It is useful at this point to step back for a moment and think about the meaning of the past several weeks’ financial crises. The government has been bailing out banks, a large insurance company, investment banks, overseas central banks, and money market funds. The amounts of money involved are stupendous.
The government’s bailout is our bailout. Every last cent of the cost will be borne by Americans who pay taxes.
The government’s actions indict government itself. We are seeing the failures within our system of government showing up as failures in the banking and financial system. These are not failures of free markets or free enterprise or free banking. We do not have free markets or free enterprise or free banking, and we haven’t had them for a very long time.
This is a time to look at matters carefully and decide: Do you favor free markets or do you favor the State? Do you think that these failures are failures of the free market or do you think they are failures of the State?
The same questions arose when the Great Depression occurred. The government blamed that on speculators, on the stock market crash, on greed, on over-consumption, on under-consumption, on sticky prices and wages, etc. But the real causes of the Great Depression and the real failures owed to government. The government created the Federal Reserve system, and it was the Fed that created the deflation. The government regulated banks and supported unit (isolated) banks, and it was these isolated banks that failed in the thousands. It was the government that raised taxes and tariffs and choked off economic activity. Then, having begun the depression, it was the New Deal that prolonged it. It was the New Deal that over-regulated and cartelized the economy. It was the New Deal that started up a new devaluation of the dollar.
This is a time to look carefully and choose up sides: free markets or the State? There is no in between. Freedom vs. slavery. Which is it?
A free market is not a lawless market. It is governed by natural law and judges and juries administering that law. It is governed by agreements that merchants make among themselves, and judges and juries that handle disputes that arise. It is governed by the consumer who has the say-so of whether or not to buy a product or service. Liability is assigned to those who are responsible. Losses, when they occur, are borne by those who are responsible. They are not spread to taxpayers by edict or force. A free market is not chaos. It has governance, but it does not stem from the variable and fickle authority of legislators who take bribes and lobbyist money. It stems from jurists who follow a body of jurisprudential principles.
A free market is definitely not a State-regulated and State-controlled market. Once the State starts legislating markets, the consumer’s say-so disappears. Merchant agreements become targets for anti-trust. Product innovation deteriorates. Once the State starts legislating markets, the weak sisters petition the State to halt the successful companies in their tracks. When the EU fines Microsoft an unbelievable amount of money and diddles around with the details of what Microsoft may or may not include in its operating system, there is no free market any longer.
Once the State gets into the act, it plays favorites. Some businesses that have losses are bailed out. The business does not pay the price of its errors. The losses are shifted to taxpayers. That is what is happening today. This is the opposite of a free market.
When we have a central bank that controls the amount of high-powered money in the economy and when such a bank can bail out at its own discretion whatever financial institutions it pleases and in whatever amounts it pleases, we definitely do not have a free market in money or banking. When bank deposits are insured, we have no free market in banking. When we have government-sponsored enterprises with direct lines of credit to the U.S. Treasury that buy mortgages, we do not have a free market in banking or mortgage lending or housing.
Free enterprise means that losses are borne by those responsible for them. When the U.S. government plays favorites and bails out the institutions with losses that it selects, there is no free market.
In sum, government forces wealth transfers by uncalled for violence, whereas persons exchange goods and services without such violence in a free market. The one is criminal in nature, the other peaceful. The one makes slaves of persons, the other respects their liberty.
Too many of us hold to a middle-of the-road wishy-washy position. Some of us are nave and misguided. There are also many who want to support government anyway and are anti-free market. They typically choose one instance where the State deregulated. Ah-hah, they say, look at how badly the industry performed thereafter! They completely overlook that the government’s basic regulatory framework is still in place, and that piecemeal deregulation often acts perversely. It makes no sense whatever, for example, to deregulate banks and allow them to engage in gross speculations while at the same time insuring their deposits.
The Fed has been in bed with investment bankers who also act as government bond dealers and distribute the government’s bonds. This elite group has always used high leverage in its operations because the Fed supported the market during bond issues. After bailing out a hedge fund like Long Term Capital Management, is it any wonder that these investment bankers have used excessive financial leverage in many of their speculations?
None of this is what a free market is. The State is out of the picture altogether in a free market. The free market does not need the State to exist, as some think and claim. The State kills the free market. They are opposites. One must choose. Are you pro-free market? Then you must be anti-State regulation of free markets. Once a State regulates a free market, that is no longer a free market.
The New Deal in the 1930s is usually chosen as one clear time period when free enterprise went by the boards. One can find others. But certainly, since the 1930s the movement away from free enterprise and toward big government is unmistakable. No one on any side of the political spectrum can deny that.
The State has taken it upon itself to govern and regulate industry after industry. Its regulation of banking goes back nearly to the founding of the U.S.A. The First and Second Banks of the United States came in the late 1700s and early 1800s. The National Bank system came in the mid and late 1800s. The Federal Reserve System came in 1913.
Central banks are always in bed with States. This is a marriage made in Hell. Control of money and finance is absolutely essential to a State. The Bank of England was begun in 1694 explicitly to support the government. In the U.S. case, that control is one of several key props that hold up the Empire and the ability of the State to wage incessant warfare. Another main prop is the efficient tax-collecting system. The tax system and the money system work together. Bonds cannot be issued unless there are tax revenues to pay the interest on the bonds. Behind the tax revenues are the basically decent and hard-working American people. They are being taken for a ride. There are many more props, but I will stop here.
I am at a loss to know what term to use to describe this octopus of the State’s control over finance and industry. Call it socialism, or fascism, or communism, or democracy, or democratic socialism, or regulatory socialism, or statism, or authoritarianism, or collectivism, or centralization, or nationalism. The failures we are seeing right now are failures of all of these ideas, every last one of them. None of them work. They all are the antithesis of free markets, which is the only institutional framework that does work in conjunction with appropriate arrangements to maintain natural law, to assign liability to those who damage others, and to uphold legitimate agreements.
In functional terms, what we have now is authoritarian centralization. This system is mistakenly supported by the nationalistic sentiment of a good many Americans. The national government is held in a regard that it totally fails to deserve. It has successfully shifted the blame for its own failures to business enterprise. It blames Americans for its own faults. The two presidential candidates blame the greed of Americans for the current debacle. This is a Big Lie, one of the Biggest. The same Lie has been used in the past to blame oil companies for high oil prices. Politicians are inveterate liars because their lies are believed. They are also in many cases economic and financial illiterates, although they know enough to line their own pockets. Love of country should never be confused with love and support of national government.
The national government’s modus operandi is to centralize decision-making and to impose it by law. It does this in areas where there is not the slightest justification for it. Money and banking is one such area. The government’s control over money and banking, essential to its own growth and survival, has now failed so badly that the debacle is making daily headlines.
Authoritarian centralized decision-making and control is doomed to failure. The big guys don’t know what they are doing. They are full of hot air. They are con-men. They are fakes. They are out for themselves. They could care less about you and me. They have the power, and they will use that power to paper over their failures. They will use their power to print money and make loans to cover over the failures of the State-controlled money and banking system that America is saddled with.
This is why it is a time to get off the fence and choose. Do you favor free markets and its methods of governance, or do you favor the State and its authoritarian centralized government?
Michael S. Rozeff [send him mail] is a retired Professor of Finance living in East Amherst, New York.