Why Isn't the Market Listening?

You've probably seen the Disney film, Fantasia, in the segment called The Sorcerer's Apprentice. Mickey Mouse is the apprentice, and he decides to use some of the sorcerer's magic while the boss is away. The experience is glorious, until he realizes that he can't control it any more and he finds himself drowning in a self-created flood.


[Thanks to Wikipedia.org for the illustration by S. Barth.]

Jean-Claude Trichet, the European Central Bank president, must see the market as a kind of sorcerer who is on his way home to save the day. As the Financial Times tells us (here and here), Mr. Trichet has called on financial markets to "help policymakers rebuild the levels of confidence in the banking system required to kick-start economic growth around the world." He "gave a stark warning to financial markets yesterday to stop putting pressure on banks to hold more capital."

But the market is not the sorcerer. It is the water--neither good nor bad, just flowing, or flooding, or drying up, doing what water does.

Trichet's jawboning reveals that politicians and their appointees, the quasi-government officials, are not part of the solution; they're part of the problem. They are Mickey.

It should be no surprise, then, that Mickey decided in 1913 to take over the powers of the sorcerer by turning a market-suggested financial-market-system convenience--the Federal Reserve clearing house set-up--into a powerful and politically expedient government-like macromanager of our money supply. Nor should it be a surprise when he ends up destroying our economy in the process. (See my article on the Fed, Page 1, Page 2, and Page 3 for more.) He's got the broom now, and things are getting out of hand. Mickey can call on every power he possesses, the water will never heed him.

We shouldn't be disappointed when ordinary humans fail at sorcery. It's not really their fault. Our government agents are themselves part of a bigger "market," in a sense. When we go to the polls and vote for more government intervention in our life, we are expressing our political "market" preference for government sorcery.

In our current crisis, here's an example that shows the pickle their in. This article in the FT says:

"Amid the recrimination and hand-wringing over the causes and consequences of the financial crisis, bankers and policymakers at the World Economic Forum in Davos have identified a new threat to global prosperity: the rise of financial protectionism. The huge state-backed bank bail-outs in Europe and the US, while necessary to prevent a collapse of confidence in the financial system, have forced banks to withdraw from overseas markets in order to concentrate their limited resources at home. ... The sharp reversal of capital flows appears at least partly due to political pressure on banks, especially those that have received large doses of state support, to sacrifice international operations in favour of maintaining lending to domestic consumers and companies. For governments attempting to explain their decision to commit hundreds of billions of taxpayers' money, this is an understandable response."

Likewise, when our factory workers start to hurt, the government becomes protectionist on that front as well. In 1930, Roosevelt's Congress, in response to public pressure to "do something," forced the market to "buy American" by passing the Smoot-Hawley Tariff Act. This Tariff turned out to be one of the main reasons the country didn't recover from the Great Depression until a decade later.

Here's more evidence of the public's growing protectionist spirit in the form of restrictions on purchases of steel with the stimulus package. (At press time, Obama seems to be rethinking this, but he will have to disappoint his base to do anything about it.)

Another example of forthcoming problems for the Sorcerer's Apprentice: The stimulus package won't work the way it's intended. You can't force banks to lend by throwing money at them, because as one banker put it, paraphrased by the Financial Times, "it is difficult to make loans to companies and individuals as most new lending would be loss-making and end up burdening their balance sheets with further writedowns." (FT Article.)

You can't buck the market. Nor can you force home buyers to buy when they know darn well prices will go down even more. Furthermore, when the government borrows money to spend on its own projects, it takes it away from the very people it is trying to help: capital-starved small businesses.

If we step back for a better perspective, clearly we are confronted with a culturo-political phenomenon: People have turned to government to cure a problem of government's own making. That's like asking Apprentice Mickey to solve the water problem.

