Foreclosure Settlement in the U.S.- The Proper Course of Action?

LvMIC:

After years of litigation, the United States government, along with the governments representing the fifty states, has reached a joint settlement with the country’s five major banks and mortgage lenders over their questionable practices of mortgage foreclosure.  Via Financial Times:

US regulators are preparing to announce a settlement, worth up to $39.5bn and covering nearly all 50 states, that would resolve allegations that five leading banks systematically abused borrowers in their pursuit of improper home seizures.

Under the proposed agreement, Bank of America, Wells Fargo, JPMorgan Chase, Citigroup and Ally Financial would be forced to improve their mortgage procedures; reduce borrowers’ loan balances and monthly payments; and make about $4.2bn in cash payments to an estimated 750,000 aggrieved homeowners and state governments, people with knowledge of the matter said.

In exchange, officials would promise not to pursue certain mortgage-related legal claims against the targeted banks.

From an austro-libertarian perspective, this settlement can be looked at in a variety of ways.  Depending on your view of the legitimacy of government, federal regulators and state governments filing suit over fraud in mortgage practices or wrongful foreclosures could be seen as the correct avenue to pursue.  This is especially so for minarchists and classical liberals who see the state as justified in righting instances of fraud.  For those of the more anarchist or Rothbardian variety, legal arbitration such as this can be handled by private courts, enforcement, and even company directed boycotting.  Whatever the case, if the banks were in the wrong, than the rule of contractual law dictates concessions to be paid toward the victims.

Unfortunately, the foreclosure mess and infamous robo-signing scandal is anything but a simple, black and white issue to resolve.  In fact, the Federal Reserve, in a report release almost a year ago, found no evidence of wrongful foreclosure practices by the big banks.  Given the Fed’s, let’s just say “close,” relationship with the financial sector, some discretion should perhaps be applied when considering the report.  And it’s precisely because of this public-masquerading-as-private affiliation between the mortgage market and federal government that the housing bubble was exacerbated and the process of sorting through the jumble has been met with so many roadblocks.

In the Ethics of Liberty, Murray Rothbard points out that, “the perfectly proper thesis that private persons or institutions should keep their contracts and pay their debts.”  But according to Doug French,

the mortgage market is anything but private. Grant’s Interest Rate Observer, in its May 14, 2010, edition points out that Fannie, Freddie, and the FHA “accounted for 97% of new mortgage lending in the 50 states. That is, they either purchased or guaranteed all but 3% of new homes secured by American dwelling places.”

So much for the mortgage market being a product of private, and thus purely market, forces.  When looked at through the lens of private vs. public, the government’s settlement with the big banks ends up being an exercise of preserving the status quo under the guise of appearing to be doing something.  As Yves Smith of Naked Capitalism shows, this settlement deal really isn’t all that it’s cracked up to be:

The total for the top five servicers is now touted as $26 billion (annoyingly, the FT is calling it “nearly $40 billion”), but of that, roughly $17 billion is credits for principal modifications, which as we pointed out earlier, can and almost assuredly will come largely from mortgages owned by investors.
That $26 billion is actually $5 billion of bank money and the rest is your money. The mortgage principal writedowns are guaranteed to come almost entirely from securitized loans, which means from investors, which in turn means taxpayers via Fannie and Freddie, pension funds, insurers, and 401 (k)s.
That $5 billion divided among the big banks wouldn’t even represent a significant quarterly hit. Freddie and Fannie putbacks to the major banks have been running at that level each quarter.

The settlement hardly puts a monetary dent in the balance sheets of the prosecuted banks; another sign that the deal is simply a farce and a handy tool for President Obama to wave around when campaigning for reelection.

In the sphere of ethical law, aggressive violations of property rights and commitment of fraud are to be prosecuted.  The state however doesn’t play by those same rules as it yields coercion over a given citizenry and commits fraud on an almost daily basis either through taxation, currency debasement, or just plain use of public funds for the purpose of enriching politicians and their friends.  With the Federal Reserve System overseeing the whole of the banking sector, banks “should really be seen as a highly regulated public utility” according to Don Luskin of Trend Macrolytics.  This says nothing about the enormous amount of money some firms use to finance the campaigns of their preferred Congressmen or Presidential candidate who in turn legislate on their behalf.

