May 20, 2018

Repealing Glass-Steagall did not create the banking monster

TAMPA, August 22, 2012 – As we approach the Republican and Democratic National Conventions with two major party candidates that don’t substantively disagree on anything, debate about the causes of the housing bubble and what should be done about it will inevitably recur.

Both candidates advocate massive government intervention. They just disagree about the details.

Neil Barofsky weighs in with the generally accepted argument that the repeal of Glass-Steagall was the creator of what he calls “the monster,” highly leveraged investment banks taking extraordinary risks that led to the 2008 financial meltdown.

Barofsky is right about Wall Street being a monster, but the repeal of Glass Steagall wasn’t its Frankenstein. As Tom Woods explains in his bestseller, Rollback,

“But did the repeal of two provisions of Glass-Steagall allowing affiliation of commercial banks with securities firms through their control by the same holding company contribute to the losses and risk that permeated the system? Certainly not. For one thing, commercial banks bought mortgage-backed securities for their AAA rating, their attractive return, and the minimal capital requirements associated with holding them; they did not acquire these assets because they were connected to investment banks that were trying to unload them.

Moreover, severe regulatory firewalls essentially prevent this kind of affiliation from contributing to losses or increased risk on the part of the commercial bank involved. The reverse problem, that affiliation with a commercial bank might bring down and investment bank, is exceedingly unlikely, given the relative magnitudes of assets held by each institution. The commercial banks’ assets were only a tiny fraction of those held by the investment banks they were affiliated with. These banks were in no position to cause the investment banks any serious problem, much less their complete downfall.”

If that’s true, then why was that “sucker going down,” as President Bush so eloquently put it?

Continue at Washington Times Communities…

Austrian Economics Is Scientific (Keynesianism Is Not)

Ronpaul1On February 9th, Rep. Ron Paul of Texas chaired his first meeting of the House Monetary Policy Subcommittee he now leads due to the Republican victories in last November’s congressional elections. Congressman Paul invited several expert witnesses to testify on monetary policy. Among these were Austrian economist Tom Dilorenzo.

Much has been made of Rep. Lacy Clay’s attack on Dilorenzo’s credibility due to Dilorenzo’s alleged association with a “politically incorrect” group called the League of the South. However, Clay also attacked the Austrian school of economics itself, calling the Austrian deductive method “a non-rigorous scientific method.” According to Clay this is because the Austrian theory is not based upon “an empirical method to study economics.” He further states the Austrian school does not recognize the Keynesian theoretical models or the aggregate data that those models rely upon to “prove” their theories scientifically.

As Robert Wenzel observed, Nobel Prize winner F.A. Hayek already addressed this criticism, arguing economists should indeed use the deductive method, rather than an empirical one, to understand economic principles. Wenzel even suggests Robert Rubin would likely agree with Hayek’s argument, because of what Rubin called “the very nature of reality–its complexity and ambiguity.”

It is somewhat futile to try to win this argument with entrenched government policy makers. The Keynesian school advocates massive government intervention into the economy to protect us from the supposed shortcomings of the free market. When crises in the economy occur, the Keynesians recommend even greater intervention in the form of increased government spending, regulation, and monetary expansion.

The Austrian school advocates no government intervention into the economy at all. They argue monumental crises are actually caused by intervention, so their cure is to cease whatever intervention has brought on the crisis, to relax regulations that impede adjustment in the labor market, and to allow the economy to rebalance itself through natural market forces.

Therefore, governments are not likely to reject Keynesianism, which grants them enormous power, and listen to the Austrians, who would strip it all away. One is reminded of the medieval governments which refused to acknowledge the world was round and called upon appointed court scientists to legitimize their assertion it was flat.

However, it is important for investors to understand which theory within the “dismal science” truly passes scientific muster. If you cannot dissuade the government from basing their policies on the wrong theory, you can at least choose the right one yourself to protect your own wealth and economic viability.

Anyone who has taken a basic chemistry class in high school remembers how you prove or disprove a theory. You conduct experiments to determine whether the predictions the theory makes are correct. For example, your theory might predict that mixing two colorless chemicals in a test tube will result in the mixture turning blue. To prove it, you must not only conduct the experiment once, but over and over again, each time yielding the same result. If your test tube turns blue under the same conditions every time, you have proven your theory. If not, your theory is considered invalid and a new one must be formulated.

Austrian economists like F.A. Hayek predicted the Great Depression when the Keynesians said that the economy was fine. Once the crisis hit, the Austrians argued that the Keynesian policies prescribed to cure it would fail, as they were merely repetition and expansion of the interventions that caused the crisis in the first place. When massive government spending and devaluation of the currency failed to pull America out of the Depression, the Keynesians argued more spending and inflation to underwrite WWII would finally do the trick. But the Depression lasted throughout the war and only subsided after massive post-war cuts in government spending, consistent with the predictions of the Austrians.

