Mark Carney and the Art of Deflecting Blame

Had this article posted at LvMIC Daily today, here is an excerpt:

In what has to be one of the most nonsensical and counterintuitive statements since Lawrence Summers, former economic advisor to U.S. President Obama and former President of Harvard University, declared that though the financial crisis was caused by too much confidence and debt run-up, the cure involves more of the same imprudent spending habits, Carney offers this muddled statement:

The challenge for the crisis economies is the paucity of credit demand rather than the scarcity of its supply. Relaxing prudential regulations would run the risk of maintaining dangerously high leverage—the situation that got us into this mess in the first place.

Read it twice for the full effect. You see, the problem isn’t a deficiency of available credit; central banks around the world have made sure of that. It’s the demand for credit that remains an albatross on a robust spending boom. Yet, and this is the best part, regulations that ensure that credit expansion, a driving force in fractional reserve banking, doesn’t finance more reckless debt amassing can’t be expunged as it would lead to another deleveraging bust.

Carney wants his cake and to eat it too. While he warns of lack of credit demand, he also worries that an increase will lead to another boom and bust. This double talk- wanting success while worrying about too much success- is typical central banker speech.

Carney is not alone in this sentiment. Public officials all over the world, namely in the U.S. and Europe, are desperate for a return to the boom years. The drug of easy credit and debt monetization had them addicted to the good times.

Like any good central planner, Carney speculates on how to best unwind the private debt load in order to run it up again. He paints himself as a deep thinking central planner struggling to find the exact formula where the BoC can use its printing press and discover the perfect equilibrium for credit expansion without blowing up another bubble.

Over the same period, Canadian households increased their borrowing significantly. Canadians have now collectively run a net financial deficit for more than a decade, in effect, demanding funds from the rest of the economy, rather than providing them, as had been the case since the Leafs last won the Cup.

It cannot entirely be business as usual. Our strong position gives us a window of opportunity to make the adjustments needed to continue to prosper in a deleveraging world. But opportunities are only valuable if seized.

First and foremost, that means reducing our economy’s reliance on debt-fuelled household expenditures.

Though Canada saw tremendous growth with public spending reforms adopted in the mid-1990s, the cyclical pattern of private overindebtedness has begun to rear its ugly head. This isn’t unexpected as the BoC, like central banks all over the world, took interest rates to anorexic levels following the financial crisis of late 2008. As I have noted, this orthodox reaction has set the stage for what looks like a housing bubble that will inevitably pop. Even Carney alludes to such as he states one of the hallmarks of the Austrian Business Cycle theory where the discoordination brought on by credit expansion leads to malinvestment in specific capital ventures and consumer goods:

Moreover, much of the proceeds of these capital inflows seem to be largely, on net, going to fund Canadian household expenditures, rather than to build productive capacity in the real economy. If we can take one lesson from the crisis, it is the reminder that channelling cheap and easy capital into unsustainable increases in consumption is at best unwise.

When the day of reckoning arrives, the market correction will undermine an already flimsy recovery. Not only will private balance sheets containing mortgages and real estate take a hit due to reduced prices but also the Canadian Mortgage and Housing Corporation will be ravaged as it guarantees about 90% of the whole housing market. As Chris Horlacher points out, the CMHC’s leverage stands at almost an astounding 100:1. A burst of the housing bubble will likely require a massive bailout via the Canadian government to keep the CMHC functional which in turn will require further debt monetization. The probability of this chance event coming to past is further emphasized by Carney’s earlier comments on the inseparable nature of the private sector from governmental dominance.

Some Problems with the Tobin Tax

LvMIC:


With backing from both the George Soros-supported Occupy Movement and French President Nicolas Sarkozy, the tax on financial transactions, otherwise known as the Tobin Tax, is looking more and more like a real possibility.  Though the proposed rate is seemingly miniscule (Sarkozy wants a .1% rate starting in August), the economic implications are disastrous.  From the Peterson Institute for International Economics:

The Swedish Social Democratic government enacted a transaction tax on stocks, bonds, options, and some other securities in 1983. The tax, named after the economist James Tobin, was abolished by the new nonsocialist government in 1991.
The tax rates varied from 0.1 percent on ordinary stock trade to 0.15 percent on treasuries and 1 percent on options.
1. The expectation had been that the tax revenues would be 1.5 billion Swedish krona (SEK), but they stopped at SEK80 million.
2. Most Swedish trade in securities disappeared and went abroad, mainly to Oslo and London, and never returned. Soon after, the previously tiny Oslo stock exchange overtook the Stockholm stock exchange, and it is still the larger of the two stock exchanges.

And from the Adam Smith Institute:

Almost 60% of trading volume of the 11 most actively traded Swedish shares migrated to London during Sweden’s attempted Tobin tax. The temptation, and indeed relative ease, with which capital flight and cross border arbitrage can occur would spell disaster for the UK.

Sweden is the only country to have tried a “pure” Tobin tax, of 0.5%. It raised only one thirtieth of the proceeds predicted by its proponents and was scrapped after five years. The taxes sparked an exodus of financial activity from Sweden. By 1990 60% of the trading volume for the top 11 most traded Swedish stocks had moved to London. Trading for over 50% of Swedish equities had moved to London by 1990.

All market participants would be subject to the tax; a Tobin tax is unable to discriminate between de-stabilising trades and those which provide liquidity, information and tradefinancing. With short-term trading providing invaluable liquidity to the market, an incapability to segregate individual trader motivations will therefore lead to a reduction in both liquidity and welfare-enhancing trade, in addition to increasing market susceptibility to individual shocks.

Financial Atlases shrugging is no surprise.  There are plenty of other developed countries out there that would gladly welcome an influx of capital from countries with politicians delusional enough to believe a predictive model based on static behavior.  It’s as if public officials truly believe people are submissive and will take their various attempts at pilfering with little, if any, protest.  Should the Tobin Tax be enacted in France, or worse yet the U.S., the short term trading industry will suffer a serious blow.  Since short term trades occur more frequently, they are disproportionately affected by such a tax.  As the study from the Adam Smith Institute shows, the Tobin Tax drove away short term liquidity traders who provide much-needed relief during downturns.

But the core issue with a financial tax goes much deeper than the immediately observable effects.  Market transactions aren’t just exchanges of goods or services, they convey vital market information as prices which represent profits and losses.  As Mises noted:

Profits and losses are essential phenomena of the market economy.  There cannot be a market economy without them.  It is certainly possible for the police to confiscate all profits.  But such a policy would by necessity convert the market economy into a senseless chaos.

The Tobin Tax starts small but one should never doubt the extent to which such taxes are increased in times of fiscal stress.  The income tax enacted in 1913 in the U.S. was first levied at 1% for most incomes and between 2% and 7% for higher incomes.  There is no telling the kind of economic growth America could have seen had these rates been kept.

So while the Eurozone continues to implode and the Occupy Movement campaigns on the behalf of increased taxes, the Tobin Tax should be feared by all market participants, not just investors.  The greater the chains of burden placed on the market, the greater the long term impoverishment for all.

(ht to Mike Shedlock for the studies)

Keynesian Mercantilism In Action?

LvMIC:

In the New York Times “Economix” blog, Binyamin Appelbaum writes (in reference to the U.S.):

Foreign buyers purchased more than $2 trillion in goods and services, the first time exports have topped that threshold. And those exports accounted for almost 14 percent of gross domestic product, the largest share since at least 1929.

