The Glories of Change
The events on Wall Street, the collapse of Lehman and the selling off of Merrill, are magnificent and inspiring events. What we see here are examples of sweeping and fundamental change taking place, a huge upheaval that affects the whole of society, and toward the better, since what we have going on here is a massive reallocation of resources away from failing uses toward more productive uses.
Hundreds and hundreds of billions of dollars are on the move, sweeping all before them. And yet take note: it is not war accomplishing this. It is not violence. It is not the result of a planning committee. No election is necessary. No terrorist act took place. There was no government edict.
The agent of change here is that composite of all the world's exchanges that relentlessly shove resources this way and that way, so that they will find their most economically valued uses in society. FULL ARTICLE
Comments (41)
David Spellman
Great commentary. I love free markets because of their ability to humble the mighty and proud.
Published: September 15, 2008 12:47 PM
george
Excellent piece, but I must point out that a significant amount of the capital lost has been from forced savings, registration of income, ie 401K's, 403B's IRA's, and Keogh plans.
These masters of finance were given themselves immense bonuses as they were blowing the bubble up, and since many, like myself, are forced to invest or lose the income through taxation it is not an free market correction.
Try buying gold bullion with your tax deferred savings, or short a stock, or buy put options or derivatives. These are only reserved for the masters of finance and the hedge capability is taken away from the benighted masses. The little guy can only go long, so we do not have an ideal market and the masters deserve some financial punishment for their participation in this scheme.
If you did this to JP Morgan it would only happen once, after robbing him you would never work on Wall St again. Nowadays you can blow a fund out, take a big bonus and have a new fund in a few weeks. These masters have a pretty good club, the little guy is barred at the gates. Inside they are partying with everybody's money. The President of Lehman will have a nice cushy retirement, the little man loses his, house his credit rating, his self-esteem and possibly his family as he trudges to bankruptcy court, not to mention that Chapter 7 is almost gone thanks to Bush legislation..
I have been a devotee of Mises for more than 30 years, and I believe his theories completely, but this correction is only a partial free market adjustment, it stinks of central banks, insider bailouts, and a good healthy dose of inflation.
I could have retired on my savings had I been allowed to buy gold and puts over the last 8 years, it did not take a genius to know what the Bush-Cheney junta would do, nor does it take one to recognize that we will be treated to more of the same.
Even as a devoted Austrian I give no credit to the market for this correction the ballon popped from overstretch, not from an institutional correction. The Ponzi scheme got to the last buyer, and that is not a free market as I have shown.
Sorry.
Published: September 15, 2008 1:34 PM
Jeffrey Tucker
It is an interesting question whether business failures that are part of an induced business cycle should be considered a market phenomen or a government failure. Mises discusses this somewhat in Human Action. Ultimately, this is a semantic issue: what we are seeing is the market responding to a previous government intervention. So long as we understand the big picture, how precisely we characterize it doesn't change the message. The government is the source of the lie and the market is the source of the truth.
Published: September 15, 2008 1:49 PM
Jim
George,
You can buy puts in IRA's.
You can also buy gold and other commodities in the form many ETF's that have sprung up around them such as GLD, USO, DBA, DBC, etc.
Some physical gold can be held in IRA's.
I do agree most of the rules around most tax defered accounts are ridiculous.
Jim
Published: September 15, 2008 2:16 PM
Allen Dalton
Unfortunately, the people who made the bad decisions that ultimately lost Merrill it's status as an independent brokerage firm were relatively unscathed by this. The Stan O'Neal gang received golden parachutes as they were forced out, and his puppet board of directors will bear little loss relative to the thousands of employees who saw the value of the stock they were being urged to purchase and keep by O'Neal and his gang plummet at the same time O'Neal and his gang were selling.
This is not an argument for a bailout. But crony corporatism is a far cry from free markets.
Your glee should be tempered by a serious look at how tax and legal status protect corporate directors, CEOs and their minions from bearing the cost of their bad decisions. Private profit and socialized losses is hardly the model the Mises Institute ought to be defending. Since the value of our Merrill stock locked in FCAAP has plummeted 78% over the last year and a half, LvMI will see a much smaller donation from this household this year.
