FOCUSING BEST THINKING
Economic and Philosophical Analyses Require Facts
By Wayne Jett © August 29, 2009
The depth of current crisis evokes guidance from close observers of economic and cultural issues. Two of the best thinkers in these fields are Gary North in the former and Victor Davis Hanson in the latter. Yet their recent efforts (North on monetary policy and Hanson on fiscal policy) fall short by missing salient and pivotal facts.
North is of the Austrian school of economics, meaning he is not Keynesian and he emphasizes close attention to practices of central banks and commercial banks. In recent commentary, he begins by focusing upon the truly dire concerns raised by sharp expansion of federal debt and by the Federal Reserve increasing the monetary base out of all proportion to historical norms, from about $850 billion to above $2 trillion.
North proceeds to assess bank conduct in handling the deluge of new money spent by the Fed, noting that while broad measure of money (M-1) has “taken off like a skyrocket” the “money multiplier” effect of bank lending has “fallen like a stone.” He explains bank refusal to lend to private customers partly by the Fed’s entirely new practice of paying interest on reserves, and notes this still leaves banks in a money-losing, unprofitable stance.
North concludes that banks’ “terror is extreme” that deflation will destroy private borrowers’ ability to repay loans, so they refuse to take the risk of private lending. So long as this remains the case, he says, “this economy will continue to decline.” North is correct in this last deduction, but is wrong in thinking the banks fear deflation.
Source of Bank Terror
Banks fear financial fraud aided by crony mercantilist government power. They watched it destroy investment banking giant Bear Stearns within a week in March, 2008, as Treasury secretary Henry Paulson stood at the helm of the gunboat with New York Fed president Tim Geithner at his side. In May, 2008, banks watched a U. S. Senator (Charles Schumer, D-NY) incite a public “run” on IndyMac, producing the largest FDIC failure ever, after naked short selling battered its share price and private equity funds waited to feast on the carcass.
Fannie Mae and Freddie Mac, the two giant government-sponsored-enterprise owners of home mortgages, fell to government takeover designed by Paulson in September, wiping out private investors in their once-conservative securities widely owned by mutual funds. Again, the hallmark of Fannie and Freddie’s demise was the flood of phantom, counterfeit shares (hundreds of millions of fake shares per day) diluting the corporate share prices. In July and August, the SEC actually issued an emergency order barring naked short selling of Fannie and Freddie, but the order expired without further SEC action. Paulson moved against Fannie and Freddie within days after a respected analyst of Lehman Bros. announced both entities had adequate capital and cash flow.
As soon as Fannie and Freddie were taken on a Sunday, as Bear Stearns was taken before them, Lehman Bros. came under the same merciless assault of naked short selling. As was true with Bear, Fannie and Freddie, the assault on Lehman was aided by the “Madoff exemption” granted by the SEC, which allowed market makers in options and derivatives to sell shares short without delivering them for indeterminate periods.
Having offended Paulson so recently by publicly reporting stronger financial positions of Fannie and Freddie, Lehman got no mercy from Treasury, no access to funds from the Fed and, of course, no help from the SEC. Lehman’s battered share price gave other firms reason to move away, and Lehman was finished – forced into bankruptcy – its shareholders wiped out.
In rapid succession, similar attacks targeted AIG, Merrill Lynch, Washington Mutual, Wachovia Bank, National City Bank (Cleveland) and others. Government crony favoritism was clearly apparent as National City was denied aid by Treasury and by the Fed, while PNC (Pennsylvania’s largest bank) was provided more funds than National City needed, so PNC could buy National City (Ohio’s largest bank) shortly before the November federal elections.
What bank would not be terrorized by such heavy-handed government intrusion into private financial affairs? Nothing defined a bank’s survivability so much as political connections with those favored by Paulson and Wall Street kingmaker Goldman Sachs. A bank whose leadership did not recognize perils for its shareholders in such events was not destined for long life. Banks seeing the perils would immediately husband all capital, calling loans and shuttering new lending.
