Friday, March 12, 2010

In Defence of Liberty: Joe Hockey Speech to Grattan Institute

From Joe Hockey. One correction. The Liberal Democratic Party is the other political party in Australia advocating Liberty. We are also advocating low taxes and a limited role for Government. Definately not a Liberal concept.


Since 1923, the 1,500 branches of the Returned Services League have commemorated their legacy under the maxim, “The Price of Liberty is Eternal Vigilance”.
This was the motivation that led Australians to go to the other side of the world to join wars against totalitarianism. And today we are waging war against terrorists and religious fanatics who threaten the values we believe are essential for human dignity and welfare.
The struggle for liberty has never been without cost.
Even for our generation it demands a price. Sometimes this is a national struggle, but often it is the efforts of individuals…who will ever forget that young man in Tian an Men Square who, with no thought for his own wellbeing, put himself in the path of a 50 tonne tank – all in the quest for democracy? And the Iranian protestor, Neda Agha-Soltan, whose death was beamed by YouTube around the world came to symbolise freedom in Iran.
It takes more than courage to do something like that – it takes conviction. The deep conviction that liberty is essential for achieving our human aspirations and for creating a better society. The deep conviction that freedom is worth the ultimate price that some of us may be asked to pay.
Tonight, I want to reflect on that struggle – to bring to mind our own young soldiers still in Iraq and Afghanistan, who we are asking to make a stand for freedom – and to stress that defence of liberty must remain at the centre of public policy debate in Australia.
It starts with what you believe in. In the Western tradition there has always been a choice between founding principles for societies. On the one hand there is the recognition and harnessing of the power of the individual. On the other there is the model of what Plato called “philosopher kings”. These are the people who believe they know what’s best for us and are better qualified to rule than ordinary folks like you and me.
I believe that we are equal in our worth, if not necessarily in our talents. I have a role, you have a role, each of us has a role to play in the process of our own governance. This is what liberty means. This is what it means to be free.
It is no coincidence that the words “liberty” and “liberalism” come from the same root – the Latin word for “free” being “liber”. That is why you find that the core values of any liberal are personal liberty, political liberty, economic liberty, social liberty and international liberty. These values are not only timeless and enduring, they’re not negotiable.
Years ago I was introduced to the political party that is called Liberal. Its founder, Robert Menzies was very clear about their commitment to liberty – individual liberty as much as social liberty. He said:
“We took the name Liberal because we were determined to be a progressive party, willing to make experiments, in no sense reactionary, but believing in the individual, his rights and his enterprise…”
I was ready to join such a party because in my younger days I had given great thought to the political philosophy that I found most compelling.
My mother has been a long time Liberal supporter. She came from a family drenched in the values of free enterprise, equality between the sexes and God, King and country. While my father shared most of those values, his political allegiances were initially different. After he migrated to Australia from Palestine in 1948, he felt indebted to the Prime Minister of the day, Ben Chifley and his Labor party – largely because these were the people who had provided him with this opportunity for a new life.
This mixture of family political allegiances left me in a kind of political middle ground. So at Sydney University, when I was elected as President of the Student Representative Council, I stood as an independent – something that was almost unheard of at the time. Here was a political novice in a role that had spawned a number of political leaders, so as you might imagine, I was courted by both sides of politics. The one thing I was sure of was that I had to be comfortable with the philosophy of any political movement that I was to join.
Fisher Library became my best friend as I rummaged through the old dusty book stacks in search of political enlightenment. I would like to think there was a moment of epiphany but in the end there was one writer who stood out to me – and that was John Stuart Mill. Sometimes you read something and just think “this guy makes sense”.
It is a continual source of inspiration to me to reflect on those men and women who, without resort to force or the trappings of political power, but through words alone, can influence their generation and those that follow.
Mill is one of those people. Always clear, often difficult, usually provocative, among the earliest defenders of the equal rights of women, minorities and subjugated peoples. He was a champion of fair, free and open elections. Himself a Member of Parliament and a political activist, Mill was above all an unrelenting champion of the principle that personal liberty was the essential element of a free and decent society.
His famous statement of liberal principles is that:
“the only purpose for which power can be rightfully exercised over any member of a civilised community, against his will, is to prevent harm to others. His own good, either physical or moral, is not a sufficient warrant.”
And just in case we have a tendency to gloss over words like “freedom” and “liberty”, Mill defines it in the most compelling way:
“The only freedom which deserves the name is that of pursuing our own good in our own way, so long as we do not attempt to deprive others of theirs, or impede their efforts to obtain it.”
Isn’t this what we all want? That we be allowed to follow our own dreams, have our own beliefs, live our own lives – as long as we don’t harm others or limit their freedom?
I believe that individual liberty must be the foundation of our society, even when it clashes head on with the perceived communal good. That belief rests on John Locke’s positive view about human nature – that there is an essential good, rationality and an innate desire to co-operate in all men and women. I share his conviction that happiness is achieved when individuals are permitted to flourish in ways of their own choosing, according to their own conscience and beliefs.
On the other side of the coin, though, individual liberty is based on an acceptance that we are all fallible – that there is no certainty that any one person or any one society knows “the truth”. It is only through diversity, debate and discourse that we can come closer to understanding what is right.
Mill recognised this, too. His said that individual rights went beyond simply stating what governments could not do. He envisaged a positive role for government in supporting individuals to fulfil their aspirations, particularly through the provision of education, which he saw as a prerequisite for a society that embraced liberty.
When Australians talk about a ‘fair go’ and we use expressions like ‘standing on your own two feet’, we are reflecting those values first articulated by Mill. These are essential for the pursuit of liberty.
I don’t think it is too much of a generalisation to describe the history of the last 500 years as the ceaseless struggle for greater individual liberty. While we think that this is a battle that has largely been won in the West, it wasn’t always like this.
Apart from some Celtic societies, which could be described as having political systems based on the recognition of individual rights, our concept of individual liberty was alien to most Europeans during the Dark Ages. While some nations sought to limit the powers of their monarchs, or wanted to establish legal rights for some of its citizens, genuine freedom was remote for the vast majority of Europeans.
The institutions of State – which included the Church – ensured that the flame of individual liberty was never lit. Dissent, either political or religious, was crushed – often ruthlessly as was so dramatically demonstrated during the Inquisitions. The Church and its earthly princes conspired to maintain the orthodoxy of their beliefs and the primacy of their own interests and the powers of hereditary authoritarian governments.
It was the struggle for religious freedom that became the first international battleground. Erasmus opened the door and others like Luther and Calvin followed – although both the latter two proved to be as intolerant of dissent as the Church they sought to destroy.
It is perhaps hard for us to imagine today in Australia what this battleground of ideas was like in Medieval Europe. Just imagine the author of the God Delusion, Richard Dawkins being burnt alive at the stake for his views and his books banned? I should point out that even today we are seeing similar sorts of brutal intolerance in some radical Islamic countries.
Fortunately, it was the European Age of Enlightenment, the quest for knowledge that science provoked and the battle against absolute monarchs that inspired philosophers of this period, like John Locke, and that led to an appreciation of individual liberty in its broader context.
Most of us have never studied a book of philosophy, let alone one from the 17th Century. But it is instructive to note just how much of an influence someone like Locke had on the way we think in the Western world today.
Among other things, Locke is regarded as a father of liberalism. His optimism about human nature was in such sharp contrast to the Hobbesian view about mankind. Thomas Hobbes, you may recall, had a rather pessimistic view of life as “solitary, poor, nasty, brutish, and short” without a strong central government. Locke, on the other hand, called for government to be based on freely given consent, personal liberty and private property rights. It was a view that was to influence and inspire Thomas Jefferson and those who drafted the United States’ Declaration of Independence, Constitution and Bill of Rights. Locke’s philosophy continues to inspire political leaders who are dedicated to freedom and democracy.
