Those who continually blame insufficient regulation for our present plight offer little or no evidence. They rely instead on the implicit assumption that if only the regulations had been much stricter, the bankers and other business-sector malefactors never would have perpetrated their evil deeds. This faith in the regulators is touching, to be sure, but it is also extremely naïve. We now have — and long have had — miles of regulations on the books and legions of regulators at work in scores of government agencies. What specific power did they lack? And had they been given even greater powers, budgets, and staffs, what enchantment would have transformed these ostensible guardians into smart, dogged champions of the public interest, rather than the time-serving drones and co-conspirators with the regulated firms that they have always been? FULL ARTICLE

>I know of no better book on the economic dynamics of the 1920s boom and early 1930s bust in the United States. I know about several other excellent books that every student of economics and economic history should read on the same topics, but if I could recommend only a single book to an aspiring economist, or even to an interested lay reader, this is the one I would recommend. FULL ARTICLE

Our ancestors relied on themselves; we rely on the welfare state. But the “safety net” that governments have stretched beneath us seems more and more to be a spider’s web in which we are entangled and from which we must extricate ourselves if we are to preserve a prosperous and free society. FULL ARTICLE

My old friends Jeffrey Rogers Hummel and David R. Henderson continue to argue that the Fed had little or nothing to do with fueling the housing bubble during the first five or six years of the present decade. Their latest article along these lines appears in Forbes. This is the third rendition of their argument that I have read, and I am no more persuaded now than I was previously.

Hummel and Henderson base their argument mainly on the claim that the Fed was not an engine of inflation between 2001 and 2006 because the rate of growth of the monetary base and the rate of growth of various monetary aggregates were declining during that period. Indeed, they were declining. Computing the rates of growth for the December value relative to the preceding December value, I find the rates to be as follows for the monetary base: 2001, 8.7%; 2002, 7.5%; 2003, 5.8%; 2004, 5.0%; 2005, 3.6%, and 2006, 2.9%. The rates of growth of M2, computed on the same basis, were as follows: 2001, 10.3%; 2002, 6.3%; 2003, 5.0%; 2004, 5.7%; 2005, 4.0%; and 2006, 5.4%.

It does not follow, however, that simply because these (and other monetary) rates of growth were declining, the Fed bore no responsibility for fueling the housing bubble. If we begin at a high rate of growth, as indeed we did in 2001, then rates may fall and still be “inflationary” in their effect on certain asset markets. Consider, for example, that during the entire period from the fourth quarter of 2000 to the fourth quarter of 2006, real GDP rose by only 14.9%, whereas during the same period (December-to-December monthly figures being used) the monetary base increased by 38.3% and M2 by 42.7%–or, by 2.6 times and 2.9 times as much as real GDP, respectively.

In pondering the Hummel-Henderson thesis, I keep coming back to various analogies, such as this one: I walk onto the street and I’m hit by a car going 50 mph; the next day, I walk out and I’m hit by a car going 45 mph; and, being a slow learner, I walk out during the next three days and I’m hit in daily succession by cars going 40 mph, 35 mph, and 30 mph. After five days, I am pretty nastily banged up, but Hummel and Henderson come along to comfort me by informing me that my being hit repeatedly cannot actually have hurt me because each day the car that hit me was going slower than the one that hit me the day before.

Hummel and Henderson also continue to endorse Alan Greenspan’s story that the real culprit was a surge in foreign savings that was invested in large part in housing-related securities, such as Fannie and Freddie’s bonds. I confess that I have never understood this story. In order to invest in securities of any kind, foreigners need to acquire dollars. And all dollars ultimately come from the Fed, because every dollar consists of either a circulating Federal Reserve note or a dollar deposit account subject to a variety of Fed controls. Was the Fed really powerless to “sterilize” the inflow of foreign savings? Or did it simply not attempt to offset this inflow, which it might have done by, for example, selling securities on the open market or by increasing required bank-reserve ratios?

