Protection from the US House of Representatives

Paris, France

The fix is in!

Well...the hacks came through, just like Churchill said they would. At least the hacks in the US Senate. The Senate voted last night to burden the entire nation with Wall Street’s mistakes. Only a handful of Senators dared oppose the measure, among them Bernie Sanders, a socialist from Vermont:

``The masters of the universe, those brilliant Wall Street insiders who have made more money than the average American can even dream of, have brought our financial system to the brink of collapse,'' Sanders said, and are demanding that the middle class ``pick up the pieces that they broke.''

Sanders must be delighted by the collapse of investment banking. But he says the way they’re going about imposing socialism is unfair to the proletariat. Oh well...you just can’t please everyone!

Over in the House, the hacks are taking up the measure today. They’re sure to want a few more lights on this tree – tax breaks for their big contributors, bridges, schools...an increase in Congressional salaries – but with the media looking so closely, they’ll probably go along with the Senate and pass the thing without further reflection. We say ‘further’ in the spirit of mischief. The whole project has been taken up with remarkably little real reflection of any kind. But we’ll come back to this in a minute...for the moment, the sky is falling...and the whole world turns its weary eyes on the US House of Representatives for protection.

For example, a big chunk of blue hit the auto industry yesterday. Sales were down to levels not seen since 1993. Even the fuel efficient Japanese models weren’t selling in September; sales at Toyota were down 32%. And those nice F-Series trucks – the most popular vehicles made by Ford – fell 42%. We used to own one. A nice dark-green pickup. We drove it to work. We drove it on vacations. It was roomy, comfortable...even fun to drive. It used a lot of fuel, but back in the early ‘90s, gasoline was so cheap, we never thought about it.

But that was then...this is now. Back then, Ford and GM were still going concerns. Now they’re going out of business. Ford’s stock has only $4.55 cents left to go...and there will be nothing left. GM has $9.45 between it and zero.

“Pass this legislation,” said a GM official. It’s the only way to break the “psychological cycle” that keeps people from buying cars and trucks, he believes.

So you see, dear reader, we are back to the ‘30s...and we have nothing to fear but fear itself. It’s all in our minds! If people weren’t so ‘negative,’ they’d be more positive. And then, they’d start to buy things again and everything would be all right.

It’s all in our imaginations! We don’t really owe too much money. We didn’t really spend too much money. And those nifty CDOs, MBSs, CDSs...Lehman...Bear Stearns...Fannie, Freddie...Northern Rock – they’re all okay after all.

But bits of sky keep coming down.

Copper has collapsed. So has shipping. Both are telling us that the world’s economy is slowing down. Housing prices are falling faster. Job cuts are accelerating. Local governments are getting hit by lower revenues – they’re having to cut back. Households are cutting back too. Walmart says it’s cutting prices for Christmas toys. Newspapers and magazines are cutting pages.

The sky is falling and anyone with any sense is running for cover.

That leaves the politicians and the bureaucrats right out in the open.

According to the theory – and here we flatter it, for there is no theory ...just wishful thinking – the feds are keeping their heads while everyone else is panicking. The Wall Street boys now say prices for their assets “make no sense.” They say Mr. Market has lost his nerve. That is how stalwart government employees are now supposed to be able to buy up Wall Street products at such large discounts they’re almost sure to make a profit.

It’s the fatal conceit...explained Friedrich Hayek in the ‘30s...that somehow public employees are immune to the blandishments of power, money and the madness of crowds...that they alone are above it all, like a politician who is too rich to steal and too dumb to lie, or like a bureaucrat who can’t be bought, because he is priceless, and can’t be outwitted, because he is witless.

It ain’t necessarily so. (More below...see Ron Paul’s comment...)

But that is the way it goes. Humanity makes progress in science and technology. In politics, love and banking it merely rehearses the same dramas, tragedies and farces – over and over, forever and ever, amen.

More thoughts...

*** American Empire – so long, we hardly knew you. But good riddance! We liked the old Republic much better.

Yes, our French editor told us yesterday that she is re-releasing our instant classic – “Empire of Debt.”

“You were right on target with that one,” said she.

Yesterday’s BBC report told us that the US was losing its place in the world:

“The financial crisis is likely to diminish the status of the United States as the world's only superpower.

On the practical level, the US is already stretched militarily, in Afghanistan and Iraq, and is now stretched financially. On the philosophical level, it will be harder for it to argue in favour of its free market ideas, if its own markets have collapsed. The political philosopher John Gray, who recently retired as a professor at the London School of Economics, wrote in the London paper The Observer: "Here is a historic geopolitical shift, in which the balance of power in the world is being altered irrevocably.

