On the Edge of the Abyss?

Pat Buchanan makes you wonder:

Irish rage at having to suffer to save Europe’s bondholders of Irish banks, the anarchy in England, riots in France to protest a rise in the retirement age to 62, the violence that wracked Greece, the precarious condition of Portugal and Spain, the anger of Germans at having to bail out their profligate EU partners — raise the question:

Can Europe’s welfare states be downsized without violence surging, governments falling and populists coming to power who will default on debts rather than force the masses that elected them to suffer to save the bank investors?

Can European democracy deal with the gathering storm?

Is not a national default and a collapse of banks across Europe inevitable? And could such a collapse be contained in Europe when America’s big banks are all transnational institutions?

No doubt about it, rough seas are ahead. America still has a lot going for it--I may go into detail sometime, but not today, I should be getting ready for work--that will enable it to come through the crisis in better shape than Europe, I think,though that may not be saying much.

Crap. All this pain and crisis because people wanted to live way beyond their means and wanted government to make it possible.

Pat Buchanan on the Fed and QE2

Not much I can add to this, methinks. You'd serve yourself well by reading the whole thing.

If it is the first responsibility of the Federal Reserve to protect the dollars that Americans earn and save, is it not dereliction of duty for the Fed to pursue a policy to bleed value from those dollars? For that is what Chairman Ben Bernanke is up to with his QE2, or “quantitative easing.”

Translation: The Fed is committed to buy $600 billion in bonds from banks and pay for them by printing money that will then be deposited in those banks. The more dollars that flood into the economy, the less every one of them is worth.

Bernanke is not just risking inflation. He is inducing inflation.

[snip]

The other Chinese complaint is that they lent us trillions to buy Chinese goods and now we are robbing them by depreciating the dollar-denominated Treasury bonds they accepted in return for their goods.

Pay back your banker in Monopoly money, and you will find you are soon unable to borrow from anyone anywhere.

[snip]

The Fed...retains a confidence that it does not deserve, when one considers that, when it was created in 1913, a $20 bill could be exchanged for a $20 gold piece.

Today, it takes seventy $20 bills to buy a $20 gold piece, which means the dollar can buy in 2010 what you could get for 2 pennies in 1910. Quite a record for a central bank set up to protect the dollar.

Well, it was ostensibly set up to protect the dollar. Before you fall for that one, maybe you ought to find out what Andrew Jackson thought of the idea of a central bank.

The American Thinker on Free Trade Again

I really enjoyed this post. The author puts objections to free trade into a small, well-managed space. You really ought to go read the whole thing, but since I know you're not actually like to do so, here's a sample, with my comments interspersed:

Free trade sounds nice. Protectionism sounds ugly. Free trade sounds capitalist. Protectionism sounds Marxist. So it is worthy of note that free trade was actually viewed by Karl Marx as a strategic force, a tool with which to undermine capitalism as an economic model:

But, in general, the protective system of our day is conservative, while the free trade system is destructive. It breaks up old nationalities and pushes the antagonism of the proletariat and the bourgeoisie to the extreme point. In a word, the free trade system hastens the social revolution. It is in this revolutionary sense alone, gentlemen that I vote in favor of free trade [i].

Marx was not far from wrong. After nearly fifty years of progressive tariff reductions, America has suffered significant economic losses. This comes as a surprise to many Americans, for years inebriated with the free trade mantra.

This is because America does the "free" while the rest of the world does something else. China, for example, manipulates its currency and engages in persistent dumping, driving down Chinese prices and displacing domestic American industries.

Amen, and amen! There are few things that annoy me more than listening to or reading someone extol the benefits of free trade without so much as noticing the elephant in the room: free trade does not actually exist! Other nations protect their markets.

The results of such one-sided free trade have been catastrophic for America. Consider that in the last fifty years, U.S. tariffs have gone from 40 percent of the price of goods to 5 percent [iv]. Over the same period, manufacturing as a share of employment has fallen from 30 percent to 11 percent and is still falling.

I swear, as God is my witness, every free trade economist that I have read writes as though any idiot can do manufacturing, or as if it is somehow a low-class form of employment.

My ***. Look, I've done manufacturing. I rather like it. I started at one factory by running a large set of industrial sheet-metal shears, then operating a CNC laser cutter, then moving on to a machine shop where I spent my days operating CNC mills and lathes and my nights learning more about how it's done. When I was laid off and moved into other fields, I wasn't even close to being a full-fledged machinist, despite having been in the field for close to two years and going to school for most of that time. It takes time, time and experience, to be a good manufacturing employee. Oh, anybody, or almost anybody, can drive a small forklift, to be sure, but to be a machinist? A fab (fabrication) worker? A welder? A tool-and-die maker? Those guys don't just fall off the trees. When we lose manufacturing jobs, those guys eventually have to move on to something else. Their skills deteriorate, and for the most part, are lost to the country.