In raising these questions, I assure my readers that I harbor no ideological or personal animus whatsoever against Jeff Hummel and David Henderson. Indeed, I love each of them as I would love a brother (which, in a sense, each of them is to me). I am puzzled by their persistence in attempting to persuade us with a story seemingly aimed at vindicating the Fed (while insisting, however, that, all things considered, the world would be better off without this central bank). I continue to believe that the Fed deserves a major part of the blame for the housing bubble because, however we tell this whole sorry story, our interpretation must inevitably include a plausible answer to the question: where’d the money (i.e., the dollars) come from?

(posted from Independent blog)

Remember the credit crunch? Of course you do. We’d never seen anything like it, or so the highest financial authorities and their lapdogs in the news media told us — not in a cool, calm, and collected way, either, but in a breathless delivery that suggested imminent economic doom unless the government immediately undertook to “do something.” Which it did, of course, on a scale never before witnessed in US history. FULL ARTICLE

Writing in the Wall Street Journal on December 23, Robert Lucas expresses approval of the Fed’s latest reduction of its target range for the Federal Funds Rate to approximately zero, calling it “welcome.” Lucas notes that this policy does not leave the Fed without the ability to inject additional reserves into the banking system, because it can purchase not only Treasury bills, as it normally does in its open-market operations, but also longer-term Treasury securities and private bonds, which continue to trade at prices that imply substantially positive yields. Of course, Ben Bernanke has already hinted that the Fed is prepared to inject funds into the financial system in any way necessary in order to pump up spending.

Lucas finds the Fed’s actions in adding more than $600 billion to bank reserves in the past few months to be “the boldest exercise of the Fed’s lender-of-last-resort function” in its history. He believes, as I do, that in recent months financial decision-makers have engaged in a “flight to quality”–I call it a flight from risk–and that by injecting reserves into the banks, the Fed has effectively exchanged risky assets (the banks’ collateral securities) for a riskless asset (deposits at the Fed), thereby satisfying their demand to hold additional high-quality assets when the market itself was not supplying more such assets.Viewing the Fed’s action as an effective way to stimulate spending, Lucas also applauds it as superior to the alternative policies to achieve this objective. “It entails no new government enterprises, no government equity positions in private enterprises, no price fixing or other controls on the operation of individual businesses, and no government role in the allocation of capital across different activities.”

I agree that these alternative policies are probably worse than direct Fed lending to the banks, but, unlike Lucas, I do not view the Fed’s abrupt, massive lending with equanimity. Indeed, as I indicated three days ago, I view the banks’ current, gigantic holdings of excess reserves as a veritable Sword of Damocles with the potential to cause a near-collapse of the dollar’s purchasing power.

I also differ with Lucas–and with Bernanke and nearly all of the mainstream commentators on the financial scene during the past several months–in that whereas he views the present situation as a liquidity crisis, I view it as fundamentally an insolvency problem for many banks and other financial institutions, inter alia. By treating this situation as if it were a liquidity crisis, like the banking situation from 1929 to 1933, one may moderate the recession for a short while or even reverse it, but only at the expense of preserving a plethora of malinvestments that ought to be liquidated by balance-sheet adjustments and, in many cases, bankruptcies, so that the valuable assets can be reallocated to their most valuable uses, rather than being kept impounded in zombie enterprises, including zombie banks. Because Lucas, in good mainstream-economics style, views the current situation in terms of aggregates, he is not looking inside the capital stock and therefore he is failing to see that the easy credit and reckless lending from 2002 to 2007 gave rise to a great many rotten investments that are not viable except by some species of Fed or Treasury bailout.

If the economy is to experience healthy sustainable growth, this garbage needs to be thrown out–and the incompetent managers and investors who created it need to be removed from positions of control over assets they have demonstrated they cannot manage responsibly and successfully. Free enterprise is a system of profit AND loss. If the government rides to the rescue of every large-scale, politically connected loser, the system will grow ever more rotten from the top down.

Yes, this way of proceeding entails short-run pain, but the alternative only pushes the pain into the future while ensuring that when it strikes, it will be even more severe.

Did fearful investors suddenly shift from holding 2-year corporate bonds to holding T-bills, thereby driving down the price of these corporate bonds and, equivalently, driving up their effective yield? Such a move might seem compatible with the onset of regime uncertainty.

But the relative steadiness of the yield on longer-term corporates is not consistent with this view.

Why would investors fearful of regime change leap out of only the relatively short-term corporates, not the longer-term corporates as well? I am puzzled.