There is one natural market phenomenon that will get Mickey back onto dry land in the longer run. It is a return to some form of a gold standard. This standard evolved in the marketplaces of the world over the centuries, and it would exist today if government agents had not decided to force their citizens to abandon it by declaring paper money to be our only legitimate legal tender.

Reality Check: The Government Stimulus and Bail-Out Plan

Today is a cartoon about the government stimulus and bail-out packages. I think it's self-explanatory. (Click on the image for a larger version.)

Excessive Power: Why Big Government is a Bad Thing

This article at Smoking Gun is an eye-opener for anyone who doubts that there is corruption in politics. Read the transcripts of the FBI's case. I drank up every word. You'll find them fascinating.


[Thanks to Transparency-USA.org for this world chart of corruption perception.]

Let me make a list of reasons why Big Government is bad:

1. All power is a corrupting force; and all human beings are susceptible to this force. It is a rare person who can resist the temptations offered by power, whether he or she be a Democrat or Republican.

2. Viewed from the other end, power is a magnet for the unscrupulous.

3. The free market works best without government intervention. (See my Economics and Government Lessons starting with my first blog posts in March 2005.)

4. The US Constitution's underlying message is the restraint of government power. Unfortunately, and of necessity, it allows for interpretation; and the present set of citizens has permitted its understanding of our Constitution to distance itself from the one originally intended. We no longer envisage the dangers from which the Founding Fathers were trying to protect us. It may not be our fault; we've just personally never experienced tyranny to any great degree.

5. Less government intervention in our life would mean more freedom to succeed and to fail, and failing is also a necessary part of the process of societal improvement.

6. I am convinced incomes would be more equally distributed not through more regulation (although rules, on the other hand, are essential), but through a freer market economy and through an economic system that relies not upon economist-humans like Bernanke to set the fiat money supply, but upon an objective and unflinching monetary standard like gold. Gold is incorruptible.

7. It is Big Government that becomes so powerful it can, for example, protect a trillion-dollar industry while that industry is creating the machine of its own destruction (e.g. credit derivatives).


These are some of the underlying reasons why the people of any democracy must struggle to contain the size of their government. No one in office should be faced with the incentives to act the way the various interlocutors in the Smoking Gun illustration are acting; and no office should be so lucrative that it attracts the criminally-minded. Yet I'm sure this type of conversation is rampant in today's Big-Government politics the world over.

But aren't we better than that? Well, see how the US ranks in competitiveness and corruption, according to Transparency-USA.org.

Government Intervention Run Amuck No. 14: Barney Frank

Barney Frank takes the cake as an example of government's mucky intervention.


[Thanks to Funnydog.net for the photo.]

Today's Wall Street Journal editorial on the Legislature's latest effort to intervene in the housing markets reveals just how far the nation has progressed towards interventionnism.

I hope Bush has the sense and courage to veto this one.

Here are a few citations of the terms of Mr. Frank's proposed new laws:

"If both borrower and lender agree to participate, lenders can accept 85% of the current appraised mortgage value and in return get to dump up to $300 billion of those loans on the Federal Housing Administration (FHA)." [And who pays the bill for that? Why, you and I, of course.]

"'If we see a widespread refusal on the part of servicers to cooperate voluntarily in what we see as an important economic problem . . . they can expect much tougher regulation in the future.' And they called Tom DeLay 'the Hammer'?" [I guess blackmail is the new Congressional tool.]

"State governments receive authority to issue $10 billion in tax-exempt bonds to subsidize home purchases and to help subprime borrowers refinance." [Sure. Give 'em some more money so that they can keep that house they can't pay for.]

"Mr. Frank also expands the low-income housing tax credit, and he creates a new refundable credit for certain home buyers. To help defray the cost to the Treasury, Mr. Frank raises taxes on multinational companies by delaying a scheduled reform." [Talk about robbing Peter...]

"Then there is the $230 million for housing counseling to be distributed by the Neighborhood Reinvestment Corporation." [Housing counseling??]