The real danger behind this foreclosure settlement is that it’s a perpetuation of the moral hazard which plagues the financial industry and the lifeblood of the economy.  Though the evidence is shoddy, there are no concrete examples of wrongful foreclosure of those who were making their payments on time.  The string of foreclosures appears to have emanated from those who couldn’t work out a reduction of their principal owed as their house went underwater due to a fall in home prices.  This settlement simply amounts to a bailout of those who can’t afford their mortgages and haven’t been making payments.  Dick Bove of Rochdale Securities explains why in a CNBC interview:

The talking heads here miss the dominant issue within this whole mess:  the fact that the Federal Reserve’s monetary policy, aided by the housing policy of the federal government and its GSEs, created the housing bubble to begin with.  Had interest rates not pushed down to unprecedented levels at the beginning of the 21st century, the housing market would not have experienced such an inflationary boom.  The mortgage foreclosure crisis is only a byproduct of the central planners at the Federal Reserve.  Once the core dilemma of continual fiat boom and bust is recognized and put and end to, widespread calamities such as wrongful foreclosure lawsuits are more likely to be contained in the future.

If interested, here is a breakdown of the settlement payout via the New York Times/Big Picture:

Here is another breakdown via FT:

Nationally:

• – Servicers commit a minimum of $17 billion directly to borrowers through a series of national homeowner relief effort options, including principal reduction.  Servicers will likely provide up to an estimated $32 billion in direct homeowner relief.

• – Servicers commit $3 billion to an underwater mortgage refinancing program.

• – Servicers pay $5 billion to the states and federal government ($4.25 billion to the states and $750 million to the federal government).

• – Homeowners receive comprehensive new protections from new mortgage loan servicing and foreclosure standards.

• – An independent monitor will ensure mortgage servicer compliance.

• – States can pursue civil claims outside of the agreement including securitization claims as well as criminal cases.

• – Borrowers and investors can pursue individual, institutional or class action cases regardless of agreement.

Bernanke Proves Critics Wrong? Don't Make Me Laugh

LvMIC:

With relatively tame inflation and a recovering, almost bullish, economy, Caroline Salas Gage of Bloomberg has come out heaping praise upon money printer extraordinaire Ben Bernanke today:

The numbers are proving Federal Reserve Chairman Ben S. Bernanke’s critics wrong.
More than a year after Republicans from House Speaker John Boehner of Ohio to presidential candidate Ron Paul of Texas warned that the Fed’s second round of asset purchases risked a sharp acceleration in prices, the surge has failed to materialize. The personal-consumption-expenditures price index rose 2.4 percent for the 12 months ending in December, near the central bank’s 2 percent target.

Even though the economy is showing signs of strengthening and inflation appears in check, Republicans Mitt Romney and Newt Gingrich, who also are running for president, have said they wouldn’t keep Bernanke, 58, when his second four-year term as Fed chairman expires on Jan. 31, 2014. Gingrich said in September that Bernanke was “the most inflationary, dangerous and power-centered chairman” in the central bank’s history.

First of all, Gingrich wouldn’t understand the nuances of monetary policy, or the Austrian school, if it was served face-to-face to him by a divorce lawyer.  The man’s disingenuous call for a gold standard commission is nothing but pathetic vote pandering and a childish attempt to co-opt Ron Paul supporters.  How would a President Gingrich be able to pay for a moon base with the Treasury tied down by a dollar fixed in gold rather than the politically helpful whim of central bankers?

With that small rant out of the way, Gage’s extolling of Bernanke misses one key aspect: where was the great bearded one in the midst of the deflating housing bubble?  Laughing it up with his equally blind central planning cohorts apparently.  That transgressions aside (an economically crippling transgression on a global scale, mind you), let’s look at the true inflation data in the U.S.  As of December 2011, the Consumer Price Index (CPI) is running at 3% annually with food at 4.7% and energy at 6.6% according to the Bureau of Labor Statistics.  The Producer Price Index (PPI) is running at 4.8% annually.  These stats are of course accurate if you buy into the flawed methodology the government uses in calculation.  Still, the fact that the core-CPI measure the Fed uses is running at 2.4%, above the target level of 2%, shows that Bernanke doesn’t have the whole world in his hands, as it were.  Central banks can’t precisely control inflation, just try to influence it by printing money.  As a recent post at Cato@Liberty demonstrates, the trend of core-CPI is trending up (ht Bob Wenzel):

In fact the core CPI continued its fairly steady increase.  Since September 2011, core CPI has been, on an annualized basis, above the Fed’s target of 2 percent (let’s set aside, for the moment, whether this is the right target or if it is even measured appropriately). Remembering that monetary policy works with “long and variable lags” the time to worry about inflation is before it hits, not after.  Given the clear upward trend in the government’s own charts, I’d say we are already past the point where we should start worrying.