Published: September 15, 2008 2:27 PM
Greg Fisher
Enjoyed your article, kind of simplistic though. You need to understand the structure of an investment bank to get a feel of the true problem. Basically, a group of investors can hire a Lehman to put together a buyout of another company. Those funds required to complete that transaction is deposited with Lehman where they in turn invest that money. Then they use those funds as leverage to complete the buyout. If the investment goes up, Lehman makes money. But if it goes south, then they need to sell or come up with additional cash to maintain required margins.
As money came into these investment banks, most saw real estate as the safest investment where they can park money for a short period, sell and make money on the deposit, after all no one looses in real estate. Money poured into buying mortgages and soon money was chasing more risky loans. And when the bubble broke in real estate, the system collapsed around them. And now you see the same thing happening in the oil markets.
Over speculation caused by too many funds chasing stocks and commodities is the real root of the problems today. Firms like Lehman pour money into these products causing the price to rise. Their problem is that when it turns, they are to large to react, and get caught holding the bag. When investing in commodities, you need to be quick getting in and getting out.
But the world is a better place without Lehman, too bad the system that allowed it, affected so many people.
Published: September 15, 2008 2:30 PM
billwald
I think Mr Tucker is describing the effect, not the cause. I think The Chinese et alia have learned from our destruction of the USSR thru economic warfare. Instead of bankrupting the US by cold war military competition they are taking a more direct approach by buying US assets with cheap dollars.
This approach may backfire for two reasons. First, running up the cost of shipping is moving some manufacturing back to the US.
Second, they can buy real estate and economic assets but they can't vote their assets in US elections. They can "own" US industry but we can invent new taxes on foreign controlled assets. For example, replace the income tax with a VAT and increased capital gains tax?
Or require the employers over a certain size to pay 100% of the Social Security tax. This will encourage small businesses and sock it to the international corporations.
Published: September 15, 2008 2:43 PM
Jeff
You concede that some sources of dramatic change are undesirable due to the suffering they create (i.e. war and revolution). But why not be concerned about the many thousands (millions?) whose investments are imperiled? Even if you want to say that it's their entirely fault they're exposed - and this is a tough argument to make these days - you're still ignoring the thousands of employees whose jobs are now seriously in danger. I would doubt they think they have a good reason to rejoice at these events. While markets occasionally humble the might and proud (and what better basis for economic policy than schadenfreude?), they also further hurt the humble in the process.
Given this human cost, one should ask whether we might have been able to avoid it, or at least mitigate it. Without presuming to answer the question, I still find it curious and conspicuous that you didn't even make a pretense at responding to the calls for greater regulation that are cropping up even from mainstream economists.
Such cursory treatment of tragedy does not make for constructive commentary.
Published: September 15, 2008 2:46 PM
Deacon
#######
#######
Getting philosophical
about the idea
"CHANGE":
"Nothing real can be
threatened. Nothing
unreal exists...Any-
thing that changes is
not real. Herein lies
the peace of G_d.
-A Course In Miracles
#######
#######
Published: September 15, 2008 3:02 PM
Proclus
Having recently read Rothbard's Case against the Fed, iirc, he mentioned that Lehman was one of the private financial institutions that comprised the Federal Reserve system.
If I got that right, I have a few questions for anyone who'll answer.
Does another financial institute get to fill the void left by Lehman?
Paulson (at Treasury--not Bernanke at Fed) said there would be no taxpayer bailout of Lehman. We all applaud. But does this mean that preventing a taxpayer bailout keeps the private interests in the Fed safe from full government absorbtion?
I'm quite new to this, so I ask for not only answers, but patience. Thank you.
Published: September 15, 2008 6:44 PM
Jeremy
Bank of America and many of the other remaining large banks and financial institutions will likely have problems of their own.