God forbid we should have to rebuild our manufacturing in a big-*** hurry. I'm not sure we could do it.

The late Milton Friedman was a committed free trade proponent. In a stunning dismissal of traditional economic theory, Friedman once remarked, "Who is hurt and who benefits ... U.S. consumers benefit. They get cheap TV sets or automobiles ... Should we complain about such a program of reverse foreign aid?"

That may sound good for the short-term, but, as classic economist Friedrich List wrote,

The forces of production are the tree on which wealth grows...The tree which bears the fruit is of itself of greater value than the fruit itself...The prosperity of a nation is not...greater in the proportion in which it has amassed more wealth (i.e. values of exchange), but in the proportion with which it has more developed its powers of production.

Manufacturing matters. Service jobs, the primary source of U.S. employment, depend on capital inputs from manufacturing even if said manufacturing is foreign. This presents problems should foreign manufacturing undergo shocks or disturbances that disrupt supply lines and, by extension, the sole source of employment for most Americans. Dependence on foreign manufacturing is inherently dangerous, since it is out of U.S. control.

The loss of manufacturing is not a trivial matter, and it has national security implications. It must be the ultimate oxymoron that Communist China is now the "arsenal of democracy." China is a strategic enemy and has threatened open nuclear war on America's homeland, and yet CFIUS has cleared the sale of factories to China responsible for producing the rare-earth magnets used in American laser-guided munitions. What happens if America ever needs to fight China?

Or, what if, God forbid, America ever needs to fight some country with which China is at all friendly?

Service economies can't issue ultimatums; only industrial economies can do that.

It is on this basis that free trade arguments fall apart. In a world with no nations, where national governments are not accountable for the economic and political security of their people, doctrines like "comparative advantage" would have validity.

Again, amen, and amen! As long as nations exist, trade wars will be just that--trade wars. And nations that refuse to protect their own people are derelict in their duties.

Refusing to protect the American economy when other nations are using manipulative "protectionist" devices is not competition, but economic suicide.

Free trade cannot work when some play by the rules and others do not. While competition and openness are desirable in ideal circumstances, reasonable protectionism has proven effective and is indeed necessary to preserve American economic strength.

This whole subject is one of the things that genuinely concerns me about the crop of "conservatives" that we are about to send to Congress. I flatly guarantee you that the vast majority of them know next to nothing about this subject and will back free trade most of the time because, if they have heard anything about it at all, they have heard it from the open-borders/free trade/free-movement-of-goods-and-people, libertarian-leaning economists that dominate most of the economic discussion in the Republican Party. You would not believe the number of "conservative" writers who pen such inanities as "free trade is a bedrock conservative principle," when it is no such thing. It might well be a bedrock libertarian principle, but whilst libertarianism and conservatism do have their areas of overlap, they are not the same thing. It is sheer idiocy to tell a nation that grew to greatness, in part, by protecting its markets, that doing the opposite is somehow "conservative," yet we have more than a few conservatives who will do just that. It's mind-boggling.

Lastly, I must point out--again--that yes, I'm aware that tariffs are not perfect and do have their flaws and negative effects. Personally, I favor the Fair Tax, which, like a tariff, is a consumption tax and will have much the same effect as a tariff, though it is likely to eliminate some of the negative effects associated with tariffs. However, if I can't get the Fair Tax, bringing back tariffs, coupled with a great lowering of income tax rates, would be something I completely support.

I Vaguely Remembered Something About Chile...

...and Star Parker, bless her soul, reminded me. Emphasis is mine:

Chile stands out as an example of achievements only possible when people commit to freedom and free markets.

It boasts the highest per capita GDP in South America and the third highest in the Western Hemisphere. Last December it became the first South American country to be invited to join the exclusive club of the world’s top industrialized nations, the OECD – Organization for Economic Cooperation and Development.

But back just a little less than 40 years ago, Chile was a typical, poor South American nation, with intrusive government and sluggish growth.

How was it transformed?

Read a short essay called “How the Power of Ideas Can Transform a Country,” by one of the leaders that made it happen – Jose Pinera.

He relates how, in the mid- 1950s, the Catholic University of Chile signed a cooperation agreement with the Department of Economics of the University of Chicago, then home to the world’s top free market economists, including the legendary Milton Friedman.

