The banking collapse is all your fault

The banking collapse is all your fault

It’s time the general public took responsibility for their ignorance and greed, says DAVID COX

So who is really to blame? Greedy bankers, witless shareholders, dozy directors or lazy journalists? It is always nice to find someone to blame. But beneath the ruins of our financial system lurks a culprit more guilty than any of these. Us.

The so-called government rescue plan is a foolish mistake. Rotten institutions should be swept away, and those who chose to invest in them should pay the price. Yet we, the people, find this harsh reality unacceptable. Politicians know they must do something, or we shall vote for someone else.

So, institutions that have gambled and lost must be propped up, and their shareholders saved from the wipeout that should be their due. Depositors must have their savings preserved in full, however greedy they may have been.

It is happening this way because we expect the government to safeguard us from the

consequences of our actions, whether these take the form of over-borrowing, over-spending or even over-eating. We are no longer responsible for our own decisions: our advisers must give us foolproof advice; regulators must eliminate the risks of the marketplace. If we buy a pup, we have been 'mis-sold'. We have become infants. When we fall over, we insist that our leaders must pick us up.

But they cannot. All they can do is postpone pain, divert it and in the process magnify it. If taxpayers' enforced investment in our bombed-out banks was likely to pay off, it would not have been necessary. Instead, it seems bound to result in big tax increases that will deepen the impending depression. These will be followed, very possibly, by hyperinflation. The first will penalise the industrious, while the second will ruin the thrifty. In the end, we shall all pay a much-enhanced price for our own folly.

Maybe it serves us right. If we are lucky, however, it may at least teach us to grow up.

Schiff: There's No Pain-Free Cure for Recession

There's No Pain-Free Cure for Recession

Belt-tightening is required by all, including government.

By PETER SCHIFF

As recession fears cause the nation to embrace greater state control of the economy and unimaginable federal deficits, one searches in vain for debate worthy of the moment. Where there should be an historic clash of ideas, there is only blind resignation and an amorphous queasiness that we are simply sweeping the slouching beast under the rug.

With faith in the free markets now taking a back seat to fear and expediency, nearly the entire political spectrum agrees that the federal government must spend whatever amount is necessary to stabilize the housing market, bail out financial firms, liquefy the credit markets, create jobs and make the recession as shallow and brief as possible. The few who maintain free-market views have been largely marginalized.

Taking the theories of economist John Maynard Keynes as gospel, our most highly respected contemporary economists imagine a complex world in which economics at the personal, corporate and municipal levels are governed by laws far different from those in effect at the national level.

Individuals, companies or cities with heavy debt and shrinking revenues instinctively know that they must reduce spending, tighten their belts, pay down debt and live within their means. But it is axiomatic in Keynesianism that national governments can create and sustain economic activity by injecting printed money into the financial system. In their view, absent the stimuli of the New Deal and World War II, the Depression would never have ended.

On a gut level, we have a hard time with this concept. There is a vague sense of smoke and mirrors, of something being magically created out of nothing. But economics, we are told, is complicated.

It would be irresponsible in the extreme for an individual to forestall a personal recession by taking out newer, bigger loans when the old loans can't be repaid. However, this is precisely what we are planning on a national level.

I believe these ideas hold sway largely because they promise happy, pain-free solutions. They are the economic equivalent of miracle weight-loss programs that require no dieting or exercise. The theories permit economists to claim mystic wisdom, governments to pretend that they have the power to dispel hardship with the whir of a printing press, and voters to believe that they can have recovery without sacrifice.

As a follower of the Austrian School of economics I believe that market forces apply equally to people and nations. The problems we face collectively are no different from those we face individually. Belt tightening is required by all, including government.

Governments cannot create but merely redirect. When the government spends, the money has to come from somewhere. If the government doesn't have a surplus, then it must come from taxes. If taxes don't go up, then it must come from increased borrowing. If lenders won't lend, then it must come from the printing press, which is where all these bailouts are headed. But each additional dollar printed diminishes the value those already in circulation. Something cannot be effortlessly created from nothing.

Similarly, any jobs or other economic activity created by public-sector expansion merely comes at the expense of jobs lost in the private sector. And if the government chooses to save inefficient jobs in select private industries, more efficient jobs will be lost in others. As more factors of production come under government control, the more inefficient our entire economy becomes. Inefficiency lowers productivity, stifles competitiveness and lowers living standards.

