This page has been archived and commenting is disabled.
A Free Market Is Not Possible Without Strong Laws Against Fraud
Many economists are now starting to question long-held assumptions that
bubbles don't matter, that huge amounts of leverage are good, and that
the Federal Reserve has mastered monetary policy. They are starting to
read Minsky and other forgotten economic theorists. And Austrian economists are gaining a wider audience.
As I wrote in March 2009:
The
Austrians have been saying for well over a hundred years that big
bubbles lead to big crashes, and that - if you want to avoid depressions
- you have to avoid the bubbles.
In today's article, entitled "Ignoring the Austrians Got Us in This Mess", Barron's agrees:
The
credit crisis and the ensuing global economic contraction have failed
to make an impression on academe, where free-market orthodoxy still
reigns supreme, the New York Times asserted in an article in arts
section recently ("Ivory Tower Unswayed by Crashing Economy," March 4.)...
What
definitely is ignored in academe is the Austrian school of economics,
especially for baby boomers brought up on Samuelson's economics text,
which was pure Keynesian orthodoxy. I did not learn the names von Mises
and Hayek or their ideas until a decade or more after graduation (with a
degree in economics, by the way.)
The
Austrian view is a mirror image on the right to Minsky's from the
left. The economy, if left alone, is self-correcting, say the
Austrians. But central banks' inflationary expansion of credit produces
booms and malinvestments, which inevitably lead to a crashes and
depressions.
The only prevention
for boom and busts are sound money, which is impossible with
government-controlled central banks. Once the bust comes, the only cure
is to let it run its course; allow the malinvestments go bankrupt and
let the market reallocate the capital to productive uses....
But
the Austrians were the ones who could see the seeds of collapse in the
successive credit booms, aided and abetted by Fed policies, especially
under former chairman Alan Greenspan. ...
Greenspan
always contended that monetary policymakers can neither predict nor
prevent bubbles in asset markets. They can, however, clean up the
after-effects of the bust -- which meant reflating a new bubble, he
argued.
That had a profound effect
on risk-taking. Knowing that the Greenspan Fed would bail out the
markets after any bust, they went from one excess to another. So, the
Long-Term Capital Management collapse in 1998 begat the easy credit that
led to the dot-com bubble and bust, which in turn led to the extreme
ease and the housing bubble.
Austrian
economists assert the current crisis is the inevitable result of the
Fed's successive efforts to counter each previous bust. As the credit
expansion pumped up asset values to unsustainable levels, the eventual
collapse would result in a contraction of credit as losses decimate
banks' balance sheets and render them unable to lend. That sounds like
an accurate diagnosis of the current problems.While
Barron's acknowledges that the Austrian school is right about how to
avoid depressions, it doesn't agree with the other main tenet of the
Austrians: that the quickest way to get out of a depression is to let
the bad investments clear themselves out of the markets by letting the
companies which made dumb decisions fail. (The sub-title for the
article is "Their ideas warned us of the bubble; their prescription for the bust is too harsh, however"; and the article ends with the phrase "Make us non-interventionist, but not yet.")
Readers
have written to me saying the same thing: the Austrians might be
right, but their remedy for an economic crisis is too draconian and we
have to do something to help the people.
So what can we do to help people and to improve the economy?
Well, as I've repeatedly pointed out, the economy cannot recover until trust and the rule of law are restored (and see this).
Imposing
accurate accounting standards, stopping high-frequency trading,
quote-stuffing and front-running, and prosecuting fraud to the fullest
extent of the law are prerequisites to restoring trust in our economy.
Indeed,
America has a long tradition of using fraud, antitrust, conspiracy and
racketeering laws to rein in the worst economic abuses. These laws are
an important part of American history, and our recent abandonment of
them must be reversed.
Austrian Economics Does Not Require Abandoning the Law ... In Fact, Laws Are Necessary for a Functioning Free Market
Just as neo-conservatives are not really conservative and neo-liberals are not really liberal, a fake, neo-Austrian legal argument has sprung up trying to excuse the criminal fraud and manipulation of the big banks.
As William K. Black - professor of economics and law, and the senior regulator during the S&L crisis - pointed out
last week, Austrian economics has been twisted by the powers-that-be
and bastardized into a basis for arguing that there should be no prosecutions for fraud or criminal conduct:
Yves
[Smith] noted that the Chamber of Commerce was leading the effort to
elect CEO-friendly judges. The Chamber is one of the points of
intersection in the discussions about electing judges and whether law
and economics has played a perverse role in causing catastrophic policy,
regulatory, and judicial blunders. The Chamber distributed a plan for
a hostile takeover of university departments of economics and finance
(and the courts and the media) proposed by Lewis Powell (the soon to be
Supreme Court Justice). Extremely conservative “law and economics”
proved to be central to this effort. The law and economics movement
began as a non-ideological approach to explaining and aiding judicial
decision-making. The scholars leading the movement had diverse views.
The Olin Foundation transformed law and economics into an ultra
ideological field dominated almost exclusively by passionate opponents
of government “interference” in “free enterprise.” Olin specialized in
creating well-funded positions in academia for scholars that had an
“Austrian” approach to economics. Austrian economics has, generally,
become more extreme since its formative years when Hayek warned that
mixed economies (e.g., the U.S. and Europe) were inevitably consigned to
the Road to Serfdom. Here is how the National Review praised the
Olin’s takeover of the field:Law and Economics: The
John M. Olin Foundation has devoted more of its resources to studying
how laws influence economic behavior than any other project. The law
schools at Chicago, Harvard, Stanford, Virginia, and Yale
all have law-and-economics programs named in honor of Olin. “You
should not forget that without all the work in Law and Economics, a
great part of which has been supported by the John M. Olin Foundation,
it is doubtful whether the importance of my work would have been
recognized,” said Ronald Coase, who won the 1991 Nobel Prize in economics.In
addition to these centers specializing in law and economics, Olin
created scores of endowed chairs at a wide range of universities. Some
of these are in economics departments and others are in law. Olin also
indirectly funded the “boot camps” at which U.S. judges were taught
Austrian economics as if it were undisputed science. The academic
journals in law and economics are dominated by virulent opponents of
regulation. The textbooks used to teach law and economics treat
economic theory as having demonstrated conclusively the folly of most
government actions purportedly designed to help the public. (I say
“purportedly” because Austrians almost always claim that the government
intervention was really designed to benefit a special interest rather
than a substantial portion of the public.)