"Also included is this addition to the Home Owners' Loan Act: 'A Federal savings association may make investments, directly or indirectly, each of which is designed primarily to promote the public welfare . . . through the provision of housing, services, and jobs.' Mr. Frank has got to be kidding." [No surprise to me. We're back to trying to confuse the public about what that phrase in the Constitution, "public welfare," really means. Good grief.]

And then this conclusion by the WSJ staff:

"The Frank plan appears to take care of everyone in the housing market, except the renters and homeowners who lived within their means."

Hear, hear.

I can't decide whether we should be thankful or not about the fact that most of these efforts will fail. Unfortunately, we taxpayers will end up holding the stick either way.

Update: Maxine Waters is going to take Second Prize for Mucky Intervention, for her new bill, which would give money to states so they can buy foreclosed homes.

What next.

Government Intervention Run Amuck No. 12: Bear Stearns Buy-Out

It's amazing how the examples of our government-genie's clumsiness seem to jump off the pages at me on a daily basis.


[Thanks to mwctoys.com for the image.]

I opened today's Wall Street Journal to fall upon this headline.

The Bear Stearns collapse and the subsequent scrambling of the Fed, Congress, J.P. Morgan and the victim Bear Stearns itself, are a great example of how too much government power gets us in trouble as a nation.

I ask you: What business does the government have (whether it be the government-proper or one of its side-kicks like the Federal Reserve) fixing the price of a failing market participant on the brink of bankruptcy? What superior knowledge will permit the government or its agencies to pick the right price?

The answer, of course, is none. They have no business, they have no knowledge, and they are fixing prices--something they profess to be loathe to do.

Not only that; they're doing it with the collusion of the two parties--or least the door is open to that accusation.

And now they're stuck with trying to explain their decision, and they will find this to be a most difficult task. They have chosen some participants over others, putting themselves in the position of the God of Markets. As such, they will recuperate the full force of all the accusatory fall-out that would normally have disinflated itself ricocheting off only non-actionable "market forces."

Here's an example of today's self-defensive jaw-boning:

"'There was a view that the price should not be very high or should be towards the low end...given the government's involvement,'" said Treasury Undersecretary Robert Steel.

The price had been set at $2, but now it five times that, for no apparent reason other than to squash dissent, to find a compromise.

So now, instead of having a bankruptcy (which is what the market would probably have required) and a few days of discomfort, we now have lawsuits, justifications, rationalizations, suppositions and hypotheses about dire consequences that they have no way of foreseeing.

Just another lesson in what is apparently going to be a very long list in my series illustrating government clumsiness.

Government Regulation Gone Amuck: An Overview

Economics professor and author Arnold Kling is an adjunct scholar at the Cato Institute, and he writes also for Tech Central Station and for his and a partner's website, EconLog.

He has recently written an article published by the Wall Street Journal on the future of government regulation in America.

He states that public understanding of the limitations of government is poor, as evidenced in the popularity of big-government ideas like nationalized health care and government control of energy production and use.

I like his piece for its clarity and good examples, and also because it sums up the conclusion I was headed toward, i.e. that excessive government regulation will always tend to run amuck, by definition. It destroys competition, pulverizes the pricing mechanism, and pushes a society towards anti-free-market socialism at its own expense, which expense big-government enthusiasts ("progressive" voters and legislators) underestimate (naively or purposely).

He finishes with this:

"Many Americans will welcome the regulatory state. Many others will accommodate it. Only a minority of us will oppose it. Somewhere down the road, as people see the indignity of the many intrusions and the adversity of the consequences, I hope that there will be a backlash. Otherwise, if the era of mandates emerges as I fear it will, then the engine of capitalism in America may run out of the fuel of competition."

I second that. Hear, hear.

Basel II: Maybe Not Too Little, But Surely Too Late?

What's this, you ask? And why Basel?