And then there is the all important consumer debt and credit trend which is also on the rise, via Wall Street Journal:

U.S. consumers ramped up borrowing in December. Consumer debt outstanding rose at a seasonally adjusted annual rate of 9.3% from November to $2.498 trillion. Behind that was a seasonally adjusted 11.8% rise in nonrevolving credit, which includes car and student loans. Revolving credit, mainly credit-card debt, climbed a seasonally adjusted 4.1% in December from the previous month.

So let’s sum up Cage’s argument: after three years of prime pumping and effectively zombifying the banking system, the U.S. economy is showing more signs of life as the money supply has been increasing at annual double digit rate for the past 6 months.  Isn’t there a theory out there which stipulates that easy money and artificially suppressed interest rates have something to do with causing an economic boom and boosting stock prices nominally as well as the capital goods sector?  Even CNBC, an outlet for many “experts” who missed the housing bubble in spades, gives credit to the Fed for the stock market’s recent strong performance

Federal Reserve  easing has helped fire up one of the strongest stock market rebounds ever, and the promise of more is keeping it going.
The chart of the S&P 500‘s more-than-100 percent run—from its March 2009 low of 666 to its current 1340-plus level—generally depicts the most powerful comeback of the past seven cyclical stock market recoveries, Wells Fargo advisors analysts say.

Like Maestro Greenspan before him, Bernanke is given credit (no pun intended) for engineering an accelerating recovery.  Problem is, if inflation expectations continue to stay on an upward trend, Bernanke may have to allow interest rates to rise, thus curtailing the current boom, forcing the U.S. government’s budget deficit to intensify as interest payments increase in size, and perhaps reveal any malinvestments hidden by easy money.  The second, and maybe more concerning, issue with Bernanke winding down the Fed’s balance sheet is summarized by David Howden at Mises Daily today:

The problem that few considered was simple: what would happen if the Fed’s new assets lost value before they were sold back to the banking system? A qualitative mismatch was made. The Fed bought assets of uncertain value and paid for them with assets fixed at par value by definition (reserves). Any loss of value in the Fed’s new assets would translate into new money that the Fed could not purchase back from the banking system. In other words, inflationary pressures will appear if the Fed realizes a loss on its assets (which it has not had to do, as they remain largely unsold). Alternatively, to bring expectations into the picture, inflationary pressures can build today on the expectation that in the future the Fed will have to realize a loss on its assets.

Bernanke is playing with fire.  It’s becoming more and more apparent that the massive liquidity injection of 2008 and subsequent inoculations were temporary fixes to postpone the inevitable market correction.  The political, financial, and media establishment still regards the printing press as the tool of the Gods and central bankers as miracle workers.  Cheerleaders of central banking were lulled into the exuberance and over confidence of the Fed-induced housing bubble almost five years ago; is there any reason to believe they won’t be blind to the next bubble and the assured bust?

Like Mises declared:

The inescapable consequences of credit expansion are shown by the theory of the trade cycle. Even those economists who still refuse to acknowledge the correctness of the monetary or circulation credit theory of the cyclical fluctuations of business have never dared to question the conclusiveness and irrefutability of what this theory asserts with regard to the necessary effects of credit expansion. These economists too must admit and do admit that the upswing is invariably conditioned by credit expansion, that it could not come into being and continue without credit expansion, and it turns into depression when the further progress of credit expansion stops.

San Fran Fed Finds Problem with Econometric Multipliers

LvMIC:

Despite the obvious bias which engulfs the incestual working relationship between the Federal Reserve System, the U.S. financial sector, and the U.S. government, occasionally some grains of truth trickle out from these Ministries of Truth.  In a new report by Daniel J. Wilson out of the Federal Reserve Bank of San Francisco, it turns out that fiscal stimulus, get this, might actually vary upon effect in implementation and thus the multiplier effect!

The severe global economic downturn and the large stimulus programs that governments in many countries adopted in response have generated a resurgence in research on the effects of fiscal policy. One key lesson emerging from this research is that there is no single fiscal multiplier that sums up the economic impact of fiscal policy. Rather, the impact varies widely depending on the specific fiscal policies put into effect and the overall economic environment.

