Archive for Recovering Founding Principles

It’s tempting to blame the current financial crisis on the free market economy. But it’s wrong.

November 1, 2008 at 7:19 am · Filed under Study History-Avoid Failure, Got Grace?, Recovering Founding Principles

Many assert that the ongoing financial crisis was caused by rampant capitalism and free-market economics. I disagree – not because I’m a hard-nosed conservative or a reckless libertarian, but because it’s the conclusion one reaches by a reasoned analysis of the facts.There are at least three distinct but related reasons for the crisis: the culture of greed and consumerism, irresponsible monetary policy, and misregulated financial derivatives. Are they rooted in free-market principles? Let’s see.

It may be argued that greed and consumerism is potentially related to some forms of capitalist ideology. However, “capitalist” or “free markets” are words which are used in many ways, as John Paul II explained in his encyclical letter Centesimus Annus.

It is one thing — and very problematic — to extol greed and to claim that market forces necessarily create good out of evil. But it is different to demand, as most advocates of free markets do, that the government should abstain from intervening in the voluntary interactions of individuals and families except in cases of clear need and manifest injustice.

One might argue that more intervention is needed to curb the excesses of the advertisement culture. Not only would this be compatible with free markets in a wide sense of the word, but it might also be necessary in order to promote genuinely free choice, by both adults and adolescents, which is based on reason, not instinct.

How about irresponsible monetary policy? It may be argued that such policies are part of capitalism, but that is questionable. As the economist Jesús Huerta de Soto explains in his book Money, Bank Credit, and Economic Cycles (2006), inflationary monetary policies are not a natural consequence of free markets, but of government meddling with money and banking:

“[T]he central bank did not emerge spontaneously as the result of market institutions, but was forcibly imposed by the government and responds to the demands of powerful pressure groups… [T]he current financial system rests on a monopoly; one government agency holds on the chief decisions regarding the type and quantity of money and credit to be created and injected into the economic system. Thus it constitutes a financial market system of ‘central planning’ and therefore involves a high level of intervention and is to a great extent ’socialist.’”

It is true that some advocates of free markets (think of Milton Friedman) might have been happy with Greenspanite monetary policies.

But their failure to grasp their intellectual inconsistency cannot be blamed on markets.

What about the misregulation of complex financial instruments, such as the infamous over-the-counter credit derivatives? On this point, I agree that the law failed to regulate them properly. However, no advocate of free markets would say that the law should promote dishonesty.

In his eye-opening account of the history of financial derivatives, Infectious Greed (2003), law professor and former investment banker Frank Partnoy explains how regulators were over several years pressured by special interest groups to adopt lax rules which paved the way for the present crisis:

“There were numerous instances of the differential treatment of derivatives and equivalent financial instruments: stock options were accounted for differently than other compensation expenses, prepaid swaps and other off-balance-sheet deals were recorded differently than loans, over-the-counter derivatives were exempt from securities rules applicable to economically similar deals, and swaps were regulated differently than equivalent securities. The result was a split between perceived costs (the numbers reported on corporate financial statements) and economic reality (the number reported in incomplete or misleading footnotes, or not reported at all).”

It is true that some advocates of free markets were champions of the unregulated derivatives markets. However, the misregulation of derivatives markets was economically inconsistent, and promoted financial practices which were practically equal to lying and cheating.

Partnoy raises a related issue: the failure of public authorities to prosecute and punish complex financial fraud. In the years and events leading to the present crisis, numerous illegalities have been committed, and law suits are beginning to pile up. But as far as past history is concerned, most individuals committing such illegalities have either gone scot-free or received a mere slap on the cheek.

A central function of law is to educate citizens in virtue. Not all vices should be prohibited, and just like in the education of children, the right mixture of rules and sanctions depends on the moral qualities of the people. In Wall Street, the culture of greed and the presence of strong financial incentives to engage in dubious practices should be countered by stronger sanctions. The failure of existing laws to prohibit and punish blatant acts of injustice has been fostering a law of the jungle.

In addition to stronger prosecution, Partnoy recommends moving from clear but narrow rules to broader standards in financial markets regulation. Broad standards are not only more difficult to avoid and exploit, but they would also help encourage a culture of honesty.

