Wednesday, June 30, 2010

My Letter to the NY Times re: Ireland and Austerity

Subject: Letter-to-the-Editor re: Ireland and Austerity
Date: Wed, 30 Jun 2010 16:03:04 -0400

Re: Ireland Paying a High Price for Austerity

Dear Sirs:
Your above-the-fold article on page one of your June 29th issue takes Ireland to task for supposedly imposing unnecessary austerity on its people when the correct path is more stimulus spending as proposed by President Obama. You make the common mistake of assuming that the nation and/or government of Ireland is somehow distinct from its people and that this entity called Ireland has resources that the people of Ireland do not. Frederick Bastiat recognized this common error over a century and a half ago when he wrote "...the state can give nothing to the citizens that it has not first taken from them." Reducing the cost of government is not austerity; it is liberating resources from the predations of the state and returning them to the people where they will be employed for real economic recovery. The government of Ireland (and the U.S, for that matter) should accelerate this process and do nothing to stand in its way. It is the sure path to recovery.

Patrick Barron

Tuesday, June 29, 2010

My Letter to the NY Times re: Government Support of Tesla Motors

Subject: Letter-to-the-Editor re: Government Support of Tesla Motors
Date: Tue, 29 Jun 2010 12:03:48 -0400

Re: Tesla IPO

Dear Sirs:
Your article about the upcoming Tesla Motors IPO illustrates beautifully how our government gambles with the peoples' money. The government has "loaned" Tesla $465 million. I put the word "loan" in parentheses, because this is not a real loan. Undoubtedly the rate is below market, but there is no way of knowing, because there is no loan market for Tesla Motors. No bank board of directors would ever approve such a loan of its depositors' money. The article speaks for itself--Tesla has lost $290.2 million since it was founded in 2003. It has produced a grand total of one thousand cars, priced at over $100,000 a piece. Its current car has minimal range and few places where it can be recharged. By the time Tesla rolls out its next model, the big players such as Nissan will be offering all-electric cars at a fraction of Tesla's price. But how can there be a significant market for an all-electric car when nowhere can one find out its electricity cost per mile? And where will America get the power? The government, via the EPA, is making it almost impossible for America's utility companies to add electricity production. In fact, some current coal-fired power plants are threatened with closure. Nevertheless, the government is pushing this technology and trying to lure buyers by granting tax credits to purchasers of all-electric cars. But, there's a sucker born every minute. So, if you loved the DeLorean, you'll probably buy a Tesla.

Patrick Barron

Thursday, June 24, 2010

My Letter to the NY Times re: Negative Interest Rates

Subject: Letter-to-the-Editor
Date: Thu, 24 Jun 2010 17:36:05 -0400

Re: When Caution Carries Risk

Dear Sirs:
Mr. David Leonhardt thinks that Fed Chairman Ben Bernanke is too worried about the stock market and not worried enough about unemployment and the economy in general. As a result, Mr. Leonhardt claims that Mr. Bernanke's caution carries the risk of a weak recovery that will harm millions of America's unemployed. Better to prime the old pump with yet another big dose of fiat money. To support his claim of a too-cautious Bernanke, Mr. Leonhardt refers to a San Francisco Fed report. According to its analytics, the Fed's effective benchmark rate today is a negative two- percent and it should be a negative five- percent. Negative interest rates, huh? This is a case in which one's firmly and, I might add, irrationally held economic outlook simply does not pass the test of common sense. Now it is true that a bank can lend at an effective negative rate. Let’s say that the inflation rate is ten percent and the bank lends at eight percent. Then its effective interest rate is indeed a negative two- percent. But only a person completely lacking in common sense or a dyed-in-the-wool Keynesian would advise the bank to lend at five percent in order to have an effective rate of negative five percent. The bank will slowly liquidate itself by transferring its capital to its borrowers. Yet this, apparently, is what Mr. Leonhardt advocates.

