Federal Government Takes Desperate Measures to Save Itself

Welcome aboard, dylan! Good for you for being a Green. I used to be a Democrat until 2007. Then I decided to vote for Dr. Paul as a Republican. I'm in the process of changing my party affiliation. I respect and tolerate everybody and their beliefs. Hope you find out that this place has a heart the size of a ship, no matter if you're a Republican, Democrat, Independent, Green, Libertarian, Constitutionalist, etc.

First, we must look at several factors involved in the regulatory system of this government and how the application of those regulations perpetuates market distortion and the lack of responsibility. It is also necessary to understand that under the massive government regulatory processes there is a very weighed favorability toward certain behaviors and corporate sectors, which are politically connected. There is a huge difference in this type of regulatory system and having laws against corruption.

As Dr. Paul has said about the system, there have been mountains of regulatory oversight in this economy, but it is regulation that is weighted by corruption and political favoritism.

The sub-prime fiasco, for instance, was a direct result of monetary polices from the Federal Reserve, and the government regulatory agencies that foster such policies. Politicians love economic expansion and under the FED, economic expansion is brought about by loose credit. Many of these regulatory agencies actually promoted such creative "loans" as option arms, NINAs[no income, no asset verification, SISAs[stated income, stated asset verification], 3/1, 5/1, 7/1 and 10/1 arm, LIBOR-fully amortized, Interest Only, 7-year balloons, 100%, 125% loans. FreddieMac, FannieMae, both of which operate under Congressional and regulatory oversight also offered these loans, both prime and sub-prime.

This is not the first time we have gone through this folks and it has been building up for decades ready to erupt into an economic disaster. The calls for more oversight also occurred before, that oversight was provided with a mass of new regulations, so the problem are not oversight or regulations, but monetary policy and political ambitions which seem to always conflict with the public interest.

One source was the 1977 Community Reinvestment Act, which mandates that all lenders must be evaluated and scored if they meet all the perceived credit needs within the entire community. This one act enforced the promotion of certain loan products specifically designed and originated to those who would not normally meet credit-underwriting qualifications. This opens the door to all types of loan products that were “easy”. In 1995, under the Clinton Administration, strengthened the CRA of 1977, to the extent that financial regulators would give special attention to those lending institutions performances. In addition, the Clinton Administration made revisions in the Act to increase, substantially increase the amount of such loans given to small-businesses and low to moderate-income borrowers at high-risk. Now, within these very specific revisions there was an allowance of all CRA sub-prime loans to be publicly securitized starting in 1977.

Additionally, FannieMae was given the responsibility to the government to issue a report on those lenders who preformed an outstanding job implemented the CRA. FannieMae presented the report to the cheers of regulators, citing the most successful lender with the most flexible underwriting criteria permitted by the government was none other then CountryWide.

Government, by their flurry of “egalitarian” regulations, forced banks and lenders into giving loans to extremely high-risk clients that they would not normally extend. Government regulations also encouraged other elements that would have never been allowed under rational lending practices. For instance, the certain regulations, I can provide them if you like, encouraged the packaging and pooling of these high-risk loans to be sold as securities, normally such loans have recourse and are shelved by the lender instead of sold on the mortgage securities market. The dribble of regulatory missteps goes on and on, but it stems from the government insisting on and pressuring lenders to accept borrowers and qualify them when they would not normally meet the criteria for such mortgages. In other words, lenders were pressured to loan to people not based upon the criteria of credit and underwriting standards, but on a particular political agenda.

If you look at every single instance where the economy has boomed and then went into a bust phase, you will find that the policies of the Federal Reserve have had a direct impact on both cycles. In the period of "easy money" the Fed, through these very policies, loosen credit standards in order to stimulate the economy, as does regulatory agencies. These agencies, along with the Fed, have risk models that they determine what such policies should consist of and how they are implemented. During "recessionary" periods the Fed seeks to infuse as much credit into the economy as possible, it does this through various little tricks, including interest rate manipulation. This promotes the expansion of credit in the market, as such, the Fed oversees such credit expansions. The Board of Governors has a broad range of supervisory and regulatory responsibilities that affect the entire U.S. banking system.

The board is suppose to promote safety and soundness, ensure compliance with laws and regulation, and fosters the fair and efficient delivery of services to customers of financial institutions. Federal Reserve Board regulations implement policies set by Congress that are defined in legislation and referred to the Federal Reserve for enforcement. For example, the Fed has implementation and enforcement responsibilities for the Truth in Lending Act, the Electronic Funds Transfer Act, and the Fair Housing Act. The board coordinates its activities with other federal and state regulatory agencies. The board has the power to examine all member banks and their affiliates and to require periodic reports from them. So, the Fed has a far-reaching arm of regulatory compliance enforcement, what were they doing during the last 5 or 6 years?

