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Free Markets, It’s Time to Wake up America

Politics / US Politics Apr 09, 2009 - 08:21 PM GMT

By: Michael_Pollaro

Politics Best Financial Markets Analysis ArticleFree markets don't work, says Tim Geithner and Ben Bernanke. Indeed nearly all our government leaders say so; the G-20 too. The economy is a mess, but no worries because we got your back. We'll spend and print our way out of this economic crisis, then slap a whole heap of regulation on the bad guys to make sure they never hurt us again.

I say, no thanks. And you should too. As my dad used to say, “It's time to wake up America.” These people may be smart, but they are bad economists. Worse yet, they were and still are the epicenter of this mess, no matter how much they deny it. And they are causing havoc with the economy. Yes, Wall Street had its role, but it was big government lending institutions like Fannie Mae and Freddie Mac, so called deposit insurers like the FDIC, cartelization agencies like the SEC and, most importantly, the easy monetary policy of the Federal Reserve that ultimately gave us this economic crisis. Free markets didn't fail. Free markets didn't cause this mess - government intervention did.

You think I'm nuts, right? You say, what in God's name is he talking about! Well, I'm not nuts, and I'm talking good economics - Austrian economics. What does Austrian economics say about all this, you ask? Listen in on my mock Congressional Joint Economic Committee Q&A session, between fellow “nut” Congressman Ron Paul and Ben Bernanke: **

Ron : Chairman Bernanke, you consider yourself an expert on the Great Depression, is that true?

Ben : Yes, I have devoted a substantial part of my career to the study of the Great Depression.

Ron : I too have spent some time studying the Great Depression. Please, as succinctly as you can, tell me what you think caused the Depression.

Ben : It was Federal Reserve policy mistakes that caused the Great Depression, ones that I intend not to repeat. First, they precipitated the 1929 stock market crash and subsequent recession by tightening monetary policy in 1928. Then, they helped turn a recession into a depression with yet two more mistakes. First, they let the money supply contract very sharply. Prices fell. Deflation. So monetary policy was, in fact, very contractionary. Very tight during that period. And then the second mistake they made was they let the banks fail. They didn't make any strong effort to prevent the failure of thousands of banks. And that failure had terrible effects on credit and on the ability of the economy to right itself. The answer was to stabilize the financial system by providing liquidity to the system via low interest rates, loans to the banks and generally easy monetary policies. They did not, and the result was the Great Depression.

Ron: Thank you Chairman. How familiar are you with the Austrian theory of the boom bust cycle, specifically the work of Mises and Hayek?

Ben : I am familiar with their position, yes. But it is not a viable theory.

Ron : Chairman, in all candor, I couldn't disagree more. According to Mises and Hayek, the Depression was caused by the low interest rate and loose monetary policies of the Federal Reserve in the 1920's. These policies created the1920's boom which NECCESITATED the stock market crash of 1929 and economic bust of the early 1930's. You see, by lowering interest rates and increasing the money supply, the Federal Reserve creates economic and financial distortions - malinvestments, which eventually must be liquidated. The mistake was the Federal Reserve's easy monetary policy of the 1920's. The bust was the economy cleansing itself of these mistakes. Sooner or later, the Federal Reserve induced boom REQUIRED a bust. Chairman, the Federal Reserve did indeed cause the stock market crash of 1929 and the subsequent Depression, but through EASY money policies, the same policies that caused today's economic mess and the same policies you still continue to advocate.

Chairman, did you know that Mises and Hayek predicted the 1929 stock market crash and 1930's bust?

Ben : I don't recall.

Ron : As far as I know, no one other than the Austrians did. And Chairman Bernanke, did you know that many of today's Austrian economists predicted the current housing bust and financial crisis, because of the Federal Reserve's loose monetary policies? Are you familiar with any of these Austrian theorists?

Ben : I am not familiar with any credible economist that predicted the depth and breath of the current financial crisis.

Ron : These economists are quite credible. Indeed, while these economists were warning of a coming debacle, you were telling us that everything was fine. Chairman, if you had been reading these economists, perhaps you would have realized that easy monetary policies are the problem, not the solution. Then we could have avoided this whole mess and saved the taxpayer trillions of dollars. Maybe you should add these economists to your reading list. I'll get you their names.

One last question Chairman: Why is it that we have had so many busts these past 20 plus years – the '87 stock market crash, the S&L crisis, the Mexican Peso crisis, the Asian/Russian crisis and LTM, the bust and now the housing/banking implosion? And why has each one been bigger than the last? Do you think it might have something to do Federal Reserve monetary policy?