Here are two
examples that illustrate how false, but so influential and harmful
these Austrian nostrums have become through teaching falsified
economics to thousands of lawyers. Austrian law and economics is based
on suppositions that have long been known to be false. Dickens
famously had Mr. Bumble (in Oliver Twist) respond to being informed
that the law supposed him to be responsible for his wife’s behavior by
remarking that if the law supposed such an absurdity then “the law is a
ass.” The dominant law and economics text on corporate law for years
was by Easterbrook and Fischel. Judge Easterbrook is a colleague of
Judge Posner on the 7th Circuit and Fischel was for a time Dean of the
University of Chicago’s law school. They assert that “a rule against
fraud is not an essential or even necessarily an important ingredient
of securities markets” (1991: 283). Their book was written after
Professor Fischel, as a consultant to three of the most notorious
control frauds of the 1980s, tried out their theories in the real world –
and found that they failed catastrophically. Fischel praised the
worst frauds. Fischel & Easterbrook did not disclose to their
readers that their theories were falsified in the real world. Note how
extreme their claim was, the utter certainty of the claim, and the
lack of any data supporting the claim – a claim they knew to be false.
The taught students that, in the context of securities, we did not
need:1. Any laws against securities fraud
2. The FBI and the Department of Justice
3. The SEC
4. Any rules against fraud
5. Any ability to bring civil suitsFraud
is impossible because securities markets are “efficient” and act as if
they were guided by an “invisible hand.” Markets cannot be efficient
if there is accounting control fraud, so we know (on the basis of
circular reasoning) that securities fraud cannot exist. Indeed, when
Easterbrook and Fischel try to explain why the securities markets
automatically exclude frauds their faith-based logic becomes even more
humorous. They claim that honest securities issuers send one or more of
three “signals” of honesty to guide investors to purchase their
securities – and that only honest firms can send any of these three
signals.1. Hire a top tier audit firm
2. Have their CEO own a substantial amount of stock in the company
3. Cause their firm to have extreme leverageIn
reality, accounting control frauds “mimic” each of these signals and
each signal aids their frauds. Easterbrook and Fischel’s ideas are not
merely wholly ineffective against accounting control fraud – they are
outright criminogenic. That is why Fischel praised the real world
accounting frauds when he was a consultant. Each of the three massive
accounting control frauds that Fischel praised sent each of these three
signals – and they sent them years before Easterbrook and Fischel wrote
their book and made claims they had seen repeatedly falsified by
Fischel’s fraudulent clients without warning their readers.
Note
the continuing damage that these three law and economics dogmas about
“signaling” honesty had in the current crisis. Regulators continued to
treat professionals as if they were “independent” and provided expert
judgments on which regulators should rely. Basel II, for example,
reduced capital requirements dramatically if the rating agencies gave a
high rating to a toxic mortgage derivative. Economists,
criminologists, and reality had long falsified the claim but
theoclassical law and economics never challenges its foundational
dogmas.
Easterbrook provided a classic example of faith-based
law and economics’ misplaced faith in private professionals in a
decision that prompted Robert Prentice’s wonderful article: The Case of the Irrational Accountant: A Behavioral Insight into Securities Fraud Litigation
(2000). The plaintiff alleged that he was the victim of a securities
fraud that the outside auditor had aided. Easterbrook’s opinion stated
that the plaintiff should not be allowed to engage in discovery
designed to support this claim because it would be “irrational” for an
audit firm to aid a securities fraud. Easterbrook’s logic is so
irrational on so many different levels that it proved a treasure trove
for Professor Prentice. In the interest of space, consider only four
aspects of why Easterbrook’s logic fails. First, Easterbrook is the
one who co-authored the textbook claiming that serious securities fraud
cannot occur. That makes him someone that cannot admit that fraud
exists. He certainly doesn’t want plaintiffs finding facts
demonstrating fraud. Second, the same textbook claimed that only
honest corporations could hire a prestigious audit firm. He premised
this (long falsified) dogma on the claim that it would be irrational
for an audit firm to give a clean opinion to a control fraud. If the
plaintiff had been allowed discovery and demonstrated the falsity of
this dogma it would falsify Easterbrook’s entire thesis. Third,
theoclassical economics rests on even more fundamental dogmas –
economic actors are supposed to act rationally and almost entirely to
maximize their self-interest. Empirically, even economists have long
known what non-economists have always known – these dogmas are often
false. Why should a plaintiff not be permitted to discover evidence
that accountants act irrationally? Fourth, Easterbrook assumes away
reality even if we assume rational behavior. The “auditor” acts
through humans called audit partners. Audit partners gain income,
power, and status within the firm primarily by bringing in large
clients. Accounting control frauds understand this and select audit
partners that will give them clean opinions. They also put prospective
audit partners in competition with each other to intensify the
“Gresham’s” dynamic that turns market forces perverse and causes bad
ethics to drive good ethics out of the profession. Top economists had
explained why this dynamic explained why S&L accounting control
frauds had consistently hired top tier audit firms and been able to get
clean opinions from them despite the fact that their financial
statements were fraudulent.
