Fiatch

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Read Hayek:

The two most important books that any student of current events should be reading in this environment are both by Friedrich Hayek, the esteemed Austrian economist. Based on events he witnessed beginning in the early part of the 20th century, Hayek wrote The Road to Serfdom as a warning to England and the United States against the damaging impact of socialist policies and The Fatal Conceit as a warning against heavy intervention in markets and society at large. Despite the almost universal belief today that more, but better, regulation is needed and that the role of the state needs to be not just temporarily larger, but permanently larger, Hayek’s writings and logic should give everybody pause as to the consequences of these actions.

As a country, we need to rebuild confidence and trust and to understand what happened. Whether by business or by government, the misdiagnosis of situations leads to poor prescriptions for rehabilitation and recovery. When the misdiagnosis is done at the federal government level and involves large parts of a national economy, the consequences can be swift and significant. The unintended consequences are often swifter and even more significant. As the leaders in our nation continue to evaluate and evolve the policies and rules of the game, we would all be wise to heed the cautions raised by Friedrich Hayek. I appreciate that the free market can be a difficult master and that there is an important role for government and regulators, but I hope that as we move forward the rules of the game and the methodology for changing those rules will be more consistent and fair than they have been over the past year. Those who desire to protect civil liberties in times of war appreciate the importance of laws protecting individuals and institutions. In times of economic and financial distress we need to be similarly vigilant in protecting economic and contract rights so that we can continue to have a system that functions properly. Attempts to threaten or eliminate those rights will chase away the capital and investment that our country needs to restore prosperity and to thrive in the future.

Edward Lampert, “Message from the Chairman”. SEC filing.

(hat tip to Taking Hayek Seriously)

What if the ideas of the Austrian school of economics are correct?  If so, what happens next?

Have you started studying yet?  Go now.  Let’s each do what we can.

Niall Ferguson, The Laurence A. Tisch professor of history at Harvard University, and author of The Ascent of Money, A Financial History of the World, recently sat down with The Globe and Mail’s economics reporter, Heather Scoffield:

…this is a very unfair crisis. The epicentre is the United States, but the rest of the world, and particularly America’s trading partners, will get hit harder than the U.S.

This is a crisis of globalization. Therefore, the more an economy depends on the global system, the harder it hurts. Canada is not finding the worst. Asian economies are going to be really slammed this year. The U.S. won’t be as badly affected as most countries.

Partly because they can throw so much at it, and they can do it at a lower cost than anybody else, because the U.S. retains the safe-haven status, which makes the world so unfair.  It’s almost paradoxical that an American crisis … reinforces the status of the United States as a safe haven.”

And on conflict?

There will be blood, in the sense that a crisis of this magnitude is bound to increase political as well as economic [conflict]. It is bound to destabilize some countries. It will cause civil wars to break out, that have been dormant. It will topple governments that were moderate and bring in governments that are extreme. These things are pretty predictable. The question is whether the general destabilization, the return of, if you like, political risk, ultimately leads to something really big in the realm of geopolitics. That seems a less certain outcome. We’ve already talked about why China and the United States are in an embrace they don’t dare end. If Russia is looking for trouble the way Mr. Putin seems to be, I still have some doubt as to whether it can really make this trouble, because of the weakness of the Russian economy.

It’s just that I don’t see it producing anything comparable with 1914 or 1939. It’s kind of hard to envisage a world war. Even when most pessimistic, I struggle to see how that would work, because the U.S., for all its difficulties in the financial world, is so overwhelmingly dominant in the military world.

Scoffield next asks: “You speak about the crisis being in its early days, but most policy makers and the International Monetary Fund are predicting a quick end to it. Where do you differ with them?”

I do think they’re wrong. I think the IMF has been consistently wrong in its projections year after year. Most projections are wrong, because they’re based on models that don’t really correspond to the real world. If anything good comes of crisis, I hope it will be to discredit these ridiculous models that people rely on, and a return to something more like a historical understanding about the way the world works.

The Austrian economists just look better and better with each passing week, no?

How about the UK and the US, in hock up to their eyeballs?

This is going to be the beginning of a whole new investment strategy in which companies that can’t roll their debt over end up being sold at bargain basement prices, or broken up and their assets sold at bargain-basement prices, in very, very large numbers. And it doesn’t take a lot of imagination to see that the buyers will be sovereign wealth funds or other entities in surplus countries. The world divides in two, the debtors and the creditors. The debtors … (U.S., Europe) … are going to have to sell of their assets. Call it the global foreclosure. They’re going to be selling their assets cheaply to those who have the surpluses. This is not going to be like the Chinese buying Blackstone at the top of the market.

