Dan Kish sends this video. This isn’t hilarious–I was hoping for at least one more “in-the-know” stanza–but I’m just so happy that the Internet is allowing moderately talented people to finally break the statist monopoly.
BTW I was checking some of this guy’s other bits. Here’s a peek at evangelicals when the kids are home in bed and they’re being naughty.
Mario Rizzo comes late to the fight, and sees Tyler Cowen bloodied and beaten on the ground, surrounded by Pete Boettke, Steve Horwitz, David Henderson, Arnold Kling, and me. (Henderson and I are high-fiving while Horwitz gives a chest-bump to Boettke.) Mario asks what all the fuss is about, and we explain that Tyler still thinks the bailouts were a good idea. Mario says, “That’s impossible. I know back in November he still supported TARP, but back in June Tyler wrote in the NYT: ‘The sooner banks can get out of TARP the better. People have differing opinions on which of the bailouts were good ideas and which not, but we can all agree that the entire episode has been a national nightmare. We should not turn down a chance to put parts of that nightmare behind us.’“
“We hear you, Mario,” we all explain. “But he quite clearly said on his blog recently that the bank bailouts were a good idea.”
“Yes, but we’re talking about Tyler after all,” Mario says. “Maybe he is making a distinction between the Treasury bailouts versus the Fed bailouts. Or maybe he thinks nightmares are sometimes a good idea. After all, he just read 8 books on what psychologists think about the function of dreams. In any event, you guys shouldn’t have hit him,” Mario concludes.
“Hang on a second,” David interjects. “Tyler also said that Milton Friedman would have supported the bank bailouts.”
“He said that? Wow. Still…” Mario is squeamish, as Tyler lifts his (broken) hand briefly before it falls back to the ground.
“And he said that any libertarian who thinks otherwise is just ‘pretending,’” I add.
A fuse blows and Rizzo puts on a headband that reads, “Extreme Unction.” Then he declares:
[A]n interesting dispute has arisen among friends Tyler Cowen, David Henderson, Arnold Kling, Peter Boettke, Bob Murphy, Steve Horwitz and others over whether Ben Bernanke was right to bail out specific banks. (Some of this has gotten mixed up with the issue of what Brian Boitano would have done — oops, I should say Milton Friedman.)
I think the question could be simply stated in two parts. First, is it possible to prevent general deflation and not bail out big banks? Second, if so, what would be the effect on the economy of bringing the banks to bankruptcy court while preventing outright deflation?
1. The answer to the first question is yes. Even if the Fed ran out of short-term Treasuries to buy it could have bought longer-term Treasury obligations sooner. Unfortunately, in 2008 the Fed rescued Bear Stearns and AIG with Treasury securities. This then was a sterilized bailout. The bailout protected the banks but reduced the Fed’s balance sheet an equal amount. Thus, the bailout preserved certain sources of credit but did nothing to prevent deflation. The Fed’s own actions separated the two.
Therefore, I can see no reason why the Fed could not have prevented deflation without bailing out particular banks.
2. The answer to the second question is more complicated. If the Fed had not bailed banks out they would have had to go into traditional bankruptcy proceedings. This would have taken longer…But this is not altogether bad since excessive credit was the problem in the first place…Total spending need not have declined, with deflation averted, but its composition would have been altered.
…The bailout solution produces long-term moral hazard. The bankruptcy path does not eliminate that problem but reduces it substantially. It also allows the market more of a say in the composition and firm-size of a restructured banking industry. (Why should we have such large banks?)
In addition, the bailout method opens the system to rent-seeking. In the absence of a clear-cut definition (or even conceptualization) of systemic risk, there is too much room for arbitrariness or political favoritism. The expansion of government power in the direction of saving particular firms is a seriously problematic precedent.
The danger is that we continue the process of getting out of one recession by creating the basis for another recession or, at the least, further significant financial difficulties. The long run begins sooner than many people think.
After Rizzo walks away from the lifeless Cowen, I turn to Boettke and ask, “Did you know Rizzo watches South Park?”
Robert Wenzel has reported two disturbing events that portend for a falling dollar. The first is the Chinese central bank’s decision to buy about $50 billion worth of bonds issued by the IMF that are denominated in “special drawing rights” (SDRs), which is basically a basket of world currencies. (This is the first time the IMF has ever done such a transaction.) Many analysts think that the IMF SDRs will replace the dollar as the international reserve currency. (The basket would of course include the USD.)
In other news, Hong Kong is pulling its gold reserves from around the world and storing them in a new home-built facility. True, that could mean nothing, but as Wenzel says, “[T]his smells like Hong Kong wanting to keep an eye on its gold and wanting to directly control the gold during very delicate times.”
Say what you will about him, but Robert Wenzel has a good eye:
A Bob Murphy economic speech is like none other you will ever hear. It’s a stand up routine which I’m sure will eventually get him at the Improv on Sunset Boulevard in Hollywood. You really laugh so much that you almost forget that he is providing solid economic analysis with his one liners.