With this kind of groundbreaking research being produced by PhD’d economists operating as fellows or researchers at Fed banks, what other explanations or theories could we possibly need?  The serious question still remains on how is this a new discovery?  Money doesn’t transverse through millions of economic hands in a predictable fashion.  The idea that economists aided by mathematical formulas and supercomputers are able to foresee how market actors will proceed in spending funds confiscated and given away by the political class is afflicted with conceit.  Human action can’t be observed as a constant such as in the physical sciences.  Murray Rothbard explains in The Mantle of Science:

Finally such staples of mathematical economics as the calculus are completely inappropriate for human action because they assume infinitely small continuity; while such concepts may legitimately describe the completely determined path of a physical particle, they are seriously misleading in describing the willed action of a human being. Such willed action can occur only in discrete, non-infinitely-small steps, steps large enough to be perceivable by a human consciousness. Hence the continuity assumptions of calculus are inappropriate for the study of man.

This, of course, doesn’t stop some economists from presuming the infallibility of their formulas.  It’s already well known that President Obama’s first stimulus package, put into effect in early 2009, did not meet its goal of keeping unemployment below 9%.  The standard response from Keynesian proponents of fiscal stimulus to counter a cyclical downturn was that “the government didn’t spend enough.”  That is, it didn’t spend enough to jump start the fiscal multiplier and get those animal spirits shopping.
But as Wilson reveals, the alleged fiscal multiplier is hardly ever accurate:

What does this literature tell policymakers and others trying to assess the impact of fiscal policy changes? It is an inconvenient reality that this literature provides an enormous range of multiplier estimates, ranging from –1 to 3. However, this range is not so much a reflection of disagreement over an underlying parameter as it is a reflection of one of the key lessons of this research—that there is no single multiplier that can be applied mechanically to all situations. The impact depends on the type of fiscal policy changes in question and the environment in which they are implemented.

The sphere of human action is ever changing; of course there can be no one true multiplier.  With fiscal stimulus acting as the equivalent of a dart board for bureaucrats and economic mathematicians to calculate a multiplier, is it any wonder that grand promises of free lunches are never delivered upon with the enactment of a large increase in government expenditure?

As Frank Shostack shows (channeling Say’s Law), the free lunch doesn’t exist and any “extra” spending generated by fiscal stimulus backed by multipliers must come at the expense of future or existing production:

In the Keynesian multiplier story the initial consumer expenditure creates new income for the next person, who in turn creates income for another person and so on. However, to have income for consumption one must first produce something useful that can be exchanged in the market.
Through the production of goods an individual can secure the produced goods of other individuals in an economy. His production backs up, so to speak, his demand for the goods he wants to secure. For instance Bob the farmer secures one loaf of bread from John the baker by paying for the loaf of bread with five tomatoes. Bob also secures a pair of shoes from Paul the shoemaker by paying for the shoes with ten tomatoes.
Let us examine the effect of an increase in the government’s demand on an economy’s overall output. In an economy, which comprises of a baker, a shoemaker and a tomato grower, another individual enters the scene. This individual is an enforcer who is exercising his demand for goods by means of force.
Can such demand give rise to more output? On the contrary, it will impoverish the producers. The baker, the shoemaker, and the farmer will be forced to part with their product in an exchange for nothing and this in turn will weaken the flow of production of final consumer goods. Again, as one can see, not only does the increase in government outlays not raise overall output by a positive multiple, but on the contrary this leads to the weakening in the process of wealth generation in general.

Rather than justifying the multiplier effect, Wilson’s report is demonstrative of the kind of muddled thinking and practice behind such a concept.  There can never be a true multiplier just as there can never be a perfectly static economy.  The process of the market is dictated by human action outside the bounds of predictive mathematics.  You don’t need to peruse a bunch of time studies to figure out what should be common sense.

Just don’t expect this truth to stop the countless retorts of “we didn’t spend enough.”

Joe Stiglitz Thinks the ECB is Beholden to Special Interests...

LvMIC:


Though I find it excruciatingly hard to agree with Nobel Laureate Joseph Stilgitz on anything, I can’t say he is wrong on his latest hunch.  In his Project Syndicate column today, Mr. Whither Socialism suspects that perhaps the European Central Bank doesn’t have the “public’s” interest at heart in its attempt to resuscitate the Euronzone and guide Greece through what looks like an impending default.  He writes:

The ECB’s insistence on “voluntary” restructuring – that is, avoidance of a credit event – has placed the two sides at loggerheads. The irony is that the regulators have allowed the creation of this dysfunctional system.

The ECB’s stance is peculiar. One would have hoped that the banks might have managed the default risk on the bonds in their portfolios by buying insurance. And, if they bought insurance, a regulator concerned with systemic stability would want to be sure that the insurer pays in the event of a loss. But the ECB wants the banks to suffer a 50% loss on their bond holdings, without insurance “benefits” having to be paid.

