The Current Crisis

[BrightNoon]

I blame the keynesian economics of the United States for exacerbating what could merely have been a natural low in the capitalist cycle. The government garantees to fannie and freddie come to mind as source of the worst sub-prime mortages which the free market, without government insurance, might have avoided. Moreover, whatever the primary cause, it seems to me that the sort of government interference in the market, the nationalization of the banks, loans to institutions, the purchase of all 'bad debt', is unsustainable fiscally and counterproductive.

I have posted on this subject before, but that was before the current crisis; now, it is even more evident that continued deficit spending on an unprecidented scale will ultimately damage the faith of foreign investors in the Federal bond and T-bill markets. Because of the policies of dear old Maynard, we (Americans) find ourselves in the unenviable position of having to borrow/print more just to prevent our current bubble of borrowing/printing and inflation from collapsing. Of course, we are now talking about a second stimulus package and other methods to meet 'full employment' by convicing people to spend money that the government has printed on new cars and homes, which they cannot afford. A crisis of excess and debt is not solved by borrowing and the printing press. The major rating agency for sovereign governments has atually predicted that within the next several decades the U.S., the U.K. and the E.U. will lose there AAA rating and slip rapidly into insolveny; that predition came before the current crisis. The result of such a policy of increasingly large government investments in the private sector and of continued and massive deficits through borrowing and printing will result eventually in hyperinflation. The enormous faith in U.S. curreny right now will make the eventual collapse all the more precipitous and unexpected.

If Americans have become too sensitive to market declines, which are neccessary in order to increase efficiency through a kind of darwinism and produce new growth, capitalism is dead. The idea pubicly epoused by the Bush Administration, that we are currently 'saving the free market from itself' is at best an imbecility, at worst a fraud of Orwellian proportions. the democrats at least make no qualms about burying their old nemesis.

Any thoughts?

[Theaetetus]

It's not the Keynesian economics of the United States that has caused the current economic crisis, it is the Reaganomics of the last 30 years that has caused the crisis. Democracy and capitalism run into severe issues when there is such disparity in income between the rich and the poor. There was supposed to be a "trickle down" of wealth, but it never materialized. Instead there was the vacuum effect. The wealth vacuums of the rich began to be stuffed and little bits managed to escape and float down to the lower classes.

The return of Keynesian economics is an attempt to stop the bleeding caused by irrational economic theory. While the answers may not be contained in the policy passed so far, it was better than doing nothing. The markets will not fix themselves overnight. The free market failed. The only choice the government really has to remedy the problem is by buying stakes in the failing financial sector.

[BrightNoon]

That is capitalism, which I prefer to the alternative. It's beauty is that, unlike socialism, no one is promised anything by right, which either does not exist or cannot be given to them. An economy, however moral its regulators, does not are if some people deserve a house or a car or a good job; there is only so much to go around. Distribution by free contract, by supply and demand, is not only just but efficient, in contrast to the government regulation of a market, which is usually incomplete, wasteful or corrupt. The 'unbridled deregulation and free market philosophy of the last eight years' cannot be blamed for this crisis, because there has been no such free market! The government has been insuring the market against losses, leading, obviously, to unusually high risk moves by these institutions. In some cases, such as with Fannie and Freddie, the government actually required that those institutions lend to low income people who ordinarily would not receive a loan, beause the free market thought them too risky! Of course, capitalism has natural flucuations and cannot expand endlessly. However, the government has caused a natural low to become a crisis, after which, even if these measures are temporarily succesful, there will be even more debt, publi and private, which was the real cause of all this.

However, that is a long a probably futile argument. Regardless of the causes of this crisis and of the comparative merits of capitalism and socialism, what are your thoughts on the governmental actions taken to combat the crisis? What will be the consequences of so much new money (mostly printed) flooding the system? Obviously, the U.S. cannot borrow and print ad infinitum, at some point there will be insolvency; are we approaching that point? As our money is no longer based on gold or any other commodity, its value is pegged directly to confidence in the federal government, which as I said before, is approaching a reduction in its credit rating by the international rating organization. This would mean that interest rates on T-bills will have to increase to draw investors, which in turn inreases the deficit and further reduces our solvency and credit ratings; as you can imagine, it becomes as auto-catalytic and exponential process, which is exatly what the rating ageny shows in terms of reducing credit ratings. The government would have no choice but to keep borrowing and printing to pay the urrent debts, because a default would lead to total collapse. This causes hyperinflation; it is exatly what happened in Argentina and Zimbabwe recently.

