Again, let me emphasise that participation in political competition, political engagement, and hence the work of politicians are of the essence in defending the system of liberty that underlies our civilization.
Just ponder these words of a politician:
…However, I leave the post with great misgivings about the power and irresponsibility of - to coin a phrase - the Green Blob. By this I mean the mutually supportive network of environmental pressure groups, renewable energy companies and some public officials who keep each other well supplied with lavish funds, scare stories and green tape. This tangled triangle of unelected busybodies claims to have the interests of the planet and the countryside at heart, but it is increasingly clear that it is focusing on the wrong issues and doing real harm while profiting handsomely. Local conservationists on the ground do wonderful work to protect and improve wild landscapes, as do farmers, rural businesses and ordinary people. They are a world away from the highly paid globe-trotters of the Green Blob who besieged me with their self-serving demands, many of which would have harmed the natural environment. I soon realised that the greens and their industrial and bureaucratic allies are used to getting things their own way. I received more death threats in a few months at Defra than I ever did as secretary of state for Northern Ireland…
Chris Berg of Australia's Institute of Public Affairs discusses "Too Big To Fail", and comes to a different conclusion than I do. He argues that the problem cannot be solved because it is an inherent concern of politicians to protect certain companies or institutions from terminal collapse.
I would argue, that only politics can change the present state of affairs. However, if libertarians are unwilling to participate in politics, eschewing the competition for political dominance of the state, matters are indeed bound to linger on in their unsatisfactory condition.
"Too big to fail" describes financial institutions, mostly banks, which have become so large and so deeply integrated into the financial system that if we let them collapse they would take everything else with them.
If a corporation is too big to fail, then, it follows, taxpayers have to bail them out.
It's quite a problem. A market economy is supposed to be dynamic, full of entries and exits. Firms that add economic value thrive. Those that do not go broke.
So bailing out failed companies makes the economy less efficient. More gallingly, it redistributes money from the poor to the rich. And it creates "moral hazard" - a belief by management that ultimately they won't have to pay for their mistakes.
Moral hazard is a particularly severe problem for banks. Banks trade on risk. A bank's basic job is to transform short-term highly liquid deposits into long-term extremely illiquid loans. Too much of the latter will prevent redemption of the former.
Too big to fail encourages banks to make riskier loans. Why wouldn't they? They're not the ones bearing the cost of failure. Taxpayers are.
So it would be great to get rid of too-big-to-fail. Or at least limit it somehow. The Murray Inquiry has a few ideas: higher capital requirements for bigger institutions, for instance, or new procedures for when banks do fail.
But the question isn't what should we do about too-big-to-fail but what can we do about it.
And the answer to that question is almost certainly nothing.
One of the problems with freedom is that her child civil society works so well, we can afford - that is without all hell breaking lose at once - to despise and antagonise both.
Arnold Kling advises:
If those of you who are graduating today go on to attend a liberal arts college, you will hear constantly from people who equate moral character with political expressions of approval for non-profits and disapproval of business. They judge you not be [sic] the content of your character but by the conformity of your political expression. I urge you to reject their doctrines.
If you undertake community service, do so quietly, without righteousness. Do not celebrate community service. Do not give a special place of honor to community service. Above all, do not demean those who serve the community by helping to provide ordinary goods and services through profit-making enterprises. Their community service is honored not by wealthy donors or by doctrinaire teachers. Instead, their community service is honored by ordinary people who voluntarily choose to spend money to obtain what the profit-seekers have to offer. These willing consumers are all the evidence that is needed to show that the occupation of those in business has decent moral worth.
Image credit. Hegel’s famous tagline “The Owl of Minerva only takes flight at dusk” explains his theory of how we gain knowledge. We may only gain wisdom of history through hindsight (dusk). ‘Minerva’ is the Greek goddess of wisdom and her ‘Owl’ is the spirit by which the wisdom takes flight.
Everyone knows this type of uncomfortable dream: you need to move quickly to escape from danger but your body hardly responds to the urge. To me, discussing NSA-surveillance issues feels a bit like the dreamer's straight-jacketed impasse. My mind intends swift and decisive action: I urgently wish to make a strong case, but sooner or later I am overcome with a sagging feeling that reminds me of the holes in my knowledge.
