Written by The Daily Bell
ECONNED shows how the financial crisis is ultimately rooted in dubious economic theory. Its wide-ranging historical treatment starts with changes in methodology in the economics profession in the decade after World War II, leading to the rise of neoclassical economics and financial economics, which over time came to dominate policy thinking. These ideas were seized upon by conservative and corporate interests to promote deregulation starting in the 1970s, which included deregulation of financial services. But as ECONNED explains, financial markets operate differently than goods markets. Most importantly, they lack a propensity to self-correct. The result of deregulation of financial services was a rise in predatory behavior and looting, which unwittingly aided by overly accommodative Federal Reserve interest rate policies, produced the financial crisis. – Interview with Naked Capitalism founder
Dominant Social Theme: The problem with capitalism is that it is not regulated enough.
Free-Market Analysis: Naked Capitalism just picked up an article attacking DB as a "parody" of Austrian finance, so we thought we'd do a bit of research to find out why it posted the story. You can see our initial response here:Attorney Responds to the Daily Bell.
The founder of Naked Capitalism is Yves Smith, a pen name of Susan Webber, and she has written a book calledECONned. She gave an interview about the book (see above) in which she said that it was based (at least in part) on the idea that financial markets lack the propensity to "self correct."
She also said that the financial crisis was caused by financial deregulation and aided by "unwitting" Federal Reserve interest-rate polices. We don't think so. What we tend to believe after a century or so (actually closer to 500 years, collectively) of running central banking, those who seem to be in charge know EXACTLY what it does to the larger economy. No, we don't think it is unwitting at all.
Here's a question: If after 100 years, central banking officials don't understand the results of their policies, should they (the institution, anyway) be given power to run economies? And if they DO know what central banking does to an economy, aren't they being malicious (to say the least) in continuing to foist this system on everyone else? Central bankers would seem to be either ignorant or malicious. Either way, what are they doing with the power to run and ruin economies?
In fact, what central bankers do over and over is "fix" the price of money. They do so by regulating its volume and worth. Most recently, the Fed is said to have issued US$16 TRILLION into the marketplace to support an economic system that is dying.
They should have let it die quickly. Instead, people throughout the Western world are being tortured by the money supply. One tallies the cost in human despair: People lose jobs and houses, even commit suicide. Old people eat cat-food because of horribly low interest rates.
Meanwhile, the powers-that-be launch war after war to protect this dysfunctional system by distracting people's attention and further militarizing what is left of Western economies. Depleted uranium has killed or sickened millions overseas; still bombs drop and the poison drifts down from the sky in a gentle, endless, agonizing rain.
The modern money system is apparently the flip side of the modern economic system. It doesn't have to be this way, though. The only arbiter of money, in truth, is the marketplace, which regulates the creation of money naturally through supply and demand – usually through the circulation of gold and silver. Too much and the price goes down and less supply becomes available. Too little and the price goes up and more supply becomes available.
It is a simple fact that price-fixing doesn't work. Doesn't. Can't. Ever. So ... here is another question for pro-central banking advocates (or even those who merely think the system is unwitting): How much is too much? Alan Greenspan himself admitted early in his tenure that he couldn't find a way of accurately measuring how much money an economy needed – except in hindsight (when it's too late).
As Austrian economics points out correctly, the overprinting of money, which central banks (and especially the Fed) do constantly, swells the economy with overconfidence and currency. This is inevitably dangerous.
Eventually, when the markets reveal the mass of promotions to be unworkable, there is a crash and people's investments lose value. If the crash is deep enough, people lose much of what they worked for. Usually, central bankers do not. Meanwhile, remaining industry is further consolidated by the powers-that-be with additional central bank-printed capital!
One more thing. As a side effect, the powers-that-be use major downturns to pass more government regulation. Since the elites control governments behind the scenes via mercantilism, the central banking cycle is inordinately profitable. It consolidates both industry and government control in their hands.
Still another point: Much fraud in financial markets is CAUSED by the overprinting of money. Such euphorias make people over-confident and greedy. It makes them easily suggestible. They participate in investments they never would involve themselves in during a less euphoric time. This is why we disagree about Naked Capitalism's approach to the markets (if we understand it properly).
A free and fully deregulated market absent central banking and other distortions would likely be self-corrective; the Invisible Hand would work. But that's not what we have. Central bankers didn't "unwittingly" cause the current economic crisis. The system is SET UP to cause it.
Over the years, central banks consistently attempt a "soft landing," thus perpetuating one side of the larger business cycle. It is like a balloon that is puffed up until it bursts and a depression ensues.