[BrightNoon]

...and this is all a result of the keynesian theory that claims to solve all economic downturns with increased consumer spending, via government issuance of new money.

[Mr. Fight the Power]

Originally Posted by Theaetetus

It's not the Keynesian economics of the United States that has caused the current economic crisis, it is the Reaganomics of the last 30 years that has caused the crisis. Democracy and capitalism run into severe issues when there is such disparity in income between the rich and the poor. There was supposed to be a "trickle down" of wealth, but it never materialized. Instead there was the vacuum effect. The wealth vacuums of the rich began to be stuffed and little bits managed to escape and float down to the lower classes.

The return of Keynesian economics is an attempt to stop the bleeding caused by irrational economic theory. While the answers may not be contained in the policy passed so far, it was better than doing nothing. The markets will not fix themselves overnight. The free market failed. The only choice the government really has to remedy the problem is by buying stakes in the failing financial sector.

Empty rhetoric. I would love to see you show me what free market actually failed, but the political talking heads who generally throw this out are usually pretty silent when you ask this.

What I can point out to you is that Reagan's economic policy was typified by massive deficit spending and government stimulation of the economy, both qualities of Keynesian economics and not free market economics. Furthermore, Reagan increased government debt from 700 billion to three trillion.

Of course the "Reaganomics of the last 30 years" ended with Reagan, as Clinton put a halt on deficit spending, and Bush Jr. concentrated on demand-side stimulus (ie Keynesian economics) over the last eight disastrous years.

Politicians do not enhance their careers by doing nothing. Media outlets do not enhance their careers by saying "Don't listen to me, this will work itself out if we just give it a chance". Both groups have an enormous interest in going out and convincing people that the government must step in and save the day, and the blurb you just spewed has been spewed a million times before by people who are not really as interested in economics as they are in career preservation.

Both supply-side economics and Keynesian economics are capitalistic economic models, but neither are free market oriented.

[Theaetetus]

Originally Posted by Mr. Fight the Power

Empty rhetoric. I would love to see you show me what free market actually failed, but the political talking heads who generally throw this out are usually pretty silent when you ask this.

Your right there was no real free market, but the "free market" (someone else's words not mine) centered around a debtor economy is crumbling due to too much debt and not enough wealth to cover it.

Originally Posted by Mr. Fight the Power

What I can point out to you is that Reagan's economic policy was typified by massive deficit spending and government stimulation of the economy, both qualities of Keynesian economics and not free market economics. Furthermore, Reagan increased government debt from 700 billion to three trillion.

The deficit spending was caused by reducing taxes which reduced revenue. The government then sunk in money it no longer had coming in and thus racked up massive deficits.

Originally Posted by Mr. Fight the Power

Of course the "Reaganomics of the last 30 years" ended with Reagan, as Clinton put a halt on deficit spending, and Bush Jr. concentrated on demand-side stimulus (ie Keynesian economics) over the last eight disastrous years.

This is plain wrong. The only reason why Clinton put a halt on deficit spending was due to the booming economy that turned around under Clinton's watch. As soon as he left office, the deficits began for two reasons, a slashing of taxes (decreased revenue), and a deliberate devaluing of the US dollar.

Originally Posted by Mr. Fight the Power

Politicians do not enhance their careers by doing nothing. Media outlets do not enhance their careers by saying "Don't listen to me, this will work itself out if we just give it a chance". Both groups have an enormous interest in going out and convincing people that the government must step in and save the day, and the blurb you just spewed has been spewed a million times before by people who are not really as interested in economics as they are in career preservation.

Well someone has to do something. Doing nothing is going to cause many people to end up in financial ruin because the system failed. The problem though is the government seems more concerned about saving institutions rather than citizens. That though falls on the shoulders of the citizens themselves. They contiune to vote for people that do not really care about them.

[Theaetetus]

Originally Posted by BrightNoon

...and this is all a result of the keynesian theory that claims to solve all economic downturns with increased consumer spending, via government issuance of new money.

Actually, the only thing that is really going on right now is that more money needs to be printed because of the demand for cash that doesn't exist and never did except in theory.

I do agree though that in the past that all of this resulted in the Keynesian theory, but it worked for both Roosevelt and Clinton. I think the situation now is unique to what has happened in the past.

[Mr. Fight the Power]

Originally Posted by Theaetetus

Your right there was no real free market, but the "free market" (someone else's words not mine) centered around a debtor economy is crumbling due to too much debt and not enough wealth to cover it.