Source: Bureau of Economic Analysis

The reason for this jump in exports?

The value of the dollar has declined, so that foreigners save money when they buy American. Businesses, struggling to find customers here, are focusing on foreign sales. And a boom in commodity prices, which has raised the price of life for most Americans, has produced a windfall for those who trade in commodities.

Now has the dollar really seen that much of a decline relative to other industrialized competitors which has in turn served as a boon to exporters?  Take a look at some dollar exchange ratios with major economic players such as Canada, Japan, the Eurozone, and Sweden:






From the above charts, it’s clear the Federal Reserve’s multiple engagements of quantitative easing and dollar debasement have succeeded in lowering the dollar’s value in terms of other major competitive currencies (China of course has an active currency peg whereas it keeps the yuan undervalued compared to the dollar).  With financial crisis hitting in late 2008, the dollar saw a boost in terms of investors looking for a save haven.  It has since seen a downward trajectory albeit few bumps along the road.



Orthodox Keynesiansim suggests that inflation is the correct remedy for downturns as it empowers exporters whose goods are cheaper in foreign markets.  As Paul Krugman wrote last May:

First, what’s driving the turnaround in our manufacturing trade? The main answer is that the U.S. dollar has fallen against other currencies, helping give U.S.-based manufacturing a cost advantage. A weaker dollar, it turns out, was just what U.S. industry needed.

But of course this came at the expense of a 3% annual increase in the Consumer Price Index, an almost 10% annual increase in gasoline prices, and a 4.7% increase in food prices according to the Bureau of Labor Statistics.  Funny how Krugman claims to care for the poor yet advocates for policies that disproportionately affect them on a negative basis.

But as Henry Hazlitt points out, inflation isn’t all that it’s cracked up to be:

An inflation is initiated or continued in the belief that it will benefit debtors at the expense of creditors, or exporters at the expense of importers, or workers at the expense of employers, or farmers at the expense of city dwellers, or the old at the expense of the young, or this generation at the expense of the next. But what is certain is that everybody cannot get rich at the expense of everybody else. There is no magic in paper money.

Inflation through government decree is nothing more than glorified mercantilism on the part of politicians looking to buy votes and campaign donations from bankers and favored industries.  Nothing better brings rounds of dimwitted applause from ignorant votes than speaking on the importance of “manufacturing” or “boosting exports.”  Inflation impoverishes the public which thinks it’s getting a free lunch.  Even the manufacturing worker who takes comfort in a briefly secure job potentially pays for it with every gallon of gas or loaf of bread he buys.

If John M. Keynes endeavored at duping the public into thinking that economic cures spring froth from the printing press, consider him a success.  Meanwhile, the dollar devaluation seen over the past three years will inevitably hit a cliff of no return where inflation will take off and lead to more misallocations of resources and distortions and thus paving the way for another bust.
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Also of note, had an article at the American Thinker today entitled "How China Transformed Its Economy."  It is a reiteration of a previous post of mine.

Krugman Sinks to a New On-Star Guided Low

LvMIC (and possible draft for the American Thinker):

With every New York Times column, it’s getting harder and harder to differentiate Princeton economist Paul Krugman from an unabashed political hack.  Certainly Krugman has always played the role as champion of the Democratic Party, but this latest attempt to defend President Obama takes the cake.  This week’s crime in unsound economics?  Offering nothing but praise for the bailout of General Motors and Chrysler.  Krugman writes:

The case for this bailout — which Mr. Daniels has denounced as “crony capitalism” — rested crucially on the notion that the survival of any one firm in the industry depended on the survival of the broader industry “ecology” created by the cluster of producers and suppliers in America’s industrial heartland. If G.M. and Chrysler had been allowed to go under, they would probably have taken much of the supply chain with them — and Ford would have gone the same way.
Fortunately, the Obama administration didn’t let that happen, and the unemployment rate in Michigan, which hit 14.1 percent as the bailout was going into effect, is now down to a still-terrible-but-much-better 9.3 percent.

So how many jobs did the bailout really save?  Paul Roderick Gregory at Forbes estimates around 4,000.   Obama and the White House claim at least 1 million jobs saved.  Somehow I doubt their sincerity on such a rosy number.  Whatever the number of jobs supposedly saved, the cost to taxpayers has been an estimated loss of $14 billion according to Obama’s ex-Auto czar.  What’s $14 billion among friends?  And by friends, I am of course referring to the United Auto Workers whose price tag has been satisfied in return for some much needed votes come this November.

What Krugman doesn’t, or won’t mention, is the real reason GM and Chrysler survived- that is a successful bankruptcy process.  There is absolutely no reason in the world to believe that had Uncle Sam not come to the rescue with a sack of taxpayer dollars, that GM and Chrysler would have ceased to be auto companies today.   Markets have tendency to self correct when push comes to shove.

Yet even the bankruptcy procedure initiated by the Obama administration wreaked of favoritism.  From David Skeel, law professor at the University of Pennsylvania, writing in the Wall Street Journal:

But the “sale” also ensured that Chrysler’s unionized retirees would receive a big recovery on their $10 billion claim—a $4.6 billion promissory note and 55% of Chrysler’s stock—even though they were lower priority creditors.
If other bidders were given a legitimate opportunity to top the $2 billion of government money on offer, this might have been a legitimate transaction. But they weren’t. A bid wouldn’t count as “qualified” unless it had the same strings as the government bid—a sizeable payment to union retirees and full payment of trade debt. If a bidder wanted to offer $2.5 billion for Chrysler’s Jeep division, he was out of luck.

Basically, if private creditors looking to use their own funds wanted to save either auto company, they had to appease the UAW’s retirement fund.  Funny how bailouts, financed by money not belonging to bureaucrats, work.

Krugman goes on to cast a blanket over capitalism itself as being wholly reliant of government to exist.

But the current Republican worldview has no room for such considerations. From the G.O.P.’s perspective, it’s all about the heroic entrepreneur, the John Galt, I mean Steve Jobs-type “job creator” who showers benefits on the rest of us and who must, of course, be rewarded with tax rates lower than those paid by many middle-class workers.

Unfortunately for Mr. Keynesian, capitalism does not exist in a vacuum of rugged individualists in a constant state of ruthless competition.  Certainly producers fighting for market share and profits are great in terms of seeking innovative ways to lower costs for consumers.  But markets are always the product of social cooperation no matter how reclusive or self reliant an entrepreneur wishes to be.  Just like in tango, it takes two in order to offer remuneration for a consensual transaction.

The idea that free market types remain entranced with the fantastical entrepreneur as the building blocks for a productive economy is a blatant smear on Krugman’s part.  No surprise from him there.  What he fails to specify is that every participant in the complex system known as the market acts as an entrepreneur in forecasting their own financial conditions.  Steve Jobs and the teenager at McDonald’s both make subjective decisions based on their own ability to satisfy demand.  Capitalism is a function of economic actors collaborating en masse in the constant pursuit of improving their own standards of living.  Starkly dividing a free economy’s success by individual or collective factors is pure demagoguery.