And that’s a purely objective statement. I know I link to him a lot, but Wenzel and I barely know each other.
In an irritable mood, I once penned an essay for Mises.org titled, “The Worst Economics Article Ever?” It was a critique of a plea to “buy local” that I read in New York’s L Magazine.
Well the young lady who wrote that particular piece–which made very infrequent references to Bastiat–can rest easy, because she has been demoted. This is quite clearly the worst economics article I have ever read. A fan of Mises.org, Alex, sent it to them, and they in turn activated the Bat signal. I will write up the full critique tomorrow, but for now, just revel in its stupefying ignorance and sheer evil:
Six months after the financial world seemed to be coming to an end, the world’s economies appear to be recovering. Banks that seemed to be on the brink of failure less than a year ago are now able to pay back investments made by the Treasury.
It is too early to declare victory, but the world looks much safer than it did only a few months ago. Credit markets are recovering…
If victory is to be had, it will owe a lot to the willingness of American policy makers to set aside cherished policies and simply create money. And that is one reason it is appropriate to pause and celebrate an unheralded bicentennial: The father of the greenback, Elbridge Gerry Spaulding, who was born 200 years ago, in 1809.
Spaulding was that rarest of creatures, a man who succeeded in both business and politics; a congressman who saw a problem coming and had a solution ready. It was he who, at the end of 1861, figured out that the American government simply needed to print money to pay for the Civil War. It was economic heresy then, but without it this country might not have survived.
Such an idea was then dismissed by some as “fiat money,” money that is money not because it is backed by gold or silver, but because some government says it is money.
That such currencies can fail to work is obvious, as those who lived in Weimar Germany or present-day Zimbabwe have found out. But notwithstanding those examples, the last 20 years deserve to be remembered as the age of fiat money. For much of that time, central bankers were revered as heroes for engineering long booms and short, shallow recessions.
[Bernanke] may have been slow to realize how critical the situation was, but when he did, he acted decisively. Like Spaulding almost 150 years ago, he showed a willingness to abandon the wisdom of an earlier time. The government lent money it did not have to financial institutions, and bought stock in them.
The Federal Reserve expanded its balance sheet to an unprecedented extent, and seemed to be guaranteeing almost everything in sight. Given how closely the Fed worked with the Bush and Obama administrations, it may not have reinforced its reputation for independence, but it was certainly a pioneer in innovation.
Today Spaulding is largely forgotten. Civil war generals are remembered with monuments and even colleges; Spaulding has a dormitory named for him at the University of Buffalo.
But some deem him a hero. “If Wall Street had saints, then the college of financial cardinals would surely canonize Elbridge G. Spaulding,” wrote T. J. Stiles…
Spaulding, wrote Mr. Stiles, “performed a true miracle: he conjured money out of nothing, and so contributed more toward the Union victory (and the future of New York’s financial sector) than any single battlefield victory.”
How did he do that? A congressman from Buffalo, and a banker before and after he was a politician, he was chairman of a House Ways and Means subcommittee when the government was in danger of running out of money to pay for the Civil War. He wrote a law that allowed the government to print money and declare it had to be accepted as legal tender.
Until then, the only circulating paper money was notes issued by banks. Those notes were supposed to be convertible into gold, although the banks had been forced to suspend such conversions at the end of 1861. There was no central bank.
To opponents, Spaulding’s plan was simply immoral. “It will infinitely damage the national credit,” warned Representative Justin S. Morrill of Vermont, adding that it was “a breach of the public faith” that would lead to rampant inflation.
The bill passed Congress not because anyone thought it was good policy absent a crisis, but because most thought it was necessary. Something very similar can be said about the government’s multiple bailouts during this crisis.
In the end, Spaulding was proved right. “It was at once a loan to the government without interest and a national currency, which was so much needed for disbursement in small sums during the pressing exigencies of the war,” he wrote years later in his book, “History of the Legal Tender Paper Money.”
He even created a floating currency. Gold dollars still existed, and were the only dollars that could be used for international trade. When the war appeared to be going badly for the North, the value of the greenback sank. Someone with first knowledge of a Union victory could gain a quick profit by selling gold for greenbacks.
Contrary to the expectations of Representative Morrill, paper money did not set off sharp inflation over time, and when the paper money eventually was made convertible into gold, there were no lines of people wanting to trade in paper for bullion.
Mr. Bernanke’s eventual reputation is likely to be determined by how well he succeeds in his vow to right the economy without prompting a major devaluation of the dollar.
Some doubt he can do it. “The Fed, which saw none of this coming, now asks us to believe that it will see clearly enough into the future to remove this massive monetary stimulus before it becomes harmful,” said James Grant, the editor of Grant’s Interest Rate Observer.
If Mr. Bernanke does manage to accomplish that, he, like Elbridge Spaulding, will have earned financial canonization.