Ben : Congressmen Paul, the free market is a great system and has served this country well. But it has flaws. One is it is prone to boom bust cycles. That is why Congress created the Federal Reserve, to stabilize the financial system and to provide liquidity in times of economic stress; as we are doing now. Add better regulatory oversight, the kind that Treasury Secretary Geithner and I have been advocating, and I assure you we will be in a much better position to control the frequency and severity of future boom bust cycles.

Ron : Chairman, I must again disagree. It is governments and their central banks that cause the boom bust cycle, not the free market. Yes, there were boom bust cycles prior to the creation of the Federal Reserve. But such is the inevitable result of a government-approved-fractional-reserve-banking-system, where money can and is created out of thin air. Importantly though, without the Federal Reserve as backstop to the banking system, those monetary bursts were strictly limited. As a result, the busts of yesteryear were shorter and less frequent than what we have today.

It's the Federal Reserve's now unrestricted ability to print money and depress interest rates that explains the frequency and severity of today's busts. Federal Reserve easy money causes the boom, which then requires a bust. Then, in its zeal to arrest the bust through yet more easy money, the Federal Reserve prevents the complete liquidation of the prior boom's malinvestments. In essence, the next boom bust cycle begins, with baggage. And on and on it goes. And because the economy never has an opportunity to completely cleanse itself, we get snowballing malinvestments. The result, more and more busts, with each bigger than the last. Seems to me that America needs a different monetary policy before we completely destroy our economy?

As to more government regulation, haven't we seen enough already? Was it not Congress that passed ill-advised legislation helping to extend homeownership to Americans that would have been better off renting? Are not Fannie Mae and Freddie Mac government institutions and were they not at the heart of the housing boom and bust? Is the Federal Reserve not a government institution and wasn't the Federal Reserve the institution that brought interest rates from 6.5% to 1% and held them there for more than a year, thereby underwriting the whole housing debacle? No Chairman, regulation is part of the problem, not part of the solution. These same Austrians teach that the checks and balances of the free market are our best defense against things like excessive leverage and speculation, not some lumbering regulatory authority, always two to three steps behind and quite frankly all too prone to granting special privilege at the taxpayer's expense.

Chairman, instead of pursuing the same old policies, the ones that got us into this mess, maybe we should take a hard look at what the Austrians have to say. I think we will all profit from the exercise. I look forward to your feedback at our next Q&A.

America, don't believe Ben and his cohorts. Listen to Ron Paul and the Austrians. More of the same - more spending, more money printing and more government regulation – will only make things worse. Yes, you may get a boom, better termed a bubble, but because it's an artificial boom, built on easy money, the boom MUST end in a bust.

As you know, the government is unfortunately at it again, this time with the biggest spending and money printing blitz in US history. In his April 3rd Interest Rate Observer , James Grant reports that the combined Federal Reserve and US Government response to this economic crisis, defined as the change in the Fed's balance sheet plus the US Government's fiscal deficit as a % of GDP, is some 30% of GDP. To put that number into perspective, that's 10 times the postwar recession average of 2.9% and 3.5 times the previous record of 8.3% seen in you guessed it, the Great Depression. The next, even bigger crisis awaits, with this one looking like the mother of all crises.

America, you want change, I mean real change. How about FREE MARKETS!

This “nut” will end this missive with a simple recommendation for those who want to learn more, about Austrian economics and free markets. Pull up a chair, open a bottle of wine and have a look at this entertaining video, featuring Austrian investment professional Peter Schiff:

Then have a listen to this audio, featuring Austrian academic Tom Woods:

And if you really want to be in the know, then fork up $20 and read Wood's N.Y. Times best seller, Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse :

To wet your appetite while you await delivery, read Wood's explanation of how the Federal Reserve creates booms and busts:

And be sure to buy another bottle of wine when the book arrives, unless of course you think now's the time for something a bit stronger.

** Note that this Q&A is my best effort to represent the views and or likely responses of both Ron Paul and Chairman Bernanke.

By Michael Pollaro


I am a retired Investment Banking professional, must recently Chief Operating Officer for the Bank's Equity Trading Division. I am also a passionate free market economist in the Austrian School tradition and private investor

    Copyright © 2009 Michael Pollaro - All Rights Reserved
    Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Michael Pollaro Archive

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10 Apr 09, 14:27
Peter Schiff and Austrian Economics

Austrian economists take the root of the problem and try to avoid it happening again, but keynesian economists are always preaching about how to get themselves out of crises by pouring money into the economy...very interesting. Just by how they attack problems illuminates how many problems result because of the economic system. Aust. economics the market cures problems, whereas constant government intervention is the solution in Keynesian economics. Peter Schiff is a noted Austrian economist who is pondering running for Senate in 2010...give him your support to avoid the inevitable disaster attached to Keynesian ideals.

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