The blowups are the result of the market - however the buyers are all supported by the Federal Reserve in one way or another - does anyone seriously think that Bank of America would be able to survive without the below market interest rates provided by the Fed (and 'temporary' lending facilities available only to financial institutions?) It's bit off way more than it can chew (Countrywide and now ML?), especially with the Alt-A resets of '09-'12 which haven't really started.
At one point in recent times, I remember reading the 'reserves' of the banking system were at a negative number, in the order of several hundred billion.
It's not over till it's over, and for the financial system to survive it's likely that a lot more money is going to be poured into this before it's over.
If the free market were allowed to really function, the Federal Reserve abolished and legal tender laws repealed while returning the gold to the people based on how much 'money' out there (making dollars and dollar denominated accounts redeemable in gold with 100% backing for all dollars out there), I would guess most major financial institutions would fail sooner rather than later.
Published: September 15, 2008 8:32 PM
Peter
Deacon:
Why
do
your
posts
all
look
like
this?
Please learn to format your posts normally. Thank you.
Published: September 15, 2008 8:41 PM
Tom Vogler
We might rejoice in the reallocation of resources to more productive uses if we felt that the new allocation was likely to benefit us, not someone on the other side of the world. Sadly, with fiscal policy the way it is, investment is headed outside of the good ol USA and this crash will be the first step towards some real hard times here. I expect to be carrying my possesions on the end of a pole while I ride the rails looking for work in the near future.
Published: September 15, 2008 9:36 PM
Tom Vogler
As a further comment, I can't rejoice in the destruction of these companies, when so much of the damage is directly caused by the actions of government. Unpredictable fiscal, monetary and regulatory policy create bizarre opportunities that can result in spectacular gains and losses. Of course people will try to bet right. The reallocation of capital that comes from see-sawing government policy is not necesarily the glorious actions of a free market, but rather the pathetic wreck left by government interferance in the free market. We would all be better off with a sound currency and a predictable tax system. This is what happens when governments interfere in the housing market, jerk and gyrate the currency and make tax policy that expires, making a certainty that the future includes higher taxes.
Published: September 15, 2008 9:51 PM
Real Change Not McObama Change
The market is the solution and not the cause. Our beloved Federal Reserve with the monopoly on money and the Federal Government have been throwing fuel on this heap for 20 years. These large bail outs will not save the organizations and their bloated payrolls.
Hell the employees of Fannie and Freddie were guaranteed their jobs. At least make work is better than the work they did.
The only solution is more freedom. Less freedom only makes us poorer.
Published: September 15, 2008 10:12 PM
Kel
I know this is not exactly the most appropriate comment for this article, but I'm not sure how/where else on the site to ask:
Has there been any discussion on this site regarding the safety of investment accounts in the event of a system-wide bank failure, and what options people are thinking of?
If so, can you point me to the location?
Published: September 15, 2008 10:28 PM
Intern Austronomist
Brilliant! One thing strikes me. This is a paradox of the division of labor according to which financial companies should be good at what they are doing, i.e. managing investments. As we can see they make grave mistakes.
Published: September 15, 2008 10:46 PM
Brandonm
Preface: Im ignorant in the realm of economics, but I think there's logic a foot that goes beyond the requirement of knowing too much here.
With respect to Jeff's concern about apathy to the plight of newly unemployed masses, I think Tucker while reveling in the beauty of the supernova he witnessed failed to mention he was also in the path of its destruction (perhaps he even failed to notice).
So in essence does the US system of economics fail because we are not free enough and hence we yield to those that are more free? (by all means tell me who is) , or does it fail because we were apathetic to the cataclysm of unchecked human desires.
fascinating discourse either way.
Published: September 16, 2008 1:51 AM
Bryan Edds
This isn't even about the market correcting its own flaws... The flawed state of the market was caused by government intervention. What you see is the market correcting the flaws created by that external intervention.
Far from being unable to correct its own flaws, it is capable of correcting its own flaws plus the flaws of the schemes of those who intervene with it. The market is about as flawed as the earth's gravitational pull. Trying to "fix" or "perfect" either of them with external intervention can only end in disaster.