“It’s revenge of the sovereign wealth funds. They got burned. And this time, no more Mr. Nice Guy.”

For additional commentary that favors the Austrian view, consider this exchange:

Scoffield: You’ve written that many financial crises are the result of excesses due to a belief that governments will bail out the financial sector. Do we need to get rid of this moral hazard through tighter regulations?

Ferguson: “In the Ascent of Money, I argue that you can’t really have a bubble if you don’t have a monetary authority that has been excessively generous. From John Law in 1719 to Alan Greenspan in the late 90s, there’s always a banker, there’s always a central banker making credit too readily available. The second thing is, though, that regulation may not prevent that.”

“Monetary policy evolved in a peculiar way in the 1990s towards de facto or de jure targeting of inflation, an increasingly narrow concept of inflation – core CPI. I thought it was a mistake at the time because it seemed to me crazy to ignore asset prices. Why differentiate? What’s the difference between pricing a loaf and pricing a house? Why do we care about one and not the other? In fact, we should probably care more about the price of a house than the price of a loaf, certainly in developed societies. I think there was a flaw in the theory there, that essentially you could call the Jackson Hole consensus. When the central bankers got together at Jackson Hole, the view that emerged from the debate in the late 90s was, we shouldn’t really pay attention to asset prices in the setting of monetary policy.”

Are you an Austrian yet?  Are you at least getting motivated to start investigating?  If so, start now.  If not, start now anyway.

The article contains additional quality exchanges, such as this dim outlook for the wealth-generating potential of the US going forward:

There was a time when if you said the United States was going to suffer a lost decade like Japan did in the 1990s, everybody would have said you were a mad pessimist. That begins to look like quite a good scenario. And I think it’s a realistic scenario.

One of the facts is if you subtract mortgage equity withdrawal from the Bush years, the real underlying rate of growth of the U.S. economy was 1 per cent. So much of the consumption has been fuelled by mortgage equity withdrawal. So that seems like a reasonable growth rate for 10 years. … We just don’t have an improvement of standard of living of the sort we’re grown used to. And indeed if you have a more equitable redistribution through the tax system, which Obama is committed to, it might actually be no discernible downside for middle America and lower-class Americans. So many of the benefits of the boom went to the elites. If you have a lost decade plus redistribution, it may not be that dramatic a change for many, many people. People just have to get over the fact that their wealth wasn’t worth what they thought it was in 2006. Whether it’s their stock market portfolio or their housing. If we simply go back to where we were, in 2005, that’s surely not the worst thing that could happen to us.”

So, the good news / realistic scenario is that we can keep from drowning if we tread water and allow one portion of society to do all the work for another.  That’s exciting, isn’t it?

It’s also worth mentioning that there is no such thing as “equitable redistribution.”  It literally does not exist.  I find this misnomer an interesting marker because it clearly signifies that Niall Ferguson is no Austrian economist.  And yet much of his commentary makes the Austrian school look better than ever.

(hat tip to WGF)

If you believe that markets generated the Great Depression and that government intervention via the New Deal and other programs ended the Great Depresssion, you’re doing it wrong.

Finally, Tom Keene, who runs a great show, includes an Austrian view on “Bloomberg on the Economy.”  May he host many more such guests.

Gerald O’Driscoll, a senior fellow at the Cato Institute and former vice president of the Dallas Federal Reserve, talks to Bloomberg’s Tom Keene about fiscal discipline and the U.S. government’s response to the financial crisis, the gold standard, Austrian economics and economist Friedrich Hayek, and President-elect Barack Obama’s economic team.

Subscribe to Wealth Is Not The Problem for excellent posts like this:

Both presidential candidates are attacking the foundations of our prosperity.

Profit-seeking is not greed, but simply the means of directing resources to their most efficient uses in areas of greatest demand (and does so through voluntary exchange!!)

The wealth which is created through successful business ventures is not community property to be seized and “redistributed,” but the reward properly earned through the efficient production of the goods and services most highly desired by others. (This too is accomplished without coercion.)

The wealth created beyond that which is used for personal consumption is the wealth which is invested in growth and progress. This excess wealth is required for taking risks on the new and untried. Only from this surplus are we able to improve the length and quality of our lives and environment.

To take from the rich is to impoverish ourselves.