FULL ARTICLE

We are now hearing ominous warnings about imminent deflation. Checking the welcome page at AOL this morning, I see that the lead item in the financial news section heralds “The Looming Threat of Deflation.” This headline encapsulates two highly problematic ideas. The first is that deflation would necessarily be a bad thing. The second is that deflation is likely to occur in the near term. FULL ARTICLE

Congress gave Hank Paulson the $700 billion, and the first thing he did was to take $125 billion out of the bag and give it to his pals at the nine biggest banks and investment banks in the country. Never one to display ingratitude, he gave $10 billion to Goldman Sachs, the firm he had headed before passing through the revolving door to the Treasury. He went on to give other big financial institutions a cut of the loot, too. So generous was old Hank with the taxpayers’ money that he has now handed out $290 billion of the $350 billion that Congress authorized him to spend immediately. FULL ARTICLE

A memorably painful part of my graduate education consisted of my attempts to read and understand Samuelson’s landmark book Foundations of Economic Analysis (1947), a treatise in mathematical economic theory, patterned after classical thermodynamics, that set the tone for much of what the cleverest mainstream economists would do for decades to come. The protocol became: build a mathematical model of abstract actors engaged in constrained maximization or minimization of an objective function; prove that the model has a stable equilibrium; show how the model’s equilibrium conditions change when its parameters are changed (the so-called method of comparative statics). FULL ARTICLE

Here is a note that I wrote Guido Hulsmann, author of Mises: The Last Knight of Liberalism:

I have finally finished reading your great book about Mises. When I use the word “great,” I mean not simply that it weighs at least a kilo and contains more than 1,000 pages. I mean most of all that it is a magnificent scholarly achievement. I can’t remember when I have taken more pleasure from a book. It is  a joy to read, in every way. The English is precise and polished, and everything  is put just right. The research is amazingly broad, yet deep, too. The judgments  are sensible and mature. The coverage–from the personal details to the content  of Mises’s ideas to the context in which he lived and worked–is extraordinary,  and the organization puts everything into comprehensible order. The bibliography  is more than impressive. All in all, the book is simply an amazing  accomplishment, and a fitting tribute to its great subject.

The Mises Institute deserves great credit, too, not only for its support of your work on this project, but also for producing a book that is a fine example  of the publisher’s art: the typeface is clean and clear, and large enough to  permit effortless reading; the layout is spacious and proper; the footnotes are where they should be, and they, too, are large enough to be read without a  magnifying glass; the illustrations are splendid complements to the text; and  the indexes are terrific. The work is thus not simply beautiful intellectually,  but beautiful physically, as well.

If I had ever written anything half so wonderful–and I recognize that I lack the abilities to do so–I would consider my career a complete success, and feel myself justified in taking my ease, to rest on my laurels. I do not perceive that you have this plan in mind for yourself, and therefore the world will be the better, not only for your great book on Mises, but also for all the great achievements that lie in your future. I salute you, my friend, not without  a touch of envy, but with my whole heart.

My idea of a great president is one who acts in accordance with his oath of office to “preserve, protect, and defend the Constitution of the United States.” Not since the presidency of Grover Cleveland has any president achieved greatness by this standard. Worse, the most admired have been those who failed most miserably. Evidently my standard differs from that employed by others who judge presidential greatness. FULL ARTICLE

Robert Samuelson verges on Austrian cycle theory–without knowing it, of course.

The July 2006 issue of Imprimis, a widely circulated monthly publication of Hillsdale College, contains an interview with Milton Friedman that took place on May 22, 2006, in connection with a seminar celebrating the 25th anniversary of Milton and Rose Friedman’s book Free to Choose. In responding to a question about whether “our government has learned its lesson about how to manage the money supply,” Friedman said, in part: “The fundamental problem is that you shouldn’t have an institution such as the Federal Reserve, which depends for its success on the abilities of its chairman. My first preference would be to abolish the Federal Reserve, but that’s not going to happen.”
So, even though Friedman continues to accept, as he has always accepted, seeming political realities, he now regards the Fed’s abolition as his “first preference.” So far, so good.