That is why all governments eventually crumble. Every government that opposes the market (that is, every government that has existed) will eventually be made into dust by market mechanisms. That is why statists hate the market, economics, liberty, and objective reality itself. The market is a perfect storm that exposes and nullifies all of their illusions. Just as a thunder storm is the result of nature balancing out imbalanced systems, the market is a storm that results from balancing out systems temporarily unbalanced by government interventions.
The system is still incredibly out of balance. I cheer on the continuation of our economic storm to use unstoppable force to put things right. I applaud the creative destruction, and the end of the statist schemes that caused this imbalance in the first place.
Published: September 16, 2008 2:18 AM
Bryan Edds
george -
You've got to keep in mind... this is just the beginning.
>:)
Published: September 16, 2008 2:32 AM
Bryan Edds
I think Austrians (and statists especially) must all keep in mind the reality of the market.
The market is not an institution that man simply decides to put in place. The market is a _force of nature_. You can't fight the market any more than you can fight the waves of the ocean.
The system WILL be rebalanced. It is only a question of when.
Published: September 16, 2008 2:46 AM
Sinecure
One key thing Tucker doesn't directly address is the possibility that the buyout of Merrill Lynch might have been initiated by the Fed to Bank of America as opposed to allowing the free market to unravel and solve the mortgage meltdown by itself.
So what does this mean?
Government-sponsored buyouts in the past (e.g. Bear Sterns) and in the future only prolong and exacerbate the inevitable market correction as beleaguered business leaders struggle to maintain most of their fortune.
This short-lived celebration is a farce to free marketers.
Published: September 16, 2008 3:28 AM
Liangshanhaohan!
Although I realize this blog is about seemingly more important things, I must point out a contradiction that crops up with disturbing frequency in so-called "libertarian" circles. Billwald writes, "I think The Chinese et alia have learned from our destruction of the USSR thru economic warfare." Instead of "The Chinese"--the definite article even got capitalized here, further underscoring the "brand"--why not say "China" or "the Chinese Government" (or whatever other term would accurately characterize the entity committing the lowdown trick of executing a reasonable business decision)? Minor point? Irrelevant? Perhaps to some here, but to others, there is a difference and it's right there in Billwald's own sentence.
Published: September 16, 2008 5:28 AM
Peter
This is a paradox of the division of labor according to which financial companies should be good at what they are doing, i.e. managing investments. As we can see they make grave mistakes.
On the one hand: they do what they can with the information available. Central bank operations screw with that information, making it less useful to them. Even if they "know" what's going on, there's not much they can do about it...they don't operate in a free market. On the other: the people running those operations generally make out OK; it's not entirely clear that they do make "grave mistakes"
Published: September 16, 2008 5:29 AM
Peter
Although I realize this blog is about seemingly more important things, I must point out a contradiction that crops up with disturbing frequency in so-called "libertarian" circles. Billwald writes,
Billwald is not a libertarian. As far as I can tell, he's some sort of Marxist. He's been posting the same tired nonsense here for as long as I can remember, and doesn't appear to read anything.
Published: September 16, 2008 5:35 AM
Deacon
#######
#######
Attn: Peter
To answer your question:
-because
psychologists
have learned
how to keep
the attention
of a reader,
which
methods
I
use
here.
So, dear Peter, you've told
everyone posting here that
you're a member of the
herd, conformist, and not
willing to think outside of
the box?--nor to be a true
libertarian and allow posters
here to be creative?
#######
#######
Published: September 16, 2008 7:27 AM
Erik
Deacon,
Personally, I like the format!
( :
Keep it up!
Published: September 16, 2008 9:03 AM
Arend
@ Deacon: afaik Peter isn't disallowing anything. The one with the proprty rights of this site is, which as you might know is a righteous libertarian all the way.