It took the horrors of two World Wars for something of an international consensus to emerge about human rights that were to become regarded as universal. Australia played a notable part in the development of those standards drawing on its own unique history. Our nation moved almost seamlessly from autocratic colonial rule to a liberal society without the violence and turbulence that marked the history of both America and most European nations.
I think we can all recognise the fundamental difference between those societies based on individual liberty and those that reject that foundation principle.
On the one hand you have societies that are free and open. The press is free and the judiciary is independent. Elections are free and regular. An open mind and spirit of enquiry are fostered. The arts and sciences flourish and innovation is encouraged. Multiculturalism, diversity and tolerance are hallmarks of a liberal society. The existence of dissent and debate are regarded as positive signs. Authority is respected only when that respect is earned. It is from this that economic and entrepreneurial activity arises in a way which, over time, raises the living standards and dignity of all citizens.
And on the other hand, you have societies that are not based on individual liberty. In those societies conformity and control are the guiding principles. The alleged good of society (usually only code words for the benefit of the ruling elites) are extolled above the rights of individuals. There may be art and science, but there is little creativity. Dissent leads not to debate, but to detention. Economic activity is centrally controlled and usually stagnating. Wealth is created, but only for the few.
The way I see it, the choice is black and white…
Freedom for each and every one of us.
Or freedom for an elite few who want to tell the rest of us what to do.
In the Federal Parliament I represent the only political party that was established to advance the cause of liberty. It is a Party whose purpose is to advance the rights and liberties of the individual. While liberalism is a political philosophy that is arguably broader than just the concepts of liberty and freedom, they are the enduring principles at the heart of what modern liberals believe. Liberty is the foundation stone of liberalism.
The Liberal Party of Australia was formed just over 65 years ago. It was not the first Australian political party to bear the name Liberal and its roots lay very much in the liberalism of Alfred Deakin and the political movement he helped establish in the years following Federation.
The history of the Liberal Party has, however, been somewhat different to the intention of its founders. The Westminster system of parliamentary democracy tends to encourage the two-party system that has largely dominated the history of the Australian Parliament. The result has been that the Liberal Party represents, to use one of John Howard’s expressions, a “broad church” of the political spectrum. We are a party that brings together conservatives and liberals under the one banner.
Menzies summarised the liberal approach well when he spoke at the formation of the Liberal Party and commented on the Party’s support for private enterprise using words that had been first used by Deakin:
“If the expression connotes ‘each for himself and the devil take the hindmost’, with no provision against depressions, with big monopolies running free and injuring the consumer, with an absence of proper government controls and government liabilities, then it is something which Liberalism cannot support.”
It is this constructive role for government that distinguishes the liberal from the libertarian.
Liberalism, in placing primacy on the individual, also stands in contrast to the philosophies of conservatism, socialism and communitarianism. They tend to share the belief that society and its institutions are the first and most important aspects of human existence and that individuals are always subject to some larger interest such as the alleged “community” or the state itself.
Liberalism not only confers the rights of individual liberty on a nation’s citizens, but it also demands that citizens accept their civic responsibilities.
I am however concerned that some of the liberties we take for granted in Australia are being eroded by the actions of government.
I fear that step-by-step and in a way that barely registers in the consciousness of most people, we are losing some of the protections against the arbitrary and interfering actions of the State.
Some of these changes are driven by the community itself. It is hard to empirically quantify, but I am concerned that our society is becoming less self-reliant and placing more store in government to solve our problems.
Again, Mill warned us against this:
“some, whenever they see any good to be done, or evil to be remedied, would willingly instigate the government to undertake the business…”
We see this attitude in so many areas of Australia today. If a company goes bust, then the government should save it. If we are eating unhealthily, then it’s the government’s fault for not regulating fast-food outlets rather than the problem of those who choose this diet. If some of our children are becoming delinquent, then it’s our schools to blame and not their parents. If people are drinking too much then it’s up to the government to change drinking hours and close liquor outlets-even as was suggested on Australia Day!
Such attitudes are encouraged by governments who want to be seen to be acting in response to the twenty four hour media cycle. But in many cases they should act through education and persuasion rather than more regulation. But by expanding those aspects of society that come under the control of government we ultimately diminish our own liberty.
My commitment to liberty as a principle is not just a matter of pragmatism – an understanding that liberty “works” and non-liberty does not. It has a deeper attachment for me. If I may be self-indulgent for a moment, and quote my own words, when I spoke In Defence of God I said:
“For us in Australia we owe our liberal democratic tradition to the understanding that comes from believing in the essential worth of every other human being. It is the message of the Golden Rule, to love thy neighbour as thyself, and it is inspired by the understanding that we are all the children of God.”
However everything is not all rosy and theoretical. I perceive a number of significant threats to the maintenance of liberty today. I am going to highlight three areas that illustrate our complex and ongoing struggle in defence of liberty. First, are the threats to our natural environment, second, the challenges facing the international community and third, infringements of liberty by our state and federal governments.
Whatever people may argue about global warming, international whaling, deforestation or anything else, we need to observe the precautionary principle – we cannot indefinitely plunder the resources and alter the environment of the planet without consequence.
We are merely transitory custodians of this planet and to deplete our natural environment leaves future generations with an impaired quality of life.
Food security, energy security, fresh water and clean air are surely necessary for the maintenance of a decent quality of life.
Liberty cannot flourish amid chronic and debilitating poverty. Lifting people out of poverty has been one of the mightiest triumphs of an economic system predicated on personal liberty and the ability to create personal wealth. Aspiration must be rewarded.
It is my strong belief that only through increased wealth creation and innovative renewable energy technology will we be able to move our civilisation towards environmental sustainability.
Equally, liberty is essential for a society that must meet head on the challenge of complex global disease. From where have the great advances in medicine and public health come? They have come from free societies where the liberty of people to think and experiment has led to global benefits. It is no coincidence that the most significant advances to both eradicate and treat HIV have come from the West.
The contribution of the West is not limited to Google, Coke and Hollywood however. Freedom and liberty empower innovation and investment. The goals and achievements we have are much desired in countries. Globalisation is a derivative of the success of liberty.
Globalisation also represents the great potential of economic liberty. The breakdown of tariff walls, which restricted individuals and companies from trading, the internationalisation of the labour force, and the reform of failed centrally controlled economies has delivered wealth to large portions of the world’s population.
We rightly paused during the recent financial crisis to reign in the excesses and address some of the flaws in the global financial system, but the shock of recent events has not diminished my faith in either market forces or the positive power of a globalised economy.
Wealth should never be the sole indicator of progress. However globalisation, and the economic growth it is delivering to developing nations, is the most effective poverty reduction program in operation today. For example, between 1990 and 2015 the World Bank estimates that the number of people living on less than $1.25 a day will halve – from 1.8 billion people to 950 million people.
Internationally we have come to an understanding, arising from the horrors of two World Wars and genocidal experiences in places such as Cambodia and Rwanda, that free nations have a responsibility to stand up for the liberty of all oppressed and threatened peoples across the globe. Interventions in East Timor and Kosovo were expressions of the determination of free nations to ensure the liberty of others. Liberty and freedom are not merely Western concepts or constructions – they are universal.
Of course today the immediate challenge is our response to the threat of terrorism.
This is a global and domestic threat. The rise of religious extremist movements and their expressed belief that only violence can lead to justice – a proposition refuted by the examples of Ghandi, Mandela and Martin Luther King – represents a clear challenge to societies. Our response should be to enhance and expand liberty not to curb or curtail it. This is as important locally as it is globally.
As a liberal, a legislator and a lawyer, it is the Anti-Terrorism laws, enacted by a government of which I was a member, that has given me great cause to reflect on our individual rights.
Are there occasions I ask, in which the welfare of the majority warrants the restriction of the rights of the few? It is one of the challenges that we face in seeking to apply Mill’s principles.