Yet economist North does not mention this source of bank terror. He thinks banks fear “Deflationary Falls,” and so reasons that these fears will be alleviated only by more Fed stimulus. Having misread the fear, he mistakes the solution. He is right that the Fed and Treasury have already over-stimulated and more will only make inflation worse. If he saw the mercantilist cronyism inflaming the banking sector, undoubtedly he could prescribe actions necessary to address it so banks could safely resume lending.
What Drives Monstrous Public Debt?
Professor Hanson commits a similar factual oversight in analyzing motives of the Obama administration in its seemingly irrational acts in borrowing and spending not just wastefully but at astonishingly high levels. The motive of such profligate spending, Hanson argues, is not economic stimulus, or entitlements, or even graft or corruption, but rather to create monstrous public debt so as to guarantee much higher U. S. tax rates indefinitely. This crucial point – described here as “debt of a scale capable of nothing other than plunging the U. S. into third world debtor status [and] high-tax regimes from which populations never recover" – deserves much wider attention, which Hanson’s effort will boost.
The factual oversight comes in Professor Hanson’s effort to explain why U. S. political leadership is motivated to burden future generations of Americans with high public debt and crippling tax rates certain to impoverish them. He says Obama’s people see such high taxes as “a public good” which can “spread the wealth” from “lucky,” overly ambitious, socially desirable, “quasi-criminal” rich people to the unlucky and unjustly treated poor.
But the poor and unlucky have never been in power in this country, and neither have their benefactors. Barack Obama, though radical he sometimes sounds, and although he received votes from some poor and unlucky Americans, was not put in power by them. Wall Street’s “inner elite” (think George Soros, the Rockefeller interests, and numerous other big players), working through MoveOn.org and the Kennedy and Chicago political machines, put Obama in the Oval Office.
This is entirely consistent with U. S. historical experience. Franklin Roosevelt wrote to Wall Street’s top lobbyist in 1933, Col. E. M. House, the “truth” that Wall Street interests had “owned” every U. S. administration since Andrew Jackson left office in 1836. The “truth” for Americans has been even more dismal since 1933, with partial exceptions under Truman, Reagan and (until July, 2006) George W. Bush. Surely no one mistakes Henry Paulson, pressed upon Bush as Treasury secretary and "economic czar" by Senator Schumer and other Goldman Sachs functionaries, as calling the shots of 2008 as benefactor of the poor and unlucky. Obama's Geithner is simply continuing the game plan Paulson brought to Washington on behalf of Wall Street.
America’s inner elite are not “statists” and neither are the poor and “unlucky,” so Hanson is importantly off the mark in pointing to statism as the motive behind the nightmarish run-up in public debt. Obama’s supporters surely include some whose thinking may be called statist, and Obama himself may have such tendencies. But neither Obama nor his rank-and-file supporters are setting the agenda objective to create such gargantuan public debt so quickly as to impoverish and enslave all future generations of the current middle class. The inner elite set this agenda, and their motives in doing so have been explained. Very high marginal tax rates destroy the upper middle class, which is the only competitive threat to the inner elite’s hold on political and financial power.
Cap-and-trade takeover of all energy sources and uses would be an equally powerful weapon of the inner elite against middle class prosperity.
Likewise, statism is not the moving force behind the federal drive to take over health care in the U. S. through enactment of HR 2454. American elitists, particularly the inner elite, are highly motivated towards control of population growth. This was true a century ago when H. G. Wells preached eugenics and other theories to Manhattan and the Eastern Establishment, and it is all the more true today, as Justice Ruth Bader Ginsburg recently gave testimony.
Getting these two vital points straight – why banks are afraid to lend, and why Obama-Pelosi-Reid seek to create mindless amounts of public debt – is essential if effective opposition and remedies are to be achieved. Wall Street’s inner elite – the mega-billionaires who capture and dominate public officials and agencies – are the culprits behind financial fraud which froze credit markets and collapsed the global economy. The same inner elite propel cap-and-trade and healthcare power-grabs to impoverish and eliminate the middle class. They must be stopped. ~
