It’s Déjà Vu All Over Again

Ben Bernanke has apparently added a little stand-up comedy to his bag of tricks.  This past week, Chairman Bernanke indicated his belief that there are no “obvious” asset bubbles in our economy right now.  To quote Bankruptcy Ben, “It’s extraordinarily difficult to tell, but it’s not obvious to me … there are any large misalignments currently in the U.S. financial system.” 

What is he thinking?  The stock market is currently a huge bubble.  From October 2007 to March 2009, the Dow Jones Average fell by about 50 percent.  This is indicative of the fact that the previous market highs were out of whack for market conditions and needed to come down to reality.  That is how the free market works when it is given the opportunity.  Since last March, in just nine months, the Dow has rebounded off its low by an astounding fifty-three percent!  It’s a bubble being fueled by all the cheap dollars the Fed is injecting into the economy. 

If you don’t believe me, Mary Miller, director of fixed income for the T. Rowe Price Group indicated at the company’s symposium in Baltimore on Thursday, “I’m familiar with one institution that just borrowed $400 million – because they could – and then called up and said, ‘What should we do with it?”  That is what a lot of banks are doing with our money that has been given to them – not lending it but speculating once again in another Fed induced bubble.  It is outrageous.

What is even more outrageous is Bernanke saying essentially that the current stock market fueled by his printing press is not a bubble.  The economy is still in the dumper – I won’t bore or depress you further with all the numbers, but the stock market continues to climb to exorbitant highs.  Give me a break and come clean Mr. Chairman.

Bernanke is clearly being disingenuous because if he acknowledged the truth it would indict the system that he has made a very good living from.  The Federal Open Market Committee must be agonizing over whether to leave interest rates at essentially zero and continue to perpetuate the stock market bubble or raise rates and watch that bubble burst.  It is going to happen sooner or later – sooner would still be painful but less extreme.  Bernanke may not know it but the no win quandary he faces explains to a degree the Austrian School of Economics’ Business Cycle Theory.

Under the theory, business cycles, circular boom and bust periods, are not considered a natural phenomenon of free markets.  Instead, government interference in the economy, specifically through manipulating the money supply, is the culprit.  Booms are caused by artificially low interest rates and busts occur when the Fed decides to provide an “easy landing” for an overheated economy by raising rates.  In both cases, low rates and higher rates, fallible humans at the Fed decide the rate levels.  Thus, the market plays little if any part in the determination.  Having been taught in an American public school, I was cynical myself of this analysis.  After all, my Franklin Roosevelt loving social studies teachers taught me that capitalism has certain failures which we need the government to correct for us. 

However, by looking at historical data it is possible to see the correlation between low rates (the cause of booms) and higher rates (the pin that punctures the bubble) and booms and busts.  Because I have a day job, I only had time to analyze rates and recessions since 1971.  1971 is significant because that is the year Nixon opened the flood gates for the Fed’s printing presses by abolishing the last vestiges of the Gold Standard.  The following is the year of recession followed by the lowest rate during the preceding period, the highest rate during the preceding period, and the spread between low and high rates:

November ’73 – 5% – 11% – 6 points
January ’80 – 4.75% – 15.5% – 10.75 points
July ’81 – 15.5% – 20% – 4.5 points
July ’90 – 5.875% – 9.75% – 3.875 points
March ’01 – 3% – 6.5% – 3.5 points
December ’07- 1% – 5.25 – 4.25 points

Source:  www.chartoftheday.com
              http://www.newyorkfed.org/markets/statistics/dlyrates/fedrate.html

The most important observation that can be made from examining the data is there was a significant spread between the lowest rate and the highest rate before each recession.  These wide disparities in rates sent the wrong signals to investors and entrepreneurs.  In other words, because money and credit were in abundance during artificially low rate intervals entrepreneurs invested in ways that market forces would have prevented if the supply of money was realistic (market determined).  Thus, a misallocation of resources took place.  Too many products were produced; too many houses were built; too much money was invested in companies with little or no earnings.  All this happened because money was cheap and plentiful.  Remember folks borrowed millions and invested in dot com companies before many of them even went online.  Also, remember that right now we still have a glut of homes because Alan Greenspan kept rates near one percent for close to three years!  Of course it was the housing crisis that led to this current recession.

When the Fed pulls the rug out from under the artificially propped up economy by raising rates significantly, thereby increasing the cost of money, people stop borrowing and many lose their jobs because products and services are no longer being bought with borrowed money.  With higher interest rates, adjustable rate mortgages rise and homebuyers default on their debts.  Asset prices fall and unemployment rises due to further cutbacks in consumer spending.  The bubble is burst and recession sets in.

Now, recessions are unfortunate, but necessary like vomiting is essential during the flu – to rid the organism of bad material.  In the case of the economy, the bad material is all the mal-investments that were made during the boom. 

