The (Near) Death of the State

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I’m fully aware that Paulson and Bernanke have some nefarious scheme in mind to reverse the thrilling defeat of their criminal bailout package, a package shot down by independent members of Congress on both sides. But reflect for a few minutes on what it means that the House did this. It was a revolutionary act in the best sense of that term.

The entire establishment was united in favor of what was surely the most horrible and outrageous bill to ever come before Congress. The Fed, the Treasury, leadership of the Democrats and Republicans, the Wall Street Journal and the New York Times, all the major think tanks, most talking heads, the wealthiest corporations, important academics — in short, the whole of the power elite — were united in favor of this awful thing that proposed the following: Americans were to be stripped of their earnings and their future to prop up failed enterprises.

Forget back-door socialism: this was right through the front door. The consequences would have been dreadful and very scary. It was to be the first of many bailouts, since of course it cannot and would not work. Bad debts can’t be made good by legislation. This means that more money would be necessary, as the middle class was sucked dry by the vampire state for years to come. Deeper and deeper economic depression — a repeat of the 30s — was certain. Best to put a stop to this now.

The administration might have tried to do its wicked deeds through executive order rather than asking Congress. But there are two problems here. One is that they wouldn’t be able to share the blame when the plan flops. The other is economic. The Fed and Treasury are actually very worried that they are incapable of injecting more credit into a banking structure averse to lending right now. They would rather have the congress authorize the money directly and run up the debt.

In any case, no matter how you look at it, the defeat of the bill is a victory for freedom. The defeat of the power elite is essential for liberty to thrive. For the free market to function, we need the government/corporate cabal to lose its capacity to get its way in every area of life. They need to feel fear. They need to lose security. They need to have a sense of uncertainty as to whether their every wish is our command. The House defeat of the bailout is a magnificent rebuke in that sense.

But does it mean that the economy is going to tank and we will all suffer? On the contrary, it could mean that we can begin an economic recovery from the Fed-generated bubble that should have and would have burst years ago but for artificial props by the Fed. If the stock prices of these troubled institutions can fall to where they need to be, they can be taken over, and their assets used productively and traded by the market. Once this deleveraging takes place, we will be ready for a new round of economic growth.

You have to understand how ridiculous this whole debate looks to anyone who understands the price system. Let’s change the example from houses to apples to see how silly it is to suggest that falling prices can be made to rise. Let’s say that the Fed created an apple hysteria that drove the price from $3 per pound to $10. Stores loaded up and even used them as collateral for expansion. Suddenly the price collapsed to $5 and finally to $2.

Now government takes notice. What can government do to deal with the problem? It can try to boost the price of apples by forcing stores to raise their prices. But what about consumers? They won’t buy at $10. So the apples sit and rot. Maybe government should buy them all or force consumers to buy them. Also perhaps stores will just not buy any more at all. Government could force them to. But it can’t force them to stay in business. People can always walk away. So perhaps government can just buy the stores, all in the interest of keeping the price of apples up. But it will have to buy the apple-leveraged stores at a much higher price than the market would offer, so this is a bad economic deal on the face of it.

The tangles can get ever more complicated and billions and trillions can be spent. You can put everyone in a prison camp and force people at the point of a gun to buy and sell apples at $10. But in the end, the problem is still the same: the price of apples wants to fall. Nothing government does changes that one fact. To attempt to change it is like trying to change gravity. Of course, the government’s central bank can raise all prices through inflation to the point that apples do in fact cost $10, but this is purely cosmetic. In fact, in real terms, the price of apples is still $2. It is a pointless and destructive activity to try changing this. You only cause massive damage in the attempt.

More great things happened after the bailout failed. Commodity prices including oil fell dramatically. This is a magnificent thing. Right now, consumers are not threatened by the possible failure of another paper-addicted investment-banking house. Consumers are threatened by ever-higher prices for all goods. If we are in a recession, especially if it lasts and lasts, low prices are precisely what we need to start economic recovery again.

It is not entirely clear why prices fall. It could be the worldwide economic slowdown. It could be that the markets are beginning to doubt the capacity of the Fed to actually achieve the hyperinflation that it wants, since banks have become quite risk averse. In any case, we need ever-lower prices on all things, including gas and groceries — and, yes, houses. This is the basis for economic recovery.

The failure of the bailout bill was the precondition for economic recovery. It should make believers in liberty realize that we can change history, that tyranny is not our fate, that the leviathan state can be beaten back.

Recently we have urged readers to look to books on money and banking. Now it is time to look at books like the Discourse on Voluntary Servitude by 17th-century French writer tienne de La Botie. It was his view that the state is the least plausible institution on earth, one that would be overthrown in a day but for propaganda and ideological error. He explained all this in his book, introduced by Murray Rothbard. We just so happen to have a new edition out.

Yesterday was one of the worst days in decades for the power elite. It was one of the best for liberty.

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