Anarchy versus rule of law as investors tackle political theory.
One of the healthier debates that took place during the macroeconomics group session revolved around the role of government – the good, the bad, the ugly – and the uglier. What is government for? What is it not for? Who stands to gain, to lose, from government with more authority? With less authority? Libertarianism? Ron Paul? Saudi Arabia? Wall Street “banksters?” All that and more below.
Please add your comments at the bottom of the page, and enjoy!
[Editor’s note: Posts have been edited for punctuation, spelling, grammar and length.]
StilesBC: Increased protectionism is par for the course as economies begin to slow. I call it FDRism. This, along with central bankers intervening and trying to slow and dampen the credit unraveling is why we're more likely to see a depression than a sharp correction and quick recovery. Those who earn wages are hurt by this. Those who set wages benefit. Once again, governments are the problem.
gabrielgray: Yes, indeed. You're my kind of libertarian anarchist. Governments wouldn't be such a problem if they could get it through their heads that they're there to serve the people, not vice versa. But they can't keep it in their heads 15 minutes past the time they're sworn in. There are just too many enticing opportunities to feather their own nests.
StilesBC: Not an anarchist. I am a firm believer in the rule of law. It is government's job to ensure that it is followed. That is the primary necessity of government. You can add national defense (read: defense) and emergency response to natural disasters.
Any other problems within society (and there will be problems) are better left to their own devices to correct themselves democratically via day-to-day choices made by individuals. If those individuals' choices impose on the liberties of others, they should be punished appropriately.
Sorry to turn your macroeconomics discussion into a political one, Rob. However, I don't see the point of us all sitting around and agreeing with each other on the problems if we're not going to also talk about solutions.
gabrielgray: The rule of law is the central province of government. It's just that the rule of law ought to extend to the government itself, not just the vassals, er, citizens.
littleguy123: Now you two must KNOW that I wasn't about to let this tiny-government-is-good-government manifesto just slide by. It was pure "small government" (i.e. the ruling monarchy) which has had Saudi Arabia pumping out its oil at virtually full capacity for decades - generally at $30/barrel or less.
This led to MASSIVE over-consumption (most notably in the U.S.), and is about 80% responsible for us having to live with $120/barrel crude today. Now that the same "small government" is about to (VERY belatedly) ease back on the flow - so there MIGHT be some oil left 20 years from now - we have a "problem" with government interference in "free markets"? This is obviously a problem CAUSED by out-of-control capitalism.
StilesBC: Did you just argue that the Saudi monarchy is a small government? I am sorry, but an authoritarian welfare state is not small government. The government itself takes to building entire cities for crying out loud! How do they enforce some of the worst infringements on freedom of speech and freedom of religion in the world with small government? Saudi government is enormous. They own all of the oilfields in the entire country, and control how much is produced. How is this in any way "out of control capitalism"? Government ownership is inherently socialist. No? We're talking about the same things here right?
littleguy123: Then we have the "crime of the century" perpetrated by the Wall St. banksters. Was this a problem created by over-regulation, and over-involvement of government? Is there ANYONE proposing that the current problems should be dealt with through even LESS government regulation and oversight?
StilesBC: Yes. Ron Paul is proposing this (and more than 1 million Americans that voted for him). I am proposing this. The Austrian School of Economics has been proposing this for over a century (see: mises.org). Tell me this: Would the fraud perpetrated by American "banksters"(hehe, I like that) be possible without the "Affordable housing act"? This paved the way for the creation of Fannie Mae and Freddie Mac, where the banksters could dump their garbage home mortgages. This artificial boost in demand for mortgage securities told the banksters that they should issue MORE loans. The rest is history. Would bankers have given $500,000 loans to people with $25,000 of stated income per year, and not worried about the consequences, without this government backstop? Of course not. Bankers can only be banksters with the help of government. Just like Al Capone NEEDED the prohibition to be a gangster.
gabrielgray: Sorry, LG. You still haven't grasped the picture on the "crime of the century." You're operating on a popular misconception about the nature of central banking and governance itself. You reject the concept of limited government on the basis that only a hellacious government with almost unlimited power can restrain the avarice of the "capitalist fat cats."
Let's start from the beginning: The root of your error is a false distinction. That false distinction is your idea that central banks are discrete entities composed of bankers and their minions, and governments are arrayed against them as watchdogs and regulators. This is simply not the case. It may have been the case in 7th-century Byzantium (or it may not), but it is not the case in modern times.
Today, the central bankers and the government are (take a breath and steady yourself) essentially the same people. It does not matter that the consortium of private banks behind the Fed is comprised of banking families scattered around Europe and the U.S. The central bank is operated for the benefit of private bankers and government, and for this reason Presidents and Senators are always calling on the central bank to facilitate this or ease that. The tentacles of central banking go deep inside the corridors of power in Washington, D.C., just as they do in Toronto, Paris, London, Brussels... everyplace that there is substantial wealth to manipulate. It is no accident that the former CEO of Goldman Sachs is Secretary of the Treasury. Senator Jon Corzine of New Jersey is another former Goldman head. Bankers and former bankers are in positions of high influence throughout this government. Government and central banking are made up of the same people, working hand in hand.
Let's look at your statement: "Then we have the ‘crime of the century’ perpetrated by the Wall St. banksters. Was this a problem created by over-regulation, and over-involvement of government? Is there ANYONE proposing that the current problems should be dealt with through even LESS government regulation and oversight?"
