudence of “loose construction” was far too narrow. Nearly everything liberals wanted the Federal Government to do was unconstitutional. The key to it all, I thought, was the Tenth Amendment, which forbids the Federal Government to exercise any powers not specifically assigned to it in the Constitution. But the Tenth Amendment had been comatose since the New Deal, when Roosevelt’s Court virtually excised it….

In a way I had transferred my patriotism from America as it then was to America as it had been when it still honored the Constitution. And when had it crossed the line? At first I thought the great corruption had occurred when Franklin Roosevelt subverted the Federal judiciary; later I came to see that the decisive event had been the Civil War, which had effectively destroyed the right of the states to secede from the Union. But this was very much a minority view among conservatives, particularly at National Review, where I was the only one who held it….

In the late 1980s I began mixing with Rothbardian libertarians — they called themselves by the unprepossessing label “anarcho-capitalists” — and even met Rothbard himself. They were a brilliant, combative lot, full of challenging ideas and surprising arguments. Rothbard himself combined a profound theoretical intelligence with a deep knowledge of history. His magnum opus, Man, Economy, and State, had received the most unqualified praise of the usually reserved Henry Hazlitt — in National Review!

Murray’s view of politics was shockingly blunt: the state was nothing but a criminal gang writ large. Much as I agreed with him in general, and fascinating though I found his arguments, I resisted this conclusion. I still wanted to believe in constitutional government.

Murray would have none of this. He insisted that the Philadelphia convention at which the Constitution had been drafted was nothing but a “coup d’etat,” centralizing power and destroying the far more tolerable arrangements of the Articles of Confederation. This was a direct denial of everything I’d been taught. I’d never heard anyone suggest that the Articles had been preferable to the Constitution! But Murray didn’t care what anyone thought — or what everyone thought. (He’d been too radical for Ayn Rand.)

Murray died a few years ago without quite having made an anarchist of me. It was left to his brilliant disciple, Hans-Hermann Hoppe, to finish my conversion. Hans argued that no constitution could restrain the state. Once its monopoly of force was granted legitimacy, constitutional limits became mere fictions it could disregard; nobody could have the legal standing to enforce those limits. The state itself would decide, by force, what the constitution “meant,” steadily ruling in its own favor and increasing its own power. This was true a priori, and American history bore it out.

What if the Federal Government grossly violated the Constitution? Could states withdraw from the Union? Lincoln said no…. The United States, plural, were really a single enormous state, as witness the new habit of speaking of “it” rather than “them.”

So the people are bound to obey the government even when the rulers betray their oath to uphold the Constitution. The door to escape is barred. Lincoln in effect claimed that it is not our rights but the state that is “unalienable.” And he made it stick by force of arms. No transgression of the Constitution can impair the Union’s inherited legitimacy. Once established on specific and limited terms, the U.S. Government is forever, even if it refuses to abide by those terms.

As Hoppe argues, this is the flaw in thinking the state can be controlled by a constitution. Once granted, state power naturally becomes absolute. Obedience is a one-way street. Notionally, “We the People” create a government and specify the powers it is allowed to exercise over us; our rulers swear before God that they will respect the limits we impose on them; but when they trample down those limits, our duty to obey them remains.

We may challenge the government in the courts… its courts.

…Franklin Roosevelt and his Supreme Court interpreted the Commerce Clause so broadly as to authorize virtually any Federal claim, and the Tenth Amendment so narrowly as to deprive it of any inhibiting force. Today these heresies are so firmly entrenched that Congress rarely even asks itself whether a proposed law is authorized or forbidden by the Constitution.

In short, the U.S. Constitution is a dead letter. It was mortally wounded in 1865. The corpse can’t be revived…

Other things have helped change my mind. R.J. Rummel of the University of Hawaii calculates that in the twentieth century alone, states murdered about 162,000,000 million of their own subjects. This figure doesn’t include the tens of millions of foreigners they killed in war. How, then, can we speak of states “protecting” their people? …As for warfare, Paul Fussell’s book Wartime portrays battle with such horrifying vividness that, although this wasn’t its intention, I came to doubt whether any war could be justified….