Various reforms are needed, but they do not consist in heavier taxes and more industry regulation. Big government will only make it more difficult for economies to adapt to the crisis situation. We must tackle the problem at its roots by defending basic principles of justice and honesty.

Trained in economics and law, Oskari Juurikkala is doing a PhD on the problems of financial markets regulation. He is the author of Pensions, Population, and Prosperity (Acton Institute, 2007).

http://www.mercatornet.com/articles/view/has_the_time_come_to_dump_free_markets/

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The Make Believe American Middle Class

October 7, 2008 at 6:51 am · Filed under Study History-Avoid Failure, Just War Doctrine Discussion, The Make-Believe Middle Class, Death of the West?, One Nation Under God, Culture Wars, What Is A Conservative? - Discussion, Got Grace?, 2008 Campaign, The Role Of America In The World - Discussion, Classical Liberalism, And what exactly is it you do?, The Primacy of Natural Law, All Things Must Pass, Critical Thinking, An Informed Mind and Conscience, Recovering Founding Principles

http://upload.wikimedia.org/wikipedia/commons/d/d1/Ruckert_Dauber_T201_combined_bbc.1557cu.jpg
Brooklyn Superbas players Nap Ruckert on front (left), and Jack Daubert on folded card (right), player information on back (middle); T201 Mecca Double Folders baseball card
Benjamin K. Edwards Collection at the U.S. Library of Congress, LOT 13163-27
1911
American Tobacco Company, compiled by trialsanderrors

http://www.spiegel.de/international/0,1518,439766,00.html

By Gabor Steingart

At the beginning of the 21st century, the United States is still a superpower. But it’s a superpower facing competition from beyond its borders as well as internal difficulties. Its lower and middle classes are turning out to be the losers of globalization.

Editor’s Note: The following essay has been excerpted from the German best-seller “World War for Wealth: The Global Grab for Power and Prosperity” by SPIEGEL editor Gabor Steingart. SPIEGEL ONLINE is publishing a series of daily excerpts (more…) from the book.

There are essentially three exclusive characteristics whose simultaneous development have served as the foundations of the United States’s success up until now — and they only appear in this particular combination in America. They are not only the country’s biggest strengths, but also its greatest weaknesses. It’s worth scrutinizing them more closely.

First, nowhere in the world can you find such a high concentration of optimism and daring. America is the country that strives hardest for what is new — not just since yesterday (like Eastern Europeans) and not just for the last three decades (like the Chinese); rather from the very instant settlers began arriving. Unabashed curiosity seems to be hardwired into the nation’s genetic code.

The steady influx of the adventurous and hard-working — which helped increase the country’s labor force by about 44 million people since 1980 alone and continues today — ensures a constant replenishment of daring. After all, it’s not just the additional people that make the difference. The mere addition of 17 million people into Germany following reunification in 1990 – newcomers more concerned with preserving their guaranteed rights than with making the extraordinary effort necessary for success – did nothing to foster the kind of daring you see in the United States. Indeed, the result was exactly the opposite, and it has been a painful lesson for Germany.

Second, the United States is radically global. Its very origins — in the rebellious citizens from every country in the world who assembled on the territory that is now the United States — mark its people as true children of the world. Former German Chancellor Helmut Schmidt calls the founding fathers of the United States a “vital elite,” one that continues to pass down its genes to this very day. Their language is dominant, having marginalized Spanish and French during the second half of the past century. Their everyday culture — from the T-shirt and rock ‘n’ roll to e-mail — has peacefully colonized half the world. And from the very beginning, US corporations were eager to venture abroad in order to trade and set up production sites in other countries. Multinational corporations may not have been a US invention, but they became its specialty.

Third, the United States is the only nation on earth that can do business globally in its own currency. Indeed, the dollar has established itself as the world’s currency. Whoever wants to own it has to purchase it in the United States. All important decisions about the quantity of cash that circulates or the setting of interest rates are made within the nation’s borders, which guarantees a maximum degree of national independence. It’s American blood that flows through the veins of the global economy. Almost half of all business deals are closed using dollars as the currency, and two-thirds of all currency reserves are held in dollars. Charles de Gaulle, who was president of France after World War II, admired this “exorbitant privilege” even then.