Like me, I would guess, most of us do not even know the knowable as fully as is desirable -- another case of rational ignorance. There is a limit to the effort a non-specialist can make to become conversant with an issue.
Comfortingly, unlike Minerva, we may take flight in daylight, if we so choose. Unlike Hegel in his information-starved times, nowadays, once you decide to put serious energy into researching a certain topic you have a good chance of becoming rather knowledgeable, thanks to our open society and its internet.
Every society will have to cope with the irremediable problem of rational ignorance, and hence a certain level of political disagreement will be due to the blind bumping into the blind.
But again, she who gets seriously involved in a theme of heightened interest to her can expect substantial returns of expertise in our free societies.
[T]he information grab is expanding until Big Brother, under the guise of (failed) protection now knows everything about its citizens. Simply said: this is merely government bloat in its most purest - spending ever greater amounts of money to become increasingly more inefficient, in the process destroying the concept of individual privacy.
Health is a struggle for balance between anabolic and catabolic processes. The West is stuck in the catabolic mode of re-slicing and using up substance more than creating it.
It is remarkable that these days Indian minds seem to be more open to the values of liberty than those of Western voters:
The Indian election was a classic confrontation between the proponents of growth and the advocates of redistribution and the welfare state. Growth won across the board in all classes and regions. The young especially voted for growth. The same message brought Ronald Reagan to the presidency for two terms. Like Reagan, Modi urged voters to choose growth and opportunity instead of redistribution, higher tax rates, and envy.
In March, I had plans to follow Krugman's blog for a while to come up with a (number of) critical post(s) on some of his output. In the meantime, the matter has resolved itself. Better and more knowledgeable minds have produced refutations so powerful that Krugman has now effectively barred articulate criticism from his blog at the New York Times.
Writes American Thinker, in a must-read piece:
A marvelous thing happened over on Paul Krugman's blog at the New York Times last week. Krugman effectively conceded defeat on a range of economic debates. Who defeated him? People who posted comments on his New York Times blog. Mere commenters.
For those who do not know, Paul Krugman is one of the few who still claim that Keynesian progressivism is the answer to America's (and Europe's) problems, not their cause. He repeats that claim many times each month. Amid these repeated expressions of his "progressive" faith, he now also repeatedly expresses grim despair because his progressive policy prescriptions are being accepted less and less in the public square, even by the Obama administration.
[Among] the dozen or so points that Krugman makes over and over [... here] are a few: Obama's stimulus was too small. Debt is good. Austerity is bad. Deflation is coming. Ken Rogoff, Greg Mankiw, Alberto Alesina (all at Harvard), and other serious economic scientists do not understand economics as well as he does. Those who do not agree with him are "mass delusional." And perhaps Krugman's favorite line: "I was right, of course."
Befitting his ideology, Krugman has only one policy to propose, regardless of topic: Transfer more resources from the discipline and dynamism of markets to the inefficiency and cronyism of government.
Government-run health care. Government-controlled banks. Government bailouts. High taxes. High spending. Krugman wants it all, just like in Europe (which, in 2008, he called "the comeback continent"). And Krugman has no problems denying economic science and current events to advocate it.
Scholarship as ideology is an oxymoron, writes Ed Stevens in his blog.
It is very hard to square the role of political partisan with that of the relentless truth seeker. I think, I feel attracted to the classical liberal approach, because it lends itself better than any other ideology to a fusion of both roles. Mind you, neither the requisite aspiration and effort nor success are guaranteed for him who takes the classical liberal path. However, to me freedom increasingly takes on the additional meaning of intellectual method, the critical method, the kind of skepticism that makes for honesty by defaulting to truth.
So when I criticise some of the habits characteristic of the political animal in us, I feel I am raising a mirror for all of us to look into, irrespective of our convictions.
It appears that in innumerable cases, developing political commitment is very similar to opting for a fashion and a desire for sartorial loyalty.
Thus partisan zealots tend to rely on a vast arsenal of mock arguments. The purpose of this resource is not to attain truth, but to crowd out other views by claiming the moral high ground. Ultimately, the objective is to dominate affectively, i.e. to invigorate, maintain and broaden the public believe in and respect for a favoured tale of bad guys and good guys.