Now, here we have some of the most regulated industries in this country, the mortgage industry and the Securities industry, and yet we have this sub-prime/insurance/investment fiasco, which is only symptomatic of a much broader foundational problem in this fiat economic system.

The "invisible hand" of self-regulating economies tends to punish the misdeeds of business rapidly, and likewise it rewards proper actions and decisions. Under a free-market, business have a true rate of interest in which to perform their businesses instead of a manipulated one where future rates cannot be relied upon due to the nature of the FED meddling. Since real interest rates are based upon time values, the businessman or businesswoman can accurately determine not only the time value of their inventories, but also real rates of return on their capital investments. At present, that is all but impossible.

The problems with government regulatory agencies and the Fed, is that they depend much more on statistics, massive statistics and statisticians who do little but read these statistics without realizing that there is no neutrality in reality like there are in those statistics. People, who make up the economy through their actions, are not neutral with respect to their economic environment. People, unlike statistics, actually base economic decisions based upon certain values that they prefer. People have goals, wants, desires, hopes, aspirations, and fears, etc. that drive their financial decisions, these make up the economy and are based upon a myriad of values. While the government is all about statistics, the reality is that economics is much more than mere statistics isolated outside of the real world, it is the science of human action, and that action rest in some very deep-seated and fundamental principles of human behavior. This government bases its economy and the regulations it attempts to impose upon it only on numerical quantities and ignores the larger, more influential qualitative functions of human action.

The government is quick to provide a regulatory agency with “police powers”, but as experience proves, such powers do not mean that there is a solution at the end of the government’s induced rainbow of regulatory bliss. Take monopolistic corporations, such corporations could not enjoy monopoly characteristics without government privileges of some type. Normally, that is to say, in a free-market, corporations would be thrown to the consumer wolves and their fate would be determined by the actual competitive edge in service, price, and quality delivered to the consumer. Yes, in free-markets there is no government bailout, businesses must depend on good practices, not only to stay competitive, but also to be successful, otherwise they fail. Oh the horror, to imagine that companies would be allowed to fail, especially large corporations, but in a free-market it is not only possible but necessary if there is a level state of commerce that actually benefits both the economy and the people of the country through commercial practices that result from voluntary choices of both buyer and sellers, all in open competition.

For decades, this government has been in the “wealth” redistribution business, which, they assumed, would bring about a more “equitable” society, but the only thing that can accomplish that is actual wealth creation and the government cannot accomplish that feat, only free-market enterprise with full property rights can accomplish that. At one time, our money was considered our property, a person worked and was compensated for that labor with money that was a unit of value that could consistently be counted and relied on more times than not. The illusion is that money is wealth when it is not; even the government promotes this illusion to a large degree. While it is true that the government can transfer the wealth of one group of people to another, this accomplishes nothing but momentary satisfaction and relief, but it does little to raise the actual living standards of the people who need it the most.

Living standards depend on creating wealth through enterprise, through manufacturing, through trade and creativity. Redistributing money does nothing but increase the availability of goods and services those trapped in poverty. It simply transfers buying power from one person to another. This is a sensitive point, so bear with me, when the government takes taxes from one person and then redistributes that money to another person with the idea of equalizing wealth, they are really just taking more productive long-term goods and services from one group to give to another which must meet immediate needs with the funds the government provides. Of course, the government, and socialists don’t see it that way, they don’t realize that by taxing the fruits of working laborers actually discourages thrift, work and future productivity which increases the possibility of job creation, while subsidizing idleness only increases it.

The key is not found in either the Republican or the Democratic Parties; they are pretty much in the same boat, but using different paddles to get to the same place. The most efficient resource in this country is private ownership of productive resources that can be used to create job opportunities and a far more abundant living standard for those trapped in the government induced cycle of poverty. There have been so many people who have been dispossessed, in some cases driven, in the name of slum clearance and urban development, from their modest homes, which they could afford into public housing projects. On top of that they must then pay much higher grocery bills because our Congress passed and funded a massive $300 Billion Dollar Farm bill, with borrowed inflationary money, that subsidizes farmers, some of whom are wealthy.

I know that for a fact, a neighbor of mine owns about 13,000 acres, and is a multi-millionaire, yet he gets a hefty little check, well over 6 figures, from the government each and every year to subsidize his little farm. The poor are prime targets for the warmongers too; the recruiters hit them with fairy tales of excitement and adventure, including money for college. The lower one third and the middle class are asked to pay for government protection of corporations and industry in the form of tariffs, quotas, embargoes and other price-hiking policies created by some bureaucrat who is connected or influenced by some corporate special interest lobbyist. The poor in this country have been reduced to slaves of handouts and subsidies with guaranteed subsistence complete with its own shackles. The poor are completely stripped of their self-respect, their concept of self-responsibility has been torn from them to the point that they may no longer respect their lives or the lives and property of others. The politicians have promised the poor of our country so much and delivered little more than policies that maintained and promote poverty. It sickens me!