Of course, our economy was not given the chance to vomit the mal-investments made during the last boom.  Through so-called “stimulus” and the easy money policies of Bernanke’s Fed we are into our 24^th month of recession.  What’s more the reckless monetary policies of the Fed have blown up another bubble in the stock market. 

Which brings us back to the beginning of our article – Bernanke must be joking; there is a huge bubble in the stock market because there is no good reason for the extraordinary rise in stock prices given that consumers aren’t spending; commercial real estate is about to hit a crisis; and unemployment is still rising.  The only explanation is a bubble caused by artificially low interest rates.  In the words of Yogi Berra, “It’s déjà vu all over again.”  The bright side is perhaps Bernanke can find work as a stand-up comic after his tenure at the Fed is over.  He does get a good one off every now and then.

Hassan Attack Could Have Easily Been Avoided

The primary responsibility of government is to protect its citizens from internal and external threats.  Last week, that basic trust was shattered with the attack by Major Hassan on his comrades in arms at Fort Hood.  Many ask the question, “How could this tragedy happen?”  Easy, government, especially big ones, are inefficient, incompetent, and essentially answerable to no one.  Look at the record.  Washington has let us down on everything it has ever promised:  affordable healthcare for the elderly and poor, eradication of poverty, excellence in education, a money supply that guarantees stable prices, care for our veterans.  The list of federal government failures goes on and on.  Now, we have the Fort Hood tragedy.  Of course, they will spend millions on the investigation and no one will be held accountable because government works very differently than the real world.

What Americans should really be questioning is not how the federal government could allow a “terrorist” to infiltrate the ranks of our military and commit such a heinous act, instead Americans should ask the question of themselves:  how could we allow our government to put us in this position in the first place?  We need to question the actions of our government like never before and hopefully come to the reasonable conclusion that our government in Washington is more responsible for our vulnerability to terrorism than the terrorists.  Put another away, if we have any hope of living in relative safety Washington must change.

Let’s begin by setting the record straight: terrorists hate the United States not because we are free or capitalist, like the pundits and politicians would have us believe, but because the United States has done the Arab world wrong.  Qatar, my country of current residence, is an incredibly wealthy country because of its primarily free market economy which allows Qatari citizens to reap the benefits of oil, natural gas, and private ownership of the means of production.  Under the above logic, terrorists should be blowing up this place into small pieces.  They are not.  On the other hand, Qatar is also not involved in occupying any other country’s territory in the Middle East.  It is not responsible for propping up corrupt dictators because it serves its own interests.  Qatar is not trying to force its way of life and its system of government on anyone.  The Emir is fulfilling his solemn responsibility as leader of the country to keep his citizens safe from external attack.

On the other hand, Americans are “free” but their government in the last twenty years has occupied Middle East territory by invasion and the enforcement of a no-fly zone.  The U.S. government has propped up with financial and military aid corrupt dictators in Iraq (let’s not forget Saddam Hussein), Pakistan, Egypt, Afghanistan, and Saudi Arabia.  For God’s sakes Saudi Arabia still cuts off hands for stealing and stones women for adultery.  Washington is currently in the process of attempting to force our system of republicanism on two countries that have as much chance of success with it as we would have with monarchy.  In the process of our meddling, literally millions of Middle Easterners have been killed, tortured, imprisoned, and maimed.  All of this was done in the cause of our national interests.

And absent from all of the meddling mentioned above is our unflinching support of Israel to the detriment of the Palestinians.  We supported Israeli atrocities in Gaza directly with financial aid and indirectly with our no vote on the resolution condemning Israel at the United Nations.

These actions of our government are what make us less safe and more vulnerable to terrorist attack.  Now, I know that Qataris are fellow Muslims and therefore somewhat shielded from the wrath of their brethren.  But, what about free and capitalist countries like Luxembourg and Switzerland?  They are closer to the Middle East but significantly less vulnerable to attack.  No, the difference is that these countries mind their own business and consequently have not made the same enemies that we have.

We would not like it if NATO sent troops onto Texas soil to prevent illegal immigrants from entering the United States.  We would balk at the idea of moving Iowans off their farmland and offering it to any Israelis who would be interested in relocating.  We would not stand by idly while a coalition of Middle Eastern countries invaded the U.S. because they perceived our country as being a part of some “axis” of evil” antithetical to their national interests – set up a Green Zone in D.C. and force upon us a structure of government – say monarchy, that is so foreign to us it isn’t even funny.

The point is that we would respond to a call to arms if any of these scenarios had any possibility of happening.  So why are we surprised when others respond to a call to arms against the U.S. when we do these things to them?  Look in the mirror America.  We will not be truly safe until you do.

For good or bad, one man’s terrorist is another man’s freedom fighter.  The Irish Republican Army fought for years to free Northern Ireland from British control.  The minutemen fought a guerilla war for our independence.  Don’t we wish the Zimbabweans or Cubans or Venezuelans would rise up and overthrow their respective dictators?  There are two sides to every issue.  Our country is facing an onslaught of violence because of its government’s actions.