The Keynesian answer to this anomaly? Ignore the results and just state that Keynesian policies did cure the Depression, regardless of verifiable  facts to the contrary. This is science?

The Keynesians were also explicit that high unemployment and price inflation could never coexist together. The Austrians made no such claims, as they recognized that monetary expansion causes both price inflation and the malinvestment that leads to unemployment. In the 1970’s, Austrian theory was again proven correct and Keynesian theory proven wrong.

Most recently, the Keynesians argued that the technology and housing bubbles were not bubbles at all, but sustainable increases in wealth caused by their wise stewardship of the economy. If you listened to them, you were either wiped out by the NASDAQ crash, left owning a house with an underwater mortgage, or both. If you listened to the Austrians, you got rid of your technology stocks early, during the formation of the bubble, and avoided buying houses whose prices had been bid to unsustainable levels by the combination of monetary expansion and government intervention.

Even after all of this proof is in, the Keynesians are still employing the only defense they have left that their theory is sound. Deny, deny, deny. With government and consumer debt threatening to cause cataclysmic economic collapse, the Keynesians are encouraging government and consumers to borrow and spend more. The Austrians advise consumers to pay down their debts and investors to avoid the next bubble. They urge investors to protect their wealth in gold and other commodities, as they have for the past decade. Those that have listened to them have turned huge profits during this historic economic calamity.

Imagine that you are back in your high school chemistry class lab, conducting experiments. In the row behind you, an Austrian economist is testing his theory. The test tube turns blue one time after another, just as he predicted it would. In the row ahead, a Keynesian economist is testing his theory. His test tube turns a different color every time and then finally explodes, lighting his beard on fire. Which one would you deem the better scientist? Which one would you bet your life savings upon in the next experiment? If you wish to take the scientific approach, listen to the Austrians.

Tom Mullen is the author of A Return to Common Sense: Reawakening Liberty in the Inhabitants of America.


The Bill Clinton Myth Finally Debunked

clintonWhether you are watching the stock market, the headlines, or merely your 401K account balance, there is not much positive about the economic collapse just getting underway in the United States. With each new negative earnings report, bankruptcy, and ominous unemployment report, it gets a little harder to see any silver lining around the black cloud. However, there is one positive consequence of the economic debacle: The Bill Clinton Myth has finally been debunked.

Most people are familiar with the Myth, but mistake it for history. It’s a wonderful story if you are a Democrat or other variety of government-worshipper. For those who practice that religion, the Bill Clinton years serve as a Golden Age to talk about, write about, maybe even pray about, hoping for their return.

Unforunately, this myth does not even offer the benefits of its more interesting ancient predecessors. While the ancient myths of gods and monsters contained spiritual and philosophical truth underneath their obviously fictional storylines, the Bill Clinton Myth contains no truth at all. Perhaps “myth” is the wrong word, because it gives good myths a bad name.

The Bill Clinton Myth goes something like this. After “mismanagement” of the economy by President George H.W. Bush, which resulted in the recession that coincided with the 1992 election, Clinton took office and “managed the economy” wisely during his eight year presidency. Clinton’s “centrist policies” were just what the economy needed at a time of technological revolution, and his wise stewardship resulted in not only unprecedented growth and low unemployment for the economy, but balanced budgets and even surpluses for the federal government. By the time Clinton left office, the United States was more powerful economically than it had been at any time in its history.

Like the Populist Myth of the 19th Century, this one is a great story, but none of it is true. While even some Republicans begrudgingly credit Clinton with the mythical budget surpluses or the equally mythical prosperity in the 1990’s, they do themselves a disservice in regard to their quest to discredit every Democrat who ever (or will ever) lived.

In reality, there were no federal government surpluses. The lion’s share of the prosperity was a Federal Reserve-created bubble (the dot com bubble) and what real economic growth there was occurred despite Clinton’s policies, not because of them.

It might be necessary to go back and read that last sentence again. It is heresy, as surely as Galileo’s heliocentrism was to the Inquisition. It’s also just as true.

First, the so-called “surpluses” were bogus. As Craig Steiner explains, the appearance of a surplus was merely increased tax revenues from the dot com bubble allowing the Clinton administration to borrow more money from Social Security. While the public debt went down in the last four years of the Clinton presidency, the intergovernmental debt (mostly to Social Security) went up by an even greater amount, resulting in an increase in the national debt in each of those years. These are easily verifiable facts out of the published federal government budgets for those years. Anyone who doubts this can simply look up the budgets from 1997- 2001 and see the deficits for themselves.

