The Great Depression Online

Great Depression Online Archive Issue:

Wreaking Mischief on the Lives of Billions

Great Depression Online
Long Beach, CA
June 19, 2009

Inside This Issue You Will Discover…

*** Basking in the Drivel
*** Tossing Horseshoes in the Rain
*** Wreaking Mischief on the Lives of Billions
*** And More

Basking in the Drivel

The latest plan to make the world a better place was unveiled on Wednesday.  Reuters called it the “biggest financial reforms since 1930s.”

“My administration is proposing a sweeping overhaul of the financial regulatory system, a transformation on a scale not seen since the reforms that followed the Great Depression,” announced President Obama in a speech at the White House to commemorate the occasion.

“A centerpiece of the plan is vesting the Federal Reserve with new powers over ‘systemic risk’ in the economy with the aim of preventing future disasters like September’s collapse of former Wall Street giant Lehman Brothers and the taxpayer bailout of mega-insurer American International Group,” explained Reuters.

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Here’s the oratory kicker…

“We are called upon to recognize that the free market is the most powerful generative force for our prosperity,” said the President “but it is not a free license to ignore the consequences of our actions.”

With that we’ll pause to bask in the utter drivel that’s been showered upon us.

Tossing Horseshoes in the Rain

First: A question…

Since when have we had a free market economy?  Certainly not in our lifetime.  And certainly not anytime since 1913.  For that was the year the Federal Reserve came into existence.

Before that the price of the economy’s most essential component – the basic element of markets and trade – was determined by the free market.  That is between two willing participants engaged in a business transaction.  Since 1913 the Federal Reserve’s been fixing the price of this critical building block of the economy by way of committee.

What is it exactly we’re talking about?

Money.  More precisely, the price of money as determined by the rate of interest in return for credit.  The Federal Reserve’s been monkeying around with the price of money like drunks tossing horseshoes in the rain for the last 96 years.

Once the price of money – which impacts every aspect of an economy – is fixed by a central planning bureaucracy, how can a free market still exist?

In our modest estimation…it can’t.

Wreaking Mischief on the Lives of Billions

What’s more, this government tinkering gives false signals to businesses and investors, which lead to distortions and misallocations of capital. 

One guy may borrow money to expand production of his granite mine in Italy to meet the fervent demand for placing large slabs of Italian granite on counter tops across America.  Little does he know the increased demand’s being driven by consumers extracting cash from their homes, whose value has been inflated by artificially low interest rates courtesy of the Federal Reserve.

Even the wizards on Wall Street took the bait and concluded that what goes up, must go up more.  In other words, they concluded house prices would go up forever.  So much so that they held their own toxic tranches of mortgage back securities on their books rather than pawning them off on unsuspecting pension funds halfway around the globe.

Now that the whole trembling edifice of it all’s come a tumbling down the government wants to give the Federal Reserve more power to wreak economic mischief on the lives of billions.  It would be madly comedic if it weren’t so tragically mad.

As an aside, following Tuesday’s issue one GDO enthusiast whom we deeply respect wrote…

“The Laffer Curve is simply not a theory.  It is a fact.  When tax rates are reduced tax revenues increase.”

We’ll take a moment to clarify that we weren’t disagreeing with the Laffer Curve; but rather were making the point that while revenues grew – as a result of lowering taxes – government spending grew even more.  In fact, government debt grew at twice the rate of GDP.

We’ll also add that we like tax cuts and lower taxes as much as the next guy…perhaps even more.  But we also like small government; not big government.  For this reason we find something perverse about advocating tax cuts as a means to grow the size of government. 

The smaller taxes smaller government proposal is what we’ll endorse should we ever see a major party candidate get nominated on this platform in a general election.  It may one day happen…but not likely in our lifetime.


M.N. Gordon
Great Depression Online

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