The only thing that can raise the level of poverty into prosperity in this country is good ole fashioned free-market enterprise, but that depends on a sound monetary system with a very restricted efficient government where power is decentralized and held in check, where corruption is actually eradicated and the politicians once again realize that they serve at the people’s pleasure and with their consent.

It is not that there are no risks involved however, when the government has the habit of bail-out after bail-out, it only goes to reason that there is that effect on larger financial institutions, especially those who are “too big to allow to fail” that the government or the Fed will come to the rescue. In a free-market, the government has no favors to impart or offer and no arbitrary penalties to impose. This does not preclude legal offenses of course, criminal activities are still criminal even in a free-market and would probably be punished with much harsher penalties then such activities now receive.

There was an article on Bloomberg not too long ago: “The correct number of banks to fail when a credit bubble bursts is not zero. If the best way to avoid the miss-pricing of risk in future is to sacrifice some of the less-prudent lenders on the altar of liquidity, then let the culling commence. That is especially the case if it erases the perception that central banks will always act as lenders of last resort, even to institutions that don't deserve to survive. ``The provision of such liquidity support undermines the efficient pricing of risk by providing ex post insurance for risky behavior, that encourages excessive risk-taking, and sows the seeds of a future financial crisis. This assist commercial banks salvage their ``risky or reckless lending'' is especially dangerous because it ``encourages the view that as long as a bank takes the same sort of risks that other banks are taking then it is more likely that their liquidity problems will be insured ex post by the central bank.' Banking is essentially a confidence trick.

Depositors have to be confident they can draw freely from their accounts. Retailers have to be confident swiping a rectangle of plastic in exchange for goods and services will produce a balance transfer in their favor. And the banks themselves have to be confident they and their peers have sufficient assets to meet their liabilities.

For now, that confidence has evaporated as hedge funds and structured investment vehicles and conduits -- spawned while the credit-market party was hopping -- come knocking at the door for handouts because the music has stopped. And thus, the banking community wants the central banks to soothe its hangover and refill the punchbowl by cutting official interest rates.”

The truth of the matter is that “Monopolists” and their “Political Pigs” tremble at the thought of a free-market because it would inhibit them from creating a false economy where they are the first at the trough. Eventually, people will begin to notice that the monetary policy of the FED is, to a very large extent, the cause of the very problems it is supposed to solve. Sooner or later, we will wise up.

This was proposed by the Bush Administration early in this decade, the intentions were good, at least I hope they were:

“Through America’s Homeownership Challenge, more than 2 dozen companies have made commitments to increase minority homeownership, including pledges to provide more than $1.1 trillion in mortgage purchases for minority homebuyers this decade.

The Bush Administration has begun the final stage of its effort to reduce closing costs, simplify the settlement paperwork, and eliminate surprise-closing costs for American homebuyers by reforming the rules governing the Real Estate Settlement Procedures Act.

According to an analysis released in 2002 by HUD, meeting the President’s goal to close the housing gap will involve $256 billion in economic activity in the form of construction and remodeling jobs, spending on household goods, and other benefits. Because of rising home values, Americans are enjoying more than $2.5 trillion of greater housing wealth than they did at the beginning of 2001.”

http://www.whitehouse.gov

Now from an editorial by Professor Stan Liebowitz:

http://newmarksdoor.typep...

“PERHAPS the greatest scandal of the mortgage crisis is that it is a direct result of an intentional loosening of underwriting standards - done in the name of ending discrimination, despite warnings that it could lead to wide-scale defaults.

At the crisis' core are loans that were made with virtually nonexistent underwriting standards - no verification of income or assets; little consideration of the applicant's ability to make payments; no down payment.

Most people instinctively understand that such loans are likely to be unsound. But how did the heavily regulated banking industry end up able to engage in such foolishness?

From the current hand-wringing, you'd think that the banks came up with the idea of looser underwriting standards on their own, with regulators just asleep on the job. In fact, it was the regulators who relaxed these standards - at the behest of community groups and "progressive" political forces.

In the 1980s, groups such as the activists at ACORN began pushing charges of "redlining" - claims that banks discriminated against minorities in mortgage lending. In 1989, sympathetic members of Congress got the Home Mortgage Disclosure Act amended to force banks to collect racial data on mortgage applicants; this allowed various studies to be ginned up that seemed to validate the original accusation.

In fact, minority mortgage applications were rejected more frequently than other applications - but the overwhelming reason wasn't racial discrimination, but simply that minorities tend to have weaker finances.

Yet a "landmark" 1992 study from the Boston Fed concluded that mortgage-lending discrimination was systemic.