There are three explanations for the ECB’s position, none of which speaks well for the institution and its regulatory and supervisory conduct. The first explanation is that the banks have not, in fact, bought insurance, and some have taken speculative positions. The second is that the ECB knows that the financial system lacks transparency – and knows that investors know that they cannot gauge the impact of an involuntary default, which could cause credit markets to freeze, reprising the aftermath of Lehman Brothers’ collapse in September 2008. Finally, the ECB may be trying to protect the few banks that have written the insurance.

Surprisingly, Stiglitz recognizes the need for a “deep restructuring” of Greece’s debt; no doubt alluding to a hard default.  Where he was making this call two years ago when the crisis started gaining steam in the home of democracy, no one can say.  In reality, Stiglitz at first denied Greece would need a bailout and then became a supporter of the measure to prevent a default.  So much for appraising the behavior of culpable political institutions.

As anybody who has looked into the history of central banking knows, these established systems of regulation are never the product of an altruistic political class but merely an implicit maneuver to cartelize the banking system in favor of banker elites.  Like Hayek said, “Socialism has never and nowhere been at first a working-class movement.”

From the beginning of the Eurozone crisis, those who understood the symbiotic relation between central banks, their respective governments, and the financial institutions which fund the state, realized that the exercise in bailout futility, otherwise known as kicking the financial can, was done on part not to bailout countries such as Greece and Italy but to save the banks which hold large portions of their debt.  In short, the governments weren’t being bailed out, the banks were.  Stigliz finally seems to get it:

In fact, the ECB may be putting the interests of the few banks that have written credit-default swaps before those of Greece, Europe’s taxpayers, and creditors who acted prudently and bought insurance.

Better late than never.

Despite his economic accolades, Stigliz may finally be grasping on to the true nature of central banking:

The final oddity of the ECB’s stance concerns democratic governance. Deciding whether a credit event has occurred is left to a secret committee of the International Swaps and Derivatives Association, an industry group that has a vested interest in the outcome. If news reports are correct, some members of the committee have been using their position to promote more accommodative negotiating positions. But it seems unconscionable that the ECB would delegate to a secret committee of self-interested market participants the right to determine what is an acceptable debt restructuring.

News to the Columbia U. Professor, power centers attract powerful special interests.  Angels don’t occupy public offices; those who take great pleasure in wielding coercive authority over their fellow man do.
Though Stiglitz believes the Eurozone crisis is a product of a lack of regulation (by easily bought bureaucrats, which he grudgingly admits), he is correct that a hard default is the correct path through the storm.  If the EZ wants to retain any credibility of free market capitalism, losses must be taken by those who took the risk. 

Perpetuating moral hazards by papering over the bad decisions of market participants creates further disasters down the road.  But with a hard default must come a triggering of credit default swaps which the ECB wants to prevent.  Credit default swaps, for all their demonization by the anti-Wall Street crowd, are merely a means for investors to hedge themselves against potential default through risk assessment.  Take away this function and the market will find inevitably find another way to protect itself against recklessly spending governments.  For all the faith thrown bestowed upon faceless regulators by those who wish the hand of government in every affair of life, these bureaucrats have specialized in always chasing the last market innovation.  Despite increases in staff and funding, regulators simply don’t have the vast amount of knowledge to attempt to plan an economy.

The economic fact is that credit default swaps don’t cause fiscal destabilization.  The profligate spending of governments and continual interest rate manipulations by central banks are what wreak havoc on normal working order.  Markets are self correcting when left to their devices.  An emboldened political and regulatory class that sees itself as omniscient in the face of the complex phenomena known as an economy only ever burdens this process.  Allowing the triggering of credit default swaps, like the financial meltdown in the fall of 2008, won’t be the end of the world.  Even Stiglitz recognizes this:

The one argument that seems – at least superficially – to put the public interest first is that an involuntary restructuring might lead to financial contagion, with large eurozone economies like Italy, Spain, and even France facing a sharp, and perhaps prohibitive, rise in borrowing costs. But that begs the question: why should an involuntary restructuring lead to worse contagion than a voluntary restructuring of comparable depth?

If an auto insurance company sees a large, but uncorrelated, jump in claims, the government shouldn’t step in to protect its losses by stopping a payout to insurance holders for the sake of financially saving the company.  Those who insured themselves were acting prudently; why should they by punished?  What kind of message does this send for future drivers?