In this case, the Australian government – like its counterparts elsewhere – was responding to terrorism threats that potentially put the lives of thousands of people at risk.

But did the solution also have the potential to limit the freedoms we hold so precious?
Under normal circumstances, much of the powers conferred on enforcement agencies by the Act are ones that I would be horrified to see any democratic government advance.
In particular, I make mention of “preventative detention” without charge that severely limits access to legal assistance or even outside communication; “control orders” that limit movement and may be in force for up to ten years; and expanded police stop, search and interrogation powers.
However, I reached the conclusion that the threat to liberty of so many justified the actions we took against so few. When effectively the whole polity is under threat from attack by people determined to bring it down, then the government’s primary responsibility is to secure the safety of its citizens.
These are war-time measures. If the nation was under immediate threat of invasion, I suspect that debate and concern would have been more muted. However, the war against terrorism is far less tangible. It’s like a guerrilla war where the enemy is not as easily discernible.
What is important to me is that the restrictions on individual liberty contained in our Anti-Terrorism legislation do not become permanent. The Act includes a sunset clause for some of its more draconian elements, which is essential. There is a compelling case for those sunset clauses to be something less than their current ten years.
But what if the war against terrorism is to last a life time? As the government’s White Paper released last month concluded, there is no end point in sight. Do these laws effectively stay on the statute books forever because the threat of terrorism will persist for generations to come?
It is my own view that the loss of individual liberty that these laws represent cannot stand for all time. What we must do is objectively, dispassionately and regularly review their efficacy, preferably in a bipartisan way. If we find the laws have not been used, or have not been needed, then they should be repealed. I would not find it acceptable to declare a situation an “emergency” one day and then declare it “permanent” the next.
And this brings me to other threats to our freedoms that are much closer to home. Some of these come from our own political leaders. They may seem trivial when you look at them individually, but add them all up and you see the liberty that we’ve fought so hard for starting to fray at the edges.
For example, there was a recent suggestion that the drinking age be raised to 21.
Yes, we have a problem with binge drinking and yes, this should be a cause for concern. But if you are old enough to fight for your country, if you are old enough to vote, if you old enough to be tried in a criminal court as an adult, then you are an adult and the concept of telling someone who is 18, 19 or 20 that they are prohibited from consuming alcohol is an infringement of individual liberty that goes way too far.
When the Police in New South Wales suggested banning the sale of full strength alcohol on Australia Day, not one politician bought into the debate despite this being an obvious direct attack on liberty. It was not accepted because it was clearly a ridiculous proposal. But few people hear the Police call for less regulation and greater personal responsibility.
Similarly, we see the current Federal government seeking to introduce laws that will effectively censor the Internet. Of course we all want to stop unlawful material being viewed on the Internet. There are appropriate protections that are in place for that. But I have personal responsibility as a parent. If I want to stop my children from viewing other material that I feel is inappropriate then that is my responsibility to do something about it – not that of the government.
What we have in the government’s Internet filtering proposals is a scheme that is likely to be unworkable in practice. But more perniciously it is a scheme that will create the infrastructure for government censorship on a broader scale. Protecting liberty is about protecting freedoms against both known and future threats. Some may argue that we can surely trust a democratically-elected government in Australia to never try to introduce more wide-spread censorship. I am not so sure!
We would all like to think that liberty in Australia does not need defending however warning bells must surely have started clanging when the South Australian Labor government sought, in a ham-fisted and ultimately unsuccessful way, to actually censor political bloggers on the Internet in the lead up to their current election.
Perhaps such proposals for winding back liberty are not surprising from a Labor Party that argues for an ever-expanding role for government in the affairs of our nation and our personal lives.
I don’t mean to suggest that there is no room for government intervention and regulation. There is probably a legitimate debate to be had about the controls (for example via the classification system) placed on extremely violent video games. I heard a compelling interview on ABC radio recently on this subject. Dr Wayne Warburton, a psychologist at Macquarie University was explaining how repeated exposure to violent games can influence the behaviour of their users. In contrast to watching a violent movie on the odd occasion, spending hours embedded in a game – actually “pulling the trigger” and “killing” virtual people that are now so realistic that fantasy and reality have merged – can rewire our brain.
What concerns me about these games is that they, at the most benign end, make us immune to violence or, worse still, encourage us to think of violence as a legitimate tool. Fundamentally, the loss of respect for human life and dignity that these games encourage becomes a threat to the respect we have for individual liberty.
In other areas such as DNA testing, data matching, credit history and mobile phone tracking we must be ever vigilant to prevent the punishment of the few becoming the entrapment of the many.
Huxley’s Brave New World morphs from fiction into frightening fact – all by little increments and all in the name of just a little more security. But as Benjamin Franklin said:
“those who would give up essential liberty to purchase a little temporary safety deserve neither liberty nor safety.”
In addition to this, we should be concerned about the rapid proliferation of CCTV cameras across our cities. Whilst they may be acceptable in crime hot spots do we really want to go down the path of Great Britain and find that it is impossible to travel any street without being recorded by the government or the police on video?
Even in my local area CCTV was set up to protect the welfare of revenue raising parking meters from vandals, but they have inadvertently provided a viewing platform of the local community going about its business.
Even when they should be helpful such as during a recent bombing of TIO offices in Darwin, the Police were allegedly using the cameras for inappropriate and unrelated purposes.
In every State and Territory there is an endless and rarely challenged demand for expansion in police powers – taken to extremes in Western Australia with a proposal to allow virtually unrestricted stop and search powers for police. I understand that similar proposals have also won favour in Victoria. Surely the Australian interpretation of liberty extends to the right of an individual to go about their daily business without being subject to a random body search by Police. The Police do not have to declare a reason for the random body search. In my view this goes too far.
Finally, I wanted to briefly touch on the issue of a Bill of Rights. The government has before it the report of the Brennan committee which recommends a Human Rights Act.
The Federal Coalition has indicated its opposition to such a Bill, a position I support.
My concerns about a Human Rights Act lay in the power and authority that such an Act would give to the judiciary. Such responsibilities would be both undemocratic and ultimately undermine the independence of our Courts.
I referred earlier in my speech to the conflict that often occurs between different human rights. Many, if not all, involve contestable propositions that fall outside the usual role of judges to interpret the law through the prism of legal principles – they are essentially political rather than legal judgements. For example, the Courts could be asked to judge whether a law that bans tobacco advertising infringes free speech. This is not a legal issue but is one that should fall within the responsibility of democratically elected legislators to determine.
Judges are not elected, they do not necessarily represent the diverse range of views in society in the way that an elected Parliament can, and they are not subject to the scrutiny and accountability of elected officials. You will, very appropriately, never find judges fronting door-stops or public meetings to justify their decisions.
I also fear that by burdening the Courts with such a role that work will undermine the integrity and independence of the judiciary. I am a true believer in the separation of powers.
If Courts are making findings on contestable and essentially political issues, politicians and those in the community who support the actions of the Parliament will find themselves criticising their findings. Unwittingly, judges will find themselves players rather than arbiters and be the subject of the full weight of public opinion and sanction.
There are better ways to guarantee human rights.
Fundamentally, our institutions are sound and those features of the Australian polity that I referred to earlier guarantee that we can and do, by large measure, ensure that human rights are protected.
Ultimately it is what beats in the hearts of Australians that forms the best protection of all.
Our desire for a fair go. Our healthy scepticism. Our belief in self reliance, diversity and our multicultural society are the values that have guided Australia’s development. They cannot be taken for granted. It is the duty of us all to ensure that every new generation of Australians – whether native born or recently arrived – share those ideals.
It is the fundamental duty of governments, parliaments, places of learning, and our civic and cultural institutions and for us as fellow citizens to fight to maintain the fire of liberty for which our Diggers fought.
And that is why it is right for our veterans to remind us that the price of liberty is eternal vigilance.