@ Article: Of course the fall of once invincible companies is due to the market process (in the Austrian sense of the word market), as is the rise of these companies in a bubble economy. The whole point is of course that the market process is distorted by government interventionist incentive structures. Unnatural low interest rates, money creation and subsidies in the mortgage market are illustrations of these unstable incentive structures. You cannot blame the market of the way the unnatural incentives structures worked out, because if it were for the market, these incentives structures would almos certainly not exist in the first place. What institutions it might have created is guesswork, but that it would be a much more stable and prosperity generating system can be claimed with near certainty.
Published: September 16, 2008 9:04 AM
Deacon
#######
#######
Attn: Arend
Nice that you've come to
Peter's defense, but, un-
less he gives me instructions
not to post that way in the
future, I'll continue presenting
my ideas using this format.
And, yes, I have absolutely
no interest in posting here,
except to correct where
correction is needed.
Post a note, and I'll move
on...never to return.
#######
#######
Published: September 16, 2008 11:06 AM
Deacon
=======
=======
P.S.
FYI: Peter et al
I'm a student of
Jungian psychology,
and a student of
the history of civil-
izations (( Will
Durant's volumes ))
--and studies in
anthropology,
sociology and
philosophy.
Here is a description
of the abilities this
scribbler brings to
this Web page, as
I'm what Jungian folks
type as: INTP, and
about which type they
say:
"Listen whenever they speak!"
http://thinkmoredeeply.blogspot.com/
Less than 1% of the world's
population possess my
analytical skills.
And I've engaged mental
combat with the most
influential people in the
INTERNATIONAL libertar-
ianism movement, to in-
clude Michael Gilson De
Lemos.
=======
=======
Published: September 16, 2008 11:51 AM
george
Dear Jim,
I have a 403B and the closest I can come to gold is to buy a Fidelilty gold fund, kind of putting the wolf in the hen house.
A bar in the upper peninsula of Michigan has a nice tradition. Once the ice freezes over in a nearby lake the bartender takes bets on the day that an old car towed onto the ice falls through. The closest to the day wins the pot.
Maybe Mises.org will sponsor a day that Goldman, JP Morgan or Citibank fails. An alternative will be the day that Bernanke calls for a banking holiday. Closest to the day gets a free Mises Book.
Published: September 16, 2008 11:55 AM
george
Dear Jim,
I have a 403B and the closest I can come to gold is to buy a Fidelilty gold fund, kind of putting the wolf in the hen house.
A bar in the upper peninsula of Michigan has a nice tradition. Once the ice freezes over in a nearby lake the bartender takes bets on the day that an old car towed onto the ice falls through. The closest to the day wins the pot.
Maybe Mises.org will sponsor a day that Goldman, JP Morgan or Citibank fails. An alternative will be the day that Bernanke calls for a banking holiday. Closest to the day gets a free Mises Book.
Published: September 16, 2008 11:56 AM
Deacon
=======
=======
P.P.S.
Michael Gilson De Lemos:
http://www.anti-state.com/user.php?user_id=21
=======
=======
Published: September 16, 2008 4:29 PM
curio
Deacon - Nice to see a fellow INTP here. Many of the ideas here are quite logical, which is what drew me in.
At any rate, although the article professes joy, the unfortunate reality is that these occurrences will likely result in more federal intervention and new government schemes to keep the system limping along...
Published: September 17, 2008 6:50 PM
newson
####
i
cast
a
vote
in
favour
of
quirky
formats.
(one
of
deacon's
unloved
99%).
####
Published: September 17, 2008 9:33 PM
Peter
As another INTP I just want to point out that (a) being INTP doesn't make you any smarter than the average bear (and anyone who brags about his "analytical skills" on a blog almost certainly has none), (b) being INTP doesn't mean you have to use weird annoying formatting, and (c) psychologists certainly do not say that writing one or two words per line keeps the reader's attention (in fact, many studies have been done into to the best line (and page) length for readability, and show that a width of 7.3 inches is optimal for readability of 12 pt text; on my browser, comments here are 7.75 inches - just a tad long). I know that I can't read more than about 5 lines of Deacon-text before it becomes too painful to bother.