As James Pierce, Executive Director
of the National Commission on Financial Institution Reform, Recovery
and Enforcement (NCFIRRE) explained:Accounting
abuses also provided the ultimate perverse incentive: it paid to seek
out bad loans because only those who had no intention of repaying would
be willing to offer the high loan fees and interest required for the
best looting. It was rational for operators to drive their
institutions ever deeper into insolvency as they looted them.The
National Commission on Financial Institution Reform Recovery and
Enforcement (NCFIRRE) (1993), reported on the causes of the S&L
debacle. It documented the distinctive pattern of business practices
that lenders typically employ to optimize accounting control fraud.The
typical large failure was a stockholder-owned, state-chartered
institution in Texas or California where regulation and supervision
were most lax…. [It] had grown at an extremely rapid rate, achieving
high concentrations of assets in risky ventures…. [E]very accounting
trick available was used to make the institution look profitable, safe,
and solvent. Evidence of fraud was invariably present as was the
ability of the operators to “milk” the organization through high
dividends and salaries, bonuses, perks and other means.The
top tier audit firms knew that the “typical large failure”
“invariably” involved fraud by senior S&L executives, who used
“every accounting trick available” in order to create fictional income
in order to aid the executives’ looting of the S&L. These lenders
followed a distinctive pattern – deliberately making bad loans – that
was rational only for accounting control frauds. The unique pattern
that optimized fraudulent accounting income was simple for an auditor to
spot. The S&L accounting control frauds always hired top tier
audit firms and virtually always succeeded in getting clean opinions for
fraudulent financial statements. That was supposed to be impossible
under Easterbrook and Fischel’s theories. NCFIRRE explained the
“agency” problem that Easterbrook and Fischel missed.[A]busive
operators of S&L[s] sought out compliant and cooperative
accountants. The result was a sort of “Gresham’s Law” in which the bad
professionals forced out the good.Theoclassical
law and economics scholars continued to chant the second signaling
dogma – though falsified throughout the S&L debacle and Enron era
accounting control frauds – throughout the nonprime mortgage era. They
asserted endlessly that modern executive compensation “aligns” the
interests of the CEO with the shareholders’ interests. The reality was
that it frequently magnified the long-standing misalignment of those
interests. That is the key point of Akerlof & Romer’s classic
article – the CEO profits by using accounting fraud to loot the bank
that he controls. He arranges his executive compensation to be
extremely large and based primarily on short-term reported accounting
profits. Akerlof and Romer explain why accounting fraud is a “sure
thing”— mathematically guaranteed to report extreme (albeit fictional)
profit in the short-term. The combination of accounting control fraud
(“blessed” by a top tier audit firm’s clean opinion) and deliberately
misaligned (anti) “performance pay” is that the CEO is guaranteed to
become wealthy – immediately. Moreover, by using seemingly normal
executive compensation bonuses to become wealthy he coverts large
amounts of firm assets to his personal benefit while minimizing the
risk of prosecution. The result of a strategy that employs deliberate
adverse selection in lending is typically a bankruptcy that wipes out
the shareholders. No greater misalignment of the interests of the CEO
and shareholders is possible than that caused by modern CEO
compensation. Modern executive and professional compensation are often
criminogenic, yet theoclassical economists strive even now to preserve
the ability of CEOs to loot through perverse executive compensation.
The third “signaling” dogma, however, is never discussed today
by theoclassical law and economics scholars. The Austrians generally
ignore the endemic accounting control fraud (their heroes have always
been business cowboys) in their explanation of why we suffer recurrent,
intensifying financial crises. The Austrians love to blame the Federal
Reserve and “easy money” for producing low interest rates. The
Austrians claim this led to excessive leverage, and blame the global
crisis on extreme leverage. It is inconvenient to this new meme to
recall that the extreme law and economics scholars used to light candles
to leverage and chant its praises as a unique signal of honesty.
Accounting control frauds do optimize fictional accounting income by
engaging in extreme leverage. The leverage is a tactic of the
accounting control frauds that drive modern crises, not the cause of the
crisis. Because accounting control fraud produces exceptional
reported income it is easy for the frauds to borrow enormous amounts
(lenders virtually break down the frauds’ doors in their eagerness to
lend). The more money an accounting control fraud borrows, the greater
the sums the CEO can loot.
Michael Milken was the original
high priest of the extreme leverage dogma and the claim that it
signaled honesty (Fischel was his acolyte). Milken was, of course, an
expert at signaling honesty while practicing control fraud. His time
in prison only increased his hate for U.S. government “interference” in
“free markets.” The Milken Institute, therefore, now commissions
articles about the ongoing crisis that emphasize (in huge fonts):From Main Street to Wall Street, one common thread runs through all facets of this story: excessive leverage.
http://www.milkeninstitute.org/pdf/Riseandfallexcerpt.pdf (p. 9)
That’s
right – the fraud whose entire junk bond business model at Drexel
Burnham Lambert rested on the dogma that corporations had too much
capital and needed to massively increase their leverage (e.g., through
LBOs) is now running an institute whose scholars claim that (far
lesser) leverage that modern U.S. banks employ is the primary cause of
global catastrophe. Of course, there’s no mea culpa by Milken admitting
that his earlier dogma was false.
The fact that, empirically,
accounting control fraud is a severe problem is no barrier to
theoclassical law and economics ignoring control fraud. I invite
readers who have taken law and economics and corporate law classes to
inform me whether their textbooks discussed Akerlof and Romer’s
article: Looting: The Economic Underworld of Bankruptcy for Profit.
Akerlof was awarded the economics version of the Nobel Prize in 2001
and Romer is also a brilliant economist. Neither Easterbrook nor
Fischel is an economist. Akerlof and Romer’s article explains how the
managers that control a firm use accounting fraud to create a “sure
thing” of fictional profits. The managers get rich, the firm dies.
Akerlof & Romer provide theory, data, and real world examples. The
lawyers that seek jobs at the financial regulatory agencies are the
lawyers most likely to have taken law and economics and corporate law
courses in which Easterbrook & Fischel’s claims were treated as
objective science. In my experience, it is vanishingly rare for them to
even be aware of Akerlof & Romer’s work or the work of
white-collar criminologists documenting and explaining accounting
control fraud.
When regulators believe that control fraud is
impossible – they make control fraud certain by eviscerating regulation
and supervision. The most infamous recent example of this is Alan
Greenspan (like Fischel, a former consultant to the most infamous
S&L control fraud – Charles Keating’s Lincoln Savings). Greenspan
refused to believe that fraud could occur in financial markets. He
refused to take any effective regulatory steps against what the FBI had
warned him (in 2004) was an “epidemic” of mortgage fraud even though
they correctly predicted that it would cause a “crisis.” The Fed had
unique regulatory authority under HOEPA to regulate all mortgage
lenders.
