Monday, 22 September 2008

Stop the bailouts! [updated]

US financial "experts" are talking about "a trillion dollar bailout" of the troubled financial system -- "the mother of all bailouts" -- yet note that these are the same "experts" largely responsible for the explosion of artificial central-bank-created credit that caused those troubles, and this is more of their same rocket fuel that caused the problem in the first place!

As if he were just speaking yesterday, Nobel Prize-winning economist Frederick Hayek has some advice for those "experts" -- and for all those who are giving them their head:
Instead of furthering the inevitable liquidation of the maladjustments brought about by the boom during the last three years, all conceivable means have been used to prevent that readjustment from taking place; and one of these means, which has been repeatedly tried though without success, from the earliest to the most recent stages of depression, has been this deliberate policy of credit expansion. ... To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about; because we are suffering from a misdirection of production, we want to create further misdirection--a procedure that can only lead to a much more severe crisis as soon as the credit expansion comes to an end. ...It is probably to this experiment, together with the attempts to prevent liquidation once the crisis had come, that we owe the exceptional severity and duration of the depression.We must not forget that, for the last six or eight years, monetary policy all over the world has followed the advice of the stabilizers. It is high time that their influence, which has already done harm enough, should be overthrown.

Time to abandon the illusion that inflating the currency to effect price stability can lead to anything but disaster; and time, now urgent, to stop propping up failure so the recovery itself can get going.

"America is more communist than China right now," declares maverick investor Jim Rogers. "This is welfare for the rich."

He's right you know, and it will work just as well as every welfare programme, won't it.  Trouble is, failure on this front means failure of the very financial system on which we all rely for our prosperity.

UPDATE 1Notes Mark Thornton, former Assistant Superintendent of Banking in the state of Alabama,
The financial panic that has engulfed the planet is considered by politicians, bureaucrats, journalists and mainstream economists to be a problem of regulation. I find myself in the uncomfortable position of having to agree with this gang of opinion makers, but it is not a problem of insufficient regulation, inadequate regulation, unenforced regulation, out-dated regulation, or anything of the kind.

The problem is with regulation itself. With regard to financial markets, government regulates everything...
Contrary to the "solutions" put forward by McCain, Obama and Uncle Tom Cobley and all, more government regulation is not the solution.
Government regulation is the problem... What the American public needs to be told [and all the "experts" need to be told] is that the crisis is actually the market trying to reestablish some rational order in the economy beset by regulation. It is the market that is tearing down these mega financial firms and disposing of the crazy financial products that they created. It is the market that is punishing those who grew rich on paper money schemes, derivatives, sub prime mortgages, and hedge funds. These are the same people the taxpayer is being asked to bail out--Wall Street fat cats.

What the American public needs to hear [and all the "experts" need to be told] is that regulation is the problem and that the "unfettered market" is the only way to break out of the business cycle.

UPDATE 2Speaking on the bailouts to Time magazine, economist and executive director of the Ayn Rand center Yaron Brook said, "It's a complete disaster. Its a form of national socialism of the financial markets...This is socialism 101."

Brook doesn't blame speculators, traders or financiers for the market's near-collapse, but instead blames government for having overregulated the markets in the first place. The business leaders bailed out by government this week "are victims," he said, "and the government set it up." Washington underreacted to previous crisis, let Fannie Mae and Freddie Mac spin wildly out of control as quasi-government agencies while taxpayers piled up
unsecured debt in their names. The crisis, he added, was "really fed throughout by government policies."

"The unfree market has failed," he says. "It’s time for a truly free market.”


  1. They don't call GS "Government Sachs" for nothing.

    The rich always win because they make the rules to suit themselves.

  2. Whatever happened to the deputy at the US Treasury saying, "enough"? That was only last week.

    I was thinking this morning this consistent willingness of the US government to step in when things go bad - provided the institution is large enough - must create a massive moral hazard problem.

    A serious business strategy large companies seeking to maximise profits will now consider is to achieve critical mass that makes it politically costly not to bail them out should things turn out poorly.

    True, if things go horribly, shareholders are still out of pocket, but not by nearly as much without a bailout to cushion the fall. The upshot is positive expected earnings to being a corporate behemoth which might otherwise be unprofitable absent any prospect of a bailout when disaster strikes.

    Hard to have 'creative' without the 'destruction' if resources are forcibly consumed by large corporates and not by the highest bidder.

  3. This is very interesting:

  4. And on top of all this, the SEC banned short selling! Talk about strangling the canary!

  5. The Real Culprits In This Meltdown.

    Without the housing bubble there would have been no financial bubble - or it would have been much more niche specific and would have done far less damage.

    Every product bubble (from Tulipmania on) has been closely followed by a financial bubble to finance the traders in the tulips, or dot.coms or houses.

    So if you want to blame the real bubble-makers blame the Smart Growth planners and of course Al Gore who made the attack on urban sprawl a major plank of his Presidential campaign.

    Al seems to be attracted to “disasters”. And the next financial bubble will be financing investments in carbon trading, tidal power, and renewables etc.

    Al will have much to answer for.
    (read my essays and NBR columns on the “Double Bubble” at the Centre web page

    We have to remember that the double-bubble has struck in places far from the peculiar circumstances of multiculturalism which drove some of the sub-prime lending. The common thread, linking inflated housing markets and financial collapses in markets all over the world, is the planning fad called Smart Growth, and the associated over-regulation of supply of land.

    This is not the collapse of capitalism or an example of market-failure.
    It is yet another catastrophic outcome of central planning.

  6. Great article. Permission requested to repost at We will include authors name/URL, etc.?

  7. Hi Chris,

    Yes, please do. Be my guest. :-)


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