Regulatory Romanticism

Although I find myself in disagreement with most of what Paul Krugman writes, he has some blog posts this week that definitely lend to larger discussion. The one I want to cover today is his one on "Financial Romanticism," although I do want to get to his post on the Austrian view of 100 percent reserve banking. (My guess is that Bob Murphy and maybe some others in the Austrian camp will jump on it before I do, and that is fine with me.)

Krugman is first and foremost a Progressive, and Progressives believe that a society makes "progress" by advancing the powers of the State. Unlike, say, Thomas Jefferson, who believed that the State gained power only by taking away liberties of individuals, Progressives want us to believe that freedom actually is enhanced when the State imposes its Wise Will upon individuals who may not know better.

In this post, Krugman openly mocks individual freedom with this title (and, of course, the South) and hints that only expansion of the State can make our lives better. And in this post, he lets us know that the government passenger rail service makes HIM feel more free, so it must be good. (That much of this particular "freedom" is financed by people who will not have the opportunity to ride on those trains, and who have less personal freedom of their own because government is confiscating their income to fund Krugman's rides, seems to be lost on Krugman. What matters is what HE wants, not what the Great Unwashed might think.)

His "Financial Romanticism" post does go into areas of thought that interest me, as I wonder if the Real World ever would permit a banking sector that is not bailed out at times. Before I give my own thoughts, however, let me deal with Krugman's point that because the fractional reserve system of modern banking can lead to a "cascading crisis," some sort of bank regulation is inevitable. He writes:

...even if you persuade yourself that the moral hazard created by financial firefighting outweighs the benefits of avoiding a 1931-style cascading crisis, the fact is that policy makers will intervene. Hank Paulson set out to make Lehman an example; two days later he was staring into the abyss.

So the only feasible strategy is guarantees and a financial safety net plus regulation to limit the abuse of those guarantees. It’s imperfect; it faces the constant threat of regulatory capture; but it has worked in the past, and it’s the only game in town. (Emphasis mine)

Thus, one tries to put the regulatory fences at a place where the banks don't get too big and the failure of one institution leads to a run on other banks. I understand the logic and realize that there is strength in his argument of inevitability, and appreciate his point that we are dealing in a second-best world.

There is something that Krugman leaves out, however, as his own Progressive thinking tends to lead him to the belief that the regulatory system that comes from the executive branch always will give the "best" results. The "rule by experts" has been a dream of Progressives for more than a century, and no public intellectual has absorbed this religious belief more than Paul Krugman.

As Krugman sees it, any regime that holds financial institutions completely responsible for their own entrepreneurial errors is bound to bow to the inevitable. If left on their own, banks become too big, and ultimately will be come too risk-loving, especially when they are not being reined in by risk-averse bureaucrats. And while he gives a nod to "regulatory capture" theory, nonetheless he seems to believe that the gods of expertise (and rule by the "correct" political party) ultimately will overcome such problems.

Krugman, however, leaves out something that I believe that the Austrians also forget (and I will critique both sides): politicians, like the famous bank robber Willie Sutton, also know "where the money is." Furthermore, unlike Sutton, who allegedly did not carry loaded guns into the banks that he robbed, the politicians tend to be much more predatory and threaten much more violence when they are seeking political "contributions" from banks and other businesses.

The regulatory theory to which Krugman refers is "Capture Theory," in which the entities that are regulated "capture" the process. The typical Progressive antidote to that theory is for regulators to be liberal Democrats who are so pure of heart and so wise and caring for consumers and True Believers in their Holy Mission that they are able to overcome the temptations. (Yeah, Krugman really does believe that, and for those who would argue, read his columns in the aftermath of Katrina. He claimed here and here that the problem was that the Bushies simply did not believe in the power and goodness of government.)