Thus began the education of a generation of young Chileans in the wisdom of economic freedom. Beginning in the late 1970s, these young leaders, with newly minted PhDs, helped implement new economic reforms in Chile protecting private property and promoting free trade.

A graph showing annual economic growth in Chile over the last hundred years looks like a hockey stick. From the early part of the twentieth century until 1980, the line is flat, averaging less than one percent growth per year. But beginning 1980, growth takes off in a vertical surge, averaging over 4% per year.

One of the most sweeping reforms, done by Jose Pinera, then Chile’s Minister of Social Security, was the transformation of Chile’s government Social Security system, identical to what we now have in the U.S., to a system of individually owned private retirement accounts. Chile’s payroll tax based government system was broken and bankrupt, as ours is today.

The reform, enacted in November 1980, restored the solvency of Chile’s retirement system and brought personal ownership and wealth to Chilean workers. After 30 years, these personal accounts have averaged annual returns of 9.2% above inflation.

Now, not that George Bush was so hot, he wasn't, God knows, but do you remember what happened when he noted the obvious, that Social Security was on the ropes, and proposed to privatize a little, just a little, of the system? Do you remember how he was demonized for that? Do you remember how that tiny bit of privatization was denounced as a "risky scheme?"

Tell it to the Chileans. Their retirement system appears to be working. Ours is in the red, so I understand, this snappin' year!

Just to drive the point home: leftist crap doesn't work. Never has, never will.

On the other hand, if a person's ever considered trying to emigrate to a country where economic freedom is not an epithet, Chile has to be considered.

Grasping the Obvious

As I've said more than once before, sometimes I wake up and it seems like only Pat Buchanan is asking the obvious questions--Diana West, too, I guess. Someone once quipped that Mr. Buchanan's tombstone should read, "I told you so, you ------- fools!"

...the behavior of senators suggests thatneither party appreciates the depth of the crisis we are in or the pain that will be required to get us out.

[snip]

Consider. Congress this year will spend $1.6 trillion more than it collects in revenue, with the largest outlays in that FY 2010 budget for defense at $719 billion and Social Security at $721 billion.

Thus, if the U.S. Government on Oct. 1, 2008, had shut down the Pentagon and furloughed every soldier and civilian here and around the world, and announced that it would not send out a Social Security check for a full year to any of the 50 million retired and elderly, we would still be $160 billion short of balancing the budget. If you zeroed out federal benefits to veterans for a full year, that, added in, would bring us close.

Such is the magnitude of the fiscal crisis facing the country.

[snip]

This city does not seem to grasp that the days of wine and roses are over. We are not in the 1950s or 1960s anymore. Then, we could throw open our markets to imports from the world. Then, we could dish out foreign aid and fight wars in Vietnam with 500,000 men, while maintaining 50,000 troops in Korea and 300,000 in Europe.

America is headed for a time when, like the British Empire, she is going to have to make painful choices, or have them forced upon us.

Recommended: Architects of Ruin

I would love to give Architects of Ruin: How Big Government Liberals Wrecked the Global Economy and How They Will Do It Again if No One Stops Them a full review, but the more I contemplate it, the more it seems like the work of hours. The story it tells is simple enough. Alinsky-influenced radicals started out by using various forms of pressure--like, for example, getting hundreds of people to open up savings accounts with only a buck, and then coming back the next day to close those accounts, which more or less shut those banks down for real business--to induce banks to lower their lending standards so people less likely to be able to pay a mortgage could get one. Then they managed to get law passed that made it necessary for banks, before they could do things like mergers, open new branches, and so forth, to get the community to agree that they'd been properly socially conscious, which ultimately led to banks committing more funds to risky loans in order not to have their applications for such business moves stymied by activist groups. Then the Clinton administration came along and very aggressively implemented that law, going as far as to threaten perfectly good banks with all sorts of investigations and suits in order to pressure them to make such loans. Then people started packaging those bad loans into various kinds of securities and selling those. Fannie Mae and Freddie Mac were hip deep in this sort of thing. Then the Clinton administration kept bailing out Wall Street investment firms--I believe Goldman Sachs got bailed out three or four times during the Clinton administration, if I recall correctly--which encouraged more and more investment in those bad, but politically correct, socially conscious loans. Then a Republican congress failed to ride roughshod over Barney Frank and Maxine Waters, which they certainly should have done, but apparently they were afraid of being called RAAAAAAAAAcists, to get those laws repealed, and the whole mess festered until it all imploded and threatened to take down the world's financial system with it.