When an economic theory leads one to advocate that America liquidate its capital base in order to save itself, it is time to re-examine that theory. The Keynesian theory of lack of demand, which requires government stimulus via low rates and fiat money spending, should be discarded in favor of something that reflects reality. Artificially low interest rates in the early and middle part of the decade caused malinvestment that must be liquidated. We simply spent too much money producing stuff that people really didn't want or wanted less than other things. This is not a lack of demand of everything as much as a lack of demand for some things. Only a recession can cleanse the economy of this superfluous inventory and redirect it to meeting the real needs of the people. This takes two things--time and freedom. Zero or less-than-zero interest rates freeze malinvestment and prevents the economy from adjusting. Another big round of stimulus spending is the wrong policy.

Patrick Barron

Wednesday, June 23, 2010

A Quick Lesson In Understanding the Fed

My students at the University of Iowa must understand how the Fed operates. We study books and articles by great Austrian economists, such as The Mystery of Banking by Murray N. Rothbard. Even though Professor Rothbard presents his subject in about as clear and concise terms as one can imagine, it takes some serious application of one’s time and energy to comprehend all that the Fed does and how it does it. It then takes even more time and energy to comprehend the Fed’s impact on the economy to arrive at a conclusion that is greatly at odds with mainstream economists. Mainstream economists revere the Fed as the “All-wise, All-knowing Great Oz” that stabilizes the economy, prevents depressions, ensures full employment, etc. And, they have formulas and econometric models to prove it! By contrast we Rothbardian Austrians conclude that the Fed causes the boom/bust business cycle by expanding the money supply and encouraging malinvestment that must later be liquidated. This is known as the Austrian theory of the business cycle. After studying the Fed’s operation, students dive into the study of this equally serious and time-consuming subject.

The Fed as a Monopoly Counterfeiter

Well, I have come up with a much simpler way to understand what the Fed does and its impact on the economy. There are no books to read or equations to memorize. Simply think of the Fed as a counterfeiter, but a very special kind of counterfeiter. Real counterfeiters operate in secrecy, knowing that their paper money amounts to theft and that their discovery would result in jail time. Printing money does not create a resource; it merely redistributes it. But, curiously, the Fed does the same thing and, except for us Austrians, engenders great respect from both the citizens and the government. Unlike a real counterfeiter, the Fed operates in the light of day. It has nothing to fear, because it has a legal monopoly on its counterfeiting activities. This makes all the difference and makes it easy to explain its operation.

The Police Power of the State Protects the Fed…for a Price

The Fed is the only entity that is allowed to manufacture money in America. The full police power of the federal government ensures its monopoly. The federal government forces everyone in America to use the Fed’s product—the dollar—for all monetary transactions. Even if we agree with one another to use some more desirable money, such as the yuan or the Euro, we are prevented from doings so under penalty of law. Furthermore, if we refuse to accept the dollar to satisfy a debt, the debtor is released from his obligation ever to pay us! This state-enforced monetary regime is known as “legal tender law”.

Holding the monopoly of money production in America makes the Fed a very popular entity, to say the least. As a semi-independent agency, the Fed can print money in just about any amount it wishes and can give it to just about anyone it wishes. But it gives most of its money production to the government itself, and it is not hard to understand why. A symbiotic relationship exists between the Fed and the federal government. Each gives the other something that it cannot have on its own. As already mentioned, the Fed gets protection from the federal government for its monopoly counterfeiting operation. Without this protection Gresham’s law would operate to drive the Fed’s fiat currency out of circulation; i.e., no one would want to use a currency that lacks intrinsic value.

But the Fed has the full coercive power of the federal government to force the dollar upon us, because the federal government gets an equally important benefit. It gets as much newly manufactured money as it requires, without going to the people via taxation or honest borrowing. When the government must appeal to the people for the money it wishes to spend, its insatiable appetite for spending meets the reality of the marketplace. There is only so much that the government can tax and/or borrow before the people either revolt or are driven to destitution and have nothing more to give up. But when the federal government can “sell” its debt to the Fed and receive as many dollars as it desires…and its desire is unlimited…it need not appeal to the people at all!

