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    Default Wild West Capitalism

    Wild West Capitalism

    The very title of this forum invites us to spend weeks here, for we can deconstruct just about every aspect of what passes for economics in the mainstream media. The whole Keynesian-Phillips-Curve-NAIRU paradigm is junk economics … after all that’s what has been practiced for decades and look where it has gotten us. But time being a finite resource, it suffices for now to take on that facet that is most visible in current events: the well-worn truism that our problems are the result of a sort of wild west capitalism, unrestrained by insufficient regulation, and that more government involvement is what is needed to cure what ails our financial system.

    This line of big-government PR can only be willingly swallowed in the context of ignorance about how things have worked. If Wall Street has unduly prospered, it is not because the sheriff has been out of town, but because he has been on the job stacking the deck in its favor.

    Let’s take a quick compare of a couple industries. Tech and finance. Which one has the most federal involvement? Which one is most scandal-ridden? The answer is obvious to the point of needing not be stated. Except possibly for one point; the conventional image that finance has had too little federal involvement.

    Has it really? Where exactly have the biggest, most threatening and most damaging developments occurred? We recall that the first early warnings showed up in the mortgage market, then spread to encompass almost every corner of finance in the world. Right at the intersection of Housing Street and Credit Avenue. What areas of finance and the economy have had the most powerful and pervasive federal involvement? Hint: Fannie Mae, Freddie Mac, and the Federal Reserve. The very raison d’etre for Fannie and Freddie (Feddie for short) was to stimulate housing finance. Guess you could say mission accomplished. It got stimulated right into oblivion. But we’re saving the best for last here, because the Really Big Kahuna is the Federal Reserve. It is, quite simply, the single most powerful agency of central planning in history. We could formulate its mission in several different ways, but one of them is surely to stimulate the growth of credit. Its central modus operandi is to engage in price-fixing in the credit markets. In the course of pursuing this, it issues what has become the world’s reserve currency, and through its operations controls the supply thereof. That control, over the past two or three decades, has virtually uniformly been biased in the direction of keeping the price of credit (interest rates) lower than it would otherwise have been. In this way, it has competed with savers, making saving unattractive, and glutted borrowers with all the credit they could handle. And then some more. The result has been that the US has gone from being the world’s biggest creditor nation to its biggest debtor, its trade deficits blown out, and its own productive enterprise fast becoming a second rate player on the world stage as it ultimately pays for its excess consumption (which the Fed openly endeavors to "stimulate") by disgorging its capital wealth at an alarming rate. This has always been an unsustainable model; as iTulip has pointed out for years, the only question was when it would start to collapse.

    Okay, Finster, so what’s this have to do with greed and corruption on Wall Street? Glad you asked. Feddie didn’t make loans directly to homebuyers. The Fed doesn’t lend directly to consumers. They need middle men to ply their trade. The detailed alchemy is quite complex, but in essence the Fed, for example, lends money - most recently at about zero interest rate - to banks and other financial intermediaries, who in turn lend it to businesses and consumers at rates several percent higher. This is how it creates money and credit. Picture this, hundreds of billions - even trillions - of dollars coursing through the hands of these intermediaries at huge net markups. And you don’t think a few pigs might show up at the trough? Nice work if you can get it.

    With me so far? The picture should be by now starting to snap into focus. To implement its policies, the Feds needed a vast financial web to distribute all the new money and credit they wanted to create. This is important, so I will say it again. The Feds needed that vast money-distribution machine to ply their trade. Want to know why regulators failed to stop it?

    This is what the government was trying to do!

    So please pardon us if we appear to be a bit skeptical of the load of propaganda now being propagated by the power elite. It is like the fire department that sets a huge blaze behind the curtain, rushes out with its hoses, and then takes center stage to claim credit for putting out the fire, asking for more money and power so it can do the job more thoroughly going forward. There is something rotten with this picture, but it sure is not the free market running wild for lack of government involvement here. Wild West Capitalism indeed!
    Last edited by Finster; 04-23-10 at 02:09 PM.
    Finster
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