Stiglitz naively believes that “democratic” institutions are too beholden to wealthy special interests.  Until he realizes that institutions given monopolies on a specific industry or over force and legal arbitration themselves attract the most unscrupulous of men, he won’t see the true cause of societal impoverishment and decay.

Marc Faber Mentions Canada Housing Bubble

LvMIC (considering I blog here predominantly, I figure it's important to cover the looming housing bubble in Canada):

In another interview filled with dire predictions of money printing and inept central banking, the always great Marc Faber makes a passing mention of housing bubble in Canada- see around the 4:00 mark.


Faber:

Previous to that I was in Canada.  In Canada, in the cities, you have boom conditions and real estate prices are very high, four or five times as in Arizona.  In Arizona you can buy a beautiful house for $150,000.

In a recent Bloomberg article, Andrew Mayeda mentioned the similarities between the U.S. housing market during the heyday of the boom years and Canada’s market today (my emphasis added):

Canadian lenders are loosening standards, offering mortgages similar to U.S. subprime loans that pose an “emerging risk” to financial institutions, according to the country’s banking regulator.
Banks and other lenders are becoming “increasingly liberal” with mortgages and home-equity credit lines that don’t require individuals to prove their income, according to 152 pages of documents obtained by Bloomberg News under freedom of information law from the Office of the Superintendent of Financial Institutions. The mortgages, typically granted to the self-employed and recent immigrants, “have some similarities to non-prime loans in the U.S. retail lending market,” the documents show.

When Bank of Canada head Mark Carney and his board of central planners flooded the market with liquidity in 2008, the easy credit appears to have financed a speculative bubble in housing.  Since November 2007, the variable mortgage rate in Canada has dropped from about 6.25% to a low of 2.25% in May of 2009 and has increased slightly to 3% as of January of 2012.  In the same time period, the 5 year fixed rate has dropped from 6% to 3.79%.  At the same time, M3 money supply in Canada has jumped from $1,110,823,000,000 in 2007 to $1,448,852,000,000 in 2011- an increase of about 30%.

As Austrian economist Joseph Salerno documents, this correlation bears a resemblance to the conditions of the housing market in the U.S. (my emphasis added):

From the beginning of 2001 to the end of 2005, the Fed’s MZM monetary aggregate increased by about $1billon per week and the M2 aggregate by about $750 million per week. During the same period the monetary base, which is completely controlled by the Fed, increased by about $200 billion, a cumulative increase of 33.3 percent.

The Fed Funds rate was driven down below 2 percent and held there for almost three years, pegged at 1 percent for a year. Rates on 30-year conventional mortgages fell sharply from over 7 percent in 2002 to a low of 5.25% in 2003 and, aside from brief upticks in 2003 and again in 2004, fluctuated between 5.5 percent and 6.0 percent until late 2005. Perhaps, more significantly, 1-year ARM rates plummeted from a high of 7.17 percent in 2000 to a low of 3.74 percent in 2003, rising to 4.1 percent in 2004 and to slightly over 5 percent in 2005. In addition, credit standards were loosened and unconventional mortgages, including interest-only, negative equity, and no-down-payment mortgages, proliferated.

As I have said before, the housing market in Canada appears to be in a bubble.  Unlike, the blindness that pervaded the housing bubble in the U.S., there is a lot more awareness of the looming downturn this time around.  Even Mark Carney has acknowledged that the housing market may be “overvalued.”  Unfortunately for him, it’s his own policies that have created the boom in the first place.  Should Carney need to reverse the historically low interest rates to curtail higher inflation expectancies, or should the malinvestment finally reveal itself in the form of capital unknowingly consumed due to an inflation fueled equity mirage, Canada will likely fall back into recession.  As the Austrian school teaches, accurate predictions can’t be made in the sphere of human action but trends can be analyzed and applied to possible future events.  The day of reckoning must come for the Great Northern White as Mises pronounced:

Credit expansion is not a nostrum to make people happy. The boom it engenders must inevitably lead to a debacle and unhappiness.

------------------------------------------------------------------------
Also of note, I had an article at the American Thinker today entitled "The Tobin Tax: Stealing From Not Just The Rich."  It's is a reiteration of an older post of mine.

Candian Savers Aren’t the Only Ones With a Sinking Feeling…

LvMIC:


With three straight years of anorexic interest rates, it looks like The Globe and Mail finally realized the winners and losers of central banking:

It’s the saver’s dilemma. Life for these Canadians has become an uncomfortable squeeze between weak returns on their investments, stagnant incomes and the steadily rising cost of everything from food to fuel to housing.