"The era of American global leadership, reaching back to the Second World War, is over... The American free-market creed has self-destructed while countries that retained overall control of markets have been vindicated."

"In a change as far-reaching in its implications as the fall of the Soviet Union, an entire model of government and the economy has collapsed. "How symbolic that Chinese astronauts take a spacewalk while the US Treasury Secretary is on his knees."

Of course, not everyone agrees. The BBC reporter put the question to former UN ambassador John Bolton.... He replied: "If Professor Gray believes this, can he assure us that he is selling his US assets short? If so, where is he placing his money instead? And if he has no US assets, why should we be paying any attention to him?"

Herewith, we give a short list of people who had no US assets, but whom readers might want to listen to: Jesus Christ, Adam Smith, Emmanuel Kant, Marcus Aurelius, William Shakespeare, etc. ...etc. As to the question of what one should do with his money after selling the US short, Mr. Bolton, similarly mistakes patriotism for thought. It’s a big world. And there are a lot of places you might want to put your money, where it is beyond the reach of US asset prices – including the most obvious one, gold.

*** At least one member of the US House of Representatives is keeping his wits about him, our old friend Ron Paul:

The financial meltdown the economists of the Austrian School predicted has arrived.

We are in this crisis because of an excess of artificially created credit at the hands of the Federal Reserve System. The solution being proposed? More artificial credit by the Federal Reserve. No liquidation of bad debt and malinvestment is to be allowed. By doing more of the same, we will only continue and intensify the distortions in our economy - all the capital misallocation, all the malinvestment - and prevent the market's attempt to re-establish rational pricing of houses and other assets.

The president assures us that his administration "is working with Congress to address the root cause behind much of the instability in our markets." Care to take a guess at whether the Federal Reserve and its money creation spree were even mentioned?

We are told that "low interest rates" led to excessive borrowing, but we are not told how these low interest rates came about. They were a deliberate policy of the Federal Reserve. As always, artificially low interest rates distort the market. Entrepreneurs engage in malinvestments - investments that do not make sense in light of current resource availability, that occur in more temporally remote stages of the capital structure than the pattern of consumer demand can support, and that would not have been made at all if the interest rate had been permitted to tell the truth instead of being toyed with by the Fed.

Not a word about any of that, of course, because Americans might then discover how the great wise men in Washington caused this great debacle. Better to keep scapegoating the mortgage industry or "wildcat capitalism" (as if we actually have a pure free market!).

Speaking about Fannie Mae and Freddie Mac, the president said: "Because these companies were chartered by Congress, many believed they were guaranteed by the federal government. This allowed them to borrow enormous sums of money, fuel the market for questionable investments, and put our financial system at risk."

Doesn't that prove the foolishness of chartering Fannie and Freddie in the first place? Doesn't that suggest that maybe, just maybe, government may have contributed to this mess? And of course, by bailing out Fannie and Freddie, hasn't the federal government shown that the "many" who "believed they were guaranteed by the federal government" were in fact correct?

Then come the scare tactics. If we don't give dictatorial powers to the Treasury Secretary "the stock market would drop even more, which would reduce the value of your retirement account. The value of your home could plummet." Left unsaid, naturally, is that with the bailout and all the money and credit that must be produced out of thin air to fund it, the value of your retirement account will drop anyway, because the value of the dollar will suffer a precipitous decline. As for home prices, they are obviously much too high, and supply and demand cannot equilibrate if government insists on propping them up.

It's the same destructive strategy that government tried during the Great Depression: prop up prices at all costs. The Depression went on for over a decade. On the other hand, when liquidation was allowed to occur in the equally devastating downturn of 1921, the economy recovered within less than a year.

F.A. Hayek won the Nobel Prize for showing how central banks' manipulation of interest rates creates the boom-bust cycle with which we are sadly familiar. In 1932, in the depths of the Great Depression, he described the foolish policies being pursued in his day - and which are being proposed, just as destructively, in our own:

“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.”

The only thing we learn from history, I am afraid, is that we do not learn from history.

The very people who have spent the past several years assuring us that the economy is fundamentally sound, and who themselves foolishly cheered the extension of all these novel kinds of mortgages, are the ones who now claim to be the experts who will restore prosperity! Just how spectacularly wrong, how utterly without a clue, does someone have to be before his expert status is called into question?

P.S. If you enjoyed this article you can find out more about our free email, The Right Side by clicking here.

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Protection from the US House of Representatives

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