Crash!

With headlines like these below coming from the States, it's obvious that in the November elections the big issue will be "the economy, stupid." It doesn't look good, does it:

•AIG Plunges After Cut in Credit Rating Jeopardizes Effort to Raise Capital

•Overnight Interest Rate Doubles as Banks Hoard Cash on Failure Speculation

•Federal Reserve Adds $50 Billion to Money Market, Sending Funds Rate Lower

•Barclays Discussing Purchase of Lehman Assets, May Seek Broker-Dealer Unit

•Wall Street Convulsions May Further Erode U.S. Growth, Put Pressure on Fed

•Goldman Profit Slumps 70%, Biggest Drop Since Company Went Public in 1999

•Consumer Prices in U.S. Fall First Time in Almost Two Years as Fuel Drops

Yet if "it's the economy, stupid," it's clear that both US candidates are stupid when it comes to the economy.  The collapse of US markets has hit traders, bankers and politicians alike like a hurricane, and to all of them the crisis has all the hallmarks of a natural disaster.  But it's not.  It's entirely man-made -- yet despite all the primary causes emanating from government agencies, chief amongst them the counterfeit capital created by the US Federal Reserve, all the two leading candidates have to say is to waffle on about "fundamentals" about which they're both fundamentally ignorant, and to try and outdo each other in plans to further "regulate" financial markets.

Obama plans "an overhaul of Wall Street regulations, saying the subprime housing crisis and other problems stemmed in part from lack of transparency and accountability in the financial system."  McCain meanwhile promises to "reform the way Wall Street does business, and put an end to the greed that has driven our markets into chaos. We'll put an end to running Wall Street like a casino."

Of the two, McCain sounds the more economically illiterate -- but it's no more than a matter of degree -- but no less illiterate than the Bank of America CEO, who's more than happy to pick up Merrill Lynch for a song, despite being completely unable in the interviews I've heard to explain the process by which Merrill Lynch et al came to this parlous state.

Ignorance, ignorance everywhere ... yet the reason for the crisis is not difficult to identify.

The immediate reason for this economic depression, as Mark Thornton points out at the Mises Blog, "is the bust in the housing market."  But this shouldn't have come as any surprise to rational observers, any more than the tulip bubble of the seventeenth century or the South Seas Bubble of the eighteenth century would have been a surprise to rational observers of the time. 

While mainstream economists wring their hands now in dismay, Austrian economists were reporting on the housing bubble and its causes throughout the boom. As Thornton notes,

Beginning in early 2003, Frank Shostak, Christopher Meyer, Lew Rockwell, Robert Blumen, Jeff Scott, and others, including this author, were writing and lecturing about the housing bubble. We identified the cause of the bubble as the Federal Reserve and its inevitable consequences of a bust in the housing market and the overall economy.

Unfortunately, mainstream observers weren't listening. 

They weren't listening when the Federal Reserve created this latest bubble.  They weren't listening while Alan Greenspan was putting the rocket fuel of counterfeit capital into the economy.  They weren't listening when Bear Sterns was bailed out (with yet more counterfeit capital).  They weren't listening when Fannie Mae and Freddie Mac were created -- and then nationalised.  They weren't listening when the FDIC itself was created and expanded, which helped create the "moral hazard" of removing risk from those who risk your savings.  They weren't listening when the "conventional wisdom" of fractional reserve banking, which needs al these smoke and mirrors of government intervention to prop it up, was pointed out to be another Emperor's New Clothes just waiting to be exposed.  As banker Christopher Meyer points out about the fractional reserve system on which the whole banking system is now based, "there is always a bubble in the making in a world of fractional reserve."  No amount of further regulation can fix that -- what's necessary is the much wider understanding that the single greatest factor in causing booms and busts is the expansion and contraction of the money supply.  See.

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NB: I can't help but mention a local commentator yesterday about whom I'd had high hopes but who's proved himself, unfortunately, to be almost as bad as all the rest.  Trying to summarise the economic situation on National Radio's 'Panel' yesterday, Bernard Hickey said economic booms were "created by greed," and busts are always "characterised by fear" -- and since both are irrational, government regulators are necessary to stabilise the markets... 

Never has such an irrational argument for regulation been made by someone so seemingly obvlivious to all the evidence before their eyes.