Answers: Yes, yes and yes. Understand this: The crime of the century was not the proliferation of faulty credit derivatives. That was a by-product. Was the problem created by "over-involvement of government?" Most certainly it was. The government was involved in something it had no business in. It was fixing prices in the credit markets. If you're not clear what I mean by that, then here is the source of your misperception. Governments should not interfere in markets by fixing prices. Prices are sometimes fixed high, to loot consumers (for example sugar subsidies in the U.S.), and sometimes they are fixed low, to appease the masses (gasoline prices in Venezuela or Iran). In the case of the "crime of the century," the price of money (interest rate) was fixed at an extremely low level in order to send false signals to commerce and industry and stimulate consumption. The crime of the century didn't begin in 2002. Depending on your perspective, it began in 1971 when Nixon ended international settlements in gold, or much earlier, when Bretton Woods made the U.S. dollar the world's reserve currency.
So, yes, I propose that the current problems should be solved by getting government completely out of the way. The U.S. government begged Alan Greenspan for easy credit to ease the deflation caused by the implosion of the savings and loans that ended in 1992. Greenspan complied, and the result was the stock bubble that blew up in 2000. Again they implored the Fed to grant even more cheap credit to repair the damage of stock losses (and the market ravages of 9/11) and the Fed opened the floodgates. A torrent of super-cheap credit spawned an orgy of speculation in real estate and both residential and commercial building, while driving stocks higher as well.
Now the error is being repeated and price inflation is working its way into commodities this time around.
If the Fed was abolished and the government forced to stop interfering between buyer and seller in the money markets, the problem would right itself with the destruction of bad debts and phony money. Interest rates would be determined by price discovery between borrower and lender, and not fixed arbitrarily by government intervention.
Your idea that U.S. over-consumption is rooted in low oil prices is not borne out by either historical fact or economic reality. When Saudi Arabia was selling its oil on the world markets for $10/bbl and $20/bbl, the Ghawar field was yielding Saudi Light Sweet at a production cost below $2 per barrel. Neither Ibn Saud nor Faisal nor today's King Abdullah pumped their oil at a furious pace to please American presidents; they did so because they had established a welfare state in Saudi Arabia that required an immense flow of oil revenues to maintain an orderly society. The house of Saud is immensely unpopular with the Saudi man on the street. You imagine it is because they are lap dogs of western politicians, and you are mistaken. Western politicians go hat in hand to beg favors from Saudi rulers. Nope - the ruling family in Saudi Arabia is despised because they squander the nation’s oil wealth on palaces of unbelievable opulence, and on whores (with blond hair) and Rolls Royces and Boeing 757's and whatever else they fancy. They dole out what's left over to the unwashed Wahhabi rabble that comprises the population.
They have cut a Faustian deal with the Arab masses: We will support you modestly and overlook your Wahhabism, while you leave us in power and turn a blind eye to our revelings and ostentation. Pretend that we are faithful Muslims, and we will pretend that you deserve the money we hand out.
No, "over-consumption" is by definition only possible when "extra" money is supplied in the form of credit. Without cheap credit, the [consumer] has only the fruits of his labor to spend. He can only consume as much as he has created.
Now I'll wrap up. Your difficulty seems to stem from a preoccupation with the troubles of people who were duped, or duped themselves into buying overpriced houses with mortgages they really couldn't afford. You're angry that the U.S. government doesn't "do something" to help them, or is not doing enough. This mess blew up precisely because government "did something" to help the people who lost big money in their IRAs and Keoghs and brokerage accounts when the tech stock/dotcom bubble went south. It is partially because the Fed is "doing something" today - they are massively diluting the dollar - to help reduce debt levels, that the prices of food and fuel are reaching record levels. Government interference in the corn and ethanol markets is disrupting food supplies and causing food riots around the globe.
Government has few legitimate concerns, and they do well to discharge them without disaster. Government involvement in anything outside those legitimate tasks always results in expensive problems. Health care costs stayed flat in the U.S. until Lyndon Johnson funneled government funds into the health care sector through Medicare, Medicaid, and all the Blue-Cross/Blue Shield programs. Health care spending has increased more than fifty-fold since then.
The crime of the century was not the derivative fiasco. Had Wall Street bankers any idea how that would end up, they would never have written the first CMO. It was not the subprime mortgage scandal. Everyone who participated in that - bankers, appraisers, bond insurers, mortgage lenders, borrowers and the Fed itself - has been soundly punished for their stupidity and/or complicity.
The crime of the century is a huge heist. The government and the Fed, working together, have executed a huge theft of purchasing power from the American people, and wrecked the currency in which all their wealth and earning power are denominated.
If you propose to fix that just by clipping the bankers wings, but fail to reign in government, you will just open the door to the government perpetrating the scams on their own, without having to give the bankers a cut of the deal. See "Argentina," "Russia," etc. for further information.
This group discussion was conducted with members of the Stockhouse community.
Next: Part II of the “Government and liberty” series continues apace as members turn to a discussion of oligopolies, unemployment and Birkenstocks in “A utopian fantasy.”
Archive
Investor groups launch with macroeconomics discussion
Inflation and money supply, part I: Treasuries crowd bonds
Inflation and money supply, part II: Buyer’s remorse
Inflation and money supply, part III: Indeflationists unite
Inflation and money supply, part IV: Measuring money
Inflation and money supply, part V: Derivative “Death Star”
Oil supply, oil demand: Is oil in a bubble?
Housing crisis redux: Where do we go from here?
U.S. dollar devaluation not the only currency bet in town
Spin-offs
Inflation debate stirs investors
Oil speculation theory taken to the woodshed
Oil prices: A critique