Law and economics has, for over two decades, been
dominated by theorclassical economic dogmas that have proved false.
These dogmas are premised on an ideological hate for regulation – even
by democratic governments. The Olin Foundation did not buy the souls
of the economists and lawyers to whom it provided fellowships and
endowed chairs. It simply selected true believers for its largess. It
knew how desperately eager universities were to raise funds. There
are now tens of thousands of law and economics graduates that have
taken a class in theoclassical law and economics. They were taught
that theoclassical economic assertions (often falsified decades ago)
were objective facts devoid of ideological content. They have been
taught that economics has proven that regulation is unnecessary,
hopeless, and harmful. Some students accept this dogma as revealed
truth, but many reject it. (If your goal as a professor is to
indoctrinate students you should prepare for a life of disappointment.)
Few economics, business school, or law students have been introduced
to effective regulation or economic/finance theories that have proven
to have predictive strength. It is the non-ideologues we need to reach
and inform them about the reality-based alternative to the faith-based
version of economics they were taught.
In
truth, the leading Austrian theorists were big supporters of freedom
and liberty. You can't have freedom if a handful of oligarchs are
manipulating the economy without any checks and balances from the law.
See this.
More importantly, you can't prevent bubbles unless you crack down on the fraud which helps to inflate bubbles. As I pointed out a year ago:
Everyone knows that the Fed blows bubbles.
But William K. Black ... says that fraud by many other companies also contributes to the bubble-and-bust cycle.
In a talk Black gave in June entitled "The Great American Bank Robbery" ... he gives the following examples.
Initially,
during the S&L, Enron and subprime crises, outside audit firms and
appraisers gave their seal of approval and a clean bill of health to
the companies, allowing them to commit fraud and blow a giant
speculative bubble in toxic assets.
And the three credit rating
services also committed massive fraud which helped blow the bubble.
For example, an analyst at Standard & Poors was assigned the job of
giving a credit risk rating for derivatives backed by subprime loans.
He wanted to review a sample of loan file to assess credit risk. His
boss (a high-level officer at S&P), gave him the following written
response:Rating Agencies as Vectors.
Any request for loan level tapes is. TOTALLY UNREASONABLE!!! Most investors don't have it and can't provide it.
[W]e
must produce a credit estimate. It is your responsibility to provide
those credit estimates and your responsibility to devise some method for
doing so. [S&P 2001](capitalization and punctuation
in original). In other words, he was told to make it up, and then to
make up a rationalization.So the S&P analyst ended up giving AAA rating - i.e. zero credit risk - on something that had immense credit risk.
So the bubble was partly blown because, as Black says,"This was a trillion dollar industry based on don’t ask, don’t tell."
This
is nothing new. Black points out that the official investigation into
the S&L crisis found that in the typical large failure, fraud was invariably present.Black
also points out that the guys covering up fraud in S&L were
promoted to head regulators in the 2000's. These regulators gave a wink
and a nod to massive fraud and insane amounts of leverage. So the
regulators helped blow the bubble and sow the seeds of the current crash
as well.Fraud By the Banks, Lenders and Financial Service Companies
But
the most interesting portion of Black's talk was the role of fraud by
numerous businessmen in blowing and then bursting bubbles.Black explained that fraud by a financial company usually involves the company:
1) Growing like crazy
2)
Making loans to people who are uncreditworthy, because they’ll agree
they’ll pay you more, and that’s how you grow rapidly. You can grow
really fast if you loan to people who can’t you pay you backand
3) The use of extreme leverage.
This combination guarantees stratospheric initial profits during the expansion phase of the bubble.
But it guarantees a catastrophic subsequent failure when the bubble loses steam.
And
collectively - if a lot of companies are playing this game - it
produces extraordinary losses (more than all other forms of property
crime combined), and a crash.In other words, the companies
intentionally make loans to people who will not be able to repay them,
because - during an expanding bubble phase - they'll make huge sums of
money. The top executives of these companies will make massive salaries
and bonuses during the bubble (enough to live like kings even even if
the companies go belly up after the bubble phase).And since honest regulators would stop this fraudulent activity during bubbles, the corruption of regulators ensures wild bubbles and the subsequent crashes.
Of
course, the types of fraud described by Black in the S&L, Enron
and 2007 meltdowns are not just for the history books. Unless stopped,
they will continue and will be the cause of the next crash.
Indeed,
Austrian economists stress the need to minimize "malinvestments"
(investments made in response to faulty signals). The Austrians
stress that artificially low interest rates can send false signals to
investors. That is obviously true.
But criminally dishonest
behavior by private corporations and traders - such as high-frequency
trading, quote-stuffing, front-running, control fraud and accounting
fraud - does the exact same thing. If there is rampant fraud, collusion
or book-cooking, faulty signals will be sent.
Moreover, the type of radical concentration of wealth which comes from criminally manipulating the system itself destroys democracy and makes a mockery of our legal system.
Freedom of the market versus basic regulation of fraud is a false dichotomy. A free market and laws against criminal fraud are both necessary. Indeed, they are interrelated and mutually self-reinforcing.
Even Richard Posner - probably the leading proponent over the course of
many decades for removing the reach of the law from the economy - has
now changed his mind.
Whether you follow Keynes, Friedman, Mises and Hayek, or other economists, we all need to implement a little of the Austrian economic wisdom about preventing bubbles, and of the American legal wisdom about cracking down on fraud, breaking up the too big to fail banks using antitrust laws, and imposing accurate accounting and full disclosure requirements (see this, this and this).
The economy will not recover unless we do.
- advertisements -
gw,
great journalism. if there was still a nation your work
would be a national treasure.
.
from the barron's piece..
"The only prevention for boom and busts are sound money, which is impossible with government-controlled central banks." ...