Affective power, rather than intellectual force is the foremost concern of this kind of political commitment. Thus distortion, truncation, and inconsistency are regular features of the attendant political rhetoric. For the liberal e.g., in one context, the profit motive accounts for the entrepreneur's malice (as in his presumed passion to exploit the employee and pollute the environment), in another context, economic calculus does not matter to the evil capitalist at all, but an economically irrational, innate hatred for, say, women (as purportedly demonstrated by lower average wages for female members of the workforce).
Argumentative credibility is secondary to keeping the spot light on the right kind of scapegoat. Arguments come and go, the wished-for scandal lingers on.
In the Opinion Pages of the New York Times, Paul Krugman voices his views under the heading The Conscience of a Liberal.
When you are famous, in the majority, and totally mainstream it can be even harder to detect inconsistency and other forms of error in your ideological pronouncements. Argues Paul Krugman:
So the whole poverty trap line is a falsehood wrapped in a fallacy; the alleged facts about incentive effects are mostly wrong, and in any case the entire premise that work effort = social mobility is wrong.
Despite Krugman’s strong conclusions [... the] New York Times columnist and Princeton economics professor expressed [the opposite view] a mere two months ago:
But our patchwork, uncoordinated system of antipoverty programs does have the effect of penalizing efforts by lower-income households to improve their position: the more they earn, the fewer benefits they can collect. In effect, these households face very high marginal tax rates. A large fraction, in some cases 80 cents or more, of each additional dollar they earn is clawed back by the government.”
The great Adam Smith provides an example of how being a classical liberal is no guarantee of getting things right all the time. While he certainly got the system of liberty right, he was nonetheless not free from grave error in other matters.
Inter alia, Adam Smith did not understand that the worth of a good is subjectively determined, rather than inhering in it as an objective quality. This is a key insight of the innovative marginalist economists of the 1870s.
Incidentally, while the worth of a good is subjectively ascertained, its price reflects objective factors as well, e.g. the number of buyers and sellers, and their offers and bids, the amount of demanded resources available etc. The interplay of subjective and objective factors incorporated in prices gives rise to an objective test: the profit-and-loss-system, which ensures that the means of production are left in the hands of those who come closest to serving the most urgent demands ( = highest preferences) of consumers, i.e. those adept at offering consumers what they are most willing to spend their money on, at prices that cover the vendor's costs.
The marginal revolution - and thus much of what we consider valuable in economics after Smith - emerged during Marx's lifetime. However, Marx missed it and instead of learning the all-important marginalist lesson, he copied Adam Smith's labour theory of value, only to get into irresolvable difficulties over finding a way of measuring the supposed objective value of a good - for more on this question see the The Dramas of Value.
But what does it matter to Marxists and congenial minds; after all, socialism is a philosophy that serves to veil the greed of its adherents. Truth is no concern to those whose particularistic point of view defines "social justice".
As I like to say, if your are greedy and you want to steal under the cloak of legitimacy, do not go into business, go into politics.
George Reisman discusses another major blunder that Marx adopted from Smith, namely:
... the belief that the original and primary form of labor income is wages, with profits appearing only later, with the emergence of capitalists and their capitals, as an unearned, unjust deduction from wages.
The truth is that the income of workers producing and selling such things as pairs of shoes and loaves of bread in Smith’s “original state of things,” or in Marx’s equivalent “simple circulation,” is not wages. It is sales revenue. And precisely because there are no capitalists and thus no expenditure of money for the purpose of bringing in the sales revenues, there are no money costs to deduct from those sales revenues. Thus, the whole of the sales revenues is profit. Profit is the original and primary form of labor income.
What capitalists and their buying for the sake of selling are responsible for is not the existence of profit, but the existence of wages and the other costs of production, and thus a reduction in the proportion of sales revenues that is profit.
And just as Columbus, and not his crew, is given primary responsibility for the discovery of America, so it is businessmen and capitalists who are the primary producers in modern conditions. Profit is the income of their, mainly intellectual labor.
The entire argument is available at this source and more fully at this source, where Reisman concludes
that contrary to Smith, Marx, and the prevailing state of public opinion, a profound harmony of interests exists between wage earners and capitalists. Capitalists not only earn their incomes, but in the process benefit everyone else. They pay wages and use their wealth in the production of ever more and better products that the wage earners can afford to buy. The more and bigger the capitalists, the greater is the demand for labor and the larger the supply of products. Everyone’s actual self-interest lies with the capitalists being free to earn the profits they richly deserve and use them to accumulate as much wealth as possible, for that wealth serves everyone who sells his labor and buys products.