The Dallas Fed distributes a bi-monthly publication called Southwest Economy. Opening the latest one to appear in my mailbox, for January/February 2006, I began to read the “President’s Perspective,” by the bank’s president Richard W. Fisher, on p. 2. After a couple foggy paragraphs about globalization, its effects, and the new questions it supposedly raises, the statement lists several such questions.

The first one is, “Does declining U.S. unemployment still fuel inflation in a world of abundant production capacity?” I was stunned. It seems that, for the Dallas Fed job, Mr. Fisher has been obtained from a deep cavern underneath MIT, where he has been in a coma since 1965 (not that, even then, anybody had a good excuse for believing such nonsense).

In a nation with a central bank, the blind lead the deluded.

Anyone who has followed the literature of economics knows that articles in the professional journals tend to take a standard form. If the article is purely theoretical, the setup will be something like: introduction, literature, model, and policy implications. If the article is empirical, it will go something like: introduction, literature, model, data, econometric estimates, and policy implications. In either event, those “policy implications,” at whose pronouncement the whole effort seems dedicated, generally take the form of recommendations for the government to do something. Articles that conclude either that the government should do nothing or that it should close up shop completely are, shall we say, uncommon.

Thus, the presumptive role of adviser to the powers that be seems almost inherent in the practice of economics in the past century. To call the practitioners “court economists” would not be wholly off base. To imply that every economist who follows the standard forms is ipso facto a prostitute of the state would be unwarranted, of course. Even some who serve on the faculties of state universities—you know who you are―dedicate themselves to preserving and protecting the free market. A handful are even anarchists working at public expense (imagine that!). Think of these pro-market economists as, to borrow the old commie expression, boring from within.

Sometimes, however, the inclination to indict the economists as complete sellouts to the state is almost irresistible. Which brings me to the burr under my saddle today.

While looking through the June 2005 issue of the Journal of Economic Literature, I came upon the listing (p. 563) for a book called Taxing the Hard-to-Tax: Lessons from Theory and Practice, edited by James Alm, Jorge Martinez-Vazquez, and Sally Wallace and published by Elsevier in 2004. The journal’s just-the-facts-ma’am description of the book reads as follows: “Eleven papers, originally presented at a conference held in Atlanta in May 2003 and sponsored by the Andrew Young School of Policy Studies at Georgia State University, provide an international perspective on the problem of taxing hard-to-tax activities, sectors, or individuals and explore policy options for taxing the hard-to-tax.”

Now, when I hear about anyone who is managing to escape the tax collector, my personal inclination is to break out the champagne for a celebration. My professional inclination as an economist is to note that in this case many of the inefficiencies that accompany taxation are being avoided (in my value-free professional guise, I say nothing about avoiding the injustice of transferring wealth from the creators and the justly entitled to the wreckers and the looters). Why would any economist want to assist the state in carrying out more extensively an activity whose upshot is distortions of resource allocation, deadweight costs, administrative costs, and wastes of countless sorts, all of which might be bundled within the concept of inefficiency? Does the question answer itself?

The JEL’s description notes that Taxing the Hard-to-Tax deals with, inter alia, “the costs and benefits of a marginal reallocation of tax agency resources in pursuing the hard-to-tax; sales taxation in a global economy; a possible approach to taxing agriculture in a developing country; . . . taxing the urban unrecorded economy in sub-Saharan Africa; and strategies for taxing the hard-to-tax in the twenty-first century.” As the poker player holding the winning hand might say as he reveals his cards, “read ‘em and weep.”

I have not seen this book. All I know about it comes from the JEL’s description. I don’t expect to order the book or to have any further contact with it. Just thinking about the members of my profession cranking out this sort of thing makes me want to retch.

Were we ever to stop being afraid of the government itself, and cast off the phoney fears it has fostered, government would shrivel and die. The host would disappear for the tens of millions of parasites in the United States—not to speak of the vast number of others in the rest of the world–who now feed directly and indirectly off the public’s wealth and energies. On that glorious day, everyone who had been living at public expense would have to get an honest job, and the rest of us, recognizing government as the false god it has always been, could set about assauging our remaining fears in more productive and morally defensible ways. [Full Article]

Hundreds of Coins Found in Patient’s Belly (Associated Press)