Like I say, the story itself is pretty simple. But I have rarely run across--how shall I put this?--so fact-dense a book. If you pull quotes from the book, you are almost inevitably going to find that you need to quote something else explaining some term or some bit of history. It's hard to review a book like that in any detail, so I'm going to just point out one thing and give you one quote.

Ever since President Obama--and yes, this book will give you some interesting information on just what being a shakedown artist community organizer meant to him--started aggressively pushing the statist takeover of the health care system that he calls "reform," I can't tell you the number of people who--blogospherically speaking, nobody says this sort of thing to my face, at least not yet--give an exasperated shrug of their shoulders, place their hands on their hips, and sigh, and say, "I just don't see what you could possibly have against us helping poor people with their medical care! I mean, wouldn't that be tragic if we did that!" They act as if the simple fact that I do understand what would be tragic about that means I am some kind of amoral monster.

Well, the people that started the problems that caused that financial meltdown were prone to the same sort of thinking. Many of them started out saying, "I just don't see what you could possibly have against us helping poor people get mortgages! I mean, wouldn't that be tragic if we did that!"

Well, it did turn out to be tragic--ironically most hurting, as liberal social and financial policies usually do, the very people that were supposed to be helped. And the health care fiasco, which, I assure you, is not dead, but only sleeping, will do the same thing. So will "green energy." If you have not previously understood how this sort of thing works, Architects of Ruin will go a long way to helping you understand. It's only 184 pages; you can almost certainly check it out of your local library.

Go get it. Your time won't be wasted.

The quote? It's this, which I wish everyone, conservative or liberal, would take to heart, for too few understand it:

It's important here to draw a critical distinction: there is an enormous difference between being probusiness and pro-free market. The former position, which the Clinton administration embraced, is concerned primarily with the health of large businesses, in this case the big financial houses. Being pro-free market means being concerned with the health of the capitalist system as a whole and its underlying principles of profit and loss, risk and reward.

Too few putative conservatives understand this, too. Too many of them assume that what's good for business--and they often mean corporate giants--is good for America. What they often fail to appreciate is that there is more than one way to get, or to stay, big. A business may get or stay big by efficiently serving the needs or desires of many people. They may also--sometimes--get or--more often--stay big by working to rig the system by actually trying to make their field more regulated (so as to freeze out smaller competitors) or rigging the tax system, or, as in the case of some of these big financial houses, accepting a horrid alliance with government that leads to foolish risks being taken on the assumption that government will bail them out when the risks prove fatal.

That's not capitalism anymore.

From Architects of Ruin: How Big Government Liberals Wrecked the Global Economy--and How They Will Do It Again if No One Stops Them

I checked Architects of Ruin: How Big Government Liberals Wrecked the Global Economy--and How They Will Do It Again If No One Stops Them out from the library a few days ago. I'd love to reproduce the whole book here, but, copyright violations aside, I just haven't got the time. Those unfamiliar with a more conservative analysis of the mortgage-related financial troubles we've experienced over the last two years would do well to start with this column by Thomas Sowell. That will give you a little more background so that you can better appreciate this material from the introduction to Architects of Ruin.

All of this has led Americans to wonder: What happened? How the heck did we get here? Whose fault is it? Who do we blame? What mistakes were made? How can we get out of this mess?

There has been much debate about this question, but the ultimate source of the problem, it is generally agreed--the triggering event that caused the chain of other dominoes to fall--was the collapse of the subprime mortgage market in the United States. Banks and mortgage companies had made trillions of dollars in loans to individuals with terrible credit. They signed loans with illegal immigrants, offered so-called NINJA (No Income, No Job, No Assets) mortgages, and allowed people with bad credit to leverage their money. When the loans began to fail in large numbers, a new term entered our national vocabulary: toxic assets. And so the crisis began.

Still, an underlying mystery remained: What explains this perplexing behavior? Were they nuts? Did they simply take leave of their senses?

The conventional narrative was written in the first days of the collapse. And as usual, the loudest, most obstreperous voices seemed to prevail. "The private sector got us into this mess," Congressman Barney Frank indignantly declared as events began to unfold; "the government has to get us out of it."

According to this view, deregulation of the banking industry had encouraged the rise of "predatory lenders" who had pushed home loans on people who couldn't afford them. Those loans were then sold to unscrupulous Wall Street financiers, who repackaged them in the form of mortgage-backed securities. The securities were sold in turn to mutual funds, pension funds, and various foreign investors. but their value was grossly overstated and ultimately rested on the faulty assumption that housing prices would keep rising indefinitely. Once again, the supposed result of irresponsible deregulation of financial markets.