Fred McChesney, however, has developed a different kind of "capture" theory, one in which politicians play an active role in the predatory activities and act like a mafia. He writes:

But a politician has an alternative for raising money: selling protection. He can agree not to do something that otherwise he says he would do, something that would reduce the wealth of the potential donor. The most obvious burden that can be threatened is a tax, but there are any number of others that a politician can propose and then withdraw for a price. A private citizen will be just as willing to pay for a special favor worth $1 million as he will to avoid a $1 million tax. (This assumes constant marginal utility of wealth; with declining marginal utility of wealth, a citizen will pay more to avoid the $1 million loss than for the $1 million gain.)

This, then, is the essence of the political protection racket. Superficially, selling special favors and selling protection do look the same: payment is made to the politician in both cases. But in the extortion racket, citizens are made to pay, not for special favors from Uncle Sugar, but to protect private wealth that they have earned the old-fashioned way, outside the political process.

He continues:

One observes this sort of protection being sold routinely, at all levels of government. Legislative extortion is commonly practiced through so-called “milker bills,” to use a term popular in California. A bill is drafted and submitted, not because there is any legitimate need for it, but because it threatens some private person or group that predictably will pay to have the bill withdrawn. “Juice bills” is another term for those legislative proposals intended to squeeze private interests for cash.

Now, I am sure that Krugman would note that McChesney is referring to the legislative branch of government, not the executive branch, where the Pure of Heart Regulators reside. His view is built upon the assumption that legislators are human, but regulators who prescribe to Progressive Theology are able to overcome any weaknesses of knowledge and any temptations to "sell out" to private industry.

That tends not to be the case, as the "revolving door" between the regulators and the regulated demonstrates. For example, after leading the Clinton administration's anti-trust case against Microsoft (which had been guilty of the "sin" of not making "donations" to politicians and paying proper homage to D.C.), Joel Klein went to work for an international firm to help them avoid anti-trust pitfalls, making millions of dollars in the process. (Much of the government's Microsoft work was done by private law firms that also made millions of dollars in the process, but no doubt everyone was working out of the goodness of their hearts.)

Krugman also fails to address the desire that individuals have for power, and when power and ego combine within the regulatory confines, one can find the prescription for outright dishonesty and tyranny. I remember when I wrote an article 20 years ago for Reason Magazine on acid rain that the way that the Environmental Protection Agency destroyed the career of a good scientist that the regulators in EPA engaged in one big power trip that had nothing to do with the science or the effects of so-called acid rain.

For that matter, anyone who goes through an airport security line or has dealt with any "law enforcement" agent employed by the feds knows that employees of the executive branch hardly are "dedicated public servants" who are pure of heart. People who have power without accountability are going to be tempted to operate at the lowest common denominator, and it does not matter if they are Republicans or Democrats.

On one last matter, Krugman seems to indicate that Henry Paulson was operating out of "free-market ideology" when he failed to intervene in the collapse of Lehman Brothers. Given that Paulson and his former firm, Goldman-Sachs, were major Wall Street players, I doubt seriously that Paulson saw his role as Secretary of the Treasury as being to promote free enterprise in finance.

I do conclude that I agree with Krugman in part: actually enforcing a regime of true free-market finance is difficult if not impossible. For example, in the 1840s, when there was no central bank to act as the "bail-out" entity, many U.S. states required banks to purchase the states' canal bonds in return for receiving and keeping state charters. When the states defaulted (they had not anticipated the growth of railroads), there were numerous runs on banks.

In other words, even if everyone wanted a free-market system in finance, politicians being what they are would be predatory, and bankers, in turn, would spread around money to influence politicians. There really is "nothing new under the sun," and I admit I don't have the answers here. But, neither does Krugman.

Who are the real plutocrats?

In his most recent column, Paul Krugman praises the Wall Street protesters and claims that Republican politicians are in a panic over them.

For example, he paraphrases a quote from Rand Paul. First, this is what Krugman writes:

My favorite, however, is Senator Rand Paul, who for some reason worries that the protesters will start seizing iPads, because they believe rich people don’t deserve to have them.