“Shill” Economists Provide Theoretical Cover

The economics profession should be solidly against this well-known scam, as Dr. Mark Thornton, Senior Fellow at the Ludwig von Mises Institute, calls it. But Dr. Thornton has discovered why so many economists and academic publishers support this legalized theft—they are on the payroll, literally! As Dr. Thornton explained at this year’s Rothbard Memorial Lecture, held in March at the Mises Institute, both get lucrative grants to produce and publish monetary studies for the Fed, and their Keynesian outlook provides amply scope for research into the arcania of fiat money. To quote Dr. Thornton, “…government money dominates the whole process.” Like the priestly class who supported the divine right of kings in days of old, academics and publishers receive support and public recognition from the state in return for providing theoretical justification for the state’s parasitic activities. As the bought-and-paid-for shills of the Fed itself, this group provides the third leg of support for this grand-theft-auto of a system.

So don’t be impressed with all the theater of complicated sounding Fed programs that authorize the Fed to buy this asset or that asset or lend to this bank or that insurance company. These are simply the huckster’s sales pitches for disguising the Fed’s real operation—manufacturing money for the federal government in exchange for the government’s protection of its counterfeiting operation. This evil, destructive relationship is the most ingenious method ever devised for fleecing the people of their wealth and, eventually, destroying our society.

Monday, June 21, 2010

My Letter to the Wall Street Journal re: China Revalues the Yuan

Re: China's Yuan Rises to Highest Level Against the Dollar in Modern Era

Dear Sirs:
I cannot impress strongly enough upon your readers my recommendation that they read Murray N. Rothbard's The Mystery of Banking. Rothbard explains in capsulized form the means by which our central bank, the Fed, has created the conditions for a much higher price level in America (what most people wrongly call "inflation"). There is no way to stop this process now, because the Fed is intent upon reflating the economy, which is short-hand for destroying the purchasing power of the dollar by printing massive amounts of money. Why will it do this? Because it is the only way the government itself can repay its debts, at least in dollar terms. China now understands this. It has moved from confidence in the dollar to loss of confidence in the dollar. Therefore, it will reduce its dollar holdings by repatriating them to the US. Other nations will follow. This will increase our DOMESTIC money supply and push prices much higher. Do not believe that anyone is the cause of this other than our own government. We are about to reap the wages of a half century of money inflation.

Patrick Barron

Thursday, June 17, 2010

My Letter to the New York Times re: Useless "Crisis-Prevention Manual"

From: Patrick Barron (
Sent: Thu 6/17/10 1:43 PM
To: NY Times (

Re: Fifteen Economists Issue Crisis-Prevention Manual

Dear Sirs:
It is no surprise to Austrian school economists that Fed Chairman Ben Bernanke thinks very highly of "The Squam Lake Report", a list of recommendations by fifteen eminent economists for preventing future banking crises. The report ignores the foundation of the crisis and justifies more regulatory power that Mr. Bernanke hopes to wield. The report's tired laundry list of "fixes" will do nothing to prevent future crises, because they attack the symptoms rather than the disease. This banking crisis, like all previous ones in the last hundred years, was caused by bank credit expansion not funded by real savings. The Fed drove down the interest rate by adding reserves to the banking system. Fractional reserve banking allowed the banks to pyramid new loans onto these new reserves. Each dollar of new lending created a matching dollar of new money. This laid the foundation for the banking crisis, because at no point did the public increase real savings. It was all smoke and mirrors.

Fractional reserve banking is damaging enough when the reserves are sound, such as gold or silver, but the practice becomes most lethal when the reserves themselves are manufactured out of thin air. This is the case with all banking systems today--the banking system is allowed to expand the money supply out of thin air based upon reserves that themselves have been created out of thin air via the Fed's open market operations in which it monetizes government debt. This isn't as difficult to understand as it may sound. The Fed prints money out of thin air to buy government bonds. This money increases the money supply AND becomes reserves of the banks. Then the banks are allowed to expand the money supply, via their lending operations, by many multiples of this increase in reserves.

If the report's recommendations are adopted, the Fed will continue to shower the world with funny money while attempting to ensure that it doesn't create another banking crisis. This is impossible. The money must go somewhere, and, since it is not representative of real savings, it will cause another crisis. Attempting to prevent a crisis through regulation of banking activity will cause what Wilhelm Ropke called "repressed inflation" and what we call "stagflation", falling production and higher prices.