…For most people, anarchy is a disturbing word, suggesting chaos, violence, antinomianism — things they hope the state can control or prevent. The term state, despite its bloody history, doesn’t disturb them. Yet it’s the state that is truly chaotic, because it means the rule of the strong and cunning. They imagine that anarchy would naturally terminate in the rule of thugs. But mere thugs can’t assert a plausible right to rule. Only the state, with its propaganda apparatus, can do that. This is what legitimacy means. Anarchists obviously need a more seductive label.

“But what would you replace the state with?” The question reveals an inability to imagine human society without the state. Yet it would seem that an institution that can take 200,000,000 lives within a century hardly needs to be “replaced.”

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Anarchy naturally gives rise to capitalism, as people save and invest the fruits of their labor. Unfortunately, and without much lag, it also seems to give rise to states. Cunning individuals, as well as lazy, short-sighted or naive ones all desire to formalize the use of force to control capital.

To read some of Rothbard’s work, click here.

For Hoppe, here.

A decade without job gains

From Chart of the Day:

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What was that about credit being the lifeblood of the economy? Well, the 2000s saw the greatest bubble ever, and all it got us was richer bankers. Robert Prechter often says that the depression started with the bursting of the dot-com bubble and deflation of social mood from the euphoria of the late ’90s. This chart, like the Dow:Gold ratio (down to 9 today from a peak of 44), give you and idea of what he’s talking about. After all, there was no net growth last decade — it was all a sham.

Capitalism needs failure, say winning fund managers

Kevin Duffy and Bill Laggner are acquaintances of mine who run the Bearing Fund, which returned high double digits for its investors in 2008. Their moral and economic philosophy is grounded in the Austrian understanding of the credit cycle and the parasitic role that government plays in today’s economy. I highly recommend an interview with them in this week’s Barrons (subscription only). Here are some excerpts:

Duffy: Any healthy system needs a way to correct error and remove waste. Nature has extinction, the economy has loss, bankruptcy, liquidation. Interfering in this process lengthens feedback loops. Error and waste are allowed to accumulate, and you ultimately get a massive collapse.

Capitalism is primarily attacked by two groups: utopians who wish to impose a more “compassionate” system, and political capitalists who want to enjoy the fruits of success without bearing the pain of failure. They use the coercion of the state to gain privileges, at the expense of everyone else.

As a country we’ve become less tolerant of economic failure. The result has been a series of interventions, such as meddling in the credit markets, promoting homeownership and creating a variety of safety nets for investors. Each crisis leads to an even greater crisis. The solution is always greater doses of intervention. So the system becomes increasingly unstable. The interventionists never see the bust coming, then blame it on “capitalism.” …

Laggner: AIG made sure its creditors received 100 cents on the dollar. Essentially you have the socialization of risk, but the survivors are still highly leveraged. There is still a multi-trillion dollar shadow banking system that FASB [the Financial Accounting Standards Board] wants to address next year. The central planners have already spent $3.15 trillion on various bailouts, credit backstops, guarantees, etc., and given approximately $17.5 trillion of government commitments, etc., while allowing many of these institutions to remain in place, with the same people running them…

Barron’s: What kind of financial reform would you like to see?

Laggner: We don’t believe in a central bank. The idea that banks can speculate with essentially free money from the [Federal Reserve], which ultimately is the taxpayer, and that when they lose money the Fed bails them out and then passes that invoice to the taxpayer — that whole model is broken and needs to go away.

Duffy: To get to the heart of the problem, we need to address fractional-reserve banking, which is causing the instability. We have essentially socialized deposit insurance and prevented the bank run, which used to impose discipline on this unstable system. At least it had some check on those who were acting most recklessly. Until we address the root of the problem, we are going to have a series of crises, greater responses and intervention, and more bubbles — and the system will keep perpetuating itself.

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The whole system is broken and needs to go away. We can only hope that this depression fosters that end, though the actors that control the guns (i.e. government) will use all of their wiles to hold onto their racket.

Yes, the 1700s and 1800s had their booms and busts, but the 200 years leading up to the first world war saw the greatest improvement in living standards that the world has ever seen. The industrial revolution and development of modern communications, medicine and transportation happened on the gold standard, with non-existent or non-interventionist central banks and governments that allowed busts to clear away mal-investments and bad debts so that the market could guide capital and labor into productive hands.