In 1802 Thomas Jefferson indicated to Rufus King his foreign policy goal, “We wish to cultivate peace and friendship with all nations, believing that course most conducive to the welfare of our own. It is natural that these friendships should bear some proportion to the common interests of the parties.”  We have strayed far from the wisdom of Jefferson.  Yes, Major Hassan’s act was despicable.  He should be brought to justice.  He should be executed if found guilty.  But, instead of strengthening our resolve to continue the fight against terrorism because of this incident like our politicians and military leaders are apt to do we must reconsider our countries actions toward others and hopefully prevent the next barbarous attack on our countrymen.

Congressman Watt – Charlatan or Economic Imbecile?

Congressman Mel Watt (D-NC) is either a charlatan or ignorant of basic economics.  Either way he is unfit to serve in Congress let alone serve as chairman of the Domestic Monetary Policy and Technology Subcommittee.  This week Congressman Ron Paul (R-TX) announced that Watt took the knife to his bill to audit the Federal Reserve – The Federal Reserve Transparency Act of 2009 (HR 1207).  According to Paul, Watt as chair of the above mentioned committee cut out “just about everything”  in preparing the bill for a full committee vote.

Specifically, Watt eliminated the provisions requiring audits of the Fed’s transactions with foreign banks, its deliberations on monetary policy, the activities of the Open Market Committee, and disclosure of communications between the Federal Reserve Board and reserve banks.  Essentially the bill has become a shell of its original self.  Paul, of course, does intend to attempt to restore the bill to its original form during Financial Services Committee deliberations, but that is not the point.  The point is why has Congressman Watt gutted a bill that has over 300 cosponsors in the House and the support of a large majority of Americans?

It could be because he is repaying the financial industry which has throughout his career in Congress contributed over $890,000 to his campaigns.  That would be only fair given how much they have helped him maintain power and the privileged perks of members of Congress – great healthcare, great salary, and a great pension plan.

But, what is funny and ironic is that the industry that is second in contributions to Watt is organized labor at $873,000.  Big banks and labor unions make strange bedfellows?  You would think their interests are so diametrically opposed that they would not be #1 and #2 in contributions to the same member of Congress.  Labor union support of Watt is also curious given that North Carolina is a Right to Work state and not nearly as unionized as the People’s Republics of Massachusetts and California.   But, not to worry, Congressman Watt has traditionally taken care of unions as well.  He has supported every “entitlement” program that comes down the pike in favor of their leadership.  The list has included minimum wage, the “right” under law to collective bargaining, so-called fair employment practices, social security, socialized medicine – the list goes on and on.

So, if the congressman is so busy serving big banks and labor unions, what has he done for the actual people who elect him every two years?  Well, very little.  You see by supporting the Federal Reserve and bailing out big banks through legislation he is supporting the perpetuation of inflation.  Our dollar has lost 95 percent of its value since the Fed was given control over it by Congress in 1913.  But, most folks don’t understand how the Fed imposes this hidden tax on them by debasing our currency causing prices to rise.  Instead Watt and his ilk blame capitalism for rising prices and offer socialized medicine, minimum wages, and other socialist schemes to combat the higher cost of living for families.  If they would just support sound money in the first place there would be no perceived need for these wasteful programs.

So this is where the charlatan or economic imbecile question comes into play.  Does Watt understand that his support for the banking cartel known as the Federal Reserve System is what actually causes hardship for labor and ordinary Americans in his district?  Does he realize that by gutting HR 1207 he will help to continue the debasement of our currency?  Has it clicked in his head that his support for or at the very least his blind eye toward the reckless monetary policy of the current Fed leadership will be responsible for the future hyperinflation we will experience.  Has he considered his own culpability in the coming collapse of the dollar which will usher in an era of even higher unemployment with a drastically reduced standard of living in America?

Given the bubble mentality around Washington, a reasonable person could conclude that Watt is both a charlatan and an economic imbecile.  He is an economic imbecile because he must believe that economic doom caused by Fed policies is not inevitable otherwise he would not support them in light of the fact that the collapse would also affect him negatively.  He certainly is a charlatan because like many members of Congress Watt has the best of both worlds.  Special interests of all stripes get federal goodies from him which personally cost him nothing.  In return those special interest groups guarantee his reelection every two years with huge cash contributions to his campaigns.  In the meantime, our national debt is grotesquely high, our manufacturing base continues to move overseas, our financial industry is bankrupt, and the dollar is on the brink of collapse.

This is the essence of our problems.  Too many charlatans and imbeciles have been in charge of Washington for far too long.  Unfortunately all good things must come to an end.  The federal gravy train that Congressman Watt and his comrades have built to continually get reelected is about to crash.  When it does they won’t understand it, but they should because it will be caused by the fraud they have perpetuated on America.