Certainly, there were astounding developments in technology in the late 1980’s and throughout the 1990’s. One could look at this decade as a mild version of the technological revolution that occurred at the turn of the 20th century, although the breakthroughs, mostly in computing, were not as paradigm-shifting as the invention of the steam engine or the automobile, much less the telephone or the computer itself. These advances resulted in vast increases in productivity. A whole industry  was born, employing people in higher paying jobs and revolutionizing communication, commerce, and production.

All of this happened during Bill Clinton’s presidency, although its roots go back at least as far as the Reagan years, possibly even Carter. But what did Bill Clinton do to cause this technological revolution? Nothing. Microsoft, Oracle, Apple, and the rest of the real new companies that emerged during this technological revolution were children of the free market. Gates, Ellison, Jobs and the rest were all entrepreneurs who took enormous risks based on their superior vision of where breakthroughs in technology could take commerce.

Anyone old enough to remember knows the government had very little understanding of the tech sector and frequently complained it didn’t know how to regulate the new types of products or business processes the tech sector presented. In other words, much of the reason for the explosive growth was the absence of government involvement. Until the lumbering machinations of government caught up, a free market in technology existed that allowed for spectacular innovation and growth.

The most significant action undertaken by the Clinton administration regarding the tech revolution was its anti-trust case against Microsoft. Here, Clinton’s contempt for free markets and property rights came shining through. This particular anti-trust case had a bizarre twist, as it was based upon the ludicrous assertion that Microsoft had some responsibility to build opportunity for its competitors into its own product. As usual, the government tried to “ensure competition” by using its coercive power to cripple the leader, rather than protect the property rights of all.

There was another side to the tech revolution that wasn’t the natural result of free markets: the dot com bubble. This was, online supermarkets, and other hare-brained schemes that only got capitalized due to the reckless monetary policy pursued by the bubble-maestro himself, Alan Greenspan.

To be fair, Clinton doesn’t deserve much blame for this bubble. Most politicians demonstrate little understanding of monetary policy, beyond their belief that lower interest rates raises stock prices and higher stock prices equals votes. At one point, Clinton actually made a speech in which he claimed the business cycle had been eliminated.[1] That shows his understanding was as limited as most other presidents’.

Regardless, the dot com bubble had nothing to do with Clinton. It was merely the Fed doing what the Fed does, inflate and distort the economy, regardless of who happens to occupy the White House.

Finally, in addition to the false credit Clinton receives for his imaginary role in the perceived prosperity of the 1990’s, he has somehow escaped all blame for his very real hand in the problems we are facing now. Remember, it was Clinton who appointed FDR II (Franklin Delano Raines) as CEO of Fannie Mae, and then pressured the GSE to significantly increase its loans to riskier sub-prime borrowers.

The Clinton administration bragged it had not only had a hand in the first black CEO of a Fortune 500 company,[2] but also that it had made home ownership possible for millions of Americans that otherwise could not have obtained mortgages. Raines is now the subject of over 100 civil lawsuits and a huge percentage of those mortgages are defaulting. As usual, the government’s results when interfering in markets are exactly the opposite of its intentions.

Contrary to the Clinton Myth, the Clinton presidency had nothing to do with what real prosperity there was in the 1990’s. The Clinton administration was as clueless and impotent as most others while the Federal Reserve blew up an enormous bubble on its watch, sowing the seeds for the mortgage crisis that started the present economic disaster. Economically, the Clinton presidency was an unmitigated disaster, and hopefully it is clear to all but the most fervent believers that his “stewardship of the economy” is a myth.

Lest this be seen as partisan, let me clear the air. There have been two presidents credited with prosperity that seemed to coincide with their years in office during the past 40 years. One was Reagan, a Republican, and the other, Clinton, a Democrat. In both cases, they were falsely credited with prosperity that was mostly an illusion caused by the Federal Reserve. Their policies otherwise failed miserably.[3]

With the Clinton Myth exposed as a fraud, perhaps we can get rid of the entire government religion. Centuries ago, most people of the earth ceased sacrificing animals to bring rain, better crops, or good fortune hunting. They had finally realized there is no cause-effect relationship between killing a goat and the end of a drought. We need to likewise recognize that no politician has ever had any more to do with prosperity than those unfortunate goats had to do with the weather.[4] Freed from this superstition, it becomes clear that only free markets, individual effort, and creativity can create wealth and prosperity.

Tom Mullen is the author of Where Do Conservatives and Liberals Come From? And What Ever Happened to Life, Liberty and the Pursuit of Happiness? Part One and A Return to Common Sense: Reawakening Liberty in the Inhabitants of America.