That study was tremendously flawed - a colleague and I later showed that the data it had used contained thousands of egregious typos, such as loans with negative interest rates. Our study found no evidence of discrimination.

Yet the political agenda triumphed - with the president of the Boston Fed saying no new studies were needed, and the US comptroller of the currency seconding the motion.

No sooner had the ink dried on its discrimination study than the Boston Fed, clearly speaking for the entire Fed, produced a manual for mortgage lenders stating that: "discrimination may be observed when a lender's underwriting policies contain arbitrary or outdated criteria that effectively disqualify many urban or lower-income minority applicants."

Some of these "outdated" criteria included the size of the mortgage payment relative to income, credit history, savings history and income verification. Instead, the Boston Fed ruled that participation in a credit-counseling program should be taken as evidence of an applicant's ability to manage debt.”

http://www.investors.com/...

“"Five years ago, he [Bush] pushed for increasing homeownership in America with programs for zero-down payment and loan programs targeting low-income borrowers," writes Richard Lawson.
"It brought abuse, fed subprime lending and drew people in over their heads. The Democrats in Congress went along with the populist plan. So it all catches up. The housing market tanks, somehow to everyone's shock, and ripples through to cause many pain."

Ascribe it to the Bush Derangement Syndrome. How else could Bush, who actively promoted an increase in homeownership from his early days in office and who in December 2003 signed into law the American Dream Down payment Initiative, be the devil in details?

Black homeownership rose from 42.3% in 1994, the middle of Bill Clinton's first term, to 49.1% in 2004, the middle of Bush's. This all-time high came a year after he signed legislation authorizing up to $200 million annually through fiscal 2007 to help first-time homebuyers with down payments and closing costs.

This is how he established financial apartheid?

Once again, we have a situation in which those who profess to be the patrons of the poor are the very people who keep the downtrodden down.”

Under the CRA regulations and the manner in which those regulations are executed, especially during the last 8 years, that there has been substantial pressure on lenders, under the CRA regs, to relax underwriting requirements. In many metropolitan areas, zip codes were flagged as “hot” meaning that a certain amount of loans were expected to be originated in those particular zip codes. It is impossible to ignore the connection between these relaxed underwriting requirements, zip code targeting and the fact that credit scores as low as 485 were being approved, with little or no money down and the problems we are facing in some sub-prime markets. The government had a goal of over $1 Trillion Dollars in loans that qualified under CRA for this decade. It was an admirable goal, but it was carried out in the wrong way and made it possible for lenders to ignore good underwriting practices.

When loan officers are encouraged to go through all denied files of clients in particular zip codes for resubmittal to lenders who must specifically adhere to the guidelines under CRA for such loans then that falls under extremely risky and questionable underwriting practices. Certainly, this does not alleviate the responsibility of those lenders to understand the risk that they were taking on, but with the securitization of mortgages it passed that risk on to others.

Is this regulation only to blame, of course not, there is plenty of blame to be spread around; the government and its misapplication of regulations, the FED and its easy-money policies that fuels the feeding frenzy, the lenders and originators who bellied up to the easy-money trough, the appraisers who inflated properties, the real estate speculators who jumped in head first, and many of the borrowers who either didn't understand the fine-print or who ignored it because of the excitement of owning a home, or in many cases, the thought of cashing in on the boom-boom-mentality brought about by the FED's easy-money.

"...The granting of privileges which conflict with
traditional legal principles prevents coordinated cooperation
among the different agents in society. Indeed traditional legal
principles are essential to the coordinated, peaceful exercise of
entrepreneurship. Their systematic violation hinders the free
creativity of entrepreneurs, as well as the creation and trans-
mission of the information necessary to coordinate society.
When these principles are disregarded, social maladjustments
remain hidden and tend to worsen systematically.
The inevitable outcome of states’ systematic coercion of
society and of the concession of privileges against traditional
legal principles is widespread social disorder and lack of
adjustment in all areas and at all levels of society which are
affected by such coercion and privileges. In fact both coercion
and privileges encourage inaccurate information and irresponsible acts, and both lead to the corruption of individual
behavioral habits subject to the rule of law, favor the development of the underground economy and, in short, cause and
sustain all sorts of social maladjustments and conflicts." ~~JESÚS HUERTA DESOTO-Money, Bank Credit and Economic Cycles

The problem is not market forces, but the systematic interference and distortion of markets by both coercion and privileges. Markets have worked for centuries and every instance of distortion stems from those who think that have all the answers, politicians are, of course, notorious for thinking they have all the answers and they also think that actually have the power to control economic markets. But, I ask, what is the market after all? It is people, the population that are moved by their needs, their desires, their greed, their fears and yes, even their hopes. Markets are not abstract, but totally depend upon the people who make up the market economy. If someone thinks that they can manage the market they really have blinded themselves to what the market really is and how it works.