Nobody back then believed that consumption and “stimulous” could generate anything but debt and waste. Since the ruinous economic policies of the 20th century took hold, we have been squandering our wealth and merely coasting on technological improvements, which government only impedes in a thousand ways.

Detroit, model for future US?

Hat tip to Mish for this explanation of how government ruined one of the wealthiest cities in the world:

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Now, if the government had let Chrysler and GM go under, their factories would have been bought by Toyota and Honda and their employees would be turning out cars that people actually want, not gems like the Aztec:

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3rd Quarter GDP revised lower again

The bulls cheered when the Department of Commerce told us GDP was 3.5%, but then the estimate was quietly lowered to 2.8%, and now we hear that 2.2% is a more like it. In reality of course, when you take away government expenditures, which should not be in GDP anyway as they are not Production, the economy continued to shrink. What else would you believe given that credit is still rapidly contracting and government is throwing sand into any market mechanisms that would clear away the bad debt?

Doug Casey and Tom Woods on government

Video link from Lewrockwell.com

Here’s an excerpt from The Law, by Frederic Bastiat, a French classical liberal (today we would say libertarian) economist:

A Fatal Tendency of Mankind

Self-preservation and self-development are common aspirations among all people. And if everyone enjoyed the unrestricted use of his faculties and the free disposition of the fruits of his labor, social progress would be ceaseless, uninterrupted, and unfailing.

But there is also another tendency that is common among people. When they can, they wish to live and prosper at the expense of others. This is no rash accusation. Nor does it come from a gloomy and uncharitable spirit. The annals of history bear witness to the truth of it: the incessant wars, mass migrations, religious persecutions, universal slavery, dishonesty in commerce, and monopolies. This fatal desire has its origin in the very nature of man — in that primitive, universal, and insuppressible instinct that impels him to satisfy his desires with the least possible pain.

Make it a real audit, then end the Fed

Thomas Woods, Jr., PhD, Prepared Testimony in Support of HR 1207, The Federal Reserve Transparency Act of 2009, House Financial Services Committee, September 25, 2009:

There is no good reason for Americans not to know the recipients of the Fed’s emergency lending facilities. There is no good reason for them to be kept in the dark about the Fed’s arrangements with foreign central banks. These things affect the quality of the money that our system obliges the American public to accept.

The Fed’s arguments against the bill are unlikely to persuade, and will undoubtedly strike the average American as little more than special pleading. Perhaps the most frequent of the claims is that a genuine audit would jeopardize the alleged independence of the Fed. Congress could come to influence or even dictate monetary policy.

This is a red herring. The bill is not designed to empower politicians to increase the money supply, choose interest-rate targets, or adopt any of the rest of the Fed’s central planning apparatus, all of which is better left to the free market than to the Fed or Congress. It seeks nothing more than to open the Fed’s books to public scrutiny. Congress has a moral and legal obligation to oversee institutions it brings into existence. The convoluted scenarios by which merely opening the books will lead to an inflationary catastrophe at the hands of Congress are difficult to take seriously.

At the same time, as we hear this objection repeated time and again, we might wonder just how independent the Fed really is, what with its chairman up for reappointment by the president every four years. Have these critics never heard of the political business cycle? Fed chairmen have been known to ingratiate themselves into the president’s favor close to election time by means of loose monetary policy and the false (and temporary) prosperity it brings about. Let us not insult Americans’ intelligence by pretending this phenomenon does not exist…

If there is any truth to the idea of Fed independence, it lay in precisely this: the Fed may reward favored friends and constituencies with trillions of dollars in various kinds of assistance, while keeping the public completely in the dark. If that is the independence we’re talking about, no self-respecting American would hesitate for a moment to challenge it.

A related argument warns that the legislation threatens to politicize lender-of-last-resort decisions. Again, this is untrue. But even if it were true, how would that represent a departure from current practice? I hope we are not asking Americans to believe that the decisions to bail out various financial institutions over the past two years, and in particular to allow them to become depository institutions overnight that they might qualify for assistance, were made on the basis of a pure devotion to the common good and were not political at all. Most Americans, not unreasonably, seem convinced of another thesis: that Goldman Sachs, for instance, might be just a little bit more politically well connected than the rest of us…

If our monetary system were really as strong, robust, and beyond criticism as its cheerleaders claim, why does it need to rely so heavily on public ignorance? How can it be a sound banking system that depends on keeping the public in the dark about the condition of its financial institutions?

