financial crisis — VOICES for REASON

Ben Bernanke won a second four-year term at the head of the Federal Reserve yesterday with a 70-30 vote in the Senate. Alex Epstein pointed out the absurdity of reconfirming Bernanke on foxnews.com. Bernanke is among the individuals most responsible for the financial crisis, and he hasn’t changed his financial philosophy in the least. Yet nearly three-quarters of the Senate—and President Obama—think he saved us from disaster. To use one of Alex’s metaphors, we just elected the arsonist to put out the fire.

Image: Gage Skidmore on Flickr

For years, Barney Frank has been the most prominent cheerleader of Fannie Mae and Freddie Mac–the colossal failures that have cost taxpayers $110 billion to date. Frank has long denied any problems with the government sponsored entities designed to “promote home ownership” by making or guaranteeing loans the free-market wouldn’t.

“These two entities—Fannie Mae and Freddie Mac,” he famously said, “are not facing any kind of financial crisis. The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.”

Frank also explicitly endorsed the reckless lending that proved Fannie and Freddie’s downfall: “I want to roll the dice a little bit more in this situation towards subsidized housing. . . .”

Last week, Barney Frank changed his mind: “The remedy here is…as I believe this committee will be recommending, abolishing Fannie Mae and Freddie Mac…”

But don’t celebrate just yet. Frank didn’t call for a meaningful abolition–he called for “abolishing Fannie Mae and Freddie Mac in their current form and coming up with a whole new system of housing finance” (emphasis mine). Read the rest of this entry »

The scene: an ostensibly civilized White House gathering between President Barack Obama and executives from the nation’s largest financial institutions. The subject? According to President Obama:

My main message in today’s meeting was very simple: that America’s banks received extraordinary assistance from American taxpayers to rebuild their industry, and now that they’re back on their feet we expect an extraordinary commitment from them to help rebuild our economy . . .[this] starts with finding ways to help creditworthy small and medium-sized businesses get the loans that they need to open their doors, grow their operations and create new jobs . . . we expect them to explore every responsible way to help get our economy moving again.

A hallmark of dictatorship is the view that individuals, including market institutions, are incapable of making rational decisions for themselves, and thus must be compelled to act rationally by some higher authority. Obama’s latest meeting illustrates that he holds this view of banks, and that he is more than happy to be the higher authority that tells them when to lend and whom to lend to.

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Since the start of the financial crisis, ARC has been pointing out that the cause was not the free market, but the unfree market. Another way of putting the point is that what failed was central planning.

Central planning puts economic decisions in the hands of a few government “experts,” rather than private individuals on an unhampered market. Interest rates in the U.S., for example, are not determined by supply and demand–they are determined by rates set by central planners at the Federal Reserve. And banks don’t set their own lending standards–those standards are dictated by central planners via the Community Reinvestment Act.

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I was reminded today that this year marks the 60^th anniversary of the publication of Ludwig von Mises’ “Human Action.” 

Why read a 60-year old economics textbook today? Because insights from economists such as von Mises are relevant for evaluating the claim that capitalism is at fault for today’s economic crisis, and for understanding its real cause. Ayn Rand put it best in a letter she wrote in 1960: Read the rest of this entry »

The upcoming Spring issue of The Objective Standard includes an article by ARC’s Yaron Brook and Don Watkins challenging the notion that America had a free market economy before the recent crisis. In  “America’s Unfree Market,” they argue that since World War I the U.S. economy has been increasingly saddled with–and damaged by–the anti-free market elements of taxes and government controls.

As noted in the article, with the latest federal budget surpassing $3 trillion and tens of thousands of regulations already on the books, people’s belief that America has a free market is only possible because of a gross misconception of what a free market actually is. That’s why I think one of the most important passages in the article is the following:

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This past January, ARC hosted a talk by BB&T chairman of the board John Allison at the National Press Club in Washington, D.C. About three hundred were in attendance on a cold Thursday evening to hear the talk titled, “The Financial Crisis: Causes and Possible Cures.” The lecture portion of that event is now available on the ARC website.