I'm referring to yesterday's adoption by the Federal Reserve Board of what banking circles commonly call "Basel II," heavy banking legislation that's coming down the pike. Unfortunately, although it may not be too little, it's certainly too late. An earlier implementation of these rules could have saved the global economy trillions of dollars and a lot of grief.


[Thanks to myself for this great photo of the Swiss alps.]


What grief, you ask? Allow me to explain.

I'm referring to some grief you may never hear about, but which is turning some banking CEOs into nutty-putty. I'm talking about a disguised but huge banking industry "glitch" camouflaging itself behind a housing bust and hiding under some pretty good economic statistics.

Think of this "little malaise" as that undefinable feeling of unease that inspired consumers to lower their confidence rate this month, but that most of us can't quite seem to put our finger on.

Many people have heard of the real estate woes in the US and elsewhere. The housing boom/bust has already touched some of our friends, if not ourselves. Mortgages are becoming fewer and farther between, our home values are plummeting in many parts of the country, and refinancing the adjustable rate mortgage that you thought you could pay off before too late is becoming impossible for a small but significant number of us homeowners.

Behind all this is some hefty banking drama of which only some people have heard, and which is just plain scary. In short, the banking industry has been involved in some very unwise speculative activity. And I'm not talking about those fly-by-night banks; I'm referring to the world's biggest banking institutions, like Citicorp, Bank of America, Bear Stearns, Merrill Lynch, JP Morgan Chase, Deutsche Bank, UBS of Switzerland, and other well-known companies.

An explanation of exactly what these big players have been doing would take many thousands of words. For those who are curious about the gory details, I've written about parts of the games they play here, here, here, here, and here.

Suffice it to say that they have been having a free-for-all feeding frenzy off some credit issued by our friends at the Federal Reserve and at other central banks, and have lost sight of reality due to the blindingly drugged exhilaration of their gambling successes--at least up until June of 2007. (You've heard about those million-dollar Wall Street bonuses, right? Well, the good news is that these could be history, at least for a while.)

You may have read recently about a few bad profit numbers from a number of banking institutions. What looks like a bad hair day is really a frenzy of activity on the part of the financial elite, to save their own skins and to save the entire global banking system.

Oh, you hadn't heard? No doubt true, because our savvy federal money managers have managed to keep a lid on most of the details. (See this post and this post for a few of the ones that got published.)

For those of you who think that your good government watchdogs will be all over any hanky-panky that any dastards might want to perpetrate, let me inform you that your infamous bulldogs have been chewing on this bone since 1999, well before the latest round of unwise speculative activity began. The central bankers obviously knew something was needed in this regard; but unfortunately, the subject has occupied them for the ensuing eight years with nothing concrete to show for it up to now, as far as the public is concerned.

But with the finalization of Basel II, they're finally getting there. Why has it taken them this long? Well, Virginia, that's the nature of government committees. It just does. Meantime, eight years after they began mumbling to each other about the dangers of this evolving speculative situation--a catastrophe that they clearly saw coming and, I conjecture, that they themselves created--the crap has now hit the fan and we're all going to pay for it sooner or later, probably in the form of increased inflation, heavier government, stagnating wages, and reduced government-paid retirement benefits.

And when I think that a liberated marketplace could have eliminated all of this toil and trouble, and for free at that. That means no government bureaucracies, no Swiss holidays, no speculation with our money, no housing boom/bust; just normalcy.

To make a long story short, (1) if governments were smaller, banks would be smaller, and credit would be limited by the system. (We'll discuss that some day.) (2) Any bank that took on the kind of risk those like mortgage lender Countrywide have taken on to date, would already have failed. (In fact, were it not for our government, Countrywide would already be history. See this post for the details of how Countrywide has been bailed out with our money.) Even one such failure would discourage any other banks from trying unwise maneuvers. Heck--in fact, even the fear of failure would probably have avoided any one bank's failure in the first place.

BUT.........