Bank of Canada Governor Mark Carney, among other central bankers, has kept interest rates near historic lows since the onset of the global economic crisis in an attempt to stimulate the flagging economy, and there’s no sign of a rate hike any time soon. But some critics say the playing field is now tipped too far in favour of borrowers rather than savers. Canadians in droves have piled on debt to buy new homes and make other purchases, prompting warnings from Mr. Carney of the dangers of carrying too much debt – even as his policies encourage borrowing and provide little ability for savers to generate substantial low-risk income.

Congratulations to the writers for recognizing that money printing isn’t neutral in its effects.  As Carney and his peers, including helicopter Bernanke who wants zero bound rates till at least 2014, continue to prop up the global financial sector with cheap liquidity, it was bound to have some nasty effects on those who try to live frugally.  What central bankers have effectively done since the financial crisis of 2008 is wage a war on savers while aiding the same profligate spenders whose debt filled escapades drove the boom.  But of course these spenders were only obeying the whim of governments and central banks that took great delight in a seemingly thriving economy and influx of tax revenues.

Like all government action, the proceeds which flow from the coffers of the public chest and hands of easily bought politicians are a boon to some at the expense of others.  The benefits of government are never neutral as money changing bureaucrats merely take wealth from one or more persons and give it to another.  The same concept holds for money printing which can’t enter an economy uniformly due to ever present time and space constraints.  The method for which central banks influence the interest rate and create money is normally conduced in coordination with large financial institutions in their respective countries.  These big banks, such as the 21 primary dealers in the U.S., get the freshly computer generated funds first before anybody else.  Then of course comes the credit expansion which leads to intertemporal discoordination depending on the degree to which the central banks feel like screwing up the economy.

So as The Globe and Mail writers have observed, the ultra low interest rate policies of the Bank of Canada are having a negatively disproportionate effect on savers who wish nothing more than to try and maintain some sense of financial security in the future without having to risk their capital in the more uncertain areas of the market.  Meanwhile, low interest rates embolden spenders who seek high value goods and wish to go into debt to purchase such.  The rational behind the Keynesian cure of recessions lies in the false belief that consumption drives the economy.  Yet this puts the cart before the horse as one must produce first in order to acquire the funds to consume.  Bringing money or credit into existence at the click of a computer mouse creates value only until the illusionary boom ends in a bust lest a complete destruction of the currency.
The saver’s dilemma is not a dilemma limited to those who wish to guarantee themselves a comfortable retirement.  Abstaining from consumption and adding to the supply of loanable funds is the only means by which capital can be available for investment to grow the capacity base of the economy.  Mike the gas station attendant may not have the entrepreneurial insight to make a sustainable market investment but if he wishes to place a portion of his wages into a bank to be recovered sometime in the future at a fixed maturity (in accordance with a 100% reserve requirement) and earn interest while doing so, his money is then available to be lent out by aspiring businessmen.

Carney, Bernanke, and their money printing friends have put the kabosh on this process by doing the only thing they know how to do: print money to suppress interest rates.  This monetary manipulation is never neutral as it creates conflict between the beneficiaries of new funds and those who see the money last.  Per Mises:

The notion of a neutral money is no less contradictory than that of a money of stable purchasing power. Money without a driving force of its own would not, as people assume, be a perfect money; it would not be money at all.

Changes in the money relation, i.e., in the relation of the demand for and the supply of money, affect the exchange ratio between money on the one hand and the vendible commodities on the other hand. These changes do not affect at the same time and to the same extent the prices of the various commodities and services. They consequently affect the wealth of the various members of society in different ways.

The Importance of Individual Methodology as a Tool for Argument

LvMIC:


I got into a verbal discussion/debate with a coworker today.  As anyone who follows the Austrian school or the doctrine of natural rights may know, a casual discussion on the efficiencies of a market can be unpleasant when speaking with someone who holds the unfortunately conventional view that capitalism is defined by systematic exploitation.  Proponents of this Marxist-based ideology typically fall back on declarations that corporations “rip you off” and will do “anything for a dollar.”  Even worse, these statist advocates ceaselessly trumpet the cause of the “public good.”

But therein lies the true fallacy behind this type of thinking as it can easily be refuted through the use of individual methodology; a defining attribute of the Austrian school of economics.