The only way to stop expansion of the money supply, which is the real cause of banking crises and the boom/bust business cycle, is to stop expansion of bank reserves and end fractional reserve banking.

Patrick Barron

Tuesday, June 15, 2010

My Letter to the NY Times re: Free Trade

To: The New York Times
From: Patrick Barron
Date: June 15, 2010

Re: Senators Losing Patience With U.S. Policy on China

Dear Sirs:
Last week several members of the Senate Finance Committee dressed down Secretary of the Treasury Timothy Geithner over whether China is or is not moving fast enough for our satisfaction in eliminating its policies to protect its domestic industries. The sheer uselessness of this exercise is matched only by the implied danger that the U.S. will start a world wide trade war. China hurts only itself by intervening in its own markets, and, anyway, it is none of our business. No one in Washington seems capable of understanding why, if one wishes to benefit one’s own nation as a whole, unilateral free trade is the only rational policy to pursue. Unilateral free trade--in which the U.S. would freely import whatever goods Americans wished to buy, regardless of whether or not the country of origin allowed American goods onto its shores—means that Americans live better, more prosperous lives. If China or any other country refuses to buy from us or restricts our imports into their country in some way, then we have imported goods that we enjoy and have exported to China dirty pieces of green paper. Now, who wins from this policy?

When China intervenes in its currency markets to give more yuan per dollar than the natural, open market, it imports inflation onto its own shores while holding down inflation in the U.S. It is not true that by keeping American goods out of China, we are “harmed”. True, we have lost a sale, but that is not the same as harm. I refer you to Dr. Patrick Burke’s well-reasoned exploration of the subject in his book No Harm: Ethical Principles for a Free Market. According to Dr. Burke, no harm is incurred when one is left in a prior condition, and losing a sale leaves one in the prior condition.

Yet it seems inevitable that the US is about to commit itself to another Smoot-Hawley moment. Already we are following the playbook of Hoover and the early Fed by increasing federal spending and pumping up bank reserves respectively. So why not go for the trifecta and start an international trade war to go along with massive debt and the threat of hyperinflation? Our best policy is limited government (which means limited spending and limited regulation), sound money, and free trade. None of this needs to be managed by anyone, for a free market manages itself.

Thursday, June 10, 2010

My Letter to the NY Times re: Blog Prophet of Euro Zone Doom

Subject: Letter-to-the-Editor
Date: Thu, 10 Jun 2010 14:04:01 -0400

re: Blog Prophet of Euro Zone Doom

Dear Sirs:
Mr. Edward Hugh may be correct that the Euro will fail, but it will not fail as a direct result of cultural differences among its members. It will fail because the European Central Bank (ECB) succumbed to political pressure to abandon its primary responsibilities to keep the currency stable and chose instead to destroy the Euro's purchasing power. Profligate nations can coexist in the same currency zone as financially responsible nations, but eventually the profligate nations will be forced to mend their ways or they will run out of money. This is good--one of the benefits of a sound money is its use as a unit of account, revealing when one is accumulating capital and when one is destroying it.

The Greek financial crisis revealed that nation's path to destruction much earlier than otherwise because it was on the Euro and could not hide its problems by debasing the drachma. This was a Greek financial crisis that is merely denominated in Euros; it was not a Euro crisis. It became a Euro crisis only when the ECB bought Greek bonds and forced the European Union (EU) nations to guarantee them against the will of their citizenry. At that point it became obvious that the more responsible nations might be forced to leave the Euro Zone by the overwhelming demands of their citizenry to do so.

It is not true that debasing one's currency is a means to restoring financial solvency. Debasing the Euro may spur EU exports temporarily, but it is no long term solution. By making imports expensive a debased Euro will raise the cost of living for the common man in Europe and even raise the cost of those imports that are used as factors of production in export industries.

The world's politicians should abandon their search for a quick financial fix that does not exist. If some claimed that they have found one, you can bet that the costs either are hidden or will be borne by politically unpopular minorities. The EU had a golden opportunity to allow the free financial market to impose discipline upon the Greek government. The Greek people should demand that their leaders keep them in the Euro Zone, because that is the surest and quickest path to forcing their government to abandon its destructive fiscal policies. More debt or currency debasement will only hide the problem, make it bigger, and result in a worse situation in the future.

