The futility of bank regulation in a repressed monetary regime

Re: The Futility of Bank Regulation Under a Monetary Regime of Financial Repression, by Jeffrey P. Snider

 

I have admired the writing of Mr. Snider for some time now. His latest missive is long and detailed, but I was impressed by this passage:

 

"There is no way to practically regulate “risk” under the conditions of repression."

 

This insight is similar to number myth number five in my essay Six Myths of Money and Inflation, to wit:

 

Myth 5: More, better, and more vigorously enforced regulations can prevent loan and investment losses.

 

The purpose of monetary intervention is to fool entrepreneurs and their bankers into beginning projects that would not be seen as profitable in a sound money environment. Losses are inevitable.

The Greek deal won't solve anything

Since the Greek deal contains absolutely zero pro-market reforms, it won't fix anything. Raising taxes, cutting down on tax evasion and smuggling, even if successful in raising tax revenue, simply entrench government at its current and possibly higher level. The Greek people need economic freedom, not more government jobs and increased welfare. There are four main pillars to economic recovery--cut government spending, cut government regulations, cut taxes, and institute sound money. These reforms will increase private purchasing power and build capital, yet none are being discussed. The entire emphasis is on how to squeeze the Greeks enough so that the government can repay its sovereign debt. I have advice for the other members of the EU--Greece cannot repay its loans, and it is foolish to try to collect. Write them off. End the fallacious idea that sovereign countries can guarantee one another's debts. This institutionalizes moral hazard and leads to a tragedy of the commons. If you must keep the EU, return it to the vision of its founders as an association of sovereign countries dedicated to the free exchange of goods, services, capital, and people. Abolish the European Central Bank and reinstate sovereign currencies. Better yet, eliminate legal tender laws and allow each country to use whatever currency its citizens choose. My bet is that in relatively short order the entire continent outside the UK will become a Deutsche Mark zone.

From today's Open Europe news summary:

Greece readies list of reforms for Eurozone following late night deal on Friday

Late on Friday night Greece reached a deal with its Eurozone partners to extend its current financial assistance agreement by four months. As part of the deal Greece will today send a list of reform proposals to the Eurogroup which will need to be “sufficiently comprehensive to be a valid starting point for a successful conclusion of the [final bailout] review”, once this is approved then the deal will be confirmed. Eurozone finance ministers will hold a call tomorrow.

The list is expected to focus on structural reforms in areas such as tax evasion, corruption and public administration. Bild reports that the package will be worth up to €7bn – €1.5bn each from raising taxes on wealthy Greeks and cutting tax evasion, as well as a further €2.3bn from cracking down on fuel and cigarette smuggling.

Speaking over the weekend, Greek Prime Minister Alexis Tsipras said, “We won a battle, but not the war. The difficulties lie ahead of us,” adding that the deal marked the start of “leaving austerity, the bailouts and the Troika behind.”

However, SYRIZA MEP Manolis Glezos said in an open letter on his blog, “By renaming the troika ‘the institutions’, the memorandum as ‘agreement’ and the lenders as ‘partners’…you do not change the previous situation.” He also apologised to voters for being complicit in SYRIZA’s approach. However, on Sunday Greek daily To Vima declared the deal an “honourable compromise”.

German Finance Minister Wolfgang Schäuble said, “Being in government is a date with reality, and reality is often not as nice as a dream,” adding, “The Greeks certainly will have a difficult time to explain the deal to their voters.”

Irish Finance Minister Michael Noonan said in an interview with RTE that the biggest risk was that Greek banks would have gone “belly up” on Wednesday, adding that the deal mainly “ensures Greece doesn’t collapse next week” and there will be more negotiations on what is “effectively” a third programme for Greece. Open Europe’s analysis of the Greek negotiations drew widespread coverage, see below for more details.