Thursday, March 4, 2010

Coles boss Richard Goyder slams WA trading regime as 'an absolute joke'

This is good from a business executive who should know:


Coles boss Richard Goyder slams WA trading regime as 'an absolute joke'
WESFARMERS boss Richard Goyder has slammed WA's restricted trading hours as "an absolute joke" costing jobs and forcing customers to pay higher prices.
Speaking today at the Chamber of Commerce and Industry WA's ``In Support of Free Enterprise'' breakfast Mr Goyder said Wesfarmer's ownership of Coles and Bunnings introduced him to retail trading hours in WA and allowed him to open all guns on WA's laws which he claimed were ``an absolute joke''.
``The laws reduce employment, demand customers pay higher prices and serves the interests of a few,'' he said.
``Yes, it is competition to Coles but in the spirit of free enterprise, bring on the competition.
``Bunnings has a ridiculous situation of  being able to sell flat-pack kitchens on Sunday which are on display alongside electrical goods for the kitchen such as ovens and rangehoods. But the law says we can't sell you the electrical stuff.
``People can have a meal on Saturday on a sidewalk in Perth but if they have alcohol, they are told to move on.
``And do you know what really gets me - someone is paying people to go around and patrol this type of activity. Give me a break!''
Speaking about Australia's economic future lies in less government intervention and a greater emphasis on free enterprise principles.

He said that without free enterprise, WA citizens would not enjoy their ``marvellous'' lifestyles.

``We have living standards second to none,'' he said.
``We have excellent railways and roads and schools and  hospitals and we have a society that is very innovative - all enabled because we have free enterprise, not barriers.
``I can't think of a better place to live.''
Mr Goyder, who lived in Sydney from 1986 to 2002 before returning to WA, said he revisited NSW recently to see a friend who was in hospital.
``I think NSW is a state in decay,'' he said. ``The hospital in Sydney was like something from the third world.
``We have to be very careful this doesn't happen to WA.
``We need to ensure we have healthy businesses. We as businesses insist on exporting to free enterprise markets because we know that those markets will attract capital.''
  He said he had returned from a recent holiday with his family at Rottnest and said sections of it were ``run down'' and it ``was a good example where free enterprise could do a better job that public ownership''.
``Free enterprise is described as the freedom of private business from state control,'' he said.
``It is often maligned but is the only economic system that has delivered high rates of economic growth, standards of living and life expectancy for its communities.''
Mr Goyder used the example of New Zealand which, in 1950, had the world's third best GDP and had a strong economy.
``In 1980, after 30 years of government control, it was down to the 22nd in the world,'' he said.
``Then, David Lange stepped in as prime minister and restructured the country, deregulated it and now New Zealand is in the world's Top 10 for GDP per capita and in the Top 5 for life expectancy.
``I think that's a really good example.''
The CCI's discussion paper, presented by the chamber's chief executive James Pearson, urged that the Federal and State Governments should not lose sight of the benefits of a free enterprise economy.
``Some politicians are tempted to roll back the economic reforms that in recent decades have helped make this country one of the best places in the world to live and do business,'' Mr Pearson said.
``This must not be allowed to happen.
In the paper, Mr Pearson said: ``There is no role for government in directing economic activity in an effort to increase wealth and living standards.''