An economist used to be a person who was able to explain why the economy works well without interference by the state, and fares, indeed, much better without such meddling. Nowadays, an economist is a person who affirms that the economy can only work properly thanks to interventions by the state.
The economist – versed in knowledge about the invisible hand – has metamorphosed into a staunch proponent of economic policy, the politician’s advisor ambitious to steer the visible hand.
The approach taken to teaching economics has become one in which the market mechanism is ... taught only so that there is a basis for explaining why markets ... [do] not operate properly. The market mechanism is seldom explained as what it is: the sole means to achieve prosperity and the basis for a continuing improvement in living standards for an entire population [p.284]. ... [F]ew are any longer taught that economies have major properties for self-adjustment and are able to recuperate on their own without major government involvement. [p.287]
One of the great dangers of a state monopoly in education is that it provides inordinate leverage for uniform patterns of thought.
The massive distortions in the leading modern economies do seem to be intimately related to the prevalence of the politically both subaltern and ambitious(-for-power-and-status) "economics" of market failure and dirigiste conceit.
Kyle Bass' presentation commences at time mark 7:47
Japan's problems are formidable, but there are many other heavy-weight countries in deep water, it would seem.
Next week we will be told by Wall Street stock peddlers that what are just having a healthy correction and that it will soon be time to “buy the dip”. Don’t believe them. We are perched precariously at the top of one of the greatest financial bubbles ever because it is global—-the handiwork of world-wide central bank driven credit expansion and drastic interest rate repression.
Just recall some of the numbers. At the turn of the century, the US had about $25 trillion of credit market debt outstanding; now it is pushing $60 trillion. About 14 years ago, China had debt of $1 trillion; now its nearly $25 trillion. And similar credit explosions occurred in much of the rest of the world. It was all central bank enabled, and it caused world wide investment booms and asset inflations which defy every law of sound money and economics, and which cannot be sustained indefinitely.
The bottom line of those destructive policies is that “cap rates” are artificially low and so their reciprocal, asset values, are enormously inflated. Likewise, nearly zero money market interest rates in virtually every major economy of the world have fueled the most fantastic expansion of “carry trades” ever imagined.
As I have frequently pointed out, the short-term market for repo and other wholesale funding represents the cost of goods (COGS) for financial gamblers; its what they use to fund their speculations in higher yielding currencies, corporate debt, equities, and every manner of derivatives and OTC concoctions that Wall Street trading desks can engineer.
So when the central banks drive the money market rates to just 5-50 bps, they are offering ZERO-COGS to speculators. This is a massive incentive to bid up the price of anything that has a yield north of 50 basis points or a short-run appreciation prospect of the same—in order to capture the spread. This is what has turned the so-called capital markets of the world into dangerous casinos. This is what led speculators this week to gorge on $4 billion in Greek debt carrying the lunatic coupon of just 4.75%.
The latter is not even a remotely plausible pricing of the risk of a government with a 170% debt to GDP ratio—- sitting atop an eviscerated economy that has shrunk by more than 20% and has nothing much left except tourism, yogurt plants and a 27% unemployment rate. Instead, it evidences the fast money traders who swooped in to buy a 475 bp coupon funded by free money from the central banks, and who did so in the confidence that the ECB will do “whatever it takes” to prop up the price of member country sovereign debt.
Needless to say, the minute that the millions of gamblers who have been enabled by the ZERO-COGS gift of central banks loose confidence in their ability to prop up asset values, the panic will set in. Then a great dumping stampede will start. It will be the mother of all margin calls—-a repeat of the dumping panic on Wall Street that occurred in September 2008 when toxic mortgage securities which had been funded by overnight repo were forced into fire sales by wholesale lenders refusing to roll their repo.
Only this one will be much grander because the carry trades have gone more global then ever before. Even pig farmers in China have their sties loaded with copper because through a roundabout trade it can be repo’d for cash.
Indeed, the global financial system is land-mined with time-bombs–some hidden and others transparent. But what is certain is that when huge distortions like the newly booming market for dollar-denominated junk bonds being issued by EM companies increasingly parched for cash craters, there will be a ricocheting chain reaction that will spread far and wide.