Debt that was secured and facilitated by government intervention into money markets.

In financial terms, people are not stupid or smart, they are varying levels of risk averse. Government did everything that it possibly could to stimulate spending to avoid a financial downturn after the dot com bubble and the terror attacks. This is Keynesian thinking and it is primarily responsible for the over-leveraged institutions that are collapsing. Now that it has become obvious that this trend is not sustainable, they raised interest rates and everything started falling apart.

Now that everything is falling apart, we somehow believe massive expansionary monetary policy and unnatural growth is sustainable again. We will have a depression.

The deficit spending was caused by reducing taxes which reduced revenue. The government then sunk in money it no longer had coming in and thus racked up massive deficits.

Yearly federal revenue has increased by 700 billion over the last 10 years, budgeted spending (which is representative of only a fraction of total spending) has increased by 1.4 trillion.

This is plain wrong. The only reason why Clinton put a halt on deficit spending was due to the booming economy that turned around under Clinton's watch. As soon as he left office, the deficits began for two reasons, a slashing of taxes (decreased revenue), and a deliberate devaluing of the US dollar.

This doesn't refute my argument or bolster your original statement in any way. There were more reasons than that, but yes, the booming economy did figure greatly in the budget surplus. But revenue did actually continue to increase, and the devaluing of the dollar (or the hyperinflation the fed is wanting to institute to "save" banks) is absolutely despicable.

Well someone has to do something. Doing nothing is going to cause many people to end up in financial ruin because the system failed. The problem though is the government seems more concerned about saving institutions rather than citizens. That though falls on the shoulders of the citizens themselves. They contiune to vote for people that do not really care about them.

The system has already been ruined. It cannot be rescued, it can only be prolonged with an even greater downfall.

[BrightNoon]

I am so happy I'm almost jumping in my seat. Watching the news, I thought I was the only one to be disgusted with this 'resue pakage'; thank you Mr. Fight the Power.

Platitudes Aside:

Your right there was no real free market, but the "free market" (someone else's words not mine) centered around a debtor economy is crumbling due to too much debt and not enough wealth to cover it.

This is absolutely true and it completey disproves the premise of the current government intervention. Per the keynesian model that they have been following for decades, with varying levels of failure, the government now intends to loosen the credit markets and provide another stimulus package. What is the purpose of these two moves; to allow people to not only spend, but borrow money, creating more debt. We are only inflating this bubble, which will burst all the more mightily in the future.

The essential problem with keynesian economics is that it assumes that the government can borrow/print ad infititum. If that were possible, the bubble would never burst; of course, that is not the case.

Well someone has to do something.

Why? Uncertainty and fear are not good reasons for action.



To Mr. Fight the Power:

What do you think about the rising debt? Do you agree with me that we are rapidly approaching the 'point of no return' so to speak, in terms of solvency? Any thoughts on the next adminstration and congress with regard to how much money they might spend? I've heard various things about the current democratic leadership, their plans, etc. I wonder what they might do with a huge majority in both houses and a friendly, dependent executive?

[Mr. Fight the Power]

Originally Posted by BrightNoon

I am so happy I'm almost jumping in my seat. Watching the news, I thought I was the only one to be disgusted with this 'resue pakage'; thank you Mr. Fight the Power.

Visit LewRockwell.com. It is a little more conservative that I am, but it is an excellent source of economic articles from a free market point of view, primarily the Austrian school. Some of the writers on there have been predicting this for years, and the economic trends that underscore the current crisis have been known to Austrian economists for 80 years.

To Mr. Fight the Power:

What do you think about the rising debt? Do you agree with me that we are rapidly approaching the 'point of no return' so to speak, in terms of solvency? Any thoughts on the next adminstration and congress with regard to how much money they might spend? I've heard various things about the current democratic leadership, their plans, etc. I wonder what they might do with a huge majority in both houses and a friendly, dependent executive?

I am extremely concerned about it. I am not well versed enough to say I know that we have reached the point of no return, but I do believe that the government could lose its status as a legitimate financial institution (how it still has this is beyond me), which would have far greater repercussions than a few bank failures.

The real problem to me, however, is the risk of hyperinflation that the government is putting us through. If it were really an issue to me, I would be bailing on the dollar and just about any other fiat currency right now.

As for democrat vs. republican, it doesn't appear that either side is concerned with fiscal responsibility. In fact, we are pretty well screwed either way, because while a hostile executive and legislative may stall on some issues, the one thing they always agree on is populist spending plans.