There are economic laws that have been in force since before there was money, the barter systems operated by the very same laws thousands of years ago as our economy does today. Markets are not made up of statistics, markets are made up of billions of people making trillions of decisions moment by moment that concern their lives...that is the economic market. It is a reality beyond the reach of government to control, it can only distort and in that distortion, it manufacture eventual havoc more times than not. In the process, of course, such attempts at manipulation causes the suffering of untold numbers of people trying to eek out a living under such circumstances.

The very nature of a fiat monetary system is credit expansion. A fiat economy relies solely upon such expansion to exist since every fiat dollar is borrowed into existence there must be a constant increase of credit or you have a contraction in economic growth. The problem, of course, is the underlying debt; it eventually reaches a point where the economic growth cannot sustain the underlying debt. Assets must be inflated because of the easy money that fuels the growth under a fiat economy. The fiat expansion economy has replaced the production expansion economy. Production and capital produced from that production once were the foundation of economic growth that is no longer the case, it is now achieved by the expansion of fiat credit. Such an economy cannot be sustained; the burden of debt becomes overwhelming.

The Fed, of course, must attempt to increase the amount of credit in the markets through the artificial manipulation of interest rates, as I said, heating up the economy or cooling it down. While it's original charter was to stabilize prices, it does just the opposite and the system of fiat it employs can only inflate until there is a contraction. Booms and busts, manipulated business cycles and constant upward inflation is the name of the game.

First, the entire economy is built upon and by GOVERNMENT FIAT, that is the foundation and from which everything in the economy stems. That is, perhaps, the greatest distortion in the economy of all, and the government has stamped its blessings on the Federal Reserve Fiat Money System. Government actions always have an effect on the economy and markets; it is absolutely impossible for them not to have such an effect. Whether those actions are in the form of a regulatory process bent by influences or by overt or covert actions taken by the government, the market is distorted to one degree or another by such actions.

Additionally, the government, via the Federal Reserve pumped massive amounts of credit into the economy between 1921 and 1929. In fact, Bernake finally admitted that the Great Depression was a direct result of the monetary policies of the Federal Reserve.

At Milton Friedman's 90th Birthday, Bernake said: "Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. YOU'RE RIGHT, WE DID IT. We're very sorry. But thanks to you, we won't do it again."

Apparently, the guys at the Fed are doing pretty much the same thing that they did in the 20s. "we won't do it again." Don't bet on that statement!!!

So, to make a statement that there is no evidence that government distortions of economic markets is.... well, you get the picture!

The sub-prime crisis is really a misnomer, the actual problem; the real crisis is credit liquidity on various levels in the economy. However, this stems from very direct monetary policy that is demanded by the nature of a fiat monetary system. Sub-prime and Alt-A mortgages have been around for a long while and began to drastically increase as a percentage of all home mortgages back in 1996, today they make up about 25% of the $10 Trillion in outstanding loans. The fact of the matter is that all FHA loans, you know, those the government regulates, are considered less-than-prime, or sub-prime. In the Alt-A market, you find a great deal of NOOs, or non-owner occupied properties, such as those bought for rentals, speculation or second homes. Of course, the quality of these sub-prime mortgages and even many of the Alt-A mortgages were questionable.

Oversight in these mortgages has been there for over a decade, the requirements for due-diligence were in place on multiple levels, including in the securities industry. In many cases however, fraud, not necessarily on the part of loan officers or brokers, has been a large part of the problem. Of course, many loan products lend themselves to fraud itself, these loans products did not evolve in a vacuum over the last decade, everyone in every single regulatory agency was aware of them, how they worked and have had plenty of time over the last 10 years to understand the pitfalls of such products. Granted, many of the more recent innovations, such as IOs [interest only] and OAs [option arms] were specifically geared toward investment real estate or speculation of the artificially inflated asset market.

The point is that public regulation doesn’t work, it hasn’t worked in just about every sector it has been employed because it becomes politicized to the point that both coercion and privileges neutralize the effects that such regulations might have if employed correctly.

So, we can slap on even more mountains of regulations, but the question then becomes who will regulate the regulators? For years there were open violations of the RESPA Regs regarding "kick-backs", these violations were reported numerous times to federal regulators; what happened? Nothing, absolutely nothing happened to those who violated some of the most basic laws associated in the lending industry. The fact of the matter is that these violations were advertised on the Internet, in the open, for years and to the best of my knowledge they still are being advertised. I began to realize just how politicized the regulatory arm of the government actually is and due to that fact it is the most absurd idea to think that more regulations will solve the issues associated with the mortgage or any other industry when you have some that are granted privileges, whether by simply omission or permission and some are slapped with punitive actions for doing the same thing.