Patrick Barron

Wednesday, June 9, 2010

My Letter to the NY Times re: Shallow Economic Reporting

Subject: Shallow Economic Reporting by the NY Times
Date: Wed, 9 Jun 2010 10:32:34 -0400

Re: US. Presses the Airlines to Satisfy the Traveler


Re: As China's Wages Rise, Export Prices Could Follow

Dear Sirs:
For some time now I have been frustrated at the shallowness of your economic and business reporting. Two recent articles illustrate my point.

The very title of your June 2nd report of new airline regulations--U.S. Presses the Airlines to Satisfy the Traveler--displays your perspective that some businesses do not care about their customers and that the public must rely upon the noble bureaucrat to remedy the situation. What nonsense! Although Secretary of Transportation Ray LaHood is an honest man, what does he really know about the airline industry? Mr. LaHood is a career bureaucrat/politician. He hasn't held a real job in decades, if ever. He was chief of staff for Republican Congressman Bob Michael for many years and succeeded to the safe Republican seat when Mr. Michael was ousted from his minority leadership position by Newt Gingrich. Now he is Secretary of Transportation, with vast powers to make or break entire industries. But where is his transportation background that would make him anything more than just a nuisance to the people who are trying to deliver transportation services every day? I really doubt that Mr. LaHood has ever had any contact with airline operations other than sipping his drink in first class. In a competitive airline business, or any other business for that matter, those who serve the public at the best price and with the best service will be rewarded with the consumers' patronage. Nothing else is required.

Your June 8th report on rising wages in China--As China's Wages Rise, Export Prices Could Follow--is not really a report at all. It is pure speculation and not very good speculation at that. There is a very sound economic reason that rising wages in China probably will NOT cause export prices to rise. Rising labor productivity is very likely the reason that Chinese business owners can afford pay increases, not their benevolence, as your report suggests. In fact rising labor productivity is the ONLY way that labor can be paid more. Undoubtedly Chinese businesses are investing in more capital equipment, and it is rising capital investment per worker that underlies all worker wage gains. To pay workers more out of a sense of benevolence would lead to a lack of competitiveness and would bankrupt any firm in a very short time. Undoubtedly the beneficial effects of globalization, which is just another word for increasing the specialization of labor, is driving low wage jobs out of China and into other developing countries, just as happened with Japan after World War II. At one time the label "Made in Japan" held connotations of inexpensive, poor quality trifles. Not any more. Did Japan attain its economic eminence by paying its workers more out of the goodness of its capitalists' hearts? Of course not. Japan pays higher wages because its workers produce more and better goods that can be sold at a profit even at low prices.

More capital per worker, flexible labor rules, and sound business management are the keys to higher wages--always have been and always will be.

Patrick Barron

Sunday, June 6, 2010

My Letter to the Wall Street Journal

From: Patrick Barron (
Sent: Sun 6/06/10 10:04 AM
To: Wall Street Journal (

Re: G-20 Is Nearing Accord

Dear Sirs:
Having the world's irresponsible and bankrupt governments demand that bankers clean up their acts is like having Willie Sutton, the famous American bank robber, advising his victims! The crisis was caused by loose central bank monetary policy and not by lower capital and liquidity positions of banks. As usual the governments of the world are blaming the victim in order to divert attention from their own imminent financial collapse. And, as usual, their answer is to tax banks into creating another socialist slush fund that will punish sound banks and create massive moral hazard. The real answer to our problems is limited government, laissez faire capitalism, and sound money. But you will never hear these radical proposals emanating from a G-20 meeting, because the purpose of the G-20 itself is to coordinate centralization of economic power at the governments themselves and ensure that there exists no safe haven for capital anywhere in the world.

