Boohoo: The Mainstream Media Are Ignoring Me

by Liberty and Power

In an article in the New York Times yesterday, Edmund L. Andrews and Mark Landler report that the U.S. government will inject taxpayer money directly into private banks by purchasing their corporate shares, in addition to purchasing “troubled assets” from them, as authorized by the bailout law enacted on October 3. And why not? After all, the taxpayers have plenty of money. And even if they don’t cough it up right now, the government can simply borrow the money from the Chinese, Japanese, and Middle Easterners and put the taxpayers on the hook to service this new debt. Nothing to it, really.

In explaining the government’s resort to this partial nationalization of the banking industry, the Times reporters note that “financial markets have been going downhill faster than anyone had seen before. Credit markets seized up and all but stopped functioning, making it impossible for most companies to borrow money on more than an overnight basis.”

For some time, most recently in a commentary I posted yesterday, I have been citing comprehensive, systematically collected evidence from the Fed’s website that this “seizing up” claim is false. Although the data show some evidence of diminished lending in some credit markets, they do not comport with allegations that the credit markets have “seized up,” “locked up,” or “frozen up” or with claims that “nobody is lending” or that the credit markets have “stopped functioning.” All such turns of phrase, which appear in virtually every report in the mainstream media, are sheer hyperbole–which, I might add, serve only to heighten a sense of panic among the public and within the inner sanctums of Our Blessed Rulers and Saviors.

To my amazement, it seems that the big-time reporters are ignoring my blog posts, not to mention the publicly available data linked in them. As my old friend Murray Rothbard would have said, shockeroo. As I myself am inclined to say, whuda thunk?

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Keith Halderman - 10/13/2008

For the media it is not about money or credit it is about fear. The worse the situation the better the ratings. If it was about a few Wall Street firms going under from their own bad decisions then who would watch? However if it is about a new Great Depression then everyone is glued to the set.

William J. Stepp - 10/13/2008

If Easy Al had been a free banker instead of a central (planning) banker, there wouldn't have been a housing bubble, at least not one caused by the banking system.
I make a distinction between dislocations caused by subsidies, etc., and bubbles caused by central banks. The latter are far more systemic and nasty than the former, with consequences that are far worse for more people.

In a free banking system, the interest rate for loanable funds can't diverge from the natural rate of interest by enough to cause a business cycle. The loanable funds rate is anchored to the time preferences of everyone in the catallaxy, including capitalists and consumers, and lenders and borrowers.
There can of course be malinvestments, but not of a systematic nature, at least not systematically caused by banks.
A central bank's actions can threaten employment at the local bank, car dealer, restaurant, and steel mill.
But if the government subsidizes housing, causes poor mortgage underwriting, etc., and this is later unwinded (unwound?) by the libertarians, I don't see the collateral damage being anything as great as caused by a central bank.
Central bank-caused distortions distort the economic calculations of more entrepreneurs, including those working in the housing industry (builders, mortgage originators and brokers, real estate brokers, suppliers to the builders, home decorators, etc.), and potentially everyone else.
Intervention confined to the housing industry isn't going to effect people in other industries very much, if it does so at all, which I doubt.

Bill Woolsey - 10/13/2008

If a business cycle is defined to be a historical episode reflecting Mises and Rothbard's theory about how an incease in the money supply impact interest rates and the structure of production, then, of course, it can only be caused by monetary policy.

I think a subsidy for housing would certainly impact the pattern of employment and the production of specific capital goods. When it was replealed, what are now revealed to be "malinvestments" must be liquidated. Labor must be shifted and specfic capital is lost. How is this different from any other "Austrian" recession?

More troubling, why wouldn't "free banks" invest heavily into mortgages? If housing prices fall, that could leave free banks with solvency problems. Wouldn't that situation be even worse than the one today?

How does free banking prevent a speculative bubble in housing? Certainly, under free banking, a government subsidy for housing would raise the price of housing. Depending on the exact institutional mechanism, other prices might fall (more than usual.)

