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Re: Madness: Bailing Out Greed in Wonderland
From: David Farber <dave () farber net>
Date: Tue, 23 Sep 2008 03:23:44 -0400

Begin forwarded message:

From: Russ Nelson <nelson () crynwr com>
Date: September 23, 2008 2:20:51 AM EDT
To: Frode Hegland <frode () hyperwords net>
Cc: "Bob Frankston" <Bob19-0501 () bobf frankston com>, Dave Farber <dave () farber net >, Vadim Antonov <avg () kotovnik com>
Subject: Re: [IP] Re:       Madness: Bailing Out Greed in Wonderland

Frode Hegland writes:
Ok, pop quizz: Which economy is doing better at the moment: the
socialist economy in China or the free-ish market in the US?

Huh?  Do you mean the free-ish market in China or the socialist
nationalization of banks and insurance companies in the US?

Get over it, the US century was nice. It's over.

There is a lot of ruin in a nation.  Here is the $20 Austrian
economist's version of what has happened, and what will happen:

When I say "only", "all" and "no", I am exaggerating for the sake of
understanding.  It's easier to understand how things work when you
take them to their limits.

Free markets respond to their version of planning: prices.  For this
to work, prices need to be accurate.  The supply of money needs to be
constant (no, Mr. Bernanke, not inflating at whatever you guess to be
the growth of the economy; constant).  Government needs to not frick
with things.  No policy-based taxation, quotas or tariffs.  No minimum
or maximum prices.  No bailouts of companies "too big to fail."  No
rules against monopolization.

If these rules are observed, then companies that make their customers
happy will succeed, and those that do not will fail.  When no company
makes their customers happy, customers will not spend money.  They
will save their money, instead.  This will drive down the cost of
money.  Companies will have more money available to them to create new
products that make customers happy.  Alternatively, when all companies
are making their customers happy, the cost of money will go up, and
only those customers making their customers happiest will be able to
afford new investment.

What happens when those rules are broken?  First, if you create new
money which has no value to buy with it, you have made the cost of
money go down temporarily.  This leads companies to invest in new
products, which they expect customers to be willing to buy with the
money they've saved ... only this new money didn't come from saving.
It was created from nothing.  It was a lie.

What has happened in the U.S. is that the Fed created new money
starting in 1997.  This led to the dot-com boom.  People spent money
to create businesses they thought would be huge hits.  They thought
there was lots of new money to build businesses and later buy the
products.  There wasn't.  Same thing in 2003.  It was very cheap to
borrow money and build houses.  The homebuilders did very well.
Unfortunately, they were building them for people who hadn't really
saved, and couldn't really afford them.

Every time the central bank creates a boom, it MUST be followed by a
bust.  The boom creates incorrect investments, and the bust consists
of revaluing those investments to their new, lower value.  Companies
go bankrupt and their assets are sold off.  Homeowners cannot pay
their mortgage and lose their house (which isn't such a bad deal for
them since they had no money down, were renters before and will be
renters again).

Government bail-outs interrupt this process by stopping the revaluing.
Only when the assets have been revalued, and sold off, will the
economy recover as those assets are applied to new productive
purposes.  Prices are information and communication; interfering with
them by applying arbitrary value is just another form of government
censorship.  It destroys market planning and substitutes central
government planning (and we all know how well THAT works).

Where did the Fed get the money from to do these failouts?  By
printing up new money.  This is EXACTLY the wrong thing to do.  It
will send the wrong signal to companies and individuals.  It will be
that much longer before assets get repriced.

Banning shorting of financial stocks is more censorship.  If you have
money, and think a stock is going to go down, and you short a stock,
you borrow somebody's stock and sell it.  That drives the price down,
which reduces other people's interest in shorting the stock.  It also
brings tomorrow's price into the present.  If you're wrong in your
guess, and the stock price goes up, you lose your money and cannot
make these bets again.  If you're right, and the stock goes down
further, you have done the market a service and you get rewarded for

Prices are speech.

--my blog is at http://blog.russnelson.com | Unregulation is a slippery Crynwr sells support for free software | PGPok | slope to prosperity and
521 Pleasant Valley Rd. | +1 315-323-1241       | freedom.
Potsdam, NY 13676-3213  |     Sheepdog          |

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