Not only does Krugman disingenuously define a system of free enterprise, but he fails in accounting for the unseen consequences and price of the bailout.  While to shallow eyes it may seem like the bailout saved the auto industry, it merely papered over some losses for the sake of buying votes.  The ultimate price paid won’t be the bill forced on the balance sheets of taxpayers but the perpetuated system of cronyism and corporatism that is has become the Obama legacy.  Bankruptcy ends up not being a process to fear but embrace as it serves as a clearing mechanism for inefficient production.  Like investor Peter Schiff notes, “Bankruptcy is a good thing. It’s the way the market cleanses the economy of companies that shouldn’t be there.”  Krugman not acknowledging this phenomena speaks volumes on his credibility.

And the Global Liquidity Binge Continues

LvMIC:

Forget Fed chairman Bernanke and his central planning cronies “considering additional asset purchases,” the unsettling truth is right before your eyes (charts via Bianco Research at The Big Picture):




Here are some comparative charts (note the first is scaled in terms of U.S. dollars):


And perhaps the most worrisome chart of all:

Prior to the 2008 financial crisis, the eight central bank balance sheets were less than 15% the size of world stock markets and falling.  In the immediate aftermath of Lehman Brothers’ failure, these eight central bank balance sheets swelled to 37% the capitalization of the world stock market.  But keep in mind that the late 2008/early 2009 peak was due to collapsing stock market values combined with balance sheet expansion via “lender of last resort” loans.

Recently, the eight central bank balance sheets have spiked back to 33% of world stock market capitalization.  This has come about not by lender of last resort loans, but rather by QE expansion (buying bonds with “printed money“) even faster than world stock markets are rising.

The fundamental question needs to be asked: after punting on a necessary market correction following the U.S. housing bubble and financial crisis, has the world economy been solely propped up by major central banks alone?  Is it even possible to determine an answer to such an incredibly complex question?
Because money disperses through hands and economies in an unpredictable manner, one can’t possibly have enough knowledge to give an exact answer on the proposed question.  While the banking sector has been practically zombified with multiple adrenaline shots of liquidity, it is certainly possible that some sectors are seeing market-driven growth despite increasingly crippling government regulation and cheap money slowly, but surely, finding its way to investors.  Markets are forever resilient to some degree.   But with all this cheap liquidity running amok, there is little doubt subsequent distortions in relative prices and production structures have occurred and will continue to till another correction inevitably manifests itself.

This is already apparent as governments, predisposed to rakish spending in economic times good and bad, are still able to fund themselves cheaply (with the exception of the Eurozone which still fumbles along despite increased cost of borrowing not including Greece) and draw more and more amounts of already precious capital from a deprived private sector.

Though inflation remains comparatively low in terms of consumer goods for most of the observed countries, excluding China whose falling prices are even more evidence of the property crack up boom presently occurring, eventually a turning point will be reached where the demand to hold cash balances falls in favor of accumulating goods and investments as time preferences heighten.  This occurs on an individual subjective basis but behaves as a type of domino effect as increasing amounts of dollars/euros/yen/yuan etc. chase fewer goods.  The chain reaction, while boosting some prices first, could very well be seen as a savior-like bubble that will be celebrated as a sign of a growing recovery.  By the time the purveyors of the printing press realize what’s up, it could very well be too late.  This is even further suspected given the recent disclosure of FOMC minutes from 2006 showing the complete incompetence Fed officials displayed with a bursting housing bubble right in front of their supposedly well-educated eyes.

As the global currency race to the bottom continues, one can be sure that the path to reaching sound economic footing will be further avoided as these policies remain in place. Much like Hayke ironically observed in 1932:

“Instead of furthering the inevitable liquidation of the maladjustments brought about by the boom during the last three years, all conceivable means have been used to prevent that readjustment from taking place; and one of these means, which has been repeatedly tried though without success, from the earliest to the most recent stages of depression, has been this deliberate policy of credit expansion.

“To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about; because we are suffering from a misdirection of production, we want to create further misdirection – a procedure that can only lead to a much more severe crisis as soon as the credit expansion comes to an end.

“It is probably to this experiment, together with the attempts to prevent liquidation once the crisis had come, that we owe the exceptional severity and duration of the depression. We must not forget that, for the last six or eight years, monetary policy all over the world has followed the advice of the stabilizers. It is high time that their influence, which has already done harm enough, should be overthrown.”

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I should also mention my piece published at the Mises Institute today entitled "Mr. Rubenstein, You're No Adam Smith" which has gotten a load of compliments as well as my first piece published at PolicyMic.com yesterday entitled "Ron Paul's Impact Will Last Long After the Florida Debate."  I am not overly satisfied with the Paul piece as what I saw as the best parts were edited out but the editor asked me to write it so I took a couple of hours to do so.

The New Soros Plan on How to Save Italy and Spain

LvMIC:


Much like his last plan, Mr. Oligarch Insider once again makes another plea for the European Central Bank to intervene on behalf of the governments of Spain and Italy.  Writing in the Financial Times, Soros stays infatuated with infinite liquidity provided by the printing press:

My proposal is to use the European Financial Stability Facility and the European Stability Mechanism to insure the ECB against the solvency risk on any newly issued Italian or Spanish treasury bills they may buy from commercial banks. This would allow the European Banking Authority to treat the T-bills as the equivalent of cash, since they could be sold to the ECB at any time. Banks would then find it advantageous to hold their surplus liquidity in the form of T-bills as long as these bills yielded more than bank deposits held at the ECB. Italy and Spain would then be able to refinance their debt at close to the deposit rate of the ECB, which is currently 1 per cent on mandatory reserves and 25 basis points on excess reserve accounts. This would greatly improve the sustainability of their debt. Italy, for instance, would see its average cost of borrowing decline rather than increase from the current 4.3 per cent. Confidence would gradually return, yields on outstanding bonds would decline, banks would no longer be penalised for owning Italian government bonds and Italy would regain market access at more reasonable interest rates.

Soros’ scheme amounts to nothing more than backdoor monetization at a more aggressive rate than is happening currently with the ECB’s  LTRO program.  Take one look at the rise in the ECB balance sheet since the program kicked into gear (ht Zerohedge)

The resulting backdoor quanto easing in Eurozone is clear from the recent surge in the ECB’s balance sheet relative to the Fed’s. Thus, the ECB’s total assets have risen by 38% from €1.94tn on 1 July 2011 to €2.69tn on 6 January 2012. While the Fed’s total assets have risen by only 1% from US$2.87tn to US$2.9tn since July 2011.

And Soros wants more of this?  Just think about it, in order for Spain and Italy to refinance their debt “at close to 1%,” the ECB must be willing to buy treasuries from Eurozone banks.  These banks must be guaranteed virtually risk-less profit to play along, hence keeping the rate above the .25% currently paid for excess reserves at the ECB (which took a page from Bernanke’s play book).  With the ECB ready and willing to eat up more government bonds, suppressing yields shouldn’t be a problem outside a hyperinflationary event.  With fresh funds flowing from the banks, which have pretty much become wards of the state at this point, debt will be effectively monetized to the happy benefit of bailout out member state governments and banks looking to dump toxic securities.  As Martin Sibileau points out, this process can be aided in part with the Federal Reserve’s recent advent of cheapening dollar swap lines.