So, why not a speculative bubble?

Asset price increases don't have to be fianced by loans at all, much less bank loans matched by monetary instruments.

I have always thought that possible solvency problems in a free banking system requires some kind of rapid bankruptcy procedure. The way FDIC handed Washington Mutual is the right idea.

Of course, liquidity problems are handled by suspension.

I am not at all sure that free banking would have prevented the current crisis. Nor am I sure that it would have responded to it better in the short run (than Fed policy.)

Of course, bailing out the owners of the banks has very bad consequences in the long run, but hardly a necessary implication of central banking or deposit insturance.

William J. Stepp - 10/12/2008

If Rothbard were alive, he might dust off _America's Great Depression_ and open it up to the introduction, where he pointed out that a theory of the business cycle must have its roots in government intervention in the monetary sphere--money and the banking system. The latest edition of the American business cycle had its roots in Easy Al Greenspan's easy monetary policy of 2003-4, and in truth even before then. (The housing bubble started forming a few years before.)
He might go on to criticize the commonly held view that this business cycle had multiple causes, including several non-monetary ones, such as subsidies to the criminal sponsored enterprises (Frauddie Mae-Mac), poorly designed regulations, other subsidies, such as those to bio fuel producers, which pushed up the prices of commodities (e.g. corn), the actions of speculators, etc. (See this week's special report in The Economist, which has one of the best summaries of all the causes I've seen.)
Rothbard would point that the subsidies, etc. could not cause a cluster of entrepreneurial error, or, as the mainstream financial press would put it, contagion effects.
To be sure, they can magnify the effects of loose monetary policy on both the upside and the downside, but they can't act as independent causes of the cycle.

To drive this home, let's think in admittedly non-Rothbardian terms, and do a thought experiment in which we have a free banking system (freedom of entry in banking, freedom of note issue, and no statist interference in money and banking), and Easy Al had been doing something productive since 1987, like working as a carnival barker in a circus. Under such a system, the natural rate of interest on the time market would clear the market for investible resources, and be the same as the interest rate that cleared the market for loanable funds. There could be no business cycle in this scenario.

Now suppose the government starts subsidizing and jimmying up the market for mortgages and homes, invents Frauddie, etc. All of a sudden lots of people who previously couldn't get a mortgage could qualify for one. This goes on for a decade until the libertarians get elected and end the subsidies and kill off Frauddie. All of a sudden there are lots of foreclosures, and many former home owners become renters.
Would this lead to a business cycle in the sense the Austrians use the term and the way Rothbard used it in his book? The answer is no. To be sure, there would be a reversal of the dislocations caused by the subsidies, but there would be no "contagion" effects, and no bond or swap traders forced to unwind questionable trades made with models using dodgy numbers and Fed-infected discount rates that were absurdly low. Even if a small handful of banks had too many mortgage securities on their books and had to take writeoffs, the number would be small and the risk to the greater catallaxy would be nil.

Here's the Rx to the latest panic:

1. Abolish the Fed and other central banks throughout the world.
2. Allow freedom in banking and the supply of money, and extend this freedom to the choice of a monetary standard (e.g. a gold standard).
3. Completely deregulate the banks, and let them operate in accordance with the rule of law.
4. Deregulate all financial markets and let them operate in accordance with the rule of law. That means abolishing the Fed, FDIC, SEC, etc.
5. Allow all markets to find prices and quantities that clear.
6. No bailouts for banks and other financial institutions.
7. No bailouts for homeowners and other buyers of assets that sustained price runups and declines.
8. Arrest Easy Al and try him for monetary counterfeiting. If found guilty, his punishment should include learning Chinese and translating the works of Mises, Hayek, and Rothbard into that language, preferably from a jail cell. That should keep him busy until he goes to the great sign of the $ in the sky.

Tim Sydney - 10/12/2008

There was an interesting article today in the Western Australian press that gives the scale of US debt to China. See here. It's title is "End of America's era- now it's China's turn"