Greenspan admits ‘free market has foundered’

This is something that’s been annoying me for the past few days and I thought I’d just throw in a quick post about what Alan Greenspan has to say. Recently he admitted that this financial crisis had shown him that his ideology (laissez – faire capitalism) was fundamentally flawed in ways that he didn’t know about. He says this when he was effectively one of the “central planners” or at least a price fixer – something that is antithetical to the very idea of laissez-faire capitalism! In a true free market, there are no government restrictions on what is used as currency or govt enforced monopolies over what currency is used. 

So how is it that he was creating market distortions in his job? In his role as Chairman of the Federal Reserve, he was essentially involved in adjusting the supply of money via Fed Reserve tools such as open market operations (buying and selling of assets with US treasury securities). So essentially, the existence of the Fed Reserve and the fact that it facilitates massive expansion in the supply of money – mean that it functions as a price distorter by changing interest rates lower/higher than what they would otherwise be. 

Ever since there has been a Federal Reserve, the US did not have anything close to a free market. This is not a matter of opinion, this is fact. So whether or not you think this recent financial crisis is brought about by “greedy speculators/self interested short sellers/whoever else it is fashionable to hate” or irresponsible government policy, realise that what we have had for quite some time is not a free market. Consequently it makes zero sense to now blame “the free market” for what is happening.

Alan Greenspan is an ex-central planner looking back on his price fixing efforts and calling it the failure of the free market.

Why are governments inherently inflationary?

When I talk about inflation here, I’m talking about inflation in the sense of expansion of money supply, rather than the general and sustained increase in prices. The increase in prices is a natural consequence of the fact that there is more money in the economy chasing the same amount of goods.

As new currency is printed, we would expect that since this is a dilution of money, that all the currency gets devalued. But it takes time for this change to cycle through the economy and for businesses and individuals to take into account the fact that there is now a greater supply of money. This time lag effect has the effect of enriching those people who get first use of the new money, since they are using ‘tomorrow’s money at todays prices’. The biggest losers in this system are those who are unable to change their incomes, such as those on salaries, those people who are receiving income from annuity streams, people holding cash, bondholders. They will face higher prices for the same goods, but without higher incomes to compensate for this. 

So to answer the question, governments are inherently inflationary because inflation is a powerful way to take people’s resources. Rather than taking the physical goods or appropriating actual services for themselves, the government just makes us do most of our business denominated in a currency that they can just print more of at will. They take from us via maintaining the facade that our money is sound and that their word is credible. The government stranglehold over our currency and money is very important to their ability to take our money. It is highly important to their ability to control us.

How might currency work without government?

Here are some ways currency could work without government:

Gold Standard

Probably the most obvious option, it would mean going towards free banking, and the use of the free market in minting gold coins rather than state monopoly over it. So generally, it would mean that a dollar is defined in terms of a weight of gold. One potential problem with the gold standard is that the supply of gold (relative to the sum total of all goods +services in the economy) can change, which can bring inflation or deflation. 

Competing Paper Currencies

Banks could issue their own notes, name them whatever they want and have it function as money. Now there is a threat that the bank is able to just create as much more money as it wants, diluting the value of all its notes – the protection against that is the threat that customers will switch to another currency. 

Composite – Commodity Standard with indirect redeemability

Under this system, rather than using just gold as the standard and defining dollars in terms of a fixed weight of gold (like in the gold standard) – dollars would be defined in terms of the weight of gold equal to the value of a basket of commodities. The use of multiple commodities has a ‘balancing’ effect, which makes the existence of inflation/deflation unlikely in economies where it has been implemented.

One of these systems would be much preferred to the current one where inflation serves as a hidden tax, robbing the people of the spending power of their currency because it is being diluted by the continual issuance of new currency. When there is rampant inflation (as there is now thanks to fiat currency + fractional reserve banking) – the people who get the newly issued currency first get to spend that money with close to the ‘full’ purchasing power of the dollar. But as the new currency works its way through the economy, prices will change and people who get to use these new dollars later are the ones who suffer the most from the decreased spending power of their dollar.