The new Soros plan is the same kind of bailout, money printing extravaganza that central bankers, politicians, and their friends love to resort to in times of fiscal trouble.  Not only does it direct further capital away from capital constrained banks into bloated and unproductive bureaucracies, it would further perpetuate the belief that mistakes bear no consequences in the world of central banking.  Soros wants economic growth in the Eurozone but also wants the resources to fund such increases in productive capacity to instead be directed toward governments.  If the authorities just have enough “sufficient resources” to deal with their overspending, then all will be well.  Never mind that their profligate spending, overregulation, and inability to recognize the boom-bust cycle engineered by central banks lead to this crisis.  The plan is essentially one long punt to give these so-called leaders a chance to come up with further band aids to save their own jobs.
Soros wants an end to the “deflationary vicious circle” but, like any good Keynesian, doesn’t have the courage to admit such deflation is only in response to previous inflationary practices.  He surprisingly concedes his true intention at the close:

The stimulus must come from the EU because individual countries will be under strict fiscal discipline. It will have to be guaranteed jointly and severally – and that means eurobonds in one guise or another.

And with that Soros admits his desire for fiscal integration; the very next step toward centralizing statist power.  Elitist puppeteering has a name, and it's George Soros.

More Evidence That The Housing Bubble Has Yet To Be Liquidated

LvMIC:

Government interference with the present state of banking affairs could be justified if its aim were to liquidate the unsatisfactory conditions by preventing or at least seriously restricting any further credit expansion.  In fact the chief objective of present day government interference is to intensify further credit expansion.  This policy is doomed to failure.  Sooner or later it must result in a catastrophe. (p 445 of Human Action)

Despite claims from some confused commentators, the malinvestment built up during the boom years of housing is still weighing down a significant portion of the economy some five years after the bubble burst.  From Reuters:

In a letter sent on Friday to the Republican and Democratic leaders of a U.S. House of Representatives government oversight panel, the Federal Housing Finance Agency explained why it has long opposed principal reductions for borrowers who owe more than their homes are worth.
It said it had determined that such reductions would be more costly for the two firms than allowing those troubled borrowers to default.
The regulator has been under pressure from Democrats to permit the write-down of principal by the two government-controlled mortgage finance providers as a way to help some of the millions of U.S. homeowners who are “underwater.”
About 22 percent of U.S. homes have negative equity totaling about $750 billion, according to CoreLogic.
Fannie Mae and Freddie Mac were taken over by the government in 2008 as mortgage losses mounted. Millions of soured loans issued during the housing bubble remain on their books and delinquencies on those loans continue to rise.
Fannie Mae and Freddie Mac own or guarantee roughly half of all outstanding mortgages in the United States. Out of the approximate 30 million mortgages guaranteed by the two firms, close to 3 million of those loans were held by underwater borrowers as of last summer, according to analysis provided in the letter.

With these toxic mortgages still on the books, it should come as no surprise that financial capital remains tied up in money losing assets such as underwater mortgages.  This is just one of the consequences of stabilizing nationalization maneuvers which rather than setting the foundation for a sustainable correction continues to exacerbate the problem.  Fannie and Freddie have effectively become zombie institutions forcefully backed by taxpayers when cutting their life line was the truly sensible course to take.  Despite close to $200 billion in tax funds used to prop up the housing giants, further writedowns will put more public funds at risk.  The vicious cycle continues precisely due to the unwillingness of politicians and regulators to embrace short term pain now in return for long term growth.

As grating as it is to hear, the run up of prices in the boom must inevitably be met with a fall in prices.  The propping up, or the attempted propping up, of prices via the government prevents the market from clearing and a sound footing from being reached in order for increasing growth to take place.  Shoving wads of cash onto the hemorrhaging balance sheets does nothing to solve the core problems associated a central bank engineered boom.  It leaves less capital to be invested in actual sustainable lines of production.

Even the Fed recognizes the moral hazard associated with such a policy:

The Federal Reserve, in a white paper to Congress earlier this month, said writedowns “had the potential to decrease the probability of default” and “improve migration between labor markets.”
However, the Fed stopped short of endorsing such an initiative and noted concern that writing down loan balances would create a moral hazard – the concept that rescue efforts breed further behavior that exacerbates the existing problem – and could prompt other borrowers to stop making timely loan payments.

Ironic words coming from the institution which drives perhaps the biggest moral hazard of all as the lender of last resort to both Wall Street and the federal government.   As President Obama pushes for further writedowns, such a policy is more about buying votes than an actual understanding of how markets liquidate themselves.  If Obama really wanted to clear the housing market, he would have let it occurred years ago when he assumed office.

While writedowns will be expensive, they would have been much less expensive for taxpayers had they occurred years ago such as the market dictated.  The housing market would have been much healthier by now.  Defaults will happen; it’s only a matter of time.  The longer the children in the FHFA continue to not take their medicine, the longer sluggish progress continues.  And the art of can kicking continues much to the detriment of everyone involved.

An Austrian Arguing for Deflation?

LvMIC:


Austrian economist Antal E. Fekete has an interesting piece out arguing that many modern day Austrians misunderstand the relationship between speculators and central bankers and the means for which inflation takes hold in a credit-based economy.  This misunderstanding has lead some to incorrectly predict hyperinflation in the U.S. following the 2008 financial crisis and unprecedented expansion in the Federal Reserve’s monetary base .  Here is the relevant excerpt (emphasis mine):

These views hang the picture upside down. In actual fact, the Fed and the U.S. Treasury desperately want to beat down the value of the dollar. The greatest obstacle frustrating their effort is the stubbornly high and still increasing value of U.S. Treasurys. Captains of the world’s monetary system are yanking levers and twisting throttles which are no longer connected to anything. The captains are no longer in control. Yet they continue to wave their batons feverishly and pretend that the orchestra is paying attention. They want Jim Willie, Jeff Nielsen and everyone else to believe that the falling interest-rate structure is the outcome of their deliberate monetary policy. In fact, the Fed and the U.S. Treasury are trying to stop the rate of interest from falling further. They instinctively realize the threat of falling interest rates brings deflation and depression in its train. The dollar is much too strong, contrary to the wishes of policy-makers.
Like Mises, I also object to the use of the word hyperinflation, albeit for a different reason. It suggests that the phenomenon is linear and follows the laws of the Quantity Theory of Money. The more money is printed, the higher do prices go.
However, we are here facing highly non-linear phenomena. Our economy is torn to pieces by runaway vibration. We are victimized by the self-destruction of the monetary system subjected to oscillating money-flows boosted by the resonance of fluctuating interest rates resonating with fluctuating prices.
When the central bank intervenes in the market to control the rise of interest rates, it inadvertently makes prices fall; and when it intervenes to stop prices from falling, it inadvertently makes interest rates rise. The upshot is that the central bank intervention, rather than tempering movements, aggravates them.
At the present junction the Fed is buying bonds to combat deflation. Bond speculators know this, will buy the bonds first, driving down interest rates in the process. The result is more deflation, not less.
The Keynes-inspired central bank action is counterproductive. Policy-makers are blind and don’t see this. They stick to their selfdefeating monetary policy. They actually become the quartermaster general of the depression they are trying to avoid. As if cursed by a particular kind of madness, policy makers saddle society with the vampire of risk-free speculation.
The majority of hard-money analysts call for a hyperinflationary collapse of the dollar. Their analysis is faulty. Like a cornered rat, the dollar is capable of putting up a vicious fight for survival. In the words of Mark Twain, all the obituaries on the dollar are premature. The dollar is not a push-over. A yen-yuan coalition (or any other combination of existing or yet to-be-invented fiat currencies) cannot send it into oblivion.

