The Austrians Were Right, Yet Again

It is … futile to urge banks to lend more if real savings are not there. Likewise it doesn't make much sense to suggest that the Fed can somehow replace nonexistent real savings … by printing more money. (It is also an exercise in futility to raise government spending to fix the problem. After all if a government spends more it means that somebody else will have less resources left.) All that adding more money to the economy will do is to weaken wealth generators and thereby reduce the future supply of real savings and weaken future real economic growth.

The argument that the government is somehow pumping new capital into the market is absurd. Government is actually borrowing the money from the capital markets that it is in turn injecting into the capital markets. There is no additional source of funding; there is only a diversion of funds from more-productive outlets to less-productive outlets, with government acting as the middleman.

"After all, this Keynesian nonsense has had many trial runs, and it has failed every single time." So when Henry Paulson argues that it is necessary to pump money into credit markets to prevent them from freezing up, he doesn't bother to realize that the money he pumps into the credit markets is coming directly out of the very same credit markets. He is doing little more than rearranging the deck chairs on the Titanic.

Government has no resources of its own, no elves working overtime to produce something of value, just promoters who espouse Santa Clause economics. It can only transfer wealth from one group to another (skimming a nominal transaction fee in the process). The current … $700 $800 billion bailout (sorry, rescue) package is nothing more than a looting of the responsible and productive by the reckless and profligate. Call it reverse Darwinism: survival of the least fit.…

[T]ransferring more blood from the productive host to the parasite does not in the long run make either healthier. For the economy and country to begin healing, we need capital, credibility, and authority to move from the wasteful to the productive. The power elite, predictably, is attempting to achieve the exact opposite.

As a student of the Depression I know that Congress and the executive can do much damage before the long term gets here, and indeed, they can delay its arrival indefinitely. Will the conservatives who supported this legislation lay into a President Obama two or three years hence, in the event that the economy devolves into a repeat of the 1970s, thanks in large part to government's attempt to forestall market forces over the last two weeks? This seems likely. Our current problems resulted from the infusion of credit in the past. To think that infusion today will not have the same effect in the future is to challenge pesky things like natural and economic laws.

It is true that the financial system must be rescued; it must be rescued from the institutions holding bad debt that are currently draining capital while waiting for a bailout and adding little in return. It is they that are preventing wealth-generating activities in the financial sector and the other parts of the economy from expanding real wealth.…

"I want to be sympathetic to those who were deceived — and grant the best of intentions to those who favor stupid policy — but it is really hard." The government package is not going to rescue the economy, but it will rescue activities that the economy cannot afford and that consumers do not want. It will sustain waste and promote inefficiency, draining resources from growth and efficiency.

Is it any wonder that Treasury Secretary Henry Paulson's plan has morphed into the federal government taking equity stakes in banks, mortgage companies, and at least one insurance company? … But history is clear: more fiat money won't solve this crisis; a return to sounder money will.

When the recession is the result of a central-bank-induced artificial boom (such as the recent housing boom), the downturn is a period of readjustment, when misallocated resources are channeled back into more appropriate lines, consistent with consumer preferences and technological realities. When the government steps in and tries to prevent this readjustment, it simply maintains an unsustainable deployment of scarce resources.

The present crisis is scary, but only because no one knows what crazy new scheme the government will introduce every other day. Resources were invested improperly during the housing boom, and the economy needs time to heal itself. There is no way around this fact.

By artificially lowering the interest rate through credit expansion, central banks induce inflation-induced boom-and-bust-cycles, which lead to unsustainable debt levels. In all western countries overall debt levels as a percent of GDP have gone up strongly in recent decades.

"Why does anyone continue to take Krugman and company seriously?" Whenever financial markets set out to end the disastrous process through, for instance, a decline in economic activity, governments and their central banks will do whatever it takes to keep the fiat-money system going: lowering interest rates by increasing credit expansion and increasing the money supply.

In the current situation, however, banks' capacity to keep expanding the credit and money supply has been greatly diminished: accounting losses and — due to waning confidence in the system — presumably also payment losses erode banks' equity capital further in the time to come.

The government should completely remove itself from the course of action and let the market reevaluate resource values. That means bankruptcies, yes. That means bank closures, yes. But these are part of the capitalistic system. They are part of the free-market economy. What is regrettable is not the readjustment process, but that the process was ever made necessary by the preceding interventions.…

We need to let the market handle the entire process, come what may. I guarantee that this solution is a better one than creating another trillion or so to bail out failing enterprises.

Acclaimed minister Adrian Rogers once said that you cannot multiply wealth by dividing it. Trying to spread the wealth via a tax-and-redistribute scheme will not bring prosperity. It will only share misery (albeit perhaps more equitably). The solution is to pursue more market-oriented reforms that remove obstructions on entrepreneurs. As theory and evidence suggests, market-oriented reforms are not faith-based initiatives. They are our only hope for the long run.