This explanation, coming from Frank, had the obvious benefit of pinning the collapse on his political enemies, the Republicans, while completely exonerating any Democrat (such as himself) who had responsibility for overseeing Fannie Mae and Freddie Mac, the government-backed lending institutions that traditionally acted as a backstop to the housing market. It is not an accident that Frank has been in the forefront of attempts to minimize the crisis or (when it could no longer be denied) deflect the blame to his opponents. When some conservatives pointed out that Fannie and Freddie had abandoned their sober mission of stabilizing the middle-class housing market in favor of a misguided crusade to expand minority home ownership by forcing banks to lower their lending standards, Frank and his allies brazenly shouted them down.

[snip]

...the rush to heavy government intervention, new programs, and massive spending was now treated as inevitable. It was the 1930s all over again, and Obama was the new FDR. Free-market economics had been tried and found wanting. Obama referred to its theories dismissively as "failed ideas" and refused to entertain any talk of tax cuts or (God forbid) "doing nothing" in response. To the contrary, the crisis proved that it was time to return to stronger government controls. Anyone standing in the way was seen as part of the political fringe, a die-hard ideologue on par with a Holocaust denier.

This is the self-serving fairy tale propounded by Barack Obama and his allies in Congress and the press. The actual truth about what happened was a much more interesting and complicated--and incriminating--story, too complex to be conveyed in a media sound bite.

[snip]

It was a massive social engineering project, a grand generational enterprise, thirty years in the making, carried out by an ad hoc alliance of radical activists, labor unions, liberal politicians, federal bureaucrats, and Wall Street financial titans who sought to make getting a mortgage and owning a home a civil right.

[snip]

...the heart of the story is the role that radical activists and liberal politicians in Washington played in trying to harness the U.S. financial system to advance their socialist agenda. Properly understood, it is a cautionary tale about the perils of trying to use the power of the state to do good, to help people by giving them a leg up, to "level the playing field." Ironically, such efforts have usually ended up doing the most harm to the very people they were intended to help. The result in this case was no different.

[snip]

...two additional facts should be very disturbing to American taxpayers.

First, the same people who caused the debacle have now been tasked with cleaning it up. The Obama administration is full of Clinton retreads, and they show no signs of having learned anything from the damage they have wrought.

[snip]

Second, the same cast of characters is busy leveraging state power to manipulate capitalism for their next great social cause: the so-called green economy. Just as occurred in the subprime mortgage crisis, federal authorities and environmental activists are working in tandem, browbeating energy companies and the automotive industry, using the power of the state to compell the creation of carbon-trading schemes and the forced development of green technologies that are simply not profitable. This approach essentially co-opts the regulatory power of the government to create false incentives to invest in green technologies.

The Silicon Valley investor Eric Janszen (who according to the New York Times accurately predicted the dot-com bubble) says that the hype and activism behind green technology will create enough "fictitious value" that the coming green tech bubble will reach an astonishing $20 trillion...before it bursts. In the meantime, environmental activists and their political allies stand to profit handsomely: former Vice President Al Gore has already netted $100 million in profits from green economy schemes.

Plus, of course, the green agenda offers plenty of scope for good old-fashioned political self-dealing. See, for example, this story from the Washington Times of July 15, 2009: "Rep. Ed Perlmutter of Colorado inserted a provision into the recently passed House climate change bill that would drum up business for 'green' banks, such as the one he has invested in and his family and a political donor helped found in San Francisco...Mr. Perlmutter, a two-term Democrat, has two investments in the 3-year old New Resource Bank, which calls itself the nation's first green bank."

Needless to say, there will be much more to come. This is just the tip of the iceberg.

We have not nearly seen the end of liberal activists trying to manipulate the capitalist system for their own profit and social goals. Unless they are stopped, the rest of us are going to pay the price.

Time and again, since I was but a wee sprout, I have observed that a remarkable amount of the time, politicians get elected by promising to "fix" problems that they have caused. They use the massive power of government to fix some perceived injustice, never dreaming--they haven't the training or background reading to understand the subject, all too frequently--that they are going to cause more problems than they solve, and then, utterly unable to perceive that they have screwed up, blame everyone else for the resulting chaos and try yet again to "fix" the problem.

The story is told of a baseball manager who, unsatisfied with the play of his left fielder, benches him and plays the position himself in the critical last inning. After muffing an easy pop fly, the manager heads back into the dugout and announces to the left fielder, "Son, you got left field so messed up, can't nobody play it."

Right now, more than seventy years of government interference in the natural activity of the marketplace has so fouled up the field that can't nobody play it--and yet if you offer the obvious solution: let the air out of the balloon, get the government off the field--you will be shouted down as the obvious lunatic.