Fekete’s position is interesting to say the least.  One of the main criticisms of the Austrian Business Cycle Theory (proposed by Tyler Cowen) is that market participants are endowed with perfect knowledge to preempt central bank monetary policy and not be induced into a false exuberance over a bubble.  The intertemporal discoordination between various structures of production can’t happen as investors and speculators are supposed to know exactly what central planners will attempt next.  Of course perfect knowledge can never be held by any market actor but Fedekete seems to be implying the same concept here.  If investors and speculators knew Bernanke was going to send interest rates plummeting and engage in a couple of rounds of bond easing, they could take advantage now by purchasing bonds before their price goes up as rates drop.  From another Fekete article on the same subject:

When a central bank increases the monetary base three-fold in three years, this is a clear invitation for bond speculators to move in and make a killing. But what the central bank utterly fails to understand is that, contrary to its hopes, new money is not going to the commodity market. Speculative risks there are far too great. Instead, new money is going to the bond market where the fun is. Bond speculation is risk-free. Speculators know which side the bread is buttered.

Fekete assumes, like Cowen, that all market participants hold enough information to gauge exactly what direction the Fed is going in order to make an easy buck off the bond market.  To some extent, he is correct in that central bankers have a tendency to resort to the printing press when things look dire.  Also consider the fact that Bernanke has made it clear he intends to keep interest rates low till at least 2013 which means bond buying will continue if rates start to inch up.  With the chaos going on in Europe, and to a certain degree China, the dollar is seen as a safe haven which gets in the way of Bernanke’s dreams of a weakening it further.  All of these factors combined lead to a disincentive on the behalf of banks to lend to businesses and consumers and thus extend credit and gin up inflation- which says nothing about the rotten mortgages still dragging down some consumers.

None of this is a positive endorsement of Fekete’s theory however, but his ideas are certainly worth considering.  He is correct in that some Austrian minded folk were incorrect in predicting a large degree of inflation to take hold after the Fed’s shenanigans of 2008 (including even this author).  This wasn’t expected:


There are some stubborn facts that don’t play into Fekete’s theory however.  The CPI is currently running at 3% annually, the core CPI is at 2.2% (above the Fed’s unofficial target), energy is up 6.6%, and food is up 4.7% according to the Bureau of Labor and Statistics.  These are not exactly sure signs of impending deflation given a continually expanding money supply.

All of this just adds to the kind of complex factors which encompass a market economy composed of billions upon billions of individual transactions every day.  Unfortunately for Keynesians, monetarists, and believers in econometrics, economics is not a science to be analyzed in closed experiments.  That pesky thing called “free will” often gets in the way of central planners trying to engineer a perfect society: or at least one that is perfect from their point of view.  If there is one thing we can all agree on, the Keynesian cure of cheap money and fiscal deficits certainly isn’t bringing the prosperity promised by Paul Krugman and the like.  As Fekete writes:

Cheerleaders for fiat money in academic circles, in the media, and in financial journalism will not be able to live down the shame that will be their lot when the world economy collapses. The excruciating economic pain that people will suffer as a consequence will be their responsibility. The break-down in law and order will be their fault. As history and logic conclusively prove, fiat money is not a viable monetary system. It is prone to succumb to the sudden death syndrome. Whether caused by inflation or whether caused by deflation, sudden death is assured.

(H/T to Mish for pointing these articles out)

Fed Readying Inflation Target Strategy- Will It Matter?

LvMIC:

Rumor is abuzz this week as Federal Reserve chairman Ben “Helicopter” Bernanke may be ready to announce a strategy of specific inflation targeting to boost the market’s confidence in the central bank.  From Reuters:

The Federal Reserve could take the historic step this week of announcing an explicit target for inflation, a move that would fulfill a multi-year quest of the central bank’s chairman, Ben Bernanke.
An inflation target would be the capstone of Bernanke’s crusade to improve the Fed’s communications, an initiative aimed at making the central bank more effective at controlling growth and inflation. It would, at long last, bring the Fed into line with a policy framework used by most other major central banks.

For decades, the unofficial inflation target of the Fed has been 2%.  The 2% rate isn’t the rate calculated as the Consumer Price Index but the “core” rate which excludes volatile prices such as food and energy.   What Bernanke appears to be doing is setting the stage for further rounds of explicit bond purchasing sometime down the road if inflation should fall  short of the newly established target.

Inflation targeting however presumes the Fed is capable of reaching an exact target that is only ever dictated by the billions of actions committed by market actors.  Central banks can only ever flood the monetary system with newly created funds, they can’t force banks to lend by creating credit out of thin air.
The idea that inflation can somehow be targeted to an exact degree is pure central planning fantasy.  Like Hayek wrote in The Use of Knowledge in Society:

The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. The economic problem of society is thus not merely a problem of how to allocate “given” resources—if “given” is taken to mean given to a single mind which deliberately solves the problem set by these “data.” It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge which is not given to anyone in its totality.

But of course inflation targeting also presumes that inflation in itself is a good and necessary thing for economic growth. Yet historical evidence shows that growing economies which experience robust increases their productive capacity and general living standards are marked by falling prices.  Falling prices of course lead to raises of wages in real terms.  The real, more insidious purpose of monetary inflation was revealed in Keynes’ General Theory:

“the escape will be normally found in changing the monetary standard or the monetary system so as to raise the quantity of money, rather than forcing down the wage-unit and thereby increasing the burden of debt.”

When Keynes refers to escape, he is speaking on the best means to put an end to recessionary conditions.  Like central bankers who celebrate inflation targeting as some great tool to further their dominance over an already overly regulated economy, Keynes ignores any unintended consequences of credit expansion or Cantillon effects which distort prices and wages heterogeneously as newly created money makes it way across the market spectrum.  Inflation is treated as solution with immediate effect that doesn’t take time to fully pan out.  It’s true purpose is to clear the labor market by raising prices and thus lowering real wages without inducing outrage over a nominal effect.  Keynesians assume Joe the Assemblyman is a neanderthal too ignorant to realize he is being duped by prices rising all around him and his paycheck, though still the same numerical amount as last year’s, falling in real terms.

While a nice gesture in transparency, the Fed’s potential new inflation target strategy will likely have little effect unless the newly established target is something radically different than the unofficial rate of 2%.  Bernanke will still print his way out of any disaster, come hell or high water.  And by hell or high water, I mean the next speculative burst caused by cheap money invariably finding its way into another bubble.

How China Transformed Its Economy

LvMIC (and possible draft for the American Thinker):

I will give you a hint: it had something to do with adopting private property over communal living.  As Mises noted:

The continued existence of society depends upon private property.

In a recent National Public Radio report, the real story behind the monumental land reforms which transformed the communist dystopia was revealed.

In 1978, the farmers in a small Chinese village called Xiaogang gathered in a mud hut to sign a secret contract. They thought it might get them executed. Instead, it wound up transforming China’s economy in ways that are still reverberating today.
The contract was so risky — and such a big deal — because it was created at the height of communism in China. Everyone worked on the village’s collective farm; there was no personal property.
In Xiaogang there was never enough food, and the farmers often had to go to other villages to beg. Their children were going hungry. They were desperate.So, in the winter of 1978, after another terrible harvest, they came up with an idea: Rather than farm as a collective, each family would get to farm its own plot of land. If a family grew a lot of food, that family could keep some of the harvest.