This is the article from which he got it:

Sen. Rand Paul (R-Ky.) said Friday that he believes the Occupy Wall Street protests stem from divisive rhetoric from President Obama, who has called for the richest Americans to pay increased taxes to help close the budget deficit.

"I see the president's rhetoric of envy inflaming the public and saying, 'Go get yours because rich people don't deserve it,'" Paul said on Fox Business.

Paul said he was worried that the president would stoke the protestors' passions to the point that they could become violent.

"I see it as inflaming this Paris mob that I hope doesn't result in a lawlessness where they say, 'Well, gosh, those nice iPads through the window should be mine and why don't I throw a brick through the window to get them because rich people don't deserve to have them when I can't have them,'" Paul said.

(Actually, Rand Paul does not have to worry, as a lot of the protesters are carrying Macbooks, iPhones, iPads, and other instruments of technology that apparently they are simultaneously claiming are evil. No doubt, these people really would riot if their demands were brought to fruition and they no longer could purchase -- or even steal -- them.)

Indeed, with all of his own anti-enterprise rhetoric, what Krugman has been claiming is that a new war against capital formation somehow would help bring recovery. I don't know how that would happen, but Krugman has been saying that if the government were to sharply raise the capital gains taxes and then replace the coming dearth of private capital investment with government "investment" in things like "green energy," that we then would have a robust recovery.

Let us travel down memory lane to why we had the financial panics in the first place. The government was strongly encouraging banks and financial houses to "invest" in the housing market, and and said that Alan Greenspan needed a "housing bubble" to offset a dearth of private capital spending. And we got it.

This was unsustainable, and the Austrians got it early. Heck, even Krugman understood that this bubble would burst before it happened. (I told Allegany County's property tax board in 2006 that the bubble would collapse and that they should not base future financial predictions on the current situation. They laughed at me and one woman replied, "We don't see that happening.")

There would have been a solution to the financial crisis, and that would have been for the banks and financial entities to submit to market discipline. Don't forget that Krugman has parroted the usual line of "the panic happened because the Bush administration let Lehman Brothers fail."

No, Paul, Lehman Brothers failed because the banks -- operating under the infamous "Greenspan and Bernanke Put" -- were holding securitized mortgage paper that could not hold its value. The government bailed out a lot of the firms that drank the Kool-Aide, and Krugman endorsed the bailouts, which meant that some CEOs could hold onto their mansions in Connecticut.

Furthermore, let us remember that government housing policies drove this bubble and that the easy credit regime from the Fed -- again, done with Krugman's blessings and encouragement -- along with numerous government programs to push people into home ownership and, ultimately, into homes that were too costly for their incomes. For that matter, if Krugman really were against the creation of financial bubbles, then why has he endorsed Ben Bernanke's policies of spreading dollars around the globe to prop up both private malinvestments AND government bonds?

Let us be honest. When the entirety of the housing bubble was exposed in 2008, the banks got their bailouts (and Democratic politicians, and especially Obama, who was financed in part by Goldman Sachs, got their campaign contributions), and the Fed and the European Central Bank responded by creating an even BIGGER set of financial bubbles.

The situation is obvious: the combination of private mortgage AND government debt is unpayable and must be restructured. Krugman's "solution" is for governments and central banks to inflate currency in order to "deleverage" the unpayable debt and to repudiate debt through inflation. (One is reminded of debtors in Weimar Germany paying their debts with wagonloads of paper -- the ultimate Krugman "deleveraging solution.")

In the end, the banks pretty much have become the playthings of American politicians and labor unions, who have become the real plutocrats. We now have a president who declares that HE is the law, and that he can assassinate whomever he wishes, and if the target is an American citizen, the Constitutional right of "due process of law" means nothing. If that is not plutocracy, I don't know what is.