Source: Open Europe blog Eurogroup statement on Greece Reuters Reuters 2 The Financial Times The Wall Street Journal Handelsblatt Reuters Deutschland

My letter to the NY Times re: Why the Fed is perplexed about interest rates

Re: Fed Appears to Hesitate on Raising Interest Rates

Dear Sirs:

Austrian School economists are not at all perplexed about what to do with interest rates, because our understanding of economics and especially monetary policy is superior to that of the Keynesian School economists, who rule not only the Fed but all the central banks of the world. We understand that money is a medium of exchange and that interest rates are the result of the interplay of supply and demand for loanable funds. Demand for funds is determined by the expected profit to be realized by the various stages of the structure of production. The supply of loanable funds is determined by the desire of the public to consume in the present vs. save for the future, what we Austrians call time preference. An honest interest rate guides entrepreneurs as to the availability of real resources for the likely successful completion of their projects. The Keynesians at the Fed believe that they can put the cart before the horse; i.e., arbitrarily set an interest rate that will direct capital to a sustainable structure of production. No, it's the other way around! Furthermore, given the Fed's underlying confusion about such basic principles, it is not surprising that no matter how it believes the economy is doing, it will keep interest rates low at all times. Either it sees the economy as weak and needing lower interest rates, or it sees the economy as doing well with low interest rates and fears the result of raising them. It is especially maddening to see the Fed denigrating falling prices and expanding the money supply in an attempt to drive prices higher. Not only is the Fed's policy contrary to the best interests of the people, for whom lower prices mean a higher standard of living, but such a policy is the path to runaway inflation in the future.

"Gold is a noble metal..."

Re: Gold coins, at bottom of sea for millennium, go on display

A wonderful little report about a recent discovery of gold coins off the coast of Israel, which confirms why gold is the premier store of value since time immemorial.

My letter to the Philadelphia Inquirer re: Will a new bomber bring prosperity?

Re: Will a new bomber bring boom times? on Page A8 of Sunday February 15, 2015 issue of Philadelphia Inquirer - Philly Edition

Dear Sirs:

Ignore for the moment whether or not the US actually needs a new stealth bomber, which is a very complicated and difficult question of how best to protect our country, and understand that building one will NOT create prosperity. Military spending consumes capital, which is the product of private savings. But whereas most private savings go into building the capital stock of the nation in order to provide more goods later, military spending is pure consumption in the present. Oh, the people who build the bomber may find themselves flush, but their temporary prosperity comes at the cost of the rest of the nation both present and future.

Limited Government Is Not Possible in the Interventionist State

Would we have political liberty we must first have economic freedom, for the form of government is determined by the form of economic organization. At first blush the opposite would seem to be self-evident; i.e., that our form of government determines all else, including our economic structure. But Mises advises otherwise. In his magnum opus Human Action, (page 283 of the Mises Institute's scholars' edition), Mises explains thus (my emphasis):

Freedom, as people enjoyed it in the democratic countries of Western civilization in the years of the old liberalism's triumph, was not a product of constitutions, bills of rights, laws, and statutes. Those documents aimed only at safeguarding liberty and freedom, firmly established by the operation of the market economy, against encroachments on the part of officeholders.

Likewise, in The Law by Frederic Bastiat, (page 53 of the 2012 Laissez Faire Books paperback edition), Frederic Bastiat has this to say (my emphasis again):

A science of economics must first be developed before a science of politics can be logically formulated. Essentially, economics is the science of determining whether the interests of human beings are harmonious or antagonistic. This must be known before a science of politics can be formulated to determine the proper functions of government.

The insights of these two titans of liberty are vastly important to those of us who value our liberty and wish to maintain what we have and expand it in the future. It counsels us that attempts to pass laws or even constitutional amendments to ensure our political liberty will be wasted as long as our economic freedom continues to be usurped by government. In other words, limited government will fade in the face of the modern regulatory state, and no laws can protect us from its deprivations. Economics not only trumps politics, it determines its very form.

The root cause of economic interventions is the fallacy that government can improve our lives by making decisions for us. But this is impossible. As I explained in an earlier essay, by their very nature economic interventions by government are not something that we desire voluntarily. Cooperation under the division of labor is non-coercive and requires from government only access to an honest criminal justice system to enforce contracts and protect property rights. However, government mandates require government coercion for their enforcement.

 An example is the mandate that everyone contribute to the government's Social Security and Medicare programs. Although the public requires no government mandate to buy any of the wide ranging retirement savings and health insurance products available on the free market, government must force us to participate in its Social Security and Medicare schemes. Absent the mandates no one would participate. The systems are fatally flawed transfer taxes, Ponzi schemes of sorts, posing as retirement savings and healthcare plans. There are no real profit producing assets from which to pay the plans' distributions, merely the promise by government that it will continue to force others to pay you in the future as it forces you to pay others in the present.  The programs can be maintained only by the police power of the state. What may appear to be widespread acceptance of the Social Security and Medicare mandates is the vociferous support of those receiving benefits and the completely rational desire of those paying to stay out of jail. Social Security and Medicare have replaced our freedom to dispose of our own money as we choose with the compliance apparatus of a police state. This is not limited government, and no constitutional amendment can alter this fact.