``The government itself is not able to generate and increase wealth within an economy - it is merely able to redistribute wealth.''
Mr Pearson said the free enterprise system allowed Australia to ``adapt, respond and innovate'' in response to last year's global financial crisis.
He said our structural reforms had been critical to the Australian economy's ability to respond to changing economic conditions, such as the Asian financial crisis of the late 1990s and the recent GFC.
``To date, the impact of the GFC on the Australian economy has ben less severe than the recession of the early 1990s which saw the economy shrink and unemployment rise in excess of 10 per cent for more than two years,'' he said.
``A free enterprise system provides incentives to those who work hard and take risks.
``If these incentives are removed by introducing greater restrictions, the wealth and job-creating capacity of the economy will be significantly diminished.''

Wednesday, March 3, 2010

Stephen King: Staring at a new age of austerity

At this stage, we can't be sure we haven't been looking at a phantom recovery
As I glanced through the weekend press, I detected a growing sense of envy. The UK economy is still struggling to pull its way out of its recession while the US economy, apparently, is back to its bouncing best. Certainly, the numbers from the final quarter of last year seem to support this view. The UK economy expanded at a meagre 0.3 per cent rate, after a small upward revision, but the US economy managed to spurt ahead at a 5.9 per cent rate. What do US policymakers know that our own domestic policymakers have yet to discover?
In truth, they don't know very much more. The US numbers are "annualised". They express the quarterly growth rate as if it were to be repeated through a year as a whole. The actual percentage change on the previous quarter, consistent with the UK data, was 1.4 per cent. Admittedly, this is still a whole lot better than the UK managed, but the gap when properly measured isn't quite as big as the headline numbers suggest.
Delving into the details of the two releases, one big similarity is consumer spending where, in both nations, households remain lethargic. True, they are beginning to spend their money again but the pace is muted, reflecting what might be described as a new-found sobriety. Another similarity is inventories. Companies in both nations were either stocking less or, in some cases, rebuilding stocks, the sort of thing that always happens in the first couple of quarters of any nascent recovery, no matter what its eventual strength proves to be. Inventories often amplify the true underlying trend, at least for a quarter or two.
The big differences lie in investment and exports. Equipment and software investment has begun to pick up in the US, as have exports. Investment continues to decline in the UK, and exports, although growing, are rising at only about half the pace of those coming out of the US. This is puzzling. Sterling's collapse through 2008 should have given UK companies a big competitive boost yet exports are making only limited headway. One obvious explanation is the geographical mix of the UK's export markets. A lot of US exports go to dynamic parts of Asia and Latin America, but the UK's exporters tend to depend much more on continental Europe. Sadly for the UK, watching Europe grow is akin to watching paint dry. Being competitive is not just a story about exchange rate depreciation. You also need to export the right products to the most dynamic markets.
But before, I conclude that the US is doing a lot better than the UK, the data under discussion is all for the final quarter of last year. For the US, the new year has not been so encouraging. Two areas have suddenly looked decidedly wobbly. The first is housing, where both new and existing home sales have suddenly slumped, partly reflecting the distorting effects of the homebuyer tax credit, which helped to boost housing demand – temporarily, it now seems – in the second half of last year. The second is consumer confidence where, on the latest reading, consumers have suddenly become a lot more cautious. Even though there have been signs of improvement in the US labour mart, it's increasingly clear that US consumers continue to worry about their job prospects.
The early stages of any economic recovery are uncertain but, at present, the uncertainty is unusually high. Many of the fiscal policies introduced last year – housing tax credits, cash for clunkers and so on – have merely distorted the timing of household expenditures. Those who, in any case, would have bought homes or cars in 2010 brought forward their purchases into 2009, thereby flattering last year's economic numbers at the expense of demand in 2010. This applies not just in the US but *many parts of Europe. France succeeded in boosting car sales in the second half of 2009 only to discover that sales collapsed in January. At this stage, we can't be sure we haven't been staring at a phantom recovery.
For policymakers, these are awkward times. Often, people talk about recessions and recoveries, as if these were the only two separate economic states of nature. The world is much more interesting than that. We can have depressions, recessions, stagnation, weak growth, strong growth, productivity-led growth, deflation, inflation and all the variations under the sun. Thus we have Mervyn King, the Governor of the Bank of England, talking about the UK economy bumping along the bottom, seemingly suggesting that interest rates can remain on hold for a long time while, Paul Tucker, the Deputy Governor, warns of growing "supply-side" bottlenecks which might allow inflation to rise even in the absence of a decent recovery in demand.
It's worth going back to the 1930s debate between John Maynard Keynes and the Austrians. For Keynes, economies could settle at different levels of activity, from full employment through to the deficient demand associated with recessions and depressions. The losses associated with these periods of deficient demand could be corrected via government intervention designed to lift animal spirits, thereby bringing markets back to their senses and allowing full employment to be regained.
This story is central to those who believe that the world economy is on a sustained recovery path. Seen through Keynesian eyes, the recession was a failure of market forces associated with a collapse of animal spirits. All that's happened over the past 12 months is that, slowly but surely, those animal spirits have been revived.
For the Austrians, led by Friedrich Hayek, government (and central bank) intervention often made matters worse. Indeed, an Austrian take on the crisis would argue that the damage was done not during the crisis itself through a failure of animal spirits but during the earlier boom, a period during which central banks left interest rates too low, thereby distorting the cost of capital and promoting excessive investment in real estate. This "wasted" investment now means that the capital stock is less effective than it should be, lowering the economy's long-term growth rate on a permanent basis.
For a musical rendition of the disagreements between Keynes and Hayek, visit this Youtube site, www.youtube.com/watch?v=d0nERTFo-Sk . For a less musical version, it's possible to argue that, in a simple sense, both economic greats have something useful to say about the present crisis.
The Keynesian solution prevented a deep recession from turning into a hideous depression. Yet, from now on, the western world is likely to suffer a Hayekian constraint. We have, collectively, invested in the wrong areas of economic endeavour and wasted huge amounts of money. Whether the resulting debts reside with banks, households, the government or future taxpayers, the consequence is the same: even with signs of recovery, it will feel for a long time as though we are bumping along the bottom. Like it or not, we are heading into a new age of Austrian austerity. Keynes didn't have all the answers.

Why The Failing US and EU Should Follow the Swiss Government Model


The European Union and the United States should consider the successful freedom model of Swiss confederation government rather than the failed top down examples of other nations and empires. Few would question that Switzerland is the most secure, stable, and freedom-oriented nation in the world but it is time to ask what is so unique about the Swiss.

The answer is there is nothing particularly different about the nation or its people. They like to work hard, play hard and provide a good life for their families. So do the citizens of most other nations when given the opportunity.

They prefer peace and diplomacy to war and aggression but will fight to defend their independence and liberties. They prefer a stable currency, low taxes, financial privacy, economic prosperity and a government that represents and defends the people. Again, these are not unusual wants but few nations and governments provide an opportunity for these basic human needs and rights to flourish.