Rather than government monopoly control over currency, competition in the provision of currency is a positive thing and a free market will generally find an efficient way to organise currency.

Another fundamentally wrong aspect of the US Bailout

Ever heard of a thing called moral hazard? It’s when a person who is insured against a risk, acts differently because of the fact that they’re insured against it. A great example is a person who has car insurance not caring so much about locking his/her car because they know the insurance company is going to cover their loss anyway. 

Bailouts have the effect of ‘insuring’ against bad investment decisions by making the costs be borne by taxpayers – rather than just the specific investors who made that investment decision. Do you think it’s fair that everybody is made to pay for the mistakes of a few? 

And pay for it you will, either through increased direct taxation or decreased spending power of your dollar (via inflation).

What we have now is NOT a free market

So often now we get government leaders telling us about the “market failures” and saying that “the free market has failed”. This is an outright lie, since what we have now is not a free market:

• Government control of currency – eg. enforcing the use of certain currencies
• The existence of capital gains tax – to help the govt prevent people from using other materials as quasi-currency
• Government central banks permitting fraudulent bank activity (fractional reserve banking)
• The government doesn’t even allow people to have full allodial title over property, since it often retains the right to forcefully take property. (eg. Eminent domain in America, or Compulsory Acquisition in Australia to name a few)
• The thousands of regulations that exist in so many different industries 
• The fact that the government taxes and redistributes that money via all sorts of government programs ranging from welfare payments to ’services’ that the government provides.

So whatever you do, don’t call this crisis a ‘failure of the free market’ because that’s just straight up lying about what our present situation is.

Video game censorship

Video game censorship and the art of horror BY BEN “YAHTZEE” CROSHAW

Saw this article today about game censorship and it made me start thinking about what it means when the govt says “No you can’t play this game”. If we’re supposed to vote the government in, but then somehow the government tells us we’re not mature enough to play a game – how much sense does that make? How could it be that all 20 million of us are mature enough to realise that a certain game is ‘bad’, but we can’t we stop ourselves playing it as individuals? 

I like the point that Ben makes about how for some people, video games are like an artform that is being denied by a few people in government who think they know better than everybody else. “You aren’t mature enough to know what you want, I know what is best for you” is not the attitude that the government should take. 

Hey guys, we don’t need parents to make these decisions for their own children, we have the government to save us! Aren’t you grateful that your options are being limited for you?

“The government needs to stimulate/manage the economy”

Ok so now with the recent financial crisis (which was caused by govts in the first place) – we now see governments all over the world falling over themselves to get some kind of ‘rescue plan’/bailout/stimulation package going. 

• “Cash thrown at economic woes” – Australia
• “US to unveil $250bn UK-style banking bail-out”
• US govt moves to start $700bn bailout
• Sweeping bank bailouts unite Europe

If it is really the case that the government knows better than we the individuals do – then why are we even given any freedom at all? If you think it is the case that the government/democracy knows better than the market, then why don’t you support full blown central planning? I really think this is a glaring inconsistency in the thinking of anybody who believes in govt stimulation/management of the economy. 

To me, it seems like trying to make any distinction between things that individuals should and should not be allowed to decide for themselves is going to end up being arbitrary. I really think that you can either have total freedom of choice (free markets, anarcho-capitalism, market anarchy – whatever you want to call it) or you can have government. There is no ‘in between’, since any govt involvement will inevitably expand over time.

Perhaps the real reason all these governments are falling over themselves to create bailout plans and “stimulate the market” is because they want to be seen to be doing something. Either this, or the people “in the club” (politicians + senior government employees like McCain, Paulson, Obama, Giuliani) want to just direct some cash to themselves and their friends. Take for example, Rudy Guiliani maneuvering his own legal firm to cash in on the bailout.

Can’t you see how much the politicians really do care for us?