Published: September 18, 2008 12:34 AM
Deacon
#######
#######
Attn: Peter
I've been evaluated as
EXTREME in each
attribution; that is,
less than one-tenth
of one-percent of the
world's population
matches (or exceeds)
my analytical skills.
Peter, re narrow
columns, why do
you think magazines
use them?
You seem to seek
to engage mental
combat with me.
I'll not bite.
As for your claim
to be an INTP, I
do not see it in
your above
evaluation.
You needn't post
this.
Let's
have
this
be
a
personal
one-
on-
one
exchange.
Best
Regards,
#
#
#
#
#
#
#
#######
Published: September 18, 2008 11:25 PM
Peter
I've been evaluated as EXTREME in each attribution; that is, less than one-tenth of one-percent of the world's population matches (or exceeds) my analytical skills.
Personality type has absolutely nothing to do with "analytical skills".
(I'm very strong INT, weak P, FWIW)
Peter, re narrow columns, why do you think magazines use them?
Magazines use smaller fonts. At 10pt, the optimal column width is 3.6 inches. This should be an issue for your browser - if you like uber-narrow columns, tell your browser to display narrow columns (e.g., there's an addon for Firefox that lets you supply your own style sheet; I'm not sure what it's called - I don't use it) and write so that the style sheet can determine the format. Don't force line breaks (except in verse).
You seem to seek to engage mental combat with me.
No; I don't do battle with an unarmed opponent :)
As for your claim to be an INTP, I do not see it in your above evaluation.
I don't see it in you, either. I'm usually pretty good at placing people on the MBTI based on their posting history, but you appear to be a strong NF to me; I'd guess INFJ. A strong INTP giving as much credence as you do to the MBTI is atypical; as is your braggadocio. (Q: have you been professionally tested, relying on internet tests, or just guessing?)
Published: September 19, 2008 12:26 AM
Deacon
#######
#######
Okay, Peter, I'll
bite just a little
bit, then I'll let
this go:
Peter, TYPE has
everything to do
with ANALYTICAL
SKILLS, which is
why Jungian
psychologists call
any INTP:
"THE THINKER"
And because INTPs
are deep THINKERS,
they also say about
them:
"LISTEN whenever they speak!"
--as they are nearly always
correct in their premises and
conclusions; in their analyses.
Read about our
type once again:
http://thinkmoredeeply.blogspot.com/
Or is the process
of analysis unrelated
to the process of
THINKING?
What
am
I
missing?
Re magazine
columns:
Long printed lines
cause the eyes to
strain and drop off
the line--to lose
lone's place on
the page.
Best Regards,
#######
#######
Published: September 19, 2008 1:26 PM
Deacon
=======
=======
P.S.
"...professionally tested?:
Firstly, never use the term,
"tested," re Myers-Briggs
EVALUATIONS for TYPES.
It is NOT a test.
Secondly: YES!, to answer
your question
I've also been EVALUATED
for:
hemisphere balance
and balance for
visual vs. auditory
perception:
WHICH evaluation
of my brain reveals
an extremely rare,
near-perfectly
balanced brain.
=======
=======
Published: September 19, 2008 2:43 PM
Deacon
Hi, Peter:
Yes, it was unfair of me
to catch you using "test"
instead of "evaluation,"
as I fall into that on
occasion.
You're also correct to
challenge me on my
effort to put the INTP
as somehow superior
while the Jungian
model states that one
type ought not to be
considered more im-
portant than another.
And, yes, you're very
distracted by your day-
to-day tasks, which
puts this scribbler at
an advantage in this
mental combat thing.
My best description of
our type, Peter, is this
quote:
"There do exist inquiring minds,
which long for the truth of the heart,
seek it, strive to solve the problems
set by life, try to penetrate to the
essence of things and phenomena
and to penetrate into themselves.
-G.I. Gurdjieff (1872?-1949)
So, let's be friends.
You needn't reply.
-Deacon
Published: September 22, 2008 7:59 AM