During such times, nobody knows what to invest in anymore. It is not clear what companies are viable, given the incessant money stimulation and central banks' propensity to puff up their own distribution system of commercial banks and other huge industrial elements. Sound familiar?
Go to any city center and you'll see dozens of gleaming bank headquarters. The world is overbanked; Banking is the last big bubble, though no one ever writes about it.
The central bank itself is the fount and fundament of the problem. If one de-emphasizes its role (or even claims its manipulations are merely unwitting), one cannot correctly analyze larger issues, in our view.
And now we have our answer as to why the site posted the story referred to above. It is twofold. First, the Daily Bell is a proponent of the laissez faire (unregulated) marketplace; second, because one of its principals once had SECtroubles. Thus, the article fits within this larger meme – that "naked capitalism" on its own is dangerous and needs to be regulated. And those who are proponents of the Invisible Hand (versus big government regulation) are inevitably crooks.
In fact, we don't think a rational case can be made for regulation any more than a rational case can be made for the money-fixing of central banking. Is regulation ever REALLY effective? The 1930's convulsive change in the financial industry produced the SEC, the NASD, the NYSE (as a self-regulatory organization), Glass-Steagall and basically introduced the idea that Wall Street itself needed federal oversight.
But here we are, with worse problems than ever. Now we are being told we need still MORE regulation. Regulation and laws generally are a price fix just the way money printing by central banks are a price fix. One can argue that laws and regulations are NECESSARY but one cannot argue that they do not distort the larger marketplace.
Here is just one example of how counterproductive regulation can be. In researching a book on Wall Street (for about five years) one DB-associated writer discovered that the NYSE's former floor-based specialist system has a much different history than is ordinarily related. As even the Economist magazine pointed out a number of years ago, the specialist system was the result of one floor broker breaking his leg and standing in one place. Eventually, he began to specialize in a single stock. And thus the specialist system was born. Untrue.
In fact, from what we can tell, the real reason for the specialist system was because the NYSE was consolidating and buying up other exchanges in the 1800s. One exchange it couldn't buy was the one run by the "Uptown Boys" that were doing continuous trading when the NYSE brokers were still involved in auctions.
Eventually a deal was struck. The Uptown Boys agreed to come downtown if they could have stock franchises and the NYSE began continuous trading,which was more lucrative for brokers. And that's what happened. The specialist system was apparently born out of a business merger.
One cannot fully appreciate the ludicrousness of this unless one studies the subject. In the 20th century millions of words were written about the specialist system. Theses were written; degrees were handed out. The SEC debated the issue endless, especially after the 1987 Crash. And yet, the system was NEVER intended to protect investors from stock crashes, nor could it. A single specialist couldn't prop up his stock during a panic. He didn't have the capital to do so. No one did.
But nonetheless, the specialist system became an entrenched investor protection. The mainstream media reported on it solemnly and the NYSE honchos were very happy because their business compromise had been blessed by the regulatory authorities and turned into a market necessity. This is often how regulation seems to work. It facilitates regulatory capture. It blesses self-interest with the force of law.
Modern, centralized Wall Street is the RESULT of regulatory forces. The abuses in large part are the RESULT of regulatory price fixing and central bank money manipulation. It's fairly indisputable, in our view.
Why does this system persist and prosper? Well, as we have pointed out, it feeds on itself. Also because there are powerful interests that want it to. It's unfortunate, but after a combined half-century or so studying the way the modern financial industry works, we've concluded that there is a power elite interested in creating one-world government, one that needs to promote regulatory rule in order to create global dominance.
This is no joke. This elite that runs out of the City of London and elsewhere, doesn't just want to create world government; it actively wants to suppress the burgeoning human population – and the implication is that it wants to do so violently if necessary.
One simply needs to search the Internet for Georgia Guidestones to see what may be in store. Or read the writings of the Club of Rome and see who is associated with THAT.
It is unfortunately a basic dominant social theme, and an effective one: We need government to ensure that capitalism doesn't get out of hand. Government must be seen as the arbiter of fairness and a proponent of justice for the little guy. In fact, the calculation is much more basic: No government, no new world order.
Conclusion: We perceive an increasing number of websites that pretend to be laissez faire or pro-free market but are actually supporting the meme that free markets work best when they are under the supervision of an extensive (and growing) regulatory regime. Unfortunately, they never really attack the cause of the problem, which is money printing. This would seem to be an evolving dominant social theme of the elites as they ready their next attack on what's left of the free market, especially its financial entities.
© Copyright 2008 - 2011 All Rights Reserved. The Daily Bell is an informative compendium of independent economic views and analysis, which is published by The Foundation for the Advancement of Free-Market Thinking (FAFMT).