Isn’t that impressive? If you had been given a weekend in a secluded cottage, a typewriter, and a bottle of Scotch, could you have written a worse article of comparable length? I don’t see how that would be possible.
This is a great post; here are some excerpts. Note that the links about US military operations need to be scrolled to be believed, and the bolding is mine:
There was a time…when the U.S. pretended that it viewed war only as a “last resort,” something to be used only when absolutely necessary to defend the country against imminent threats. In reality, at least since the creation of the National Security State in the wake of World War II, war for the U.S. has been everything but a “last resort.” Constant war has been the normal state of affairs. In the 64 years since the end of WWII, we have started and fought far more wars and invaded and bombed more countries than any other nation in the world…Those are just facts. History will have no choice but to view the U.S. — particularly in its late imperial stages — as a war-fighting state.
But at least we paid lip service to (even while often violating) the notion that wars should be waged only when absolutely imperative to defending the nation against imminent threats. We largely don’t even bother to do that any more. Consider today’s defense of the war in Afghanistan from the war-loving Washington Post Editorial Page. Here’s their argument for why we should continue to wage war there:
Yet if Mr. Obama provides adequate military and civilian resources, there’s a reasonable chance the counterinsurgency approach will yield something better than stalemate, as it did in Iraq.
Does that sound like a stirring appeal to urgent national security interests? Why should we continue to kill both Afghan civilians and our own troops and pour billions of dollars into that country indefinitely? Because “there’s a reasonable chance the counterinsurgency approach will yield something better than stalemate.” One can almost hear the yawning as the Post Editors call for more war.
[T]he luxury of viewing war “as an abstraction” — is a perfect explanation for today’s pro-war Post Editorial and for the more generalized willingness to continuously start and continue more and more wars, even in the absence of anything remotely approaching a “last resort” rationale…
There seems little doubt that a major political conflict over Afghanistan in imminent and inevitable. A newly released CNN poll yesterday revealed that opposition to the war is at “an all-time high” — with 57 percent opposing the war and only 42 percent supporting it. Even more notably, 75% of Democrats and 57% of independents oppose the war…
But as became clear with Iraq, the “mere” fact that a large majority of Americans oppose a war has little effect — none, actually — on whether the war will continue. Like so much of what happens in Washington, the National Security State and machinery of Endless War doesn’t need citizen support. It continues and strengthens itself without it. That’s because the most powerful factions in Washington — the permanent military and intelligence class, both public and private — would not permit an end to, or even a serious reduction of, America’s militarized character. It’s what they feed on. It’s the source of their wealth and power.
That, of course, is the trend that has been repeating itself over and over: while Obama has certainly deviated from what the GOP would do in the realm of domestic policy, he has embraced the core prevailing principles of Bush/Cheney in the areas of war fighting, civil liberties, “counter-terrorism,” and secrecy/transparency — i.e., in the full-throated continuation of the National Security State…
All of these issues can’t be separated from one another. A country that turns itself into a war-fighting state, a militarized empire, is choosing what kind of country it wants to be. And as long as that continues, everything else — wild expansions of executive power, the explicit rejection of the rule of law for elites, a continuous erosion of civil liberties, ever-expanding secrecy justifications, supreme empowerment of a permanent national security class whose power transcends elections — are all necessary and inevitable by-products. As Thomas Jefferson observed in an 1810 letter to Ceasar Rodney: “In times of peace the people look most to their representatives; but in war, to the executive solely.” Jefferson was assuming “war” was a temporary state of affairs; where, as with us now, it’s the permanent reality, the effect is far greater. As long as a President is waging wars and trying to control the world through military force, he desperately needs the CIA, the military, the entire National Security State apparatus, and thus cannot “change” policies of secrecy, civil liberties, privacy and the like — even if he wanted to.
That’s why being in a state of endless war doesn’t merely raise discrete questions of this policy or that; it changes the character of the nation. Whether to continue our massive National Security State and general imperial behavior (unsustainable in any event) is at least as important a question in the debate over Afghanistan as specific questions raised by the war itself.
UPDATE: See also: James Madison, Political Observations, 1795:
Of all the enemies of true liberty, war is, perhaps, the most to be dreaded, because it comprises and develops the germ of every other. War is the parent of armies; from these proceed debts and taxes; and armies, and debts, and taxes are the known instruments for bringing the many under the domination of the few…. No nation can preserve its freedom in the midst of continual warfare.
My talk at the recent San Francisco Mises Circle. (Thanks to Chad Parish for putting it on YouTube.)
Dick Clark the Younger was IM’ing me about his crashing of a Moveon.org health care rally in Boston. Dick had an anti-government sign that is not appropriate for a family blog and somebody confronted him. Dick asked, “Why do you want the biggest murderer in the world running health care?” I guess the answer is that George Bush is out of power now, so everything is fine?