government has one good thing about it. It has Inspector Generals. The
government ignores what they say, but at least they give us a measure of
truth about government.
The truth these
days on the extent of government bailouts is undeniably mind-boggling. It may
make you feel queasy. It may set off alarm bells.
something called The Office of the Special Inspector General for the Troubled
Asset Relief Program (SIGTARP).
Congress, you will recall, created the TARP program in 2008 in its Emergency
Economic Stabilization Act.
The SIGTARP is a
man named Neil Barofsky. I like his honesty. I like his integrity.
tells the Treasury what it should do to administer TARP in an above-board,
efficient, and business-like manner. The Treasury ignores what he says.
Consequently, no one out here knows what’s happening to the money; and
probably no one in there at the Treasury knows either:
SIGTARP’s first recommendations was that Treasury require all TARP
recipients to report on the actual use of TARP funds. Other than in a few
agreements (with Citigroup, Bank of America, and AIG), Treasury has declined
to adopt this recommendation, calling any such reporting
‘meaningless’ in light of the inherent fungibility of
Congress is doing
one main thing. It is having the Treasury buy loans and debts (like mortgage
loans, credit card loans, auto loans) that banks created in the boom. The
government is also buying the securities of banks. It is not paying ready
cash from tax collections or its bank accounts for these loans and
securities. It does not have the vast amounts it is spending, and it cannot
tax us enough to cover the amounts being spent. So instead it is buying them
on credit in the same way that you or I buy something on credit. It is taking
out loans to get the cash to buy these other loans. The government does this
by running big deficits and issuing Treasury securities.
with banks are not sales in an open market. They are negotiated. The prices
of the exchanges are unknown.
Even if the
Treasury executed these transactions in an entirely above-board way, the
program would still fail. That’s because the strategy the Congress is
following in order to stabilize the economy cannot stabilize the economy. No
economy can be made productive and efficient by people (through their
government) buying up the bad loans that banks made during a boom. That
encourages these and other banks to make more bad loans in the future and
rewards them for having made bad loans in the past.
thinks that an economy works as follows. (1) Consumers obtain funds from
banks. (2) Consumers buy things from producers. (3) Producers pay workers who
then repay loans. They think that if they deliver funds to consumers, by
flooding the banks with the wherewithal to lend, then they can get the
economy to grow. In this strategy, the banking system’s provision of
funds almost always leads to prices rising in some asset markets,
speculation, capital misallocation, and eventual recession and bad loans. The
economy does not go onto a sustainable growth path. The excess loanable funds
cause prices in individual markets not to do a good job of reflecting shifts
in demand and supply. Market distortions arise and then a recession.
process of government manipulation of bank loans is simply one version of a
command economy, and command economies always fail.
In its analysis
and solution, the Congress is badly mistaken. It misapprehends the role of
money and lending. Money creation does not drive an economy forward. The
production of goods and services does. Non-inflationary money is a veil. An
economy more nearly works as follows. (1) People work to get the buying power
to buy things from others who also work. (2) The buying power is the real
goods they produce. (3) They use money to express the buying power they have
produced so as to avoid having to barter. In this system, prices adjust
mainly as a result of real demands and real supplies. This helps production
to be quickly adjusted to shifts in demand and supply.
In this scenario,
a consumer who gets a loan to buy something is getting an advance against his
future work product, which is the real source of his buying power. A business
that gets a loan is getting an advance with which to pay workers; the
business expects to repay the loan when workers buy the product it produces.
The loans and money that circulate facilitate the production-exchange
process. They do not cause it or give it its motive power. Real production
and exchange of real goods do that. Furthermore, the existing banks, the
central bank, and government money are not even needed to create the credits
that smooth the workings of a money economy. The people doing the
transactions can create new banks or create these credits themselves.
The latest report
of Barofsky’s office is here. The grand total of all government and
FED programs aimed at absorbing or supporting bad loans has now reached $23.7
trillion. This is $237,000 for each of the 100 million households in America.
This is government and the FED truly in panic mode and running wild. There
are frightened little men here who are doing all the wrong things. There are
23.7 trillion reasons here for buying gold.
powers of people left to their own devices is wondrous. They will create a
robust and growing economy. This is not at all where America is now headed.
We often hear the right words from officials about exit strategies, free markets,
lowering government deficits, and controlling inflation. But the actions are
all in the other direction. The budget plans for the future that point to a
greatly enlarged government only reinforce the existing huge expansion of
government into the business world.
In the space of
the last 12 months, the American political economy has drastically changed.
The government has taken over Fannie Mae and Freddie Mac, with their huge
debts. This places the government at the heart of the housing industry. The government
has taken positions in hundreds of banks. It has gotten involved in executive
compensation. It has gotten involved in bankruptcies of auto companies. It is
now on the receiving end of more requests for capital than ever from business
firms, both healthy and ailing. The FED has joined up with the government in
major fiscal actions and in allocating credit to selected firms and sectors.
The government has started to run unimaginably high deficits. One large
recession has altered the society dramatically, and it is not yet over.
America at this
time is not on a sustainable free market growth path. It may not have been on
such a path for a long time, but the shift away from it and toward an economy
that depends ever more heavily on government has made this even more evident.
showed that a government can reverse its policies, even if only in part, and
move an economy in a more favorable direction by removing burdens. Ludwig
Erhard has been lauded by none other than Alan Greenspan for his role in the
recovery of Germany and Europe after World War II. It takes courage,
firmness, and political savvy to make these changes. One cannot take naps and
leave matters in the hands of insubordinate subordinates who have other
America is not
going anywhere within the present political setup until it gets beyond its
benighted economists, its useless and shallow mainstream media, its
frightened authorities, its parochial Congressmen, and its ignorant leaders
Michael S. Rozeff is a retired Professor of Finance
living in East Amherst, New York. He publishes regularly his ideas and
analysis on www.LewRockwell.com .
Copyright © 2009 by LewRockwell.com. Permission to
reprint in whole or in part is gladly granted, provided full credit is given.