This secret meeting, though innocuous to anyone accustomed to the benefits of private property, was dangerous in the then wholly communist country.  Most importantly, the agreement was hashed out with a document that goes hand-in-hand with private property: a contract.  With a formal contract established and plots of land assigned to each family, the incentive was now in place in order for those farmers wishing to improve their own standard of living to do so by virtue of their own labor.  While a certain portion of food still had to be given over to the collective, surplus quantities could be kept for private consumption.

And with that, the tragedy of commons mentality vanquished and starvation ceased to be an issue.  The simple rule of “keep what you make” had transformed the barren economy over night.  The hallmarks of capitalism which brought hundreds of years of increasingly material prosperity to the West were ironically established in a hut that lacked both plumbing and electricity.  The results were immediate as that year’s harvest was bigger than the last five years combined.  According to one farmer, “we all secretly competed- everyone wanted to produce more than the next person.”

As men obtain the means of production, whether it be factory equipment, the contractual pledges of workers, land, etc., he becomes both an entrepreneur and speculator.  If he has any interest at all in maintaining the value of his assets, he will use them efficiently and judiciously to maximize their output.

In collectives however, the mindset is much different.  Man loses his right to the sweat of his brow.  He therefore loses any incentive to produce beyond a certain threshold as he can no longer enjoy the excess of his labors.  The mindset envelops the whole community as performing the least amount of work necessary and living off the labor of others becomes commonplace.

This communal syndicalism is what nearly brought an early end to the American experiment.  When European settlers first arrived at the colony of Plymouth, they established a communist-like agrarian economy where all harvested food was kept at a common storehouse for members of the community to enjoy at their pleasure.  And like China, rampant starvation forced a change in practice.  After two years, privatized farming was adopted which in turn lead to an abundance of food production and the very first Thanksgiving.

The message here is crystal clear- private ownership necessitates prudence.  If there is a choice between hard work or less work, and the subsequent amount of consumption enjoyed by either remains the same, man tends toward offering little work.  Risk and investment aren’t considered in an environment where high time preferences are necessary for survival.  Without capital investment, economies don’t progress above a level of minimal subsistence.  It’s a deadly and impoverishing cycle.

Early American colonists learned this lesson well over two centuries ago.  The government of China only adopted the reforms necessary for enrichment a few decades ago after holding Xiaogang as a model for success.  With hundreds of millions rising above poverty since 1978, the country ranks among the world’s leading economies.  Sure things are far from perfect in the once-communist giant, but China could easily become the economic phenomena of the 21st century if the government further eases its overbearing strangulation on the private economy.

Sanjay Paul- Central Banking Apologist

LvMIC:

The following is a piece I wrote as a response to an editorial written in the Harrisburg Patriot News by Elizabethtown College economics professor Sanjay Paul.  The piece, unfortunately, didn’t get picked up so I will reproduce it here.  It’s written for the layman as a simple critique of Paul’s commendation of the Federal Reserve during the financial crisis- enjoy!

Elizabethtown College economics professor Sanjay Paul’s recent Patriot News article on presidential candidate Ron Paul, though favorable to the Congressman’s stance on intervention abroad, misconstrues his position on the Federal Reserve. Like many orthodox economists, Professor Paul sees the nation’s central bank as a force of mitigation in the event of an economic slowdown.  Nothing could be further from the truth however.

First a short history lesson.  The campaign for the Federal Reserve and legal cartelization of the banking industry dates back to the election of President McKinley who was supported by wealth bank interests.  The Panic of 1907, caused by the inflationary policies of U.S. Treasury Secretary Leslie Shaw, provided the catalyst for a full blown crusade carried out by academics, public officials, and the banking elite. The Federal Reserve was ultimately a product of scheming for a governmental privilege by special interests including the Morgan and Rockefeller families.  With the aid of Senator Aldrich of Maryland, the Federal Reserve Act was secretly hashed out at Morgan’s vacation estate known as Jekyll Island Club.  As Nobel Prize winning economist Freidrich Hayek observed, “socialism has never and nowhere been at first a working class movement.”

Professor Paul characterizes Ron Paul’s objection to the Fed on dollar debasement alone when the Congressman’s opposition is far more complex.  Yes, the Federal Reserve inflates and debases the value of the dollar through interest rate manipulation.  That is the only tool the Fed, like all central banks, has at its disposal.

In 1912, economist Ludwig von Mises laid out a groundbreaking theory on the cause of the business cycle.  In The Theory of Money and Credit, Mises identified that artificially low interest rates, not backed by an increase in savings and decrease in the public’s consumption level, entices investors to engage in otherwise unsustainable production lines.  Central banks, which receive a legal monopoly over currency creation from their respective governments, use their printing presses to flood the market with money to suppress interest rates.  Simple supply and demand dictates that as supply increase, the price of purchase falls.  This money printing leads to asset bubbles like that recently witnessed in housing.  Mises called the bursting of the bubble “the crack up boom” which is an unavoidable consequence of credit expansion.

When Fed chairman Alan Greenspan cut the federal funds rate from 6.5% in December of 2000 to an unprecedented 1% in June of 2003 and kept it there till June 2004, the stage was set for unsustainable boom in housing.  The monetary base expanded, pushing down long term mortgage rates, and financed the inflationary bubble.  Ironically, Greenspan’s housing bubble was a reaction to the bursting of the dot-com bubble he engineered years earlier by interest rate cutting in 1998 and subsequent monetary base expansion.

Despite clear evidence that the Fed is responsible for the boom-bust cycle, it has a more insidious role in the affairs of Wall Street.  Whenever the New York branch of the Fed engages in open market operations (purchasing government bonds to expand the monetary base) it conducts transactions with 19 elite financial institutions known as “primary dealers.”  These “dealers” include such saintly firms like Goldman Sachs, JP Morgan, and Citigroup.

Central banking apologists never mention this as they would be forced to rationalize their support for a system built on crony capitalism. After all, the whole point of monetary policy is to goose the economy.  If money printing was neutral, it would affect all prices at once and not create a boom.  But that’s not how an economy works and the purpose of the Fed’s open market operations is to inject Wall Street with newly created funds first before the rest of the economy sees it.  This creates distortions, what economists call “Cantillon effects,” that boost some prices in terms of others and enriching the few as the money disperses.

Now Professor Paul claims inflation is currently a non issue despite the fact that the consumer price index is running at an annual rate of 3.4%.  Energy prices are up 12.4% and food is up 4.6% compared to a year ago according to the Bureau of Labor Statistics.  Inflation is only a non issue for those who don’t eat, drive, or heat their homes.

Though it’s true that current Fed chairman Bernanke carried out unprecedented monetary policy to fight the financial crisis, injecting the big banks with $16 trillion in loans is no better than giving a heroin junkie another fix.  Papering over losses doesn’t solve the core problem of a financial sector addicted to easy money.

While Professor Paul rightly praises Ron Paul’s stance on foreign policy and civil liberties, he misses an all-important feature of the Congressman’s antagonism toward central banking.  It goes far beyond currency devaluation as it involves the direct cause of the impoverishing business cycle.

Like the Ron Paul, Professor Paul could learn a thing or two by cracking open an Austrian economics treatise on a given Saturday night.