[1] I recall him making this ludicrous statement, but have not been able to reference it. Perhaps someone can provide the citation in a comment.
[2] The focus by both the Clinton administration and the media on Raines, a political hack who took over a Government Sponsored Entity, was a disservice in that it distracted attention from REAL black executives, like Kenneth Chenault, and Richard Nanula, who had risen to their positions based upon their talent and hard work.
[3] To be fair, Reagan’s rhetoric was admirable. He talked constantly about lower taxes, smaller government, and more personal liberty. However, he failed to implement this ideology to any significant degree, possibly because of a Democratic Congress. More importantly, he ran huge deficits due to defense spending and the growth of entitlement programs on his watch that constituted bigger government rather than smaller.
[4] Actually, the government religion is far more harmful than the ancient religious cults. When the ancients sacrificed a goat, they neither benefitted nor harmed anyone (other than the goat). When government tries to “create prosperity,” it harms everyone in society.


>Life in the Post-5/7 America

>We have spent the past seven years in a “post-9/11 world.” We started hearing this insidious slogan not long after the terrorist attacks occurred. To translate the slogan for anyone who has not realized what it means, it means this: Whatever was left of your personal liberty before the 9/11 attacks is no longer a privilege your government can afford to grant you (and make no mistake, your government considers liberty a privilege, not a right). It seems that personal liberty is something that was nice in the Old America, but is just impractical in a “post-9/11 world.”

Of course, the struggle for economic freedom was lost decades ago with the onset of public and corporate welfare, the abolition of the gold standard, and the emergence of the American Empire. However, as with the other “civil liberties,” some traces of the economic freedom of America’s former Republic have survived several decades into America’s post-WWII social democracy. Those last traces are about to disappear as well. The following is one way it could happen.

Why May 7th? There is no compelling reason for the exact day. However, it is the Thursday of the first full week after the next president’s first 100 days in office are completed. It may be just a coincidence, but cataclysms never seem to happen during those 100 days. Perhaps world market movers don’t do much until they get a feel for the new administration. Perhaps it is some kind of statist magic, left over from government sorcerers like Merlin or Morgan Le Fay. In any case, even the terrorists respected the first 100 days of George Bush’s administration before launching their attacks. So, I am going with the odds to say that the economic day of reckoning will not manifest itself until May 7, 2009 – the new “Black Thursday.”

Even if the American economy is already dead for all intents and purposes, an historic crash of the stock markets will officially signal the dawn of the new era. When it does, all pretense of the “possible moral hazard” accompanying massive government interventions into the marketplace will be dropped. We will be in a “post-5/7 economy,”[1] much like our “post-9/11 world,” and the last vestiges of your economic freedom will be lost, just as your personal liberty was lost after 9/11. Forgotten in debates regarding whether these interventions will be good or bad for “the economy” is the fact that each one amounts to stealing from someone – legal plunder because it is committed by government. Each new intervention, “unavoidable” because of the latest threat to the U.S./world economy, will cause three more problems for the government to solve with further interventions. Pointing out that the original problem was caused by a previous government intervention will be pointless. Free markets were a nice idea in the 20th century, but government control of the marketplace will be needed in a post-5/7 world.[2]

Despite the fact that government already treats the right to the fruits of your labor as a granted privilege, the small percentage Americans have been allowed to keep will seem relatively large compared to what they will be allowed after the big event. At that point, there will be a continual state of economic emergency that requires “Americans and Europeans to do more, not less,” as Barack Obama recently said in Berlin. There will be Housing in the New America and Universal Healthcare to be paid for, tens of millions of unemployed Americans to feed and clothe, and the “challenges of the 21st century (all created by government)” to meet.

Perhaps at that point it will occur to someone, somewhere, that none of this is necessary. Without the parasitic influence of a few thousand people, the other 300 million would naturally trade with each other to their mutual benefit, and would have little to fear from people thousands of miles away whom they would never think to bother themselves. It really is that easy. Americans can make a decision for freedom anytime they wish to, and rid themselves of the parasites once and for all. Hopefully, there will come a time when they will be easier to convince in the post-9/11, post-5/7 world.

[1] Whatever the actual date of the crash, simply insert it into the new government slogan and it works just as well.

[2] While it would be impossible in a Republic to enslave people with such nonsense as a market crash or a terrorist attack creating “a new world” where natural rights no longer exist, it is relatively easy in a Democracy, where only 51% of the people have to believe it for the scheme to work. This is just one reason why no politician refers to America as anything other than “a Democracy” anymore. Be suspicious of anyone who speaks likewise.