.
what? we have no government controlled central bank. you would think the editors
at barron's would have noticed? are they new at this financial journalism thing?
the governments don't control the banks, the banks have captured the
governments.
we don't even have a government controlled government. it's like the
constitution was never even written.
the people must make the distinction or lose everything.
their government, their money, their liberty, their freedom, their children
and their lives.
as it is going not only will we wake up one day and find we are slaves
to international finance but our children's children will either never be born for fear
of the cost or will be born into perpetual indentured servitude with the only escape
being some form of cannibalism? no human option, dictated by finance, for
the many, rabble, caught in that space less space between the rock and the
hard place. down by law of some questionable integrity and origin.
give the bankers an inch and they take your lungs, your young, a mile and
the most recent coat of paint on your entry door.
i digress. end the fed.
if you don't believe in regulation then prepare for the anarchy of other people's
freedom of expression, and that is up to them, and it may be well beyond
what you could imagine yourself.
.
so the year is 2010 and the only liquidity in the economy is fraud. go back
to 1913 for the explanation. promises to satisfy the insatiable are never
honored. end the fed.
imposed financial obligation, privately originated and publicly guaranteed
aka bailout, transfer, amounts to theft and fraud and a perversion of
governance and destruction of sovereignty. treason is the term that
comes to mind. end the fed.
some seem to think that this is the essence of the usa, freedom to
commit fraud, freedom to perform public displays of cannibalism,
freedom to exploit everything and anything that moves that is not
bolted down or otherwise too difficult to steal.
all i can say is oh shit. end the fed.
nature abhors a vacuum. our lack of ability to direct our collective
intelligence in a creative and productive fashion is that vacuum.
other entities in the world do not have this problem, sick as they
may be, so they fill the void and we wonder why.
end the fed.
end the fed.
You can never have a "free market" as long as the money supply is controlled either by Private Banksters or by Da Goobermint. In the case of PBs, they will use their control to manipulate the market to their own benefit. In the case of Da Goobermint, it will create conditions where TBTF monopoly becomes prevalent and eliminates any market whatsoever. A free market can only exist under conditions of pure barter, placing money as an intermediary destroys the possibility of freedom, because the money itself is a controlling medium.
RE
inevitable tyranny?
So, why isn't Bill Black AG? I think we need a little "Tough Love".
I recently read an extremely intelligent post on Goldman Sachs's message board in Yahoo's finance section. The thesis of the post was that the Federal Reserve is a banking cartel that's composed of the biggest U.S. banks.
The author of the post added that all these banks are bankrupt and have been using the power of the Fed to funnel money to themselves. The author also referenced a recent article in which analyst Jim Wllie says that the banks have been counterfeiting U.S. Treasuries through naked shorting in order to give themselves an additional source of funding.
Jim Wllie's conclusion is that there can be no economic recovery until the big banks are allowed to fail. This should, of course, include the abolition of the Federal Reserve. We cannot, as Thomas Jefferson said, allow banks to control the nation's currency.
I would like to add that wherever there is chaos -- whether it be through oil rig explosions or terrorist attacks or wars -- the big banks are invariably the perpetrators. There are no accidents in this world, and it should be abundantly clear that the bankers profit from what is known as disaster capitalism.
Therefore, if we wish to restore democracy to the United States, we must dismantle the big banks and remove them from power over the population.
<sits quietly admiring the quality of the post and the majority of the comments following it>
GW and commentors: thanks for the Saturday morning headspin; and I didn't even touch a drop last night. Now I'll have 'I abhor all things legislated' Rothbard, Ayn 'I'm all right so fuck all the rest' Rand, Tommy 'Please don't mention my Master's Thesis' Douglas, Yves 'I think I need a hug' Smith, and John 'Guilt is a great motivator' Perkins in my head all chasing each other around in circles for the rest of the day.
Can anyone spare an aspirin?
Regards
Time for us so called humans to grow up, beginning with who and what we really are and what we truly NEED. So far we are mostly getting what we want without selfknowledge or self awareness.
At the end of your term in this body you now own,,will you have lived as a merehuman or as the creative, powerful lifeforce you really are.
At last breath while dying it will be too late.
I hate to be a wet blanket but we are drowning in lies,ignorance and sheer stupidity. Too many of us are myopic in view and fail to see the larger picture beyond the markets and the money. Its as if we are polishing the car while the tsunamy towers above us. Fuck the money, get right with yourself and good luck to all of you.
OFF WITH THEIR HEADS!
www.nationalfraudconstable.org - In all the broad universe there is no other hope for mankind than the Constables.
Strong laws against fraud? . . . I suppose one might assume that . . . if one was not willing to accept personal responsibility.
However, a free market implies that the buyer must exercise "due diligence"; and a huge part of our problem is that buyers are not willing to use the gray matter that sloshes merrily between their ears to examine the merits of a transaction; Cramer comes on and says buy-buy-buy and so they buy; A week later, Cramer is lamenting in an effort to assuage his error.
Fraud today is no different than Fraud 10 years ago, or 20 years ago, or 1000 years ago. Well . . . the result is different. In the past, perpetrators were either run out of town or thrown in jail. Today, the perpetrators are bailed out, promoted to positions regulating the fraud, and declared economic heroes. In the past, losses were born by those stakeholders that failed in their due diligence; in the present, loses are redistributed to those who had no stake.
We already have laws against fraud and yet fraudsters like TimGeithner are running the show. So go ahead create new laws if it makes you feel better.
How about, "A free market is not possible... period".
i thought that too.
the problematic word is "free".
an adjective describing and characterizing the
noun "market" . a noun that is a verb. e.
the adjectives are the manipulated parts of speech.
the money words. the margin words. the juice. or the
bubbles in the champagne. ?
Why not?
I should have added, in this current "market" climate. Thanks for pushing the issue.
I should have also pointed out that having laws against fraud means nothing if not enforced.
GW....Fantastic commentary as usual....
Have you run across any "economic recovery models" or methods ...etc....that impress you ?
If so....could you elaborate ????