So why is Switzerland different? Here are some examples of why the Swiss government model works and the European Union and American Union have failed to deliver on their big-government utopian promises.
National Expansion By Voluntary Association vs Force – The term "Willensnation" is a Swiss concept of national growth and expansion by attraction through the voluntary association of neighboring principalities, cities, and individuals. This makes Switzerland a nation created by acts of free will rather than force. Growth by attraction of those willing to be part of the Helvetian Confederation rather than war and invasion have served the Swiss well over the last few hundred years of peace and prosperity.

How totally different from the American model of "manifest destiny" and military aggression which is how most of the national expansion of the United States took place. The growth of the Union was followed again by force with the outright invasion of the Southern states that decided to leave by Lincoln’s armies during the War Between the States.

The history of Europe has been far worse than the US both historically and now with the EU. Today the citizens in most European nations were never allowed the opportunity to vote on throwing away their national sovereignty and coming under EU rule. Whether these nations can voluntarily withdraw is still an open question.

Tax Competition vs Forced Tax Harmonization – In Switzerland the vast majority of taxes are collected at the canton (state) level while the federal income tax level is quite small and comparable to state tax rates in the United States. This allows different cantons and even localities in individual cantons to dramatically compete for residents, corporations, businesses and even retirees.

The tax difference can range over 20% of income from high-tax cantons like Zurich and Geneva to low-tax jurisdictions like Zug. Tax competition keeps the cantonal governments lean and productive and the politicians honest. Retirees from outside Switzerland can even create a type of low-bid competition for a set amount or percentage tax rate between cantons. This is the ultimate in tax competition.

In the US, there is little reason to move or locate businesses in specific states because the majority of the parasitic tax burden is universal at the federal level. The tax difference between the few states with no income tax and the others is minimal and with most states and cities on the verge of bankruptcy like the federal government, taxes will be rising everywhere.

It is the same with the failing European Union. The EU preference is a harmonized tax rate that guarantees a steady supply of revenue to governments and politicians and the ultimate goal is to end low-tax jurisdictions so there will be no tax competition. For example the EU requires a VAT tax of at least 15% in each country whether the nation or people want or need this burden on top of already crushing income tax rates.

Competing Currencies vs Currency Monopoly – In Switzerland, most retailers, hotels and restaurants will gladly price your purchase in Swiss francs or the Euro depending on your preference. Change is given in Swiss francs but the freedom to choose your preferred currency is usually available. Recently, in the Zurich train station, Burger King was even accepting dollars on a one to one basis with the Swiss franc.

Contrast Swiss currency competition to the silence from US political establishment when Ron Paul called for currency competition here in the US. Private entities like the LibertyDollar people are threatened and imprisoned just for attempting to offer a gold and silver alternative to the Federal Reserve’s fiat paper dollars which have an intrinsic value of absolute zero.

Here the European Union nations do have a possible alternative to the Euro. Each nation should again issue their own currency and allow it to circulate with the Euro with each national central bank or treasury pegging the national currency in a range relative to the Euro just like the Swiss central bank does.

While much has been written about how the EU is threatened by the government debts and questionable accounting methods used by nations including Portugal, Ireland, Greece and Spain, why should the concern stop here? Today’s Greece, could be tomorrow’s UK, France and even the United States. Few of the western democracies have a monopoly on corrupt politicians or out-of-control national debts.

Ultimate Citizen Control vs Political Establishment – In Switzerland, the voters ultimately rule over the politicians and political elites due to the political rights of referendum and initiative. Is the majority always right, of course not as Thomas Jefferson warned about the dangers of democracy and mob rule but at least they aren’t always wrong like politicians controlled by special interests. Switzerland has a very weak "confederation model" central government with most of the programs, regulations and taxes handled at the local level. This way programs benefit the people rather than powerful federal politicians and interests like in most other nations.

Switzerland has a neutral non-interventionist foreign policy because this is the will of the people. This is why the Swiss waited 50 years to join the United Nations even though most of the UN organization is based in Geneva.

For similar reasons, this is why the Swiss have a stable currency, why individuals can buy stock in their central bank, why they have financial privacy and a low crime rate. The Swiss people demand this from their government or else the people will act. They can nullify a law or legislation by referendum or pass legislation through the right to actually create legislation and laws by-passing parliament with the right of initiative.

Again, this is a direct contrast to the United States where everything runs downhill from the federal government to the states, local jurisdictions and ultimate the people sort of like a political sewer system. Our representative democracy does not allow direct citizen control or oversight at the federal level and this is why the will of the people is usually ignored other than with false rhetoric at election time.

The EU should act as a decentralized confederation of sovereign states similar to the Swiss Confederation as did America’s first government, the Articles of Confederation if it wants to prosper and benefit the nations of Europe. Each nation should be given the opportunity to vote on membership, to have the option of maintaining their own currency and uniqueness of their nation.

Time To Look At A Successful Political Model – Both America and the upstart European Union would do well to look at the Swiss model of limited government over state jurisdictions rather than the failed dictatorial and fascist models which are all too prevalent in history. Freedom, liberty and independence have survived to a remarkable degree in Switzerland for hundreds of years despite the hatred and fear both near and far from nations and politicians more interested in looting their citizens than in promoting liberty and limited, efficient government.

We are in the death throes of the grand experiment of top down, special-interest-controlled government and fake prosperity based on unlimited debt. The time is up for Brussels, sell-out national politicians and Washington. I hope the political elites and international financial interests who screwed the people of the world and future generations all for short-term profits and political gains should be held accountable.

How About Freedom? – Finally, it is time for the nations and peoples of the world whether occupied by corrupt political elites or foreign troops to demand what the Swiss have had for centuries. A government of their own, controlled by the citizens that works to benefit the nation instead of outside interests. I truly believe unique Switzerland has the government model which holds the key to freedom, prosperity and independence for many nations in the world today.

Now is the time to work, build and restore a limited government which promotes freedom and free-markets rather than force in governing and solving problems. George Washington, Thomas Jefferson and our founding fathers would do no less and we can do no more.

Ron Holland [send him mail], a retirement consultant, works in Zurich and is a co-editor of the Swiss Mountain Vision Newsletter

Don't Bet on a Recovery


It is astounding how many economists, government officials, and Wall Street strategists construe the current economic conditions as evidence of a bona fide recovery. It is a testament to the power of the rose-colored glasses handed out by our nation's leading universities that such a feeling could be widely held despite the clear and present danger that compounds daily. The myopia leads us to enact policies that actually exacerbate our problems. The "remedies" are postponing, perhaps indefinitely, a true recovery.

The oracles who have described the nature of this imminent recovery do so based on their conviction that consumer spending is slowly returning to levels that existed prior to the recession. New data released today seems to support this view, with consumer spending up 0.5% in January.

