In 1979 Congressman Ron Paul gave a speech on the House floor in opposition to the bailout of Chrysler.  His words are extremely relevant to the new round of bailouts being discussed today.  Some excerpts:

“Do we in Congress have the authority, either moral or constitutional, to cause this suffering? I can find no provision in the Constitution authorizing Congress to make loans or loan guarantees to anyone, let alone to major corporations. Nor have I yet seen a valid moral argument concluding that we, as representatives of all the people, have the right to tax the American people – most of whom receive less in wages and benefits than Chrysler workers – to support a multibillion-dollar corporation. What right have we – and I pose a serious question that deserves an answer – what right have we to force the American taxpayers to risk their money in a business venture which private investors dealing in their own funds have judged to be too risky? Chrysler paper is now classified; that means that any private investor who is handling funds for his depositors, shareholders, or clients may be judged as violating his fiduciary responsibilities should he invest in Chrysler. Don’t we have a trust equally important from the American people? Are we not betraying their trust by voting for a Chrysler bailout? I believe so.”

And

“Last year there were 200,000 bankruptcies in this country, according to U.S. News & World Report. Yet we have selected only the largest for our aid. This is discrimination of the crassest sort. We ignore the smaller victims of this government’s policies simply because they are small. Only the largest, those with the most clout, the most pull, get our attention. This aristocracy of pull is morally indefensible. What answer can be given to the small businessman driven into bankruptcy by government regulations when he asks: “You bailed out Chrysler, why not me?” No justification can be given for this discrimination between the powerful and the powerless, the big and the small.

It is an axiom of our legal system that all citizens are to enjoy the equal protection of the laws. That axiom is violated daily by our tax laws, and now by this proposed corporate welfare plan for Chrysler. Apparently some citizens are more equal than others. That is a notion I reject, and I hope you do, too. I urge you to reject this proposal for all the reasons I have stated.”

I highly encourage you to read the whole speech.

Russell Roberts writes for NPR.org:

“[Treasury Secretary Paulson] can inject all the money he wants into the consumer credit market and it isn’t going to make us want to buy cars or use our credit cards.

We did enough of that for a while. More than enough. Too much. And right now, before we spend, spend, spend, we’re going to wait and see if we keep our jobs. [...]

When no one knows how the rules of the game are going to change — and they seem to change from week to week — who wants to take a risk? Who wants to borrow money? Who wants to invest? Business and consumers are hunkering down, waiting for the storm of change to pass.

The problem isn’t liquidity.

It’s uncertainty.

Paulson doesn’t realize that his erratic attempts at creating liquidity are creating the uncertainty that makes liquidity meaningless.”

An excerpt from an article at the Ayn Rand Center:

“Why then should capitalism take the blame today–when capitalism doesn’t even exist? Consider the current crisis. The causes are complex, but the driving force is clearly government intervention: the Fed keeping interest rates below the rate of inflation, thus encouraging people to borrow and providing the impetus for a housing bubble; the Community Reinvestment Act, which forces banks to lend money to low-income and poor-credit households; the creation of Fannie Mae and Freddie Mac with government-guaranteed debt leading to artificially low mortgage rates and the illusion that the financial instruments created by bundling them are low risk; government-licensed rating agencies, which gave AAA ratings to mortgage-backed securities, creating a false sense of confidence; deposit insurance and the “too big to fail” doctrine, whose bailout promises have created huge distortions in incentives and risk-taking throughout the financial system; and so on. In the face of this long list, who can say with a straight face that the housing and financial markets were frontiers of “cowboy capitalism”?”

An excellent post from SFE blogger Nathan Biller on this whole credit crunch, market crisis, housing bubble, recession or whatever you want to call it.

Here’s an excerpt:

So is there a credit crunch? Absolutely! If you define a credit crunch as a situation where more people want loans than can obtain them. What about all the other crunches? Don’t you have a vacation crunch? A nicer car crunch? As a child I experienced many candy crunches (and not the good kind from Nestle). My parents knew, though that if I was given everything I wanted, I would never learn to appreciate those things. People definitely want credit, and it would sure make things easier if everyone were able to get everything they wanted: unfortunately, as one will learn in Econ 101, economics is about how limited resources get distributed to individuals with unlimited wants. If another business or individual is unwilling to loan you money, that’s really the end of the story. You’re not entitled to loan just as a child is not entitled to candy.

Now go read the whole thing!

Great article from Mises.org on how absolutely stupid it is to claim that laissez faire caused the credit crisis.

A fundemental rule of sound argument is to define your premises.  In this statement, “laissez faire caused the crisis”, one of the premises is that we currently live under a system of laissez faire.  This requires a definition of laissez faire, which is seldom given by those making the claim, yet the phrase gets defined de facto in the context of the article in which the statement appears.  And it ussually comes to mean completely unleashed free-market capitalism - a definition which would destroy the original statement, since we do not live under such a system.

Read the article.