Furthermore, the unions were able to force taxpayers to pony up to bail out General Motors and Chrysler, and then to force bondholders for these companies to stand at the back of the line during bankruptcy proceedings, despite what the law actually said. In other words, Obama and his union allies were able to be their own law, which really is the definition of plutocracy.

Don't forget that a lot of the money funding this "Occupy Wall Street" movement comes from the plutocrat George Soros, along with unions and other organizations tied to the Obama administration. And don't you know that in the upcoming political season, a lot of the firms that presently are being targeted are going to pony up and send millions of dollars to Obama and his fellow Democrats in the guise of "campaign contributions"?

Furthermore, the list of "demands" coming from the "Occupy" movement seem a bit suspicious. The immediate end to use of ALL fossil fuels? Hmmm. Sounds like something that might benefit Archer Daniels Midland and all of the "alternative energy" outfits. Gee, maybe the government could force up energy prices so high that even Obama's favorite company, Solyndra, could become solvent again.

No doubt, the president and his friends would not be facing hardships, but those of us who don't have limousines and drivers to take us where we want to go might find it difficult to get to work or even to eat. What better way to empower the state than to turn everyone into outright serfs who would be totally dependent upon the whims of politicians?

Had the banks been forced to liquidate their toxic holdings three years ago, we would not be seeing these "Occupy" demonstrations. Yes, the recession would have been sharp, but not as destructive as Krugman and others claim, and then we would be in a real recovery now. Instead, we are going to have years and years of high unemployment and social unrest.

Somehow, I think that is what the plutocrat in the White House wants.

Thank You!

Thanks to everyone who contributed to our fund raising campaign to adopt 12 year old Sintija from Latvia. Sintija is with us now and is adjusting well to her new life as part of our family. While we can't adopt any more children, we want to continue to advocate for orphans to find their forever families. Please see our campaign at The Point.

Bill and Johanna Anderson

Krugman and his Kindred Spirits: Supporting the Ruling Class

I was wondering when Paul Krugman was going to start praising the "Occupy Wall Street" protests, and he finally is getting on the bandwagon. And like about everything else Krugman does these days, he manages to write commentary without a shred of insight and once again make the claim that if we provide enough of "something for nothing," we can ride that nothing to an economic recovery. Fat chance of that.

Anthony Gregory of the Independent Institute, one of the best young libertarian writers today, has a much more insightful piece, and I link it here because, contra Krugman, Gregory actually understands that governments cannot borrow and print us into prosperity. Gregory notes:

Although there is no single ideology uniting the movement, it does seem to have a general philosophical thrust, and not a very good one at that. OccupyWallStreet.org has a list of demands, and while the website does not represent all of the protesters, one could safely bet that it lines up with the views of most of them: A "living-wage" guarantee for workers and the unemployed, universal healthcare, free college for everyone, a ban on fossil fuels, a trillion dollars in new infrastructure, another trillion in "ecological restoration," racial and gender "rights," election reform, universal debt forgiveness, a ban on credit reporting agencies, and more power for the unions.

In other words, the leaders of the Occupy movement want out-and-out dictatorship, as that is the only thing that can claim to order these things into being. In the world of Paul Krugman and his Occupy friends, government by fiat can overturn laws of science and economics and tax, borrow, print, and spend us into "prosperity."

In this world, only the State produces anything. Do we want "infrastructure?" Hey, no problem! Devote a trillion dollars to it (coming from nowhere) and it will magically appear. Do we want to do away with coal and oil and natural gas? No problem, Mon! Just make the order and we can have "clean, green energy" by fiat. Why bother with laws of science and economics when we can create a "New Science" and a "New Economics" by executive order?

For all of the "change" that Krugman and the Occupy crowd are demanding, I agree with Gregory that the Ruling Class of Washington, D.C., truly has nothing to fear from these folks. The most parasitic people among us are the ones being championed as our heroes and avengers, and I have seen nothing from the Usual Suspects leading this latest "movement" that leads me to believe that what they want is an Obama dictatorship on steroids.