There is a tendency to believe that businesses, big business in particular, favor free-markets however, the evidence it just the opposite. They are, for the most part, politically connected and as such they seek certain regulatory interventions by the government. What we are seeing in this country is little more than an extension of late 19th Century Mercantilism or a word that became fashionable, even in this country during the early 20th Century in this country: fascism or a mixture of government and corporate control over he economy. During the Nixon Administration, William Simon, then Treasury Secretary said that he was amazed as: “I watched with incredulity as businessmen ran to the government in every crisis, whining for handouts or protection from the very competition that has made this system so productive. I saw Texas ranchers, hit by drought, demanding government-guaranteed loans; giant milk cooperatives lobbying for higher price supports; major airlines fighting deregulation to preserve their monopoly status; giant companies like Lockheed seeking federal assistance to rescue them from sheer inefficiency; bankers, like David Rockefeller, demanding government bailouts to protect them from their ill-conceived investments; network executives, like William Paley of CBS, fighting to preserve regulatory restrictions and to block the emergence of competitive cable and pay TV.”

It is interesting that even in the later part of the 19th Century those who called for more government intervention and regulatory oversight was big business. Big business love government and Federal Reserve inflationist intervention into the economy, it provides them with an edge that they might not otherwise enjoy in a free market.

The “Inflationist” rules this country with an iron fist and the rest of us pay for their autocratic bumbling. With what basically amounts to subsidized interest rates created by the Federal Reserve monetary policy floods the markets with cheap money, and as a consequence the markets are distorted with an explosion of investments, as a consequence, many tend to be boom investments or malinvestments. It is almost the “Lottery Jackpot” effect, people and businesses are given an availability of easy, cheap money and they spend, many of them tend to spend in ways that are not very wise. So then, each time a down-turn begins to show itself, due to very Federal Reserve Policies that created the boom, the Federal Reserve thinking that the problem is a slow down in aggregate demand simply follow the same pattern of pumping some new money into the economy, this only exaggerates the problems of malinvestments that needed to be liquidated in the first place.

The problem for the Federal Reserve is that there is now little room to wiggle in terms of interest rates; each time the ratio between the boom and bust periods becomes more and more shallow. The economy is having more and more difficulty maintaining viability during rate changes, as we have seen in the last attempt of the Federal Reserve to raise rates, even in miniscule degrees, has taken the air out of the economy. So, as we can see, the ratio of rate change has now narrowed to the point that such manipulations no longer have the desired results the Federal Reserve is seeking. This is a sign of a much larger, much more disturbing issue that the government, the Federal Reserve and the majority of economists seem to be oblivious to and that is the underlying nature of an economy built upon fiat money. Political expediency however, demands such actions even if the attempts become less and less effective with each manufactured boom cycle.

Because of political popularity contests in this country that cringe at the thought that a recession is needed to eliminate these malinvestments caused by easy monetary inflation, the Federal Reserve, supposedly above political influences, bows to political opinions and continues playing the same game ad nauseam. It seems that both the politicians and the Federal Reserve Board of Governors seem to be totally unaware that unless we begin to permit an unhampered economy to operate according to economic law and make natural adjustments that are extremely necessary, the we will witness the continuation of a manipulated economic cycles that only slide closer and closer toward ruination. While they attempt to make our economy “depression proof”, the fact is that their actions are increasing, not decreasing the chances of such an economic disaster. Until the people of this country begin to realize that the very expansion of the government’s nation-state and its monetary inflationary expansion, along with runaway government spending, all of which create the mess we find ourselves in the first place cannot, at the same time, be a solution. The fact is that the whole thing is more about politics then the economy, more about power than anything that is beneficial to the common workingman and woman. Political confidence and prestige is the name of the game in Washington, D.C., that is the priority.

If you look at the parallels between the Hoover Administration and the Bush Administration relating to the economy you will be amazed at the similarities, and with potentially the same cataclysmic results. The New Deal was little more than an extrapolation of the policies that began under Hoover. The same “political happy-talk” employed by Hoover and FDR are being used by the Bush Administration today. It is all superficial, including the monetary manipulation, which they wrongfully suppose to be market neutral. The Federal Reserve continues with its artificial creation of debt/credit and thus money, which always leads to structural imbalances in the economy. They seem to fail to understand, or associate the relation between such monetary manipulation and how it distorts markets, creates booms that must, according to economic law, experience corrective busts that can prove very destructive to the majority of the working population.

Many of the regulations set into motion during the Clinton Administration didn’t take effect until Bush came to office. The same thing has now happened in the Bush Administration; the next president will have to deal with many regulations and decisions that he has no control over. Slapping on certain regulations, tariffs, and requirements on one industry only affects other industries. It is almost as if those who craft such regulations can only see one subject at a time. They don’t appear to realize that something that may help one market industry may have a negative corollary effect on another industry.