By SFE Blogger aaronmead:

There has been some speculation on how the weak economy and the bailout of banks will effect the government’s ability to enact policies favored by the Presidential candidates.  At the debates, moderators have tried with little success to get candidates to talk about this.  At the first debate, Obama said grimly that we’d really need to tighten the old belts, but programs reflecting his, or maybe it was America’s, “values” must be exempted from such austerity.  If you can demonstrate that a program is not merely desirable or useful, but constitutes a Values Issue, it is rhetorically invulnerable to considerations of trade-offs and affordability.  Obama went on in this fashion to verbally spend countless hundreds of billions of dollars in a minute thirty.  McCain mentioned his plans to oppose earmarks diverting small amounts of allocated money to Congresspeople’s favored projects.

Matthew Yglesias, star blogger at the Center for American Progress blog (thinkprogress is the somewhat awkward and Orwellian name for their blog headquarters) has been arguing that worries about deficit spending are misplaced:

“You need to respond to a downturn with expansionary policies of some kind. In recent decades, we’ve preferred relying on expansionary monetary policy (Fed interest rate cuts) rather than Keynesian deficit spending. But at the moment, there’s no real room left for the Fed to cut rates. That means you need deficit spending.”

Even if he is right about the need for a Keynesian stimulus, Yglesias’s analysis has problems.  The deficit is already high due to weakening tax revenues and the Keynesian stimulus that passed earlier this year.  It seems like ages past, but in fact earlier this year a bipartisan consensus in Washington, proving that we can rise above our differences, created a spending package that, they told us, was specifically designed to engineer the economy out of recession.  When the economy continued to falter, the Party in power urged us to “give the stimulus time to work,” while the opposition began to hint at the need for another.  Presumably any good Keynesian would find merit in continuing these measures for at least another year.

Further, the bailout, another bipartisan effort specifically designed to rescue the economy, will add further to the deficit.  We are engaging in deficit spending designed specifically to provide a Keynesian boost, which seems to crowd out deficit spending designed to achieve energy independence or universal health care.

Even if we do believe that deficits in the trillions of dollars, dwarfing the totals of the Keynesian heyday, or that spending on certain proposals ought to be a non-negotiable “values issue,” it might be difficult to convince a Congress composed of hundreds of people with their own agendas, priorities, and values to go along.  When Presidents make campaign promises they implicitly ask us to suspend disbelief and ignore the political realities involved in dealing with Congress.  The idea is that election will give them a popular “mandate” and change these realities somewhat, but inevitably only a small portion of a President’s agenda actually gets passed.  It would be far more useful for voters, therefore, to know a President’s priorities, how he will deal with the real world, then what his ideal world would look like absent tradeoffs.  Presidential campaigns allow few hints at this, and those only for voters paying close attention.  We should applaud the media’s effort to create incentives for candidates to more directly show their hands and lament the fact that disincentives to honest answers are still greater than inducements in that direction.

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

When it comes to the financial “crisis” (I still don’t like using that word…it’s an invitation to deprivation) I’ve heard various explanations for what got us here, but most of them go something like this:

“Greed got us into this mess”, or, “Banks were way too leveraged so they could make a buck in the short term”, or, “lenders took advantage of borrowers who didn’t know any better and gave them more loan than they could afford”.

I have several questions in response: When did people all of the sudden become more greedy?  Can you give me a date?  Did greed suddenly increase in the mid 1990’s?  Were people in prior decades not greedy?  Is greed a new phenomenon?  When did banks all of the sudden decide to become overleveraged?  If they could have made all kinds of money being overleveraged before, why did they wait until the mid 1990’s?  Why weren’t banks pushing these risky loans long ago?

The obvious answer to all of these questions is the old adage, “there’s nothing new under the sun”.  Greed is not new, and people are no more greedy today than they’ve ever been.  Banks did not all of the sudden decide to overleverage and start pushing bad loans - to do so would be against their own (greedy) interest, as we now see with many collapsing.  If you want to make greed the culprit, you have to also make it the culprit for everything else that happens in the economy, since people are always greedy (or, if you prefer a less pejorative term, self-interested).  That means when wages rise, stocks grow, unemployment drops, gas prices go down and poverty shrinks you have to also blame greed.  Greed is ever-present, so it’s unfair to only blame it when things go bad but not when things go well.  Blaming greed is like blaming gravity.

These childish analysis cannot account for our current financial situation.  But what can?  Why would banks all of the sudden make overly risky loans?  If it wasn’t in their interest to do so before, why now?  Because the rules of the game changed.

I’ve blogged on it here before, and there is lots of great analysis elsewhere (look here and here), but the bottom line is Uncle Sam changed the rules of the game by mandating banks to take bigger risks, creating a “moral hazard” by implicitly or explicitly promising to bailout those who failed, and by sending false signals through the market via artificially low interest rates (which induce more lending than real economic productivity would warrant).  To summarize, banks and financial institutions behaved in a way counter to their own long-term interest because government made it beneficial and in some instances necessary to do so.