The more government meddles in the economic sphere--which should require no regulation at all, since it is completely voluntary--the more police power is necessary to force us to comply. All government agencies possess huge enforcement mechanisms that not only can confiscate our property but take away our freedom. The Occupational Safety and Health Administration (OSHA) is little more than a government supported extortion racket, finding nebulous health and safety violations in the workplace that apparently do not concern the actual workers themselves, who haven't been chained to their machines for quite some time now. The Environmental Protection Agency (EPA) shuts down businesses and threatens entire industries for violations of arbitrarily established environmental standards that are of little concern to the people affected. Smokestack emissions and the like are purely local environmental issues for which one would expect a wide variety of standards across the nation. Undoubtedly the people employed by the giant steel mills of Gary, Indiana tolerate smokestack emissions that Beverly Hills residents would find unacceptable. These arbitrary EPA standards are depriving Americans of the opportunity to work at higher paying jobs. Their freedom to tolerate more pollution in order to enjoy a higher standard of living has been usurped by government.

Speaking of jobs, just try practicing some profession that requires a government issued license, even if the parties using your service do not care whether you have one or not. Better yet, employ someone who is willing to work at a wage rate below the proscribed minimum or who is willing to work without healthcare or family leave benefits. The police power of the state will descend upon you, even though there is no dispute between you and your employee. Want to reclaim discarded furniture, refurbish it, and sell it out of your house? Better not try to do that without a business license and a store front in an area that is properly zoned. Do you want to hire "an able bodied man" to do some heavy lifting at your place of business? Oh, oh! The discrimination police will put you in your place, which may be a jail cell if you cannot pay their fine.

 No truly limited government can perform these police functions, so expecting one falls into the category of a cognitive dissonance. In laymen's terms, we are just kidding ourselves that we are a truly free people with a government that is subservient to our wishes and exists primarily to protect our life, liberty, and property. Keep this in mind the next time you hear that some new economic regulations have been proposed or implemented. Concomitant with these regulations comes an ever more powerful and coercive government.

The lesson is clear: Where the state expands liberty retreats.

My letter to the NY Times re: How much more government "help" can the poor withstand?

Re: Consumer Protection Agency Seeks Limit on Payday Lenders

Dear Sirs:

Although one loses count very quickly, government's attacks upon the poor seem to come in three's. First government fights the dreaded specter of deflation, meaning lower prices, by its irresponsible quantitative easing programs that have indeed driven up the cost of housing and reduced home ownership to the lowest level in decades. Next government tries to raise the poor's income by increasing the minimum wage, which has simply caused a reduction in the employment chances of the least skilled of our population. And now, without a job and without a home to provide collateral, government will prevent Americans with poor credit histories from getting short term so-called payday loans. How much more government help can the poor withstand?

Wrong policies for Greece

From today's Open Europe news summary:

Greek PM refuses to change course ahead of crucial week of meetings with Eurozone partners

"...Greek Prime Minister Alexis Tsipras...reiterated his plan to increase the minimum wage, halt privatisations, reopen closed public broadcaster ERT and tackle tax evasion."

Increasing the minimum wage will increase unemployment. Halting privatisations will decrease what Murray N. Rothbard calls "private purchasing power remaining" or PPPR; i.e., resources confiscated and squandered by government cannot be used to satisfy the real needs of the market. Reopening public broadcasting will increase government spending still further--thus, reducing PPPR--and will give the government a propaganda outlet. Tackling tax evasion, although probably a worthy goal in a low and equitable tax environment, will further reduce PPPR and drive many Greeks to desperation. In other words, if pursued with vigor, all four of these policies will make matters worse not better.

The real interpretation of high German exports

From today's Open Europe news summary:

German exports hit record high in 2014

German exports hit a record-high of €1.13 trillion in 2014, a 3.7% increase from 2013, the Federal Statistics Office announced on Monday. German imports increased by 2% to €915.6bn, while the German think tank Ifo Institute calculates that Germany’s resulting trade surplus of €217bn is the highest of all countries in the world.

I would rewrite the head line to the above report in this way:

"Germany sends real goods to foreigners and receives worthless pieces of paper in exchange."