A great post by SFE blogger vapatsy on why the business cycle is NOT a product of capitalism:

From townhall.com:

The bailout passed!

Too bad.

When so many politicians speak with one voice in support of the biggest act of government intervention in the economy in generations, I cringe.

Everybody talked about the “freeze” in the credit markets, but why, I wonder, were the cable news programs that repeated the credit-freeze mantra pausing for commercials from companies trying to lend me money? Ditech and LendingTree still hawk mortgages at under 6 percent. Some credit freeze.

Economist Robert Higgs of the Independent Institute looked at the credit numbers kept by the Federal Reserve. He writes: “Although certain financial institutions are undeniably in deep trouble — difficulties of their own making … — credit markets in general have not ceased to operate. Moreover, lenders are extending credit in historically great amounts“.

Maybe this is why CNN business reporter Ali Velshi broke ranks when reporting on “dried up” credit and said, “When I say ‘dried up,’ I don’t mean there’s no money. But you’d better have good collateral and good credit.”

What’s wrong with that?

To those who say that without banks nobody can borrow, economist Steven Landsburg offers this response: “Banks don’t lend their own money; they lend other people’s (their depositors’ and their stockholders’). Just because the banks disappear doesn’t mean the lenders will. Borrowers will still want to borrow, and lenders will still want to lend. The only question is whether they’ll be able to find each other [A]s any user of Match.com can tell you, the technology for finding partners has improved since [the 1930s]. When a firm wants to raise capital, why can’t it just sell bonds over the web? Or issue new stock? Or approach one of the hedge funds that seem to be swimming in cash? Or borrow abroad?”

I suspect that the bailout will do more harm than good, like “aiding” an alcoholic by giving him booze. It perpetuates the moral hazard produced by government guarantees that created the problems in the first place. It acts as an enabler by giving more money to opportunistic lenders who assumed they’d be bailed out. And of course the politicians made a bad bailout bill worse by adding in tax breaks for stock-car racers, movie producers, “alternative” energy, etc. Then they insisted that all health insurance must cover mental illness, a requirement that will launch an orgy of fraud and make health insurance unaffordable for millions. The conceit of the anointed knows no bounds.

After the bailout passed, the stock market turned lower. Was it because investors then thought harder about how the politicians will misspend our $700 billion? All government can do is move money from one part of the economy to another. What makes anyone assume the government knows best where the money should be?

Steven Horwitz, an economics professor at St. Lawrence University, got it right when he wrote, “There will be short-term pain if we don’t bail out these firms, but that is the hangover price we pay for 15 years or more of binge lending. The proposed bailout cannot prevent the pain of the hangover; it can only conceal it by shifting and dispersing it among the taxpayers and an economy weakened by the borrowing, taxing and/or inflation needed to pay for that $700 billion. Better we should take our short-term pain straight up and clean out the mistakes of our binge and then get back to the business of free markets without creating an unchecked executive branch monstrosity trying to ’save’ those who profited most from the binge and harming innocent taxpayers in the process“.

Sure, without the bailout, there might have been a severe recession. Bubbles must pop. But it’s important that we let bubbles pop. Markets would then find a floor and recover.

Now the politicians are blowing some new air into the bubble, but we may have a recession anyway. And with more intervention, regulation and ambiguity about what the real market prices for those government-supported securities are, investors won’t know where the real bottom is.

So any recession will last longer. And the moral hazard the bailout perpetuates will lead to new bubbles … and then demands for another bailout.

Free enterprise sounds nice. We should try it sometime.

If anyone is interested this looks to be a great event!  Details below were sent to me by professor Veryser at the University of Detroit Mercy (a fine place to get a Masters in Econ. I might add!) along with this note on the event:

“The Symposium will emphasize the Austrian School of Economics’s position on the present crisis.  It should be mentioned that this school gives the best explanation of the today’s situation.  Austrians have been consistently warning about the probability of this crisis because of the tremendous expansion of bank credit in the recent past.  This symposium will describe the causes and possible solutions to this meltdown.”