However, missing from their analysis is any plausible explanation as to why consumers will be able to sustain such spending given the plunge in income and credit, and the lack of available savings. In fact, the same January spending report showed that personal income increased by only 0.1%, while the savings rate slowed to the smallest since 2008.

I would challenge those who fantasize about a consumer-led recovery to describe where the spending money will come from. Most consumers are tapped out, millions are unemployed, and home equity has been wiped out. The only reasonable thing for them to do is to pay down debt and sock away as much money as possible to rebuild their savings.

Beyond the question of "how" the spending could be achieved, is the deeper question of "why" such activity should be sought at all. Excessive spending, fuelled by an insane housing bubble and catalysed by reckless monetary and fiscal policy, was the reason that our current recession became unavoidable. Why would we want to go down that road again?

During the run up to the crash, excess spending had created economic distortions that have yet to be resolved. Too many resources, including land, labour, and capital, were devoted to servicing an unsustainable economic model in which Americans borrowed money to buy homes, products and services they really could not afford. In many cases consumer behaviour was influenced by overly optimistic assumptions regarding real estate related riches.

However, now that the real estate bubble has burst, Americans are coming to terms with a more sober reality. Many have cut up their credit cards, dramatically reduced their spending, and have squirreled away as much money as they can. This change in behaviour should necessitate a dramatic shift in the labour market as workers move away from jobs associated with consumer spending and toward jobs associated with real production, primarily for exportable goods.

The real problem is that monetary and fiscal policy designed to re-inflate the burst spending bubble is preventing this transition from taking place. As a result we are not creating the jobs we need to replace - the ones we have lost in mortgage servicing, home improvement, and real estate sales (which we never really needed to begin with). As these jobless remain unable to find alternative employment, our economy will continue to languish.

Some will argue that the new jobs created by government stimulus spending will provide the additional purchasing power necessary to revitalize consumer spending. There are two problems with this expectation. First, those jobs being "created" by the government are outnumbered by those being destroyed by government domination of resources. Second, even if it were possible for job growth to return, having hopefully learned from their mistakes, workers will be far more frugal with their pay checks than they were in the past.

Others hope that rising real estate prices will give consumers more confidence to spend. The reality is that housing prices are still too high and will likely fall further. But even if they did rise, consumers will still be reluctant to resume their shopping spree. Home equity extraction loans, which just a few years ago turned houses into ATMs, are now much harder to come by. When it comes to spending, it's not just about confidence; it's about cash.

The only possible way consumers can spend is if the government gives them the money. However, since the government cannot legitimately give money to one American without first taking it from another, the most likely means of doling out cash will be to run it off the printing presses.

That, in a nutshell, is our government's plan for economic recovery. Print a bunch of money and give it to consumers to spend. This is not a plan for recovery but a recipe for disaster. Those betting that this program can succeed in putting together a healthy and sustainable economy simply do not understand the nature of their wager. The smart money is going the other way.

Regards,

Peter Schiff
for The Daily Reckoning Australia 

Intervention and Economic Crisis


Intervention and Economic Crisis

by Thomas E. Woods, Jr.by Thomas E. Woods, Jr.
Recently by Thomas E. Woods, Jr.: 

No supporter of the market economy could have been surprised when the recent financial crisis was inevitably blamed on “capitalism” and “deregulation.” The free market, we were told, was a recipe for financial instability. “Advocates of the free market must confront the fact that both the Great Depression and the current financial chaos were preceded by years of laissez-faire economic policies,” wrote Katrina van den Heuvel, editor of The Nation, and author Eric Schlossel, in September 2008.


It is not enough to call this a distortion of the truth. It is a grotesque distortion, worthy of the Soviet politburo. The crisis is in fact the altogether predictable fruit of massive government and central-bank distortions of the economy. That may be why the free-market economists of the Austrian School were practically the only ones to have seen it coming.

But although there is no question that those factors exacerbated the problems that led to the crisis, they are not the primary culprits. Britain has also experienced a housing collapse, even though there is no British analogue of Fannie, Freddie, and the CRA. Moreover, no matter what encouragements these and other institutions may have given to home purchases, where did all the money come from to buy all those houses and drive up their prices so high so quickly?There has been much discussion on right-wing radio and in the conservative press about Fannie Mae, Freddie Mac, and the Community Reinvestment Act (CRA), which have been described as forms of government intervention that contributed to the financial crisis. To a certain extent that is all well and good: Fannie and Freddie enjoyed special government-granted privileges, along with an implicit bailout guarantee, that allowed them to become much more substantial actors in the secondary mortgage market than would have been possible in a free market. Furthermore, politicizing the lending process and cajoling banks into abandoning traditional standards of creditworthiness cannot make a positive contribution to the health of the banking industry.



We should instead focus on the Federal Reserve System, an institution few Americans know much about but which, in addition to systematically undermining the value of the U.S. dollar – which has lost at least 95 percent of its value under the Fed’s supervision – gives rise to the boom-bust business cycle.

Economist F.A. Hayek wanted to understand why the economy moved in a boom-bust pattern – why there was, in the words of the British economist Lionel Robbins, a sudden “cluster of error” among entrepreneurs. Why should the people the market has rewarded in the past for their skill at anticipating consumer demand suddenly commit serious errors and all in the same direction?



A business-cycle primer


Hayek won the Nobel Prize for his answer.
Building on the insights of Ludwig von Mises, who first began to develop what is known as Austrian business-cycle theory in his book The Theory of Money and Credit in 1912, Hayek pinpointed the central bank’s artificial creation of credit as the nonmarket culprit in the business cycle. (Economist Jesús Huerta de Soto applies Austrian business-cycle theory to cycles that occur in countries that have lacked a central bank in his treatise Money, Bank Credit, and Economic Cycles.)

Scenario 1. Consider what happens when the public increases its savings. Since banks now have more funds to lend (namely, the saved funds deposited by the public), the rate of interest it charges on loans will fall. The lower interest rates, in turn, stimulate an expansion in long-term investment projects, which are more sensitive to interest rates than short-term projects are. (Think of the difference in the decline in monthly payments that would occur between a 30-year mortgage and a 1-year mortgage if interest rates came down by even 2 percentage points.)To understand Hayek’s point, which exonerates the free market, consider two scenarios.

Lower-order stages of production are those stages closest to finished consumer goods: retail stores, services, and the like. Wholesale and marketing are examples of higher-order stages. Mining, construction, and research and development are of still higher order, since they are so remote from the finished good that reaches the consumer. When people’s consumption spending contracts, it is a perfect time for higher-order stages of production to expand: because of people’s additional saving, there is relatively less demand for consumer goods, and the resulting contraction of lower-order stages of production will release resources for use in the higher-order stages.