Mr. Allison began his service at BB&T (a large financial services company) in 1971 and served as chairman and CEO from 1989 through the close of 2008, and during his tenure BB&T has grown from $4.5 billion to $137 billion in assets. The government’s recent massive intervention into the financial industry began some months before Mr. Allison retired from his post as CEO. In this talk, he shares his views of what contributed to the current financial crisis and some of his proposed solutions for moving us towards a stronger economy. He peppers the talk with anecdotes and first-hand observations. There’s an amusing moment about a personal conversation with Barney Frank, and loads of particulars showing how government agencies and regulations disrupt good business practice. It’s worth a listen.

On our web site you can also find ARC commentary on the financial crisis.

Barack Obama tells us to embrace his “stimulus package” and other planned interventions in the economy–because “We can’t posture and bicker and resort to the same failed ideas that got us into this mess in the first place.”

True. Here are four top failed ideas that we should not resort to.

• The idea that government should take our money and spend it as it sees fit, in order to “stimulate” us to be productive participants in the economy.
• The idea that free-market outcomes must be countered with “public-spirited,” taxpayer-backed programs–such as Fannie Mae, Freddie Mac, the Federal Housing Administration, and the rest of the “affordable housing” racket.
• The idea that financial institutions are “too big to fail”–which, by virtually eliminating the possibility of failure, encourages institutions to take on much higher levels of risk than they would in a free market.
• The idea that saving is unnecessary, and that consumption, not production, is the key to economic growth–an idea that, whether quickly or slowly, whether on a desert island or a 300 million-person economy, leads to poverty.

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I was recently reading an excellent account of the government-created incentives that helped cause the catastrophic housing boom and bust.

Government-guaranteed home mortgages, especially when a negligible down payment or no down payment whatever is required, inevitably mean more bad loans than otherwise. They force the general taxpayer to subsidize the bad risks and to defray the losses. They encourage people to “buy” houses that they cannot really afford. They tend eventually to bring about an oversupply of houses as compared with other things. They temporarily overstimulate building, raise the cost of building for everybody (including the buyers of the homes with the guaranteed mortgages), and may mislead the building industry into an eventually costly overexpansion. In brief, in they long run they do not increase overall national production but encourage malinvestment.

If this paragraph had been written yesterday, I would admire it as a remarkably precise explanation of recent events. But the truth is much more impressive: it is from a book first published in 1946, Henry Hazlitt’s Economics in One Lesson.

It is typical among today’s commentators to treat the theorists of laissez-faire capitalism–such as Hazlitt, Von Mises, and Ayn Rand–as somehow refuted by today’s disasters, which are billed as a “failure of the free market.” This would be laughable if the issues weren’t so serious. There has not been a remotely free market in housing and finance, especially over the last decade. And laissez-faire theorists, as Hazlitt illustrates above, have painstakingly explained exactly how government intervention in the economy leads to injustice and disaster.

Read Ludwig Von Mises’s Theory of Money and Credit, published nearly a century ago, and understand the essential mechanics of government-created asset bubbles like the recent housing bubble or the dot-com bubble.

Read Ayn Rand’s Atlas Shrugged (1957) and Capitalism: the Unknown Ideal (1966), and understand how our current system is not a free market but a “mixed economy“: “a mixture of freedom and controls–with no principles, rules, or theories to define either…no one’s interests are safe, everyone’s interests are on a public auction block, and anything goes for anyone who can get away with it.”

Laissez-faire capitalism remains, as Ayn Rand once called it, “the unknown ideal.” “The flood of misinformation, misrepresentation, distortion, and out-right falsehood about capitalism,” she wrote, “is such that the young people of today have no idea (and virtually no way of discovering any idea) of its actual nature.” If we are to escape this financial crisis with as little damage as possible, we must learn capitalism’s actual nature by studying the great laissez-faire theorists. There is no better place to start than Rand’s essay “What is Capitalism?”