"free" market
"strong" laws
Why joke me with these adjectives? Our civilization is in a bubble and will be "dumbed down" whether we like it or not.
"free" market/"strong" law etf just listed...
Any libertarian will tell you Austrian economics is useless without sound money and the rule of law. To divorce the three will result in the sort of cognitive dissonance you're discussing in the article.
And thus their distinction as libertarian, rather than anarchist.
Libertarians are closet statists. They want to run their own lives, but only under some government that controls money and rule compliance at the point of a gun.
Talk about some cognitive dissonance.
Physical force and the readiness to use it is present in every market everywhere in the world, always has been and always will be, that's obvious. What varies are the extent to which market participants handle their own mutual security, the extent to which security is handled by specialists, and the relationship between market participants and security specialists.
Money has always had a powerful political patron, symbolized by the face of the political leader stamped onto the vast majority of coinage. It's not practical to use precious metals as money unless there is some trusted organization ensuring standard weight and purity of the coinage. Maintaining a credible currency requires a credible political system. Even with the gold standard, without a credible political system, you won't get a credible currency.
This is a common argument against private coinage. It makes as much sense as saying the state should make all weights and measures or fine machinery tools or grow all our food. It assumes only the state can provide honest measures and products.
Unfortunately, the history of debasement of currency by governments is as long as the history of governments. This is the best proof that governments are the least able to provide credible currency. If you still have doubts, how are FRN's working for you?
It further assumes that people could not use tests for purity, weight or be aware of social comment on the credibility of mints.
Please, go back to the WH and get a better blogger.
Fraud starts with fiat money.
Interesting piece of food for thought - and thanks for writing it.
But it's a difficult balancing act. Sure the need for referees in this game seems to be obvious - but as has been stated by someone far wiser than I (expanded in this discussion in a way I'm sure the original author would approve), "When buying and selling are controlled by legislation (regulation) the first thing that will be bought and sold are legislators (regulators)."
The legislators, in theory, can be changed out every so often - the regulators are there, for all intents and purposes, forever.
And under our current structure the buying and selling of regulators is a closed market.
So the solution is to open up elected politicians to a free market. An open and honest system of influence peddling- perhaps an open auction process.
Sold ! to the gentleman with the red hat. Hey, I like it.
The problem is who watches the referees?
Centralization does not work, and in this case monopolization of the referees will not work. It will be a power too attractive for the most charming and deceptive of the society and will seek to gain control to use it. It has always been like that, it will always be like that. The only solution is not handling that power to anyone.
YES WE CON
http://williambanzai7.blogspot.com/2010/09/yes-we-con.html
Regrettably fraud in our system is institutionalized. Graft is referred to as campaign finance and influence peddling is referred to as lobbying. Same thing. The real problem of course is the American public. They will not accept public campaign financing. Their loss. Nice little slaves thay are.
The real problem of course is the American public. They will not accept public campaign financing. Their loss. Nice little slaves thay are.
It makes little difference how the master class is chosen. Once the people allow a master class to assume the mantle of sovereignty which can only rightfully be credited to the individual then the individual assumes the status of slave. This is what Ayn Rand called, "the sanction of the victim."
Exactly this.
The truth and the rule of law are essential for a capitalist society; however, when those who make the laws exempt themselves and their friends (contributors) from that rule of law then capitalism fails.
Exactly, we need some prison time, starting at the top. Progressive, liberal socialist (like Obama) mantra that capitalism has failed bullshit must be nipped in the bud. Capitalism didn't fail, it was violated.
Free Markets- The New 21st Century Ultimate OxyMoron
Are you saying that voluntary transactions are incompatible with freedom?
Nope.
Basing everything on voluntary transactions alone is incompatible with the accumulation of property.
This is the choice :
1. or a capitalist system with property rights and collective institutions that govern, regulate, and control this system. With all the potential pitfalls of such a system.
2. or an anarchist system based on voluntary transactions, free markets and no property rights
A capitalist anarchist system doesn't work. It will automatically collapse or lead to the worst kind of tyranny one could possibly imagine, then collapse.
*
None of your remarks arise from a logical basis. Perhaps the problem lies in the fact that, as a sociopath, you can not envision the reasonable actions of free men in a free society.
The illusion that regulations are there to protect the people is the most dangerous idea that one can have.
Regulations have one objective and its always to benefit your political pals.
Respect to contracts and fraud is an important issue and should be respected.
But the article is just mixing regulations and fraud from contracts together and its dishonest.
Sense and sensability in the creation, structure, and application of regulation is essential in their embodiment for them to create a public benefit vs a private benefit.
I have listened to speakers from Ron Paul to locals at Tea Party events decry and vilify all regulations by not speaking up for sensable application of regulations.
Reviewing some aspects of some sensable regulation:
Gramm-Leech-Bliley and the Commodities Futures Modernization Act were was elemental in removing effective regulation that helped prevent some of the fraud and abuse, the asymetry of knowledge and wanton abuse of the less knowledgable in regard to financial practices and products that were integral to the creation and collapse of the financial products bubble.
Various regulation that have benefitted the environment, thus enabling cleaner air and water (ending acid rain that plagued the upper-midwest and east, the reduction of "smog" in the LA basin and other locations are just two examples) are other examples of how regulation have benefitted others, that are not "political pals".
Could the "free market" have corrected the externalities and cost exorcisisms of manufacturers that wantonly pollute the environment to maximize their private profits by shifting costs onto the larger public? I suppose it could, but that would require a very high proportion of informed, actively engaged and moral acting consumers, that consider all aspects of their consumption and expenditure.
Similarly, understanding financial products and the consequences of their use, and ability to be abused, call out for preventing the same asymetry of knowledge and resultant abuse and fraud to create private benefit and public costs. Is it/should it be, required of Joe and Jane Sixpack to fully understand the structure of financial markets in addition to all ordinary products to make "free markets" function, as human behavior, full and free and complete information is required for free markets to not be abuse-able?
The bevity of your argument, in its total, "the article is just mixing regulations and fraud from contracts together and its dishonest", needs much more support, and smells of a strawman or other agenda.