Today, however, the biggest banks in history and the largest mortgage companies in the world have no fear. Why? Because governments have decided they will "lower the Fed rates," lend taxpayer collateral, and perform other banking system interventions to save such big banks from failure, no matter what stupid shenanigans the financiers pull. This is lending your and my money to gamblers so that they don't lose their shirts. Meanwhile, it's you and I who will end up standing around with our pants down.

Do we really want to save gamblers from their own folly? Do we really want banks so big the government doesn't dare let them fail? Do we really want to pay sightseeing pundits to go to Switzerland to write banking policy eight years too late? Do we really need mortgages we can't afford? Do you really need the price of a home to explode (along with your property taxes in most places), only to see it come crashing back down on you a few years later?

Please ponder this, especially next time you have the urge to vote for big-daddy government. It is this very government that got us all into this pickle in the first place.

Boaz Whipping up a Storm about Big Government

Cato's David Boaz usually hits home, and he's done it again in this article about the handling of Katrina.

As he points out, "You've got to hand it to the advocates of big government. They're never embarrassed by the failures of government. On the contrary, the state's every malfunction is declared a reason to give government more money and more power."


[Thanks to lewrockwell.com for this photo.]

Isn't that the truth? Hillary, Obama, and Edwards show up to commemorate the catastrophe, and what is their message? It's not the fault of big government; it's the fault of Bush. If "I" had been in control, this wouldn't have happened. More rubbish on the Katrina trash heap.

Bush shows up and the only clip you see on the media is his affectionate gesture towards a stiff Mayor of New Orleans. (I have yet to hear on any MSM new channel what he actually said.)

People: These individuals are just your employees. They act on your behalf. Do you really want them in charge of this kind of job in the future?

Boaz also points out: "Government kept individuals, businesses, and charities from responding as quickly as they wanted.... [The] Department of Homeland Security refused permission for the Red Cross and the Salvation Army to go into the city and deliver water, food, medicine, and other relief supplies to those suffering at the Superdome and convention center. Similarly, [Homeland Security's director] took several days to sign a simple proclamation allowing doctors licensed out of state to help the sick and injured. Several doctors sat around for days waiting to go to work."

More:

"FEMA issued a sternly worded release on August 29, the same day the hurricane made landfall along the Gulf Coast, titled 'First Responders Urged Not to Respond to Hurricane Impact Areas.' [Blogger's Note: Typical big-government employee hubris, no faith in the free market.] FEMA wanted all the responders to be coordinated and to come when they were called. And that was one plan they followed. As the New York Times reported September 5:

" 'When Wal-Mart sent three trailer trucks loaded with water, FEMA officials turned them away, [Jefferson Parish president Aaron Broussard] said. Agency workers prevented the Coast Guard from delivering 1,000 gallons of diesel fuel, and on Saturday they cut the parish's emergency communications line, leading the sheriff to restore it and post armed guards to protect it from FEMA, Mr. Broussard said.'

"Those weren't the only examples. The city declined Amtrak's offer to carry evacuees out of the city before the storm. On September 2, the South Florida Sun-Sentinel reported, 'Up to 500 Florida airboat pilots have volunteered to rescue Hurricane Katrina survivors, transport relief workers and ferry supplies. But they aren't being allowed in.' Hundreds of firefighters responding to a call for help were held in Atlanta by FEMA for several days of training on community relations and sexual harassment."

You gotta be kidding.

And this is nice:

"But it's no accident that governments often fail at their tasks. The incentives are all wrong. Profit-seeking companies are constantly driven to innovate, improve, cut costs, and deliver better service for less money, lest they lose customers to their competitors or even go out of business. Churches and charities are motivated by love and commitment, as well as by the need to satisfy donors or run out of money. Governments can raise taxes or print money. If a government agency fails at its mission, the usual response is to give it more money next year--not a very good incentive for success. Politicians would rather cut a ribbon at a Cowgirl Hall of Fame than fix potholes or levees."

Read the whole article. It's an eye-opener.