If we look at government market interventions through this pragmatic lens, what can we expect from the coming avalanche of federal activism?

By borrowing more than it can ever pay back, the government will guarantee higher inflation for years to come, thereby diminishing the value of all that Americans have saved and acquired. For now the inflationary tide is being held back by the countervailing pressures of bursting asset bubbles in real estate and stocks, forced liquidations in commodities, and troubled retailers slashing prices to unload excess inventory. But when the dust settles, trillions of new dollars will remain, chasing a diminished supply of goods. We will be left with 1970s-style stagflation, only with a much sharper contraction and significantly higher inflation.

The good news is that economics is not all that complicated. The bad news is that our economy is broken and there is nothing the government can do to fix it. However, the free market does have a cure: it's called a recession, and it's not fun, easy or quick. But if we put our faith in the power of government to make the pain go away, we will live with the consequences for generations.

Mr. Schiff is president of Euro Pacific Capital and author of "The Little Book of Bull Moves in Bear Markets" (Wiley, 2008).

Is the Chinese economy running out of steam?

From Gerard Jackson's Brooke's news.

Is the Chinese economy running out of steam?

Gerard Jackson

BrookesNews.Com

Monday 22 March 2010

There are signs that China's economy could be sliding into recession. The reason these signs are being largely ignored is because virtually all of the economic commentariat believe the fallacy that consumer spending is what drives an economy when in fact it is entrepreneurship that drives it and savings that fuel it. This fallacy has led some commentators to assert that China is entering a mature phase in its economic development which will result in Chinese savers buying more Chinese goods which in turn could raise real wages.

This is appalling nonsense. Any classical economist would have quickly pointed out that it is the demand for investment goods and not consumer goods that intensifies the demand for labour and hence raises real wages. Moreover, such an economist would have been just as quick to stress that loose monetary policies are not only inflationary they also "derange" production. The second observation is of critical importance.

These economists noted how manufacturing not only went into recession first but that heavy industry also suffered the greatest contraction in output relative to the consumer goods industries. Therefore, to the older economists manufacturing was something of an economic bellwether, particularly the capital goods industries. (Economic commentary is so bad in Australia that one cannot even get this basic fact publicly discussed, not even by our so-called think tanks.)

There is no doubt that Chinese manufacturing is slowing (obviously a slowdown always precedes a contraction) which is described as a rate of reduction in expansion. However, excess capacity ("derangement") "in some industries" is making itself felt. This is not surprising given that the country probably has the largest steel producing capacity in the world, producing about 50 per cent of global output in 2009. Yet no one is asking whether this capacity is necessary.

Commentators are putting the emergence of excess capacity down to an attempt by the People's Bank of China to cool the economy by reducing the rate of inflation. (In China the central bank proposes and the government disposes.) What is not being asked is why the phenomenon of excess capacity is not uniform throughout the economy. The answer is to be found in the fact that money is not neutral. If it were then inflation-created malinvestments would not be possible because price changes would be uniform.

Therefore the appearance of excess capacity is signalling the emergence of malinvestments that must at some point be liquidated. Now these malinvestments are the creation of a reckless monetary policy which some are assuring us that Beijing is trying to reverse. When it comes to monetary policy — which includes monetary theory — Beijing is every bit as clueless as Washington and London. According to official PBC figures M1 jumped by 25 per cent from January 2009 to December 2009.

It's reported that in an effort to maintain economic growth and prevent "overheating" at the same time the government has curbed bank lending while also ordering the banks to increase their reserves. This is dangerous nonsense. Genuine economic growth cannot cause "overheating" which is another term for inflation. Those who argue otherwise are spouting rubbish. (One should have thought that some of these people would have noticed by now that this fallacy only appeared after Keynesian policies left us in a permanent state of inflation.)

If the present trend continues manufacturing will start to contract and the recession will then rapidly spread down China's production structure. Of course, the government can once again push down on the monetary accelerator. But in a sense this is where monetary and capital theory combine to produce an unstable and highly explosive mixture.

There is absolutely no way these malinvestments can be 'reversed'. Liquidation is the only solution for the great majority of them. Even trying to hold him them in check would require greater and greater quantities of monetary injections. Hence any relief would be only temporary until the point is reached where inflationary pressure is considered so great that the government is left with no alternative but to slam on the monetary brakes.

Gerard Jackson is Brookesnews' economics editor