Patrick Barron

Saturday, June 5, 2010

C + I + G = Baloney! (Or, How Government Spending Is Driving Us to Bankruptcy)

The world’s largest economies are being prevented from recovering from massive malinvestment by wrongheaded governmental interventions. Japan, currently the world’s second largest economy, has had zero growth for twenty years. A good case can be made that the U.S. has had zero growth for ten years, because the so-called growth of the first decade of the new millennium now appears to be phony. All those houses were built at a loss, which we are only now recognizing. We have yet to plumb the total extent of the rot.

The causes of the worldwide crisis are hardly debatable. Governments everywhere spent vast sums while forcing their central banks to keep interest rates low. The increased spending went to non-productive transfer payments and to subsidize government’s idealized societal improvement plans, most notably--in the U.S., anyway--that every man deserves to own his own home. So, Uncle Sam, how did that work out? Well, the damage is done and now the task at hand is to get back to work and rebuild the capital that was wasted or, as we Austrian economists say “malinvested”.

Unemployment is high, which, frankly, is to be expected according to Austrian economic theory. It takes time for labor to find new jobs in new industries, which may require learning new skills. People may have to move and, of course, will be reluctant to do so until other, less disruptive alternatives, have been exhausted. Government has no idea what opportunities exist for labor; therefore, it should do nothing to prevent labor from re-deploying as quickly as possible. As harsh as it may seem, unemployment insurance payments actually slow down this essential process. Raising the minimum wage doesn’t help either. Although many who lost their jobs are not minimum wage workers, a pernicious consequence of raising the minimum wage is that it forces up all wages. When the cost of labor increases, there are fewer employment opportunities even in the best of times…and these certainly are not anywhere near the best of times!

Victims of a Failed Economic Theory

Unemployment insurance payments and high minimum wage laws represent the typical wrongheaded policies that flow out of failed Keynesian economic theory. The working man may find it hard to believe that he is the victim of an economic theory, but that is the case nevertheless. He might be even more amazed that he is the victim of a fallacious economic equation, to wit, C + I + G = GNP. This is the simple version of the Keynesian definition of Gross National Product as the sum of Consumer Spending plus Investment plus Government Spending.

This destructive economic theory maintains that spending is all-important. By viewing the Keynesian GNP equation, one can easily see why Keynesian economists, who control the levers of government, believe that it is possible to “stimulate” the economy with government money. When consumer spending and investment drop, GNP must follow downward with mathematical certainty unless government increases its spending. We have had one massive trillion dollar spending spree, a cash-for-clunkers program, and more bailouts of failed businesses than I can count…and yet the economy continues in the doldrums. Ominously, the Obama administration is considering ANOTHER trillion dollar stimulus! Why won’t this work?

Government Spending Is a Parasite on the Private Economy

The key fallacious concept imbedded in Keynesian economics and characterized by its famous C + I + G = GNP equation is that government spending ADDS to an economy’s health. No. Government spending SUBTRACTS from an economy’s health. The real economy is the private economy; there is no other. Government spending comes out of the private economy. In olden days, no one would have accepted the argument that the king could help his nation’s economy by increasing his spending. The king’s spending was funded by taxes from the people. It is the same today, notwithstanding the eyewash of central bank manipulations of its manufactured paper money.

All government spending is parasitical. We need some government, of course, but the less we need the better off we are. No one would claim that an increase in crime that requires hiring more police or an increase in international tensions that requires a larger military would be good for an economy. Better that people are honest and other nations friendly so that we do not need to provide resources for more police and a larger army. We would much prefer that our sons and daughters produce goods and services that improve the quality of our lives than that they stand sentry on America’s frontiers, all at our expense.

Government programs that do not provide essential security services are especially illogical. For example, paying people not to work, which is the consequence of unemployment insurance, must come out of funds that WOULD employ people! All government welfare programs are funded by the private sector and do not add to the nation’s wealth, as the Keynesian equation would imply. The funds for these programs come out of the private economy and further stifle its ability to increase the nation’s wealth by reducing capital formation. Caring people feel the right to lobby government for more funds for the needy--although taking from some, at the point of a gun, to give to others is morally questionable—but they cannot and should not claim that providing such funds is anything but harmful for any economy.

Can We Get Ahead by Picking One Another’s Pockets?