American Dental Association Hates Competition

(The following is a draft for the Mises Institute, Mises Canada has either been down or messed up all day so no post there)

In his magnum opus Human Action, Ludwig von Mises wrote on the type of effect governmental occupational licensing invariably leads to:

Where the government directly fosters monopoly prices we are faced with instances of license monopoly.  The factor of production by the restriction of the use of which the monopoly price is brought about is the license which the laws make a requisite for supplying the consumers.  Such licenses may be granted in different ways…Licenses are granted to only select applicants.  Competition is restricted.  However, monopoly prices can emerge only if the licenses act in concert and the configuration of demand is propitious.

Imagine Bill runs a lemonade stand in the middle of a bustling city.  Instead of facing competition from other street vendors, surrounding eateries, and grocery stores; Bill had the foresight to lobby the local city council to outlaw all sellers of lemonade who don’t at first obtain a license from the city.  Due to his influence and close ties to select city council members, Bill fast tracked through the application process and was able to secure a license to sell lemonade before anyone else.  With such little competition standing in his way, Bill is able to keep his sale price above the level which would tend to exist in a real free market and reap in profits as consumers are still willing to take the extra hit on their wallet for Bill’s delicious lemonade.  Profits are up, times are good, and Mrs. Bill is very happy.  But now the city council is beginning to change its tune on lemonade licensing and is considering an increase in licensing allotments.  The free ride is coming to an end so Bill, worried the good life will soon be over, launches a countering lobbying effort on the basis that product quality will decrease if more licenses are given out.

Now apply this simple example en masse to the American Dental Association.

According to a recent article in Governing, many states are considering proposals in order to expand the limits of medical licensing and allow the emergence of “mid level dental providers.”  These dental providers would play a role similar to nurse practitioners and physician assistants by providing routine dental procedures while under the guidance of a licensed dentist.  States such as New Mexico, Oregon, and Washington are looking into this expansion in licensing in order to increase the supply of dental access to rural areas.

And like Bill the lemonade salesman, the American Dental Associate is lobbying against these expansions on the basis of public safety.

For anyone familiar to the workings of an uninhibited market, such a policy wreaks of further legislative cronyism to amend previous governmental intervention.  In a true free market, consumer demand is met by entrepreneurs whenever supply and demand are met at the margin.  Demand not currently fulfilled can be through an increase of investment in capital and labor devoted toward those consumers willing to pay the cost.  In that sense, there should be no issue with a lack of dental care in rural areas as an open market would ensure that such a demand is met; albeit at higher price than that of prevailing areas with greater access to care.

But like much of the medical industry in the United States, access to care is stifled due precisely to same type of solution being floated; that is occupational licensing.  As Mises showed, such licensing must lead to a decrease in supply, monopolistic conditions, and thus a lessening of competition.

Looking back at the mid-19^th century before the advent of medical licensing, the United States had one of the highest per capita numbers of practicing doctors in the world.  As Ronald Hawowy points out, medical schools were abundant and inexpensive in addition to being privately owned.  Many physicians at this time practiced homeopathy; a sort of natural, laissez-faire approach to healing where the body was to reduce its exposure to negative environmental conditions such as stress and maintain a healthy diet.  Those who practiced what was known as mainstream medicine sought to negate this competition by lobbying for medial occupational licensing via the states.  This included joining forces with the American Medical Associate to campaign for a broad enactment of licensing.  By co-opting with the Carnegie Foundation and Abraham Flexner, a virtual nobody in the medial profession who’s brother was the director of the Rockefeller Institute for Medical Research, the movement found success with the infamous Flexner Report.  In Making Economic Sense, Murray Rothbard writes on the Flexner Report and its disastrous effects:

Flexner's report was virtually written in advance by high officials of the American Medical Association, and its advice was quickly taken by every state in the Union.

The result: every medical school and hospital was subjected to licensing by the state, which would turn the power to appoint licensing boards over to the state AMA. The state was supposed to, and did, put out of business all medical schools that were proprietary and profit-making, that admitted blacks and women, and that did not specialize in orthodox, "allopathic" medicine: particularly homeopaths, who were then a substantial part of the medical profession, and a respectable alternative to orthodox allopathy.

Thus through the Flexner Report, the AMA was able to use government to cartelize the medical profession: to push the supply curve drastically to the left (literally half the medical schools in the country were put out of business by post-Flexner state governments), and thereby to raise medical and hospital prices and doctors' incomes. 

And so began the downward trend in America’s free market in medicine.  By reducing the number of medical schools, and thus number of doctors, wages are able to be kept higher than what would exist in a market dominated by competition and the unobstructed entry into practice.  Consumers, who ordinarily determine the success of producers, have lost out as they face higher costs on top of being deemed too ignorant to choose an adequate doctor without the aid of the state.

It must be stressed that the advent of an increase in licensing for a type of mid level dentist is by no means a comprehensive solution for the problems which plague the industry.  Previous governmental intervention was the cause of a shortage and increase in price of care.  Further micro management of an already overly managed problem will only bring about more unintended consequences.  Such is the nature of the state as intervention begets intervention and the path toward socialism forges ahead. As Mises apocalyptically wrote:

All varieties of (government) interference with the market phenomena not only fail to achieve the ends aimed at by their authors and supporters, but bring about a state of affairs which — from the point of view of the authors' and advocates' valuations — is less desirable than the previous state of affairs which they were designed to alter. If one wants to correct their manifest unsuitableness and preposterousness by supplementing the first acts of intervention with more and more of such acts, one must go farther and farther until the market economy has been entirely destroyed and socialism has been substituted for it.

Mark Carney- A Success or Lucky?

LvMIC:

That is the question implied by Jay Bryan of the Montreal Gazette today who praises Bank of Canada head Mark Carney for guiding the country through the Great Recession with just a printing press.

It’s really hard to manage a big, complicated machine like the Canadian economy when you only have the blunt tool of interest rates. Just ask Bank of Canada governor Mark Carney.
That’s true even though Carney is not only smart, but also lucky.
That combination of skill and luck at the top of our banking system is a very big part of the reason why Canada looks much healthier than the U.S. or Europe these days. But the luck is starting to run a bit thin.
When the financial crisis tanked economies all over the world a few years ago, interest rates were slashed everywhere because that’s how you support a faltering economy; by making money so cheap that consumers will borrow more, mostly for big-ticket stuff like housing.

Notice the great wisdom shared in that last paragraph?  The way to offset a market correction brought on by an overabundance of personal debt accumulation financed by cheap, central bank money is….more debt accumulation and cheap money!  If I didn’t know better, I would say economic non-extraordinaire Lawrence Summers ghost wrote this piece himself.  Mr. Bryan goes on to extol the rebound Canada’s property market saw since the crash of 2008 and cites it as proof of Carney’s masterful central planning.

None of this was true in Canada, whose stodgy, well-regulated banking system hadn’t permitted crazy mortgage lending to deadbeat borrowers, so cheap money worked just fine here. When interest rates were slashed, people hurried to borrow and banks were willing and able to accommodate them.
Very quickly, the late-2008 dip in home-buying and home values turned into a 2009 boom, and Canada’s real-estate market has remained strong ever since.