Bush attempted to prop up the steel and lumber industry by imposing high tariffs on Canadian steel and lumber however, the measures taken to help the American industries only proved that such measures hurt other industries and contributed to even more contraction in the economy. The truth of the matter is that Bush’s tariffs and regulations concerning lumber and steel only served to destroy more jobs than they saved, in conjunction with that it increased the funnel of capital to sectors in those industries that were not efficient, morphing this industry and taking away investments from perhaps smaller, more efficient sectors. Nothing happens in a vacuum, everything has an effect and to ignore that fact is to ignore the basic principles of economic law.

The fact of the matter is that businesses in this country are weighted down with so many regulations that are, in many cases, contrary to good business practices, some bordering on the ridiculous. There are “wild card” regulations too, these regulations simply hide in the deep dark closets of the regulators until they find a place to strike, and many times they strike with the consequences of a crime. There are so many regulations, as I have said, that are extremely open to various interpretations depending on the regulatory auditor making the determination at the time. Even private individuals must take care about cash transactions, due to some of the latest “anti-terror and anti-drug” regulations regarding cash. It almost appears that the government is doing everything they can to actually destroy the economy of this country; they are definitely destroying what value was left in the dollar. There is an old saying that goes something like this: "if you take all the government economists and lay them end to end, you'll never reach a decision".

The actions of this government and the Federal Reserve, not only seem to advance economic distress, but impede economic recovery. The proposals are always the same, they come from the same glut of idiocy that has been doing the same thing for the last 60 or so years in this country, but it has only been magnified. The belief, false in both its concept and execution, that government can stimulate aggregate demand within the economy is widespread in economic circles, at least those who still depend on Lord Keynes for their economic foundation. Every single boom in this country has been the result, not of production, but of Federal Reserve credit expansion policies; such booms always crash under the weight of malinvestments it creates.

A point of understanding should be that in all manipulated markets, asset inflation will always promote such overt market reactions because of the atmosphere created by Federal Reserve Monetary Policy distorts such markets, don’t believe it, then just take a look at the various booms and bust in the history of the last 40 years. Every time, the same thing happens however, this time it is proportionally worse. The problem is that this new “recession” is simply the continuation of one that began back in the late 90’s; the recovery never really began even though there was an artificially induced boom in markets, especially the real estate market. Every time there is a down-turn in the economy the Federal Reserve reacts the same way with the same results, it is a broken record constantly repeating the same thing over and again, except with one very important thing and that is the money supply is increased each time creating the same cyclical problems it was trying to solve in the first place.

You will notice, if you listen to the representatives of the Federal Reserve, that they will always talk about prices and price stability, which is after all the “mandate” of the Federal Reserve Charter. However, if you listen carefully, you will hear them speak of prices and price stability outside of the value or purchasing power of the dollar. You will never hear them speak about the fact that it is the very policies of the Federal Reserve in its expansion of the money supply that causes price inflation. That is however, the very cause of price inflation. In the last two years the money supply, measured by M3, has been inflated by 42% or more [think Hoover Administration] and that doesn’t count the massive infusion of money over the last few months in bail-outs and propping up certain institutions, or the war with its ancillary costs.

Now, back to the credit crisis, or credit liquidity problem this country and others are facing. This is a direct result of monetary policy, it is impossible, or should be, not to see the correlation between the type of money we use in this country and the issues we now face. Because of the very nature of a fiat market, the Federal Reserve must constantly try to stimulate the economy and then de-stimulate it.

The Federal Reserve must lower interest rates, expand credit and make it flow through easy-money channels to grow the economy and then when inflation begins express itself in the general economy the Federal Reserve must then pull back by raising interest rates to slow economic growth. It seems that the people, at least most of the people in this country, have extremely short memories because this same type of thing has been repeating itself over and over again, but that is the nature of a fiat market.

For years, my contention has been that the booms and bust cycles brought about by the monetary policy of the Federal Reserve will only become more exaggerated as time goes on because of the amount of credit expansion and contraction that must take place to maintain economic growth. It becomes distorted over years and years of monetary policy that create more mal-investment on the upside and harder troughs on the low side. Eventually, the two cycles will narrow, merging into one massive economic disaster that cannot be affected by either government intervention or Federal Reserve monetary manipulation.

Markets were formed long before governments were formed and were based on voluntary exchanges between individuals and groups. In fact, there is evidence that many governments were formed from markets forces and not vice-versa. It was the market forces of free voluntary associations of exchange that brought together people of various tribes and ethnicities. Do we actually think that in order for something to work the government must be involved or it simply will not work?

It is a contradiction of all understanding to say that a free-market economy must rely upon near perfect information to function, such statements ignore not only thousands of years of history, but the fact that free markets are based upon economic law, not upon economic information or the contrivances of men to function successfully or properly. Economics is not only about money and commerce, about statistics and ratios, but about billions of people and millisecond changes in their needs, wants, desires and the decisions upon which they base their choices.