Once the government gets the power to tax for the purpose of alleviating poverty, there is no logical stopping point. The people will demand further expansion of these programs not because they believe them to be worthwhile but because they feel victimized and want some of their money back in the form of their own benefits. The common man may not know the term “tragedy of the commons”, but he knows it when he sees it. His efforts will be for naught, though, due to another economic phenomenon—the fallacy of composition, which states that what may be beneficial for a segment of the economy cannot possibly be beneficial for the entire economy. Put simply, we cannot all subsidize everyone else and come out ahead. We want our subsidy from others but do not want others to demand a subsidy from us. But the inexorable demands of ever more special interest groups will make fleeting whatever benefits we do extort from government.

Yet Keynesianism institutionalizes the tragedy of the commons—that commonly held resources will be plundered to extinction--and claims that the fallacy of composition does not apply. We can all pick one another’s pockets and all of us can get rich doing it!

The only solution is to declare Keynesianism as dead as its author, end all government parasitical spending, and free the economy from the tyranny of bureaucrats armed with restrictive regulations. The latter is crucial, for to end welfare spending without freeing man from the straightjacket of the regulatory state would be to free him to starve. But in a totally free market economy, where each man is free to cooperate with all other men on terms agreeable to each and without harming others, prosperity and peace will prevail. It is the sure road to our salvation. Cuts in government spending are not “austerity programs”, as the mainstream media maddenly states, but are acts of economic liberation. So, lets bury that C + I + G = GNP baloney and get back to work.

Thursday, June 3, 2010

My Letter to National Review--Abolish the FDIC

Subject: Abolish the FDIC
Date: Thu, 3 Jun 2010 11:05:44 -0400

Re: Shadow Bailouts by Kevin D. Williamson

Dear Sirs:
In his May 17 essay titled "Shadow Bailouts" Kevin D. Williamson has exposed the real purpose of the Dodd bill--to socialize credit via the institutionalization of bailouts as a normal government practice. As a consequence moral hazard will reign unrestrained. The resulting chaos will reinforce government's claim that only it can prevent the complete breakdown of the nation's credit system. For this explanation Mr. Williamson deserves our hearty thanks. However, although Mr. Williamson may see clearly into the future, it is his view of the past with which I take a very small and polite issue. To quote from his essay...

"We don't mind bailing out ma-and-pa depositors when a bank goes feet-up, because keeping those depositors guaranteed adds greatly to the stability of the banking system and the economy, encouraging savings and capital formation, and does so at a remarkably low cost to the nation."

Well, we should mind bailing out ma-and-pa depositors, because that is the foundation upon which government is taking over the entire banking system. If there are natural laws of government, one of them must surely be that no government program remains small. Like a cancer it expands until it consumes the host body. The depression-era FDIC is a case in point. At one time only small depositors were guaranteed. But now we find that this guarantee, via the logic of a natural law of government, must be extended to Wall Street millionaires. A more clear-eyed assessment of the FDIC and its purported guarantee would reveal that it is not an insurance program at all. The only way a deposit can be guaranteed is for the banker to hold standard money in sufficient quantity to honor all deposits one hundred percent. Once the deposit has been lent, there can be no guarantee, for to do so would be to guarantee that all loans would be repaid in full with interest. This is impossible. A free and honest banking system would carefully delineate between a deposit, for which the bank retained one hundred percent standard money, and an investment, which would be lent to worthy borrowers chosen by the banker. The investments would be repaid either by the maturing loans or by the banker's capital itself. When loan losses exceed the banker's capital, the bank fails and the investors become general creditors.

Now, some may say that this is terrible, and it is. But in a free market, incompetent bankers would be driven from the market and would never regain their positions. Would you continue to employ a plumber or a roofer who can't fix a leak? It happens, but their incompetence becomes known rather quickly and they are driven from the market. The same with bankers. Incompetent bankers with low capital reserves would find few customers and would be driven from the market. Bankers with better judgement and larger capital accounts would survive.

Banking is a competitive, market-driven business like any other. Our problem is not that the FDIC has been expanded too far but that it was enacted in the first place.

Patrick Barron
20 McMullan Farm Lane
West Chester, PA 19382
Phone: 610-793-3605