The trial of strength

But there is a flip side to the coin. First, Americans are so optimistic that they often blur the line between optimism and naivete. Public, private and corporate debt far exceeds any previously known dimensions. Forever piously trusting in a future rosier than the present, millions of households are borrowing so much money that they end up endangering the very future they’re looking forward to. The lower and middle classes have practically given up on putting aside any savings. They’re going into the 21st century like a poverty-stricken, Third World family, living from hand to mouth without any financial reserves whatsoever.

Second, globalization is striking back. The United States has promoted the worldwide exchange of commodities like no other nation, and the result is that their local industry has begun to be eroded. Some production sectors — such as the furniture industry, consumer electronics, many automobile part suppliers, and now computer manufacturers — have left the country for good. In the recent past, free trade has primarily benefited the very rival states that are now mounting an economic offensive on the United States — and which have cut off a large slice of America’s global market share for themselves.

Third, the dollar doesn’t just strengthen the United States; it also makes it vulnerable. The government has pumped its currency into the world economy so vigorously that the dollar can now be brought to the point of collapse by external forces – such as those in Beijing, for example. Former US President Bill Clinton spoke of a “strategic partnership.” Current President George W. Bush would later speak of a “strategic rivalry.” They meant the same thing. There’s a form of dependence that obliges economic actors to cooperate in normal times. But when times change, there is the temptation to engage in a show of strength.

Read the entire excerpt at Spiegel Online:     http://www.spiegel.de/international/0,1518,439766,00.html

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Economic Depressions: Their Cause and Cure

October 3, 2008 at 7:12 am · Filed under The Importance Of Authority, Culture, Study History-Avoid Failure, The Make-Believe Middle Class, What Is A Conservative? - Discussion, Got Grace?, The Role Of America In The World - Discussion, Classical Liberalism, The Primacy of Natural Law, Critical Thinking, The Tyranny of Relativism, An Informed Mind and Conscience, Recovering Founding Principles

http://upload.wikimedia.org/wikipedia/commons/f/f0/Ludwig_von_Mises.jpg

Ludwig von Mises

This essay was originally published as a minibook by the Constitutional Alliance of Lansing, Michigan, 1969.]

We live in a world of euphemism. Undertakers have become “morticians,” press agents are now “public relations counsellors” and janitors have all been transformed into “superintendents.” In every walk of life, plain facts have been wrapped in cloudy camouflage.

No less has this been true of economics. In the old days, we used to suffer nearly periodic economic crises, the sudden onset of which was called a “panic,” and the lingering trough period after the panic was called “depression.”

The most famous depression in modern times, of course, was the one that began in a typical financial panic in 1929 and lasted until the advent of World War II. After the disaster of 1929, economists and politicians resolved that this must never happen again. The easiest way of succeeding at this resolve was, simply to define “depressions” out of existence. From that point on, America was to suffer no further depressions. For when the next sharp depression came along, in 1937–38, the economists simply refused to use the dread name, and came up with a new, much softer-sounding word: “recession.” From that point on, we have been through quite a few recessions, but not a single depression.

But pretty soon the word “recession” also became too harsh for the delicate sensibilities of the American public. It now seems that we had our last recession in 1957–58. For since then, we have only had “downturns,” or, even better, “slowdowns,” or “sidewise movements.” So be of good cheer; from now on, depressions and even recessions have been outlawed by the semantic fiat of economists; from now on, the worst that can possibly happen to us are “slowdowns.” Such are the wonders of the “New Economics.”

For 30 years, our nation’s economists have adopted the view of the business cycle held by the late British economist, John Maynard Keynes, who created the Keynesian, or the “New,” Economics in his book, The General Theory of Employment, Interest, and Money, published in 1936. Beneath their diagrams, mathematics, and inchoate jargon, the attitude of Keynesians toward booms and bust is simplicity, even naivete, itself. If there is inflation, then the cause is supposed to be “excessive spending” on the part of the public; the alleged cure is for the government, the self-appointed stabilizer and regulator of the nation’s economy, to step in and force people to spend less, “sopping up their excess purchasing power” through increased taxation. If there is a recession, on the other hand, this has been caused by insufficient private spending, and the cure now is for the government to increase its own spending, preferably through deficits, thereby adding to the nation’s aggregate spending stream.