“The American Economy in Crisis”

Saturday, November 1, 2008, 9 a.m. - noon

Macomb University Center
44575 Garfield Road,  UC-1
Clinton Township, Michigan

Featured speakers include:
Joseph A. Weglarz, senior lecturer at UDM on
“The Winners and the Losers”

Ryan Mackinder, financial associate at Thrivent Financial on
“Capital Based Macro-Economics”

David R. Breuhan, vice president and portfolio manager at Gregory J. Schwartz and Company, Inc. on
“Capital Markets: An Overview”

Harry C. Veryser, senior lecturer at UDM on
“A Program for Monetary Reform”

Paul M. Veryser, vice president of PMA on
“Manufacturing: Requirements for Recovery”

Seating is limited!! RSVP at 313-993-1589.

This event is sponsored by the University of Detroit Mercy, Department of Economics, Macomb University Center, Clinton Township, Michigan and the
UDM Center, Michigan Council on Economic Education

A great post by Frederic Sautet at the Austrian Economists blog :

The Failure of Regulation or the Failure to Regulate?

Among the multiple questions that can be asked about the current financial turmoil, this is perhaps the most crucial one. The same issue was raised many times in the past. For instance after the fall of the Berlin wall in 1989, some said that while it showed that the economy in Eastern Europe couldn’t survive at the time, it didn’t prove that communism as a system could not work because its principles had perhaps been misapplied for all these years. This opinion didn’t survive long, however, in view of the successes of the reforms that were taking place in the world at the time (UK, USA, New Zealand, Australia, etc) and the rise of the so-called Washington consensus.

But here we are almost 20 years after the fall of communism in midst of what is perhaps the most serious financial downturn the world has known since the Great Depression. The question comes back again with a vengeance and the voices supporting the failure to regulate view are now pretty loud. See President Sarkozy of France for instance. In the tradition of the populist French right, he is now calling for a “renewal of capitalism” in order to end the abuses of financial speculation. As he put it: “Le marché qui a toujours raison, c’est fini” (the idea that market is always is right is over).

The failure to regulate has also a moral component in this crisis. It is not only the failure to regulate markets because they are prone to failures; it is the idea that society has let highly paid immoral beings prey on the common person (in Main Street). As Dick Meyer on NPR puts it:

"I am now even more firmly convinced that there really is a predator class. The people responsible for creating and bingeing on the mortgage junk bonds, derivatives and financial insurance scams that are now being bailed out are our society’s most educated, highly trained and wealthiest professionals. The Meltdown of ‘08 was not caused by con men, crazed moguls and panicked masses. It was caused by financial bureaucrats of the baby boom generation who were paid megabucks for office jobs, who wear Patagonia fleece, $12,000 Brioni suits and read books about "reinventing the Self.""

While contenders of the free market thought they had lost the battle of implementation but won the battle of ideas, it is now becoming clearer that they lost both. Indeed, if the battle of ideas had been won, fewer voices would now speak against the free market. Instead, central banks are pumping more cash in markets around the world, downward adjustments of prices (and deflation) are seen as the devil, banks are not allowed to fail, and the US government is about to engage in the biggest market intervention it has done since WWII. In 2008 the ideas of the Reagan revolution are dead.

So how do we explain that the problem is the failure of regulation, not the failure to regulate? It is difficult because it goes at the heart of what is proof and truth in economics (i.e. the battle between empiricism and rationalism), but also it seems clear that arguments about market theory are not enough to convince policymakers and the public. One needs more.

Talking to people around me gives me an idea of the type of questions they have. For instance, some think that economists need to be more precise about what ‘regulation’ means, what regulation we are talking about, and why it could have unintended consequences. Some think that regular banks are more regulated than investment banks and are better off. Some don’t understand why standard rules such as prudential capital adequacy requirements are failing. Some believe that the SEC and other organisms lack power to intervene. But most can’t see the role of uncertainty in the system and the limit of knowledge on the part of regulators and actors in the market.

The trouble is that many economic problems are too complex to be understood by non-specialists and thus the public will always be ignorant (this relates to Bryan Caplan’s thesis). Economists have answers that the public won’t listen to or won’t understand. It is a tough job because (free market) economists are permanently caught in some kind of Sisyphean nightmare: called to explain the workings of the market to see their advice ignored over and over again. It’s no wonder why so many decide to become the counselors of the prince.