Could the "free market" have corrected the externalities and cost exorcisisms of manufacturers that wantonly pollute the environment to maximize their private profits by shifting costs onto the larger public?
Law, Property Rights, and Air Pollution by Murray N. Rothbardhttp://www.lewrockwell.com/rothbard/air-pollution.html
Mises Daily: Thursday, December 28, 2006 by Murray N. Rothbard
Let us turn now to the problem of how disputes — in particular disputes over alleged violations of person and property — would be resolved in an anarchist society. First, it should be noted that all disputes involve two parties: the plaintiff, the alleged victim of the crime or tort and the defendant, the alleged aggressor. In many cases of broken contract, of course, each of the two parties alleging that the other is the culprit is at the same time a plaintiff and a defendant.
An important point to remember is that any society, be it statist or anarchist, has to have some way of resolving disputes that will gain a majority consensus in society. There would be no need for courts or arbitrators if everyone were omniscient and knew instantaneously which persons were guilty of any given crime or violation of contract. Since none of us is omniscient, there has to be some method of deciding who is the criminal or lawbreaker which will gain legitimacy; in short, whose decision will be accepted by the great majority of the public.
"New proposals such as anarchism are almost always gauged against the implicit assumption that the present, or statist system works to perfection."In the first place, a dispute may be resolved voluntarily between the two parties themselves, either unaided or with the help of a third mediator. This poses no problem, and will automatically be accepted by society at large. It is so accepted even now, much less in a society imbued with the anarchistic values of peaceful cooperation and agreement. Secondly and similarly, the two parties, unable to reach agreement, may decide to submit voluntarily to the decision of an arbitrator. This agreement may arise either after a dispute has arisen, or be provided for in advance in the original contract. Again, there is no problem in such an arrangement gaining legitimacy. Even in the present statist era, the notorious inefficiency and coercive and cumbersome procedures of the politically run government courts has led increasing numbers of citizens to turn to voluntary and expert arbitration for a speedy and harmonious settling of disputes.
Thus, William C. Wooldridge has written that
Wooldridge adds the important point that, in addition to the speed of arbitration procedures vis-à-vis the courts, the arbitrators can proceed as experts in disregard of the official government law; in a profound sense, then, they serve to create a voluntary body of private law. "In other words," states Wooldridge, "the system of extralegal, voluntary courts has progressed hand in hand with a body of private law; the rules of the state are circumvented by the same process that circumvents the forums established for the settlement of disputes over those rules…. In short, a private agreement between two people, a bilateral "law," has supplanted the official law. The writ of the sovereign has cease to run, and for it is substituted a rule tacitly or explicitly agreed to by the parties. Wooldridge concludes that "if an arbitrator can choose to ignore a penal damage rule or the statute of limitations applicable to the claim before him (and it is generally conceded that he has that power), arbitration can be viewed as a practically revolutionary instrument for self-liberation from the law…."[2]
"The idea that the state is needed to make law is as much a myth as that the state is needed to supply postal or police services."It may be objected that arbitration only works successfully because the courts enforce the award of the arbitrator. Wooldridge points out, however, that arbitration was unenforceable in the American courts before 1920, but that this did not prevent voluntary arbitration from being successful and expanding in the United States and in England. He points, furthermore, to the successful operations of merchant courts since the Middle Ages, those courts which successfully developed the entire body of the law merchant. None of those courts possessed the power of enforcement. He might have added the private courts of shippers which developed the body of admiralty law in a similar way.
How then did these private, "anarchistic," and voluntary courts ensure the acceptance of their decisions? By the method of social ostracism, and by the refusal to deal any further with the offending merchant. This method of voluntary "enforcement," indeed proved highly successful. Wooldridge writes that "the merchants' courts were voluntary, and if a man ignored their judgment, he could not be sent to jail…. Nevertheless, it is apparent that … [their] decisions were generally respected even by the losers; otherwise people would never have used them in the first place…. Merchants made their courts work simply by agreeing to abide by the results. The merchant who broke the understanding would not be sent to jail, to be sure, but neither would he long continue to be a merchant, for the compliance exacted by his fellows … proved if anything more effective than physical coercion."[3] Nor did this voluntary method fail to work in modern times. Wooldridge writes that it was precisely in the years before 1920, when arbitration awards could not be enforced in the courts,
It should also be pointed out that modern technology makes even more feasible the collection and dissemination of information about people's credit ratings and records of keeping or violating their contracts or arbitration agreements. Presumably, an anarchist society would see the expansion of this sort of dissemination of data and thereby facilitate the ostracism or boycotting of contract and arbitration violators.
How would arbitrators be selected in an anarchist society? In the same way as they are chosen now, and as they were chosen in the days of strictly voluntary arbitration: the arbitrators with the best reputation for efficiency and probity would be chosen by the various parties on the market. As in other processes of the market, the arbitrators with the best record in settling disputes will come to gain an increasing amount of business, and those with poor records will no longer enjoy clients and will have to shift to another line of endeavor. Here it must be emphasized that parties in dispute will seek out those arbitrators with the best reputation for both expertise and impartiality and that inefficient or biased arbitrators will rapidly have to find another occupation.
Thus, the Tannehills emphasize:
"Arbitration was unenforceable in the American courts before 1920, but this did not prevent voluntary arbitration from being successful and expanding in the United States and in England."If desired, furthermore, the contracting parties could provide in advance for a series of arbitrators:
Arbitration, then, poses little difficulty for a portrayal of the free society. But what of torts or crimes of aggression where there has been no contract? Or suppose that the breaker of a contract defies the arbitration award? Is ostracism enough? In short, how can courts develop in the free-market anarchist society which will have the power to enforce judgments against criminals or contract breakers?
http://mises.org/daily/2429
A Critical Analysis of Murray Rothbard’s Model for Common Law Juridical Systems in the Free Society
http://www.visandvals.org/docs/The%20Price%20of%20Private%20Law,%20Bond.pdf
http://en.wikipedia.org/wiki/Criticisms_of_anarcho-capitalism
http://libertarianleft.freeforums.org/insane-rothbard-quote-t189.html
And I'll stop there for now.