The idea that increased government spending or easy money is “good for business” and that budget cuts or harder money is “bad” permeates even the most conservative newspapers and magazines. These journals will also take for granted that it is the sacred task of the federal government to steer the economic system on the narrow road between the abysses of depression on the one hand and inflation on the other, for the free-market economy is supposed to be ever liable to succumb to one of these evils.

All current schools of economists have the same attitude. Note, for example, the viewpoint of Dr. Paul W. McCracken, the incoming chairman of President Nixon’s Council of Economic Advisers. In an interview with the New York Times shortly after taking office [January 24, 1969], Dr. McCracken asserted that one of the major economic problems facing the new Administration is “how you cool down this inflationary economy without at the same time tripping off unacceptably high levels of unemployment. In other words, if the only thing we want to do is cool off the inflation, it could be done. But our social tolerances on unemployment are narrow.” And again: “I think we have to feel our way along here. We don’t really have much experience in trying to cool an economy in orderly fashion. We slammed on the brakes in 1957, but, of course, we got substantial slack in the economy.”

Note the fundamental attitude of Dr. McCracken toward the economy — remarkable only in that it is shared by almost all economists of the present day. The economy is treated as a potentially workable, but always troublesome and recalcitrant patient, with a continual tendency to hive off into greater inflation or unemployment. The function of the government is to be the wise old manager and physician, ever watchful, ever tinkering to keep the economic patient in good working order. In any case, here the economic patient is clearly supposed to be the subject, and the government as “physician” the master.

It was not so long ago that this kind of attitude and policy was called “socialism”; but we live in a world of euphemism, and now we call it by far less harsh labels, such as “moderation” or “enlightened free enterprise.” We live and learn.

What, then, are the causes of periodic depressions? Must we always remain agnostic about the causes of booms and busts? Is it really true that business cycles are rooted deep within the free-market economy, and that therefore some form of government planning is needed if we wish to keep the economy within some kind of stable bounds? Do booms and then busts just simply happen, or does one phase of the cycle flow logically from the other?

The currently fashionable attitude toward the business cycle stems, actually, from Karl Marx. Marx saw that, before the Industrial Revolution in approximately the late eighteenth century, there were no regularly recurring booms and depressions. There would be a sudden economic crisis whenever some king made war or confiscated the property of his subject; but there was no sign of the peculiarly modern phenomena of general and fairly regular swings in business fortunes, of expansions and contractions. Since these cycles also appeared on the scene at about the same time as modern industry, Marx concluded that business cycles were an inherent feature of the capitalist market economy. All the various current schools of economic thought, regardless of their other differences and the different causes that they attribute to the cycle, agree on this vital point: That these business cycles originate somewhere deep within the free-market economy. The market economy is to blame. Karl Marx believed that the periodic depressions would get worse and worse, until the masses would be moved to revolt and destroy the system, while the modern economists believe that the government can successfully stabilize depressions and the cycle. But all parties agree that the fault lies deep within the market economy and that if anything can save the day, it must be some form of massive government intervention.

There are, however, some critical problems in the assumption that the market economy is the culprit. For “general economic theory” teaches us that supply and demand always tend to be in equilibrium in the market and that therefore prices of products as well as of the factors that contribute to production are always tending toward some equilibrium point. Even though changes of data, which are always taking place, prevent equilibrium from ever being reached, there is nothing in the general theory of the market system that would account for regular and recurring boom-and-bust phases of the business cycle. Modern economists “solve” this problem by simply keeping their general price and market theory and their business cycle theory in separate, tightly-sealed compartments, with never the twain meeting, much less integrated with each other. Economists, unfortunately, have forgotten that there is only one economy and therefore only one integrated economic theory. Neither economic life nor the structure of theory can or should be in watertight compartments; our knowledge of the economy is either one integrated whole or it is nothing. Yet most economists are content to apply totally separate and, indeed, mutually exclusive, theories for general price analysis and for business cycles. They cannot be genuine economic scientists so long as they are content to keep operating in this primitive way.

Continue reading at Mises.org http://mises.org/story/3127

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