Scenario 2. Government-established central banks have various means at their disposal to force interest rates lower even without any corresponding increase in saving by the public. (For more on this, see The Mystery of Banking, by Murray N. Rothbard, or his shorter classic, What Has Government Done to Our Money?) Just as in the case in which public saving has increased, the lower interest rates spur expansion in higher-order stages of production.

The difference, though, is a critical one and guarantees that these artificially low interest rates will not yield the happy outcome we saw in Scenario 1. For in this case, people have not decreased their consumption spending. If anything, the low interest rates encourage further consumption. If consumption spending is not constricted, the lower-order stages of production do not contract. And if they do not contract, they do not release resources for use in the higher-order stages of production. Instead of harmonious economic development, there will instead ensue a tug of war for those resources between the higher and lower stages. In the process of this tug of war, the prices of those resources (labor, trucking services, et cetera) will be bid up, thereby threatening the profitability of higher-order projects that were begun without the expectation of this increase in costs.



Preventing correction
As the workers in the newly expanded higher-order stages of production begin to spend their incomes, they spend according to the same saving-to-consumption ratio they did in the past. Their desire to save, and thereby to sustain all this long-term investment, turns out to be not as great as the distorted structure of interest rates led entrepreneurs to believe. It becomes ever clearer that society is not prepared to support the expansion of time-consuming higher-order stages of production. They do not wish to save enough resources to make the completion of all the new projects possible. The lower-order stages will win the tug of war. Expansion in the higher-order stages will have to be abandoned. Some of the resources deployed there will be salvageable; others will have been squandered forever or will be of little to no use in later stages of production.


The economywide discoordination that reveals itself in the bust is not, therefore, caused by the free market. To the contrary, it isintervention into the free market, in the form of distortions of the structure of interest rates – which are crucial coordinating mechanisms – that causes the problem.
As the boom turns into bust, the economy tries to readjust itself into a configuration that conforms to consumer preferences. That is why it is so essential for government to stay entirely out of the adjustment process, because arbitrary government behavior can only delay this necessary and healthy process. Wages and prices need to be free to fluctuate, so labor and other resources can be swiftly shifted away from bloated, bubble sectors of the economy and into sustainable sectors of the economy where consumers want them. Bailouts obstruct that process by preventing the reallocation of capital into the hands of firms that genuinely cater to consumer demand, and by propping up instead those firms that have deployed resources in ways that do not conform to consumer preferences. Fiscal and monetary stimulus do nothing to address the imbalances in the economy, and indeed only perpetuate them.

Most observers cheered in the months following 9/11 when it seemed as if Alan Greenspan had successfully navigated the economy through the dot-com bust at the cost of only a relatively mild recession. The man the New York Times identified as “the infallible maestro of our financial system” had lived up to the expectations of those who treated him with a distinctly creepy reverence. But all he had done was hold off the inevitable recession, and make the current downturn all the worse. The recession of 2001 was the only one on record in which housing starts did not decline. Thus people drew the false conclusion – amplified by the alleged experts, including Fed economists – that the housing sector is robust through thick and thin, housing prices never fall, a house is the best investment someone can make, and so on.



Moral hazard
Because Greenspan would not allow the full correction to take place, clearing out entrepreneurial errors caused by his previous intervention, market actors persisted in their errors for years thereafter. With the economy having continued along its unsustainable trajectory all that time, the bust that inevitably came was that much worse. Although market decisions were distorted in countless areas of industry, it was housing whose disproportionate growth was most obvious in the most recent boom. Easy money by the Fed, combined with government regulations that made mortgage loans especially easy and attractive, gave rise to a housing bubble – in other words, an array of prices that were unsustainably high. Housing is a durable consumer good generally purchased with long-term financing, so it fits in perfectly with the Austrian analysis that artificially low interest rates give undue stimulus to long-term projects.


There has been much discussion of moral hazard in connection with the flurry of bailouts that began in 2008. “Moral hazard” refers to people’s readiness to act with an artificially elevated level of risk tolerance because they believe that any losses they may incur will be borne by other people. Hence the bailouts will tend to make major market actors even less likely to behave prudently in the future, since if they believe they are likely to be considered “too big to fail,” they have more reason than ever to believe that they will not be allowed to go out of business, and therefore that they may continue to make risky bets.


This critique is correct as far as it goes, but it overlooks the related problem that the very existence of a central bank such as the Federal Reserve aggravates – indeed, institutionalizes – moral hazard. Since there is no physical limitation on the creation of paper money, firms know that no natural constraint exists on the power of the central bank to bail them out of any serious trouble. (Even if the supply of paper should be exhausted, the monetary authority can always add zeroes to existing notes.) In our own case, financial commentators spoke of the “Greenspan put,” the implied promise that the central bank would intervene to assist the financial sector in the event of a serious downturn. No one has a right to be surprised when market actors behave accordingly. 


The Ethics of Money Production


The banks must keep certain minimum amounts of equity and reserves, they must observe a great number of rules in granting credit, their executives must have certain qualifications, and so on. Yet these stipulations trim the branches without attacking the root. They seek to curb certain known excesses that spring from moral hazard, but they do not eradicate moral hazard itself. As we have seen, moral hazard is implied in the very existence of paper money. Because a paper-money producer can bail out virtually anybody, the citizens become reckless in their speculations; they count on him to bail them out, especially when many other people do the same thing. To fight such behavior effectively, one must abolish paper money. Regulations merely drive the reckless behavior into new channels.
One might advocate the pragmatic stance of fighting moral hazard on an ad hoc basis wherever it shows up. Thus one would regulate one industry after another, until the entire economy is caught up in a web of micro-regulations. This would of course provide some sort of order, but it would be the order of a cemetery. Nobody could make any (potentially reckless!) investment decisions anymore. Everything would have to follow rules set up by the legislature. In short, the only way to fight moral hazard without destroying its source, fiat inflation, is to subject the economy to a Soviet-style central plan.
Since 2007 the typical pattern has unfolded before our eyes: a financial crisis whose ultimate cause is the government’s own central bank is blamed on anyone and everyone else, while the central bank itself is portrayed as our savior rather than the culprit. This version of events is then used to justify still more expansions of government power.
It is urgently necessary for Americans to inoculate themselves against the relentless propaganda in behalf of the government’s version of the story. That’s why I wrote my book Meltdown earlier this year: to set forth a persuasive free-market explanation of the crisis that laymen can understand and use. It spent ten weeks as a New York Times best-seller, but the Times has refused to review it. That, in turn, is about the best endorsement I could have asked for.
February 26, 2010
Thomas E. Woods, Jr. [visit his websitesend him mail] is the author of nine books, including two New York Times bestsellers: Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse and The Politically Incorrect Guide to American History. Read Congressman Ron Paul's foreword to Meltdown.
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