Indeed, Canada’s housing industry has been enjoying a bull run in recent years despite the global financial calamities plaguing every other industrialized power.  But like the two years preceding the financial crisis in the U.S., naysayers are beginning to doubt the robustness of another fiat-financed boom.  From a Bloomberg report released just two days ago:

Canadian home sales last year increased 9.5 percent to C$166 billion, the Canadian Real Estate Association said yesterday, as home prices rose 7.2 percent. Toronto-Dominion Bank (TD) estimated in a Dec. 22 report the average Canadian home is overvalued by about 10 percent.
The average resale price rose 0.9 percent in December from a year earlier to C$347,801, the smallest monthly increase since October 2010, the real estate group said.
Other reports last week showed strength in the housing market, with new home construction increasing 7.9 percent in December and residential building permits rising 6.9 percent in November.
Canadian home prices fell by 8.5 percent between August 2008 and April 2009, but have since increased by 22 percent, according to the Teranet Home Price Index (TNBHICP). By comparison, U.S. home prices fell by 33 percent between July 2006 and March 2011, and have since increased by 1.9 percent, according to the S&P/Case-Shiller Composite-20 Home Price Index (SPCS20).
“It looks like a bubble to me, so the collapse of that bubble, that’s dangerous to any economy,” said (Robert) Shiller, who is also an economics professor at Yale University.

And via a Huffington Post report just a few months ago:

One in five houses sold in the Vancouver real estate market this year went for more than $1 million, according to data from the Canadian Real Estate Association.

CREA’s data show the percentage of homes sold above the million-dollar mark has doubles since 2009. The same is true for Toronto, where more than 5 per cent of homes sold this year went for more than $1 million. That’s double the percentage in 2009.

None of this is surprising for those who understand the correlation between asset bubbles and cheap credit; a keystone of the Austrian school.  Carney’s only real success has been fighting a deflating bubble by inflating another.  The one trick pony has many fooled just as Alan Greenspan had the U.S. putting him on a pedestal in his heyday.  Carney, like all central bankers, has only resorted to what he knows best: papering over debts in hopes of avoiding the unavoidable market correction.  Austrian minded investors such as Mike Shedlock are predicting that Canada’s housing bubble bust will even be worse than what the U.S. experienced.

While Canada has escaped the financial crisis relatively unscathed (as of now) compared to the U.S. and Europe, its robust economic growth prior to 2008 is a wonderful refutation of orthodox Keynesianism.  In 1995, the country was experiencing incredibly slow economic growth and a staggering public debt.  The debt-to-GDP ratio peaked at 68.4% and unemployment was around 8.5%.  The finance minister at the time even admitted “we are in debt up to our eyeballs.” Instead of further deficit spending and currency debasement to reduce unemployment, Canada took the opposite approach by cutting spending, laying off public sector workers, and allowing its currency to appreciate relative to the dollar.  From John Stossel:

Canada fired government workers, but unemployment didn’t increase. In fact, it fell from 12 percent to 6 percent. Canadian unemployment is still well below ours. And the Canadian dollar rose from just 72 American cents to $1.02 today.

Canada also raised some taxes. But the spending cuts were much bigger, six to one: agriculture was cut 22 percent; fisheries, 27 percent; natural resources, almost 50 percent.

See the results for yourself:



Canada’s growth prior to the financial crisis can be attributed to a great reduction in government expenditures and hence, a relief on the private sector to keep much more of its income.  Such a policy is blasphemy to Keynesians who regard deficit spending as the ultimate cure for any economic hiccups irrespective of historical evidence.  It should also be pointed out that Canada’s foray into stimulus at the onset of the crisis was negligible in size compared to that of the U.S. or China and was much more of a political show than a genuine effort to squander more funds from the private market.

While Carney is lucky to be presiding over a seemingly successful tenure as the head of Bank of Canada, it won’t last forever.  Canada’s housing bubble will pop and take his reputation down with it.

This time isn’t different.  It will be yet another vindication for the Austrian school which holds that no amount of money printing or interest rate manipulation will ever pave the way for sustained growth.  Cheap money is only a languishing band aid that eventually falls apart to once again reveal the cracks of a monetary system addicted to the drug which fuels its own destruction.

SOPA: Who Is To Blame?

LvMIC:

If you had the pleasure of visiting internet giants such as Google or Wikipedia today, you may have noticed something amiss on their respective homepages.  In what has to be the largest internet protest in history, “blackout” symbolism is being used en mass to garner attention for an issue that quite literally threatens the free flow of information on the web as we know it.  Even to this author’s surprise, the Stop Online Piracy Act protest has worked; or has at least for the time being.

The Stop Online Privacy Act is of course the controversial bill currently being discussed by our glorious and endowed public leaders in the  U.S. House of Representatives.  In short the bill:

aims to crack down on copyright infringement by restricting access to sites that host or facilitate the trading of pirated content.
SOPA’s main targets are “rogue” overseas sites like torrent hub The Pirate Bay, which are a trove for illegal downloads. Go to the The Pirate Bay, type in any current hit movie or TV show like “Glee,” and you’ll see links to download full seasons and recent episodes for free.
Content creators have battled against piracy for years — remember Napster? — but it’s hard for U.S. companies to take action against foreign sites. The Pirate Bay’s servers are physically located in Sweden. So SOPA’s goal is to cut off pirate sites’ oxygen by requiring U.S. search engines, advertising networks and other providers to withhold their services.
That means sites like Google wouldn’t show flagged sites in their search results, and payment processors like eBay’s PayPal couldn’t transmit funds to them.

This places a huge burden on large internet companies such as search engines as they are now forced to police themselves for what is essentially a non-crime.  It’s the equivalent of fining or imprisoning someone who gives a good recommendation on where to score hard drugs; irregardless of your feelings on whether drugs should be fully legal or intellectual property should be bestowed with the same protections of tangible, physically scarce property.

And like all governmental power grabs, SOPA is financed and supported by big business looking to utilize the coercive apparatus of the state to do its bidding.  In this case, major media companies and groups such as Time Warner and the Motion Picture Association of America are throwing their weight behind the measure.  But as any student of revisionist history realizes, this is a predictable course of events when considering the conniving dynamics and mutual relationship between wealthy special interests and government power centers.  One look at the events leading to the inception of the Federal Reserve or America’s unnecessary foray into global conflict reveals as much.  Like Hayek said, “socialism has never and nowhere been at first a working class movement.”

While the movie, record, and television industry deserve much condemnation for their colluding with the den of thieves, also known as Washington D.C., the finger of blame isn’t squarely on them.  For it is the natural tendency of leviathan to grow in leaps and bounds as it inserts its parasitic tentacles further into the reaches of private life and civil society.  It is those who give credence to the institution known as the state to which blame for acts such as SOPA reside.  The pamphleteer who rallies on the Capital steps for such vices as public housing, universal healthcare, and food stamps paves the way for SOPA.  The editorialist who pens heart wrenching pleas for increased tax rates or a bigger public education budgets is guilty of clearing the path toward serfdom.

The state lives and grows much like weeds in an unkempt garden.  It is only the gardener who values his cherished plot of life that remains ever vigilant to ward off intruding sprouts.  And like the ever alert gardener, it is the job of those classical liberals or anarcho-capitalists to remain steadfast in their belief of a very limited role of the state or support for its abolition all together.  As long as men remain fallible, public office will be a tempting outlet to wield power.  It is up to those who place liberty, a strict protection from coercion, and the freedom of man to do as he pleases without infringing on the right of his fellow man as their highest ideals to stay vigilant and not give into temptation of using the state further ends outside these.  Prosperity breeds from these ideas.  General destitution comes in their absence.

SOPA is a byproduct of the negligence paid in part by a public that seeks to use the state as a means to transfer themselves the wealth or liberty of another.  Blame for the act’s consideration rests firmly upon their shoulders.