One thought construct utilized in the treatises and work of such prominent Austrian economists as Ludwig von Mises, Murray Rothbard, and Hans Herman-Hoppe is that of the deserted island and Robinson Crusoe.  Human action, the underlying basis for all economics, is best analyzed when put in the context of simplicity and in its barest conditions.  Rothbard described this construct as “highly important” and “indispensable” in its uses.  The very reason that the Crusoe construct is valuable is that while it’s based on an imaginative situation, the lessons derived from its use have greater implications when applied to a market economy.  This is why the Crusoe model is often “derided” by those who take a collective or inherently conflictual view of economics.  The notion that applying individual action or exchanges between individuals to  complex system of billions upon billions of transactions a day takes the proverbial weight out of arguments coming from the point of view of “public” necessities and worker exploitation.
 
By using the Crusoe construct, we can observe how man’s action, completely unobstructed from modern day conveniences, must operate in the context of nature’s dominance.  The choices Crusoe makes in order to better his well being can be deduced to the fundamental Mises axiom “human action is purposeful behavior.”  Carried on to a broad sense, applying individual methodology is a requirement for fully understanding how a market economy can ultimately work efficiently.

Now back to the story of the debate with my coworker.  After the baseless accusations of corporations ruthlessly taking advantage of hapless consumers and slave-like workers, I quickly gave an example of a remunerative transaction by pointing to his wrist watch and offering him a price of $20.00.  I explained that if he went forth with the exchange, then he obviously valued the $20.00 more than the wrist watch and that I valued the watch more than the price I offered.  The transaction must be mutually beneficial for if it wasn’t, then one or both of us would refuse to engage in the trade.

His immediate response was something along the lines of “what if I was greedy and charged $10,000 for the watch.”  After taken aback at his quick and clearly not thought out reaction, I informed him that I wouldn’t purchase the watch for such a large sum and that if he had any desire at all to sell the wrist watch, he would have to lower his price in order for me to meet him at some agreed to margin.  There is no force involved in this self adjusting procedure.

This example is taken from the simple transactions Crusoe and Friday, once introduced to the island, engage in.  Crusoe may have a stash of berries he has accumulated that he may wish to trade for a few of Friday’s recently caught fish.  If each came to an agreement that they will transact at a ratio of 5 berries per 1 fish, then each has their value scaled fulfilled in accordance with their subjective preference.  Applied in the extreme broad sense, it becomes much easier to understand how the global economy composed of 7 billion individuals functions.  What appears to be an overly complex system is nothing more than the culmination of individual transactions.

And then of course was the oft-incurred notion of the “public” good.  According to my coworker, corporations have no incentive toward looking out for the public good; certainly not a new argument used by government apologists.  But as I tried to explain, the notion of the “public” good is simply a metaphysical idea which bears no relation to accurately describing what people may actually desire.  After all, only individuals ever act.  Therefore only their needs can be satisfied by the actions of others.  Mises explains:

First we must realize that all actions are performed by individuals. A collective operates always through the intermediary of one or several individuals whose actions are related to the collective as the secondary source. It is the meaning which the acting individuals and all those who are touched by their action attribute to an action, that determines its character.

Unfortunately, this point did not sink in for my coworker who stuck by his ideals about the common good.  Ironically, our conversation preceding this debate was on the modern state of music which he denounced as basically garbage and lacking in even the remote amount of talent.  According to him, overly produced pop hits shouldn’t get the radio play or attention they garner from the public.  For someone who is clearly out of sync with what the general public demands in the form of popular music, making grand statements on what the public needs is incredibly revealing of an inner contradiction in thinking.  Because I immensely enjoy modern pop music, obviously my coworker does not know what is best for me.  If he doesn’t know what is best for me in this narrow field of preference, then how can he possibly know where billions of other individual preferences lean toward?

Despite my failure in transforming my coworker into a full fledged Austrian disciple, the tool of methodological individualism provided a guiding light through fog and deceitful invocations of the non existent “public” good.  The construct of Crusoe on the island with a subsequent alliance with Friday is insightful not just for individual action but when attempting to comprehend how a market economy operates.  In the end, the debate was fruitful from the standpoint that it made that portion of the workday fly by (while arguing, we both worked on our respective tasks) and as any foray into a specialized task goes, practice makes perfect.  It was certainly more casual than intellectually rigorous but changing minds won’t occur through infighting of blogs and academic journals only.

One mistake I am willing to concede is perhaps I should have picked a different way to describe the adoption of mandatory civil service for all high school graduates rather than “a horribly disgusting idea” and “the equivalent of slavery” when my coworker suggested it.  Though I unapologetically believe those descriptions to be true, there is probably a more sophisticated way to describe what boils down to conscription.