Judge Andrew Napolitano, who I am sure is one of the many people on Krugman's "Hate List," warns that government is subject to all of the natural laws that bind the rest of us. That is something that gets past the Krugman and Occupy crowd.

Has there been misconduct on Wall Street? Yes, but the remedy was there three years ago: let the banks and financial houses that "invested" in the "toxic assets" take the bankruptcy haircut. The market would have meted out its "justice" for the stupid decisions they made.

Instead, it has been the government itself that has propped up the bad decisions, with the government -- and especially the Obama administration -- adding even worse decisions every day. However, from what I can tell, Krugman and the Occupy crowd are not satisfied and want out-and-out dictatorship, because ONLY a dictatorship can order what Krugman and company are demanding.

And, in the end, when that fails, who will Krugman blame? I'm sure that he can find his Goldstein, as he is quite good at doing that.

I think I understand why Krugman never has mentioned Steve Jobs in any of his posts or columns. Jobs did not "invest" in giving money to politicians, and he violated the Law of Krugman by saving money and developing products. After all, everyone knows that such things only hold back the economy, which can only move forward when governments implement inflation and other measures of "aggregate demand."

Thus, to people like Krugman, entrepreneurs like Jobs are nothing but parasites. They get rich and don't spend the money where Krugman wants it to be spent. They encourage people not to become bureaucrats or even economists. Furthermore, they don't even finish college; they just DO something, and that is unacceptable in the Wonderland of Krugman.

In praise of Steve Jobs

One of the things I dislike most about both the Keynesian and mainstream economic paradigms is that they simply ignore the entrepreneur. Either the entrepreneur is simply assumed into the equation, as though what he or she does is "inevitable," or, in the case of the mainstream, irrelevant.

Worse yet, the mainstream economists will throw in the phrase, "new technology," as though a new technological product just appears as though by magic. (When one lacks a coherent theory of capital, nonsense or pure fantasy will fill the void.)

I write these words with the passing of Steve Jobs, whose genius was in the fact that he could see what others could and would not see. It was not just the technology that made Apple so influential and helped produce the Digital Age, but the fact that Jobs realized that technology meant nothing if people did not want to use it.

In celebrating the life and accomplishments of Steve Jobs, it is not that he made a lot of money, or even cared about it. He was not a political force, and Apple did not have a political action fund, nor was it a force in lobbying. While Jobs was alive, Congress and the President did not go after Apple in the way it went after Microsoft and other high-tech firms. Now that he is gone, it will be interesting to see if the federal government attempts to milk political funds from that company in the way that it has done to so many other successful firms that have demonstrated their vulnerability in the face of an unwarranted government onslaught.

No, Jobs was not someone who influenced elections or tried to make bureaucrats (and ultimately taxpayers) do his bidding. His work was much too important for anything like that, and the man truly changed much of his world -- and ours.

I include a number of tributes to Jobs in this post, including this from:

The New York Times

Holman Jenkins of the Wall Street Journal

The editors of the Wall Street Journal

Andy Kessler

Jeffrey Tucker of the Mises Institute

Had Paul Krugman written a tribute, I would have included that, but so far he has said nothing, at least in the latest update of his blog. If Krugman has something, I will put it in.

Do economic conditions make opportunity cost disappear?

With the flavor-of-the-week being blaming China for the economic depression this country caused, Paul Krugman is at it again. At least the theme is constant: a "liquidity trap" changes all the "rules" of economics.

This is a nice way of saying that if Paul Krugman believes the economy is in that "liquidity trap," then he gets to say what the "new rules" of economics are, and the first thing to go is that oppressive Law of Opportunity Cost. He writes:

Now, some people will ask, didn’t I used to be a free-trader? Yes, and under normal circumstances I still mostly am. But these are not normal circumstances! In an economy that isn’t in a liquidity trap, one can reasonably assume that jobs lost due to Chinese exports will be offset by jobs gained elsewhere, although that may be small comfort to the workers affected. Under current conditions, however, there is absolutely no reason to believe that there are offsetting gains — on the contrary, the losses to import competition are magnified through multiplier effects.