Let me also make clear that supporters of this legislation are strongly opposed to a watered-down version of the bill – which, incidentally, would only increase public suspicion that someone is hiding something.

If the Federal Reserve Transparency Act passes and the audit takes place, the American people will have achieved a great victory. If the legislation fails, more and more Americans will begin to wonder what the Fed could be so anxious to keep hidden, and the pressure for transparency will simply intensify. A recent poll finds 75 percent of Americans already in favor of auditing the Fed. The writing is on the wall.

The Federal Reserve may as well get used to the idea that the audit is coming. That would be a far more sensible approach than the counterproductive and condescending one it has adopted thus far, in which the peons who populate the country are urged to quit pestering their betters with all these impertinent questions. The Fed should take to heart the words of consolation the American people are given whenever a new government surveillance program is uncovered: if you’re not doing anything wrong, you have nothing to worry about.

The superstitious reverence that Americans have been taught to have for the Federal Reserve is unworthy of the dignity of a free people. The Fed enjoys a government-granted monopoly on the creation of legal-tender money. It is not an unreasonable imposition for Americans to demand to know about the activities of such an institution. It is common sense.

Tom Woods (see his website) is a senior fellow at the Ludwig von Mises Institute, the premier libertarian thinktank (Cato sold out decades ago after they got rid of Murray Rothbard).

The “other side” of the deflation trade

Graphite here. I remain an ardent deflationist and continue to see strong risks of a continued collapse in asset values in world real estate and equity markets. That said, one key practice in speculation, no matter how strong one’s conviction in a particular trade, is to understand the other side of that trade and how the market could move against your position.

This can sometimes present a challenge for deflationists because so much of the opposing camp is composed of die-hard Panglossian buy-and-holders betting on a V-shaped recovery, rounded out with a few gold bugs who present little or no argument other than that the Bernanke Fed will embark on a suicidal campaign of massive money printing.

Although Marc Faber has issued calls for hyperinflation before, the discussion in the video below represents a much more measured discussion of a serious alternative to the near-term bearish case for stocks and the economy:

“My sense is that — here I’m talking about the economy — that the economy, near term, can recover, and maybe the recovery will be somewhat lengthier than expected a crack-up boom, because the first stimulus package in the U.S. probably will be followed by a second one, and money printing will lead to even more money printing next year. So it can last, say, 12 to 18 months, and then we will get another set of problems ….”

Faber goes on to recommend buying financial stocks, on the expectation that the banks will continue to get free money from the government and parlay that largess into significant profits. His long-term view remains as bearish as ever, but he presents an important alternative perspective on how soon the economic calamity will arrive and what form it will take.

That said, I think Faber is wrong that the market will continue to enthusiastically take up the Fed’s offers of liquidity and use them to fuel speculation for very much longer. No one is laboring under the delusion that the garbage stocks like AIG, FNM, and FRE which have led this last leg upward are worth anything more than zero — and while from a contrarian perspective that could indicate that there is room remaining for investors to develop an even more desperate belief in a new bull market, I think it is much more likely a manifestation of the new trend toward skepticism which will come to permeate the entire market as the bear runs its course.

Whatever your perspective, it’s always fun to see Marc Faber’s characteristic chuckle at the suggestion that our wise overseers will competently steer us through the crisis.

Ron Paul sums up the crisis in 3 minutes

(thanks again to zerohedge for finding this video)

I remember when I first discovered a speech by Ron Paul back in boom-time 2005, and was shocked that a Congressman was so eloquently warning of the dangers of fractional reserve lending, the Federal Reserve system, and welfare/warfare deficit spending. It was the first time that I could fully respect a standing politician.

Dr. Paul is still the nation’s strongest voice for an honest monetary and banking system, and he delivered a zinger in front of Bernanke and Frank yesterday. If, like me, you haven’t heard him speak in a while, have a listen and you’ll remember why his campaign was so exciting for so many of us.

Money quote: “I would suggest that the problems we have faced so far are nothing compared to what it will be like when the world not only rejects our debt, but our dollar as well. That’s when we’ll witness political turmoil that will be to no one’s benefit.”

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Now wouldn’t it be great to have Peter Schiff to cause the same trouble in the Senate?