Having failed to
learn what causes depressions and how to treat them when they arrive, our
nation's leaders are steering us straight into a monetary catastrophe. Predictably, the major media voices are clinging
to the assurances of Keynesians, who see new wads of debt and paper money and
conclude that the good times are ready to roll
again; don't pay any heed to the
millions still looking for work.
Keynesians even tell us how we got into the crisis and what saved us. Paul Krugman speaks for many when he blames market deregulation for the meltdown and hails the Fed's printing press as our savior.
What does this
mean? It means we can laugh at rumors that the Fed's cheap credit brought on
the crisis. We can laugh even harder at the claim that Fed monetary pumping
will ensure an even greater disaster down the road. And we can save our
biggest laughs for that lucky guesser, Peter Schiff, whose knowledgeable
detractors laughed at him in 2006 when he predicted the current meltdown.
For many, it was
the government's tinkering with Glass-Steagall that
gave investors a free hand to commit evil — by allowing greedy mouths
to gorge themselves to the brink of self-destruction. Because those mouths
were so big, our leaders had no choice but to fleece taxpayers and
dollar-holders to save them. Once again, we were told, freedom in economics
became a recipe for disaster.
lovers, but rigging regulations to create a stupendous moral hazard does not
reflect the "influence of free-market ideology," as Krugman claims. Regulations are interventions, and
interventions are that seemingly benign collection of stepping-stones from capitalism to
socialism. The current
economic debacle is overwhelmingly a crisis of government meddling, not free
A Regulated Economy without State Coercion?
A free economy is
one that is — how to say this? — free. It is free of cronyism, favoritism,
handout-ism, protectionism, or anything else that amounts to using the state
as a means of living at the expense of others. If paupers or billionaires need help, they're required to get it
without picking the pockets of others.
In a free economy
the only role for force is the enforcement of property rights. Using force
for other means is a violation of the natural freedom of individuals. This is
what classical liberals meant by laissez-faire. A free-market ideology is one
that calls for a free market, not the massaging of one or two regulations out
of a constellation of a million.
But don't markets
need regulating? Of course. Markets in which the government hasn't turned
criminal regulate themselves without violating anyone's rights. If a bank
insists on practicing fractional-reserve lending, for example, and finds itself unable to meet depositor demands, it files for
bankruptcy, not a bailout. The free bank is thereby discouraged from creating
multiple claims to the same dollar. It cannot ask for a loan from its
friendly central banker because it doesn't have one.
A central bank
such as the federal reserve could not exist in a free market. Central banking
requires a monopoly of note issue, and monopolies — as grants of
privilege — require the enforcing arm of government. Through bank
competition and the threat of runs, a free market limits the tendency of
bankers to practice fractional-reserve lending, which is the root of the
fractional-reserve lending is profitable to bankers and government in the
same way that counterfeiting is profitable to counterfeiters, we find
ourselves saddled with a central bank to make sure the various costs of
expanding the money supply are passed on to the poor and middle class.
The idea that
central banks are independent from the governments that gave them life is a
bad joke. Through their purchase of government debt obligations, central
banks provide a convenient way for politicians to spend wildly on their pet
projects — whether it's welfare for seniors or wars overseas —
without having to raise taxes.
The hidden tax of bank inflation is perfectly suited to their ends. It gives the
impression that government is an endless source of largess, while shifting
the blame for crises and everyday higher prices onto governments' favorite
whipping boys, speculators and business people. By depreciating the currency,
bank inflation quietly takes wealth from our pockets and gives it to those in
on the racket.
existence of a fiat-paper money like federal reserve
notes precludes the possibility of a free market. "In no period of human
history has paper money spontaneously emerged on a free market," Jörg Guido Hülsmann
writes in The
Ethics of Money Production.
governments issue the stuff, they of necessity impose a "legal obligation
for each citizen to accept it as legal tender." At one point, paper
money certificates were "backed" by a certain weight of gold or
silver. But with widespread indifference to monetary issues, it proved easy
for governments to blame crises on the commodity backing rather than the
inflation of the notes. Governments outlawed the use of gold and silver as
money so they could inflate with minimal restraint.
Paper money, in
short, is not a market phenomenon; it comes into use only when the police
power of the state forces us to accept it.
Austrians on the Rise
in Foreign Affairs,
Harvard historian and bestselling author Niall Ferguson noted that the current crisis has made certain dead
economists look good, others not so good.
superficially this crisis seems like a defeat for Smith, Hayek, and Friedman,
and a victory for Marx, Keynes, and Polanyi, that might well turn out to be
wrong. Far from having been caused by unregulated free markets, this crisis
may have been caused by distortions of the market from ill-advised government
actions: explicit and implicit guarantees to supersized banks, inappropriate
empowerment of rating agencies, disastrously loose monetary policy, bad
regulation of big insurers, systematic encouragement of reckless mortgage
lending — not to mention distortions of currency markets by central
The Austrians, in
Ferguson's view, were "the biggest winners, among economists at
least," because they "saw credit-propelled asset bubbles as the
biggest threat to the stability of capitalism."
Austrian economics, we need to rein in the central bank. But what does our
2008 Nobel-prize-winning economist say about bubbles? In a New York Times
editorial of August 2, 2002, Krugman wrote,
To fight this
recession the Fed needs more than a snapback; it needs soaring household
spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan
Greenspan needs to create a housing bubble to replace the Nasdaq
On the other
hand, Ron Paul, on September 10, 2003, addressed the House Financial Services
Committee on the moral
hazard of the federal government's policy of providing special privileges to
the GSEs, Fanny Mae and Freddie Mac, and the growing credit bubble in
artificially-created bubbles, the boom in housing prices cannot last forever.
When housing prices fall, homeowners will experience difficulty as their
equity is wiped out. Furthermore, the holders of the mortgage debt will also
have a loss. These losses will be greater than they would have otherwise been
had government policy not actively encouraged over-investment in housing.
Paul warned about
the danger of bubbles while Krugman was campaigning
for their creation. Paul, an adherent of the Austrian School, believes there
is no such thing as a free lunch. Krugman, the
quintessential Keynesian, argues that there is, at least in a depression. He also says that "if politicians refuse to learn from the
history of the recent financial crisis, they will condemn all of us to repeat
But if it's
history's lessons we should imbibe, why have politicians and their pundits
ignored the lessons of the 1920–1921 recession? Let me guess: maybe letting the market fix what
government broke isn't an option they can bring themselves to embrace, even
if it's the only way out