To tax Big Oil, or any other Big Business, is to hinder their ability to invest in our future.

To take wealth by force, even when that force is laundered through the ballot box, is to attack a fundamental requirement of civil society: the right to property honestly earned.

Taxing the rich is like eating our farmers’ seed corn.

At Wealth Is Not The Problem, also explore the right column underneath the image of flowers.  You will find many good resources.

[photo source]

Buy for a nice price via the Ludwig von Mises Foundation.

Check Amazon’s “Look Inside” and this synopsis from Barnes and Noble:

Few topics are as timely as the growth of government. To understand why government has grown, Robert Higgs asserts, one must understand how it has grown. This book offers a coherent, multi-causal explanation, guided by a novel analytical framework firmly grounded in historical evidence.

More than a study of trends in governmental spending, taxation, and employment, Crisis and Leviathan is a thorough analysis of the actual occasions when and the specific means by which Big Government developed in the United States. More than an abstract account, it names names and highlights the actions of significant individuals.

The author examines how 20th-century national emergencies—mainly wars, depressions, and labor disturbances—have prompted federal officials to take over previously private rights and activities. When the crises passed, a residue of new governmental powers remained. Even more significantly, each great crisis and the subsequent governmental measures went hand in hand with reinforcing shifts in public beliefs and attitudes toward the government’s proper role in American life.

Integrating the contributions of scholars in diverse disciplines, including history, law, political philosophy, and the social sciences, Crisis and Leviathan makes compelling reading for all those who seek to understand the transformation of America’s political economy over the past century.

Here is Murray Rothbard’s America’s Great Depression, all 337 pages with an introduction by historian Paul Johnson plus appendix, index, and tables.  Study time.

Both major-party presidential candidates keep spouting their silliness about interventions and disruptions, tax plans and rescue schemes.  If only one of them had the wisdom to call for government to Get Out Of The Way, Dramatically Shrink in Size and Scope, and Stop Doing So Much Horrendous Damage.

Even as Senators Obama and McCain prattle on about change, socialism, and the very wrong-headedness that brought us here, not all are so fooled:

• The CSM included an op-ed (I assume) that stated “government regulation, not greed, caused this crisis.  When government distorts incentives, the invisible hand can become a fist.” A very visible and damaging fist, indeed.  The writer concluded, “Good intentions are not enough in designing public policy. Regulations designed with the best of intentions are likely to lead to more crises if they distort incentives and thereby cause individual ‘greed’ to undermine economic growth and harm millions. History is full of examples of politicians adopting short-run solutions without seeing the harmful long-run consequences. Today, the calls to ‘do something’ are loud. Yet amid the cacophony, there are a few voices urging not more, but less; not faster, but slower; not short term, but long term; not intent, but outcomes. Those are the voices we should heed, because if we had listened to them 15 or 20 years ago, we might not be where we are today.”

• Even the WP weighed in on behalf of markets.  While one may differ with their view in certain key respects, at least they established that “The market that failed was not exactly free… government interventions of all kinds, from the defense budget to farm supports, shaped the business environment. No subsidy would prove more fateful than the massive federal commitment to residential real estate…” and “over the long term, business works best when it is subject to market discipline alone.”

• Please also study George Reisman’s excellent “The Myth that Laissez Faire Is Responsible for Our Financial Crisis.”

• In addition, please read “The Confidence Game” by James Grant of Grant’s Interest Rate Observer via the WSJ.

Not all are fooled.  Not all is lost — despite the mounting evidence (see links above) and building consensus that our government has seriously failed, continues to fail, and plans feverishly to fail yet more spectacularly.

Though not all is lost, we likely will endure much worse before conditions improve.

Though we likely will endure much worse before conditions improve, we must begin and become the recovery, starting now.  It will not come from Washington, from your state’s capitol, from your city government.  There is no such rescue.

Mark Cuban focused properly on the motor that must power recovery.  Start your engines.  If you want, get angry.  Even better, engage, learn, and get moving.

Finally, study the actual economics of capitalism because “some things that should not have been forgotten were lost.”

If looking for a starting point, try:

• Henry Hazlitt’s Economics In One Lesson
• F. A. Hayek’s The Fatal Conceit: The Errors Of Socialism
• George Reisman’s Capitalism: A Complete And Integrated Understanding of the Nature And Value of Human Economic Life

[source of the quote in this post’s title]

Dr. Robert Murphy addresses the cause of the financial meltdown with a focus on the Austrian theory of the business cycle and its critics, via mises.org