Like everything in economics, support for free trade should be based on analysis, not slogans. And if you’re in a situation where the analysis says normal rules don’t apply, then they don’t apply.

The idea of "free trade" is nothing more than a rendition of opportunity cost. One's production decisions are based upon the opportunity costs involved, period.

What Krugman is saying is that our situation today repeals the Law of Opportunity Cost and with it the Law of Scarcity. Thus, we are left with the head-scratching notion that goods no longer are scarce, even as people are being deprived.

(I am sure I will have a host of angry readers claiming I am putting words into Krugman's mouth. All I can say is that by debunking the Law of Comparative Advantage, which is based upon the Law of Scarcity and the Law of Opportunity Cost, Krugman is doing away with those things. There is no way around it, even if Krugman's fans don't like it.)

Krugman: Blame China for our economic ills

Paul Krugman received his Nobel Prize three years ago ostensibly for his contributions to theories of international trade. (He actually received it at the time because he was writing anti-Bush columns, and the Swedes were in the anyone-but-Bush mode. A year later, President Barack Obama would receive the Nobel Peace Prize, and we see what he has done with it: employ international death squads.)

Krugman writes:

...Senate leaders will...take up legislation that would threaten sanctions against China and other currency manipulators.

Respectable opinion is aghast. But respectable opinion has been consistently wrong lately, and the currency issue is no exception.

Why such drastic steps? Krugman spells out what he sees as the problem:

Ask yourself: Why is it so hard to restore full employment? It’s true that the housing bubble has popped, and consumers are saving more than they did a few years ago. But once upon a time America was able to achieve full employment without a housing bubble and with savings rates even higher than we have now. What changed?

The answer is that we used to run much smaller trade deficits. A return to economic health would look much more achievable if we weren’t spending $500 billion more each year on imported goods and services than foreigners spent on our exports.

There is much more in his column defending countries manipulating their currencies in order to make them weaker internationally, including a demand that the U.S. Government do the same. However, since China is "manipulating" its currency to do what Krugman demands we do, China must be the cause of the depression in the USA.

Krugman uses an interesting set of logical steps to reach this conclusion. (1) The government has tried to "stimulate" the economy, (2) the economy still is in a depression; (3) therefore, China must be at fault.

When the Indonesian economy collapsed in the late 1990s, mobs murdered ethnic Chinese merchants. I guess I am grateful that Krugman is not calling for the murder of others, but nonetheless when a Nobel Prize winning economist calls for trade barriers as a way to pull the USA out of a depression, he no longer is practicing economics.

If you ask where Krugman is calling for trade barriers, I think the following quote from his column provides ample proof of that:

In the last few days a new objection to action on the China issue has surfaced: right-wing pressure groups, notably the influential Club for Growth, oppose tariffs on Chinese goods because, you guessed it, they’re a form of taxation — and we must never, ever raise taxes under any circumstances. All I can say is that Democrats should welcome this demonstration that antitax fanaticism has reached the point where it trumps standing up for our national interests.

In other words, opposition to a new tariff on Chinese goods is said to be bad because it is "right-wing" to be against "new taxes." No matter that this would be exactly the kind of measure that would make things worse; no, opposition to a new tariff is bad because Krugman thinks it is a way to score points against "right-wingers."

Before Herbert Hoover signed Smoot-Hawley in 1930, a letter signed by 1,000 academic economists urged the president not to do it. Hoover did it anyway, and the results were tragic.

Today, America's best-known economist is demanding that the Obama administration erect new trade barriers in the wrong-headed belief that restricting trade will create new prosperity. This is beyond economics; it is madness, and it also is very sad, because if Congress carries out the policy that Krugman is demanding, we are going to see the economy quickly go downhill.