This not a critical analysis. You need to define your terms. A critical analysis deconstructs an argument into its' component parts, then proceeds to argue each point while providing examples in support of its' criticisms.
Noam Chomsky's opinion is of as much value here as Donald Duck's. Rothbard supports his ideas with historical examples and well reasoned arguments that proceed to tackle all possible objections. If you take the time to read them, you may begin to understand what a critical analysis is.
Chomsky is just the guy for you. He speaks eloquently of all the ills of all the world but he has never lifted a finger to do anything about them.
There's a scene from the British series Red Dwarf which always puts me in mind of Chomsky. An evil alien is once again trying to kill our heroes but in this case each of our boys' personalities has morphed into something unusual. Arnold Rimmer takes on the personality of a university professor.
Here's the video:
http://www.youtube.com/watch?v=j0Bm1-ylsb8&feature=related
I thought you wanted to discuss reality not fiction?
I like to viddy the old films now and again.
Crockett, thank you for referencing a great argument from Mr. Rothbard. This and other essays are the only way to understand the compendium of Austrian economics. Anarcho Capitalism is a well reasoned argument against the vagaries of state systems- including law and fraud.
George, The problem with your argument is there are a number of assumptions that are false. This piece has highlighted them, but I want to answer one in particular: The first quote from Barron's is an excellent preamble to the basics of Austrian theory. Unfortunately, you go on to provide the mea culpa that this solution is too "draconian" to be taken seriously. Further, you state it will harm "the people".
Austrian theory is not new. It has been around since the 1870's. The failure of modern economists and policy makers to adopt it's principles is proof that they never wanted a free market or cared about the plight of any people but their own-the elites.
Even a Keynsian will complain that while monetarism is allowed to run amuck, the mirror image policy of tax increases during good times to achieve equilibrium has always been ignored.
An analogy might be appropriate here: if you were dying of cancer and could be saved through a draconian solution that caused great pain, would this be preferable to a slow death with less pain and discomfort?
I think the answer is self evident. Further, who are these "people" they wish to comfort? The general public has neither the wealth or potential for loss that would cause the draconian effects of this solution. Would they suffer? Sure. However, as our history clearly shows, the people have never had much and have been treated as slaves since the beginning of the republic. Labor history is replete with examples of violence committed by industrialists in coordination with the state and legal system.
The reality is the "people" that would be affected the most would be the wealthy elites who could no longer depend on the charity of the state police structure to insure their profitability and protection from free market forces.
Every call for state protection is problematic for two reasons: all government actions are violence inflicted on a particular group of people for the benefit of a priviledged elite. Two, despite all efforts to the contrary, they never accomplish their purpose. This reveals the true nature of the law in government- to confound the populace, provide a false sense of security and to protect the elites in their theft of wealth.
Finally, Austrian solutions are dramatic, in fact, revolutionary. However, liberty can only be found in a system that eschews control. They are diametrically opposed forces. Thus, we must choose: Liberty with the possibility of fraud that depends on our ability to recognize it and protect ourselves in the best way we know or statist control and slavery with the constant assurances of safety from forces that are committing systemic rape of all its' citizens.
I think the choice is simple,but then, I'm an anarchocapitalist.
The writings of Murray Rothbard and other modern Austrians are available at mises.org.
"Great argument by Mr. Rothbard"
It's only "great" when you just shut your brain after reading it. Especially when one never ever starts to consider the numerous perfectly valid counter arguments to the Rothbardian logic and mythical history. Counter arguments from anarchists, libertarians, and countless other moral philosophers.
When one starts to consider both sides, the Rothbardian arguments and the counter arguments, one arrives quickly to the conclusion that Rothbard was insane. Of couse when one only reads the Rothbardian argument and shuts one's brain it looks so perfectly wonderful, logical, simple.
"A society without a state", anarchism, will never ever be compatible with property rights and capitalism.
Perhaps you could provide a sketch of these great arguments so we can compare and contrast? As Murray Rothbard was considered a libertarian and anarchist, you might need to include him?
Your last statement requires some support.
If you are to argue as a child, without providing support for your contentions and attempting to smear an argument through insult, please go back to marketwatch. Many of the posters here are capable of constructing an argument and would appreciate a similar effort from you if you choose to attack an idea.
Suppose that anarcho-capitalism and Austrian economics are wrong and will lead to abject failure for all who willingly follow those paths. What is that to you? I will stand or fall by my own actions. But you continue to insist that I must be forced to be a part of a system which you favor and I do not. The only way for you to compel me is at the point of a gun.
If you want to live a life of sunshine and rainbows in a nice comfortable government safety net which, goodness gracious, considers the well being of all mankind, then be my guest. Just leave me out of it. Why can't you get that through your head? Is it possible that you have ulterior motives and wish to extract some form of payment or service from me?
Bugger off.
Obviously there's no point having a conversation if we both say to each other "I don't want to be part of your world".
We apparently both think there is something wrong with our world today. We apparently both want to make it a better place. We happen to differ on the implementation.
The only thing I want to extract from you are your thoughts. I hope they won't cost me too much tough.
chrisina said: Obviously there's no point having a conversation if we both say to each other "I don't want to be part of your world".
I'm just trying to help folks escape from the spider web you call a safety net. So when I call out to you, "lazy lob and crazy cob!" I merely intend to distract you and encourage your victims while I cut them free of your hideous web.
chrisina said: We apparently both think there is something wrong with our world today. We apparently both want to make it a better place. We happen to differ on the implementation.
As long as you try to implement your "better world" at the point of a gun I will fight you tooth and nail. I can not consider you to be a rational actor and therefore can not parley with you as long as you insist on exercising the power to compel me through confiscation, abduction or corporal punishment.
Invent a better mouse trap, or better yet a "better world" and the world will beat a path to your door. If you have to sell your ideas at the point of a gun you admit to their inadequacy and their lack of appeal for the participants.