Economic law is not based upon mathematics as much as it is on human actions, which in the complexity of their voluntary actions and exchanges create such mathematical statistics and ratios. The information doesn’t create economics; just the contrary economics creates information. Now the question is how is that information used and to what ends. Most of the information tends to be used in ways that conflict with the very fundamental laws that created the information in the first place. Economic laws are real world, and rarely depend upon theories to explain, theories and equations may be employed to explain particular details of mathematical functions that form around economic laws themselves, but the laws are inherently functional without theories or equations.

The free market is completely based upon the voluntary actions of people in the act of exchange, either for personal needs, commercial needs or even social needs. I realize that many believe that it is necessary to counterbalance free markets with restrictive laws to control abuses however, as I have stated, the free market is self-regulating. It will reward those who conduct good business and punish those who do not. Perhaps one of the main complaints wailed at the idea of a free market is the greed factor, apparently few people realize that greed is not based upon whether a market is free or government controlled, greed is a human quality that will always present itself.

All of those things, even the desire and the presumed need to control the economy are outside the domain of economic law. A free market is, and must be, integral to a free society and it is completely ordered by economic laws that develop and order through the voluntary actions and cooperation of the individuals that make up society. It is absolutely impossible to control the economy contrary to economic law without completely controlling the population, including their thoughts, that makes up the economic market. Such a feat is, to say the very least, quite impossible. Economics, and the laws that govern it, is the science embedded in a much larger, much broader understanding of social order, it cannot be separated and in such separation be expected to heel and bay upon the command of any government or institution; the economy doesn’t need a manager to function or even succeed. The premise that it does is the problem and it causes the problems we now witness in our economy.

It is amazing, as I said before, that politicians, bureaucrats, economists and central bankers have created a faith around themselves and their quasi-religious economic altars in hope that we will believe they have the power to move mountains when they apparently are blind to the very nature of the mountain itself. For the most part I find such people blind to the reality of everyday life of working men and women in this country, they ignore the basic principles that govern such lives and create the need for a vast array of choices and decisions. For some reason, these purported experts that we have allowed to “run the show” are ignorant of the fact that no two actions of an individual are ever the same when it comes to their daily lives because of the myriad of factors that interject into those our lives, sometimes moment by moment. These factors and the decisions they create is the basis of economic law of free markets.

The primary law that governs economics is almost primordial regarding human beings and that is the fact that human beings, both as individuals and as groups engage in conscious actions toward chosen goals. It is based upon the law of essential relationships, thus economic laws are counterfactual laws i.e. if “a” is essentially related to “b” and “a” is true, then “b” must also be true. In the most basic sense it concludes the rather obvious fact that humans act in concert with their needs, wants and desires. This one factor is why mathematics is far more applicable to the science of physics than economics, although there are mathematical equations that point to economic laws.

The primary factor that governs the economic law is that of human choice, humans choose and have the capacity to make choices based upon a host of information that can change moment by moment. These choices are always extended in time, are they not? The trouble with almost all modern economic theory and the government’s intervention based upon such theories, is that it is Procrustean, almost to the extreme. So, there is definitely a Law of Choice, if you will, that governs economics far beyond a mere mathematical model or even historical information. We must come to understand that all human action is made up of both realized and unrealized components and that these components have a huge effect on the choices made by people, even groups of people. There is therefore, a visible component to the Law of Choice and an invisible component, both play an equally important part in human action and such action effects absolutely everything, in particular it effects economic movement. So, the observable truth is that counterfactual laws exist regardless of what the conditions of action are or how such conditions may change in time.

Now, the Law of Choice cannot fully be understood without the Law of Supply and Demand or vice-versa. Of course, we must consider whether the Laws of Supply and Demand are based upon the independence of such demand or supply in the market. If there is no independence of either the supply or the demand then the choices or human action associated with this Law will still assert itself in the market however, the results of such assertion will be distorted by the artificial inhibitors placed upon the market. This fact was seen in the market inhibitors of former Soviet Union and the markets that were both State-Approved compared to those which were not.

The most interesting fact about the Law of Choice and the Laws of Supply and Demand is that the Law of Choice always preempts the Laws of Supply and Demand. Within the Law of Demand are several factors that are governed by the Law of Choice. There can be a huge supply of a variety of goods and services, but if the demand for those goods and services is not there because of the myriad of choices made by people then the supply becomes a moot point, no matter how low the price of such goods and services are in the market. Choice therefore, is not determined by the conditions placed upon the market, either by business or even government intervention, but by likes, dislikes, needs, desires, hopes, dreams, fears, etc.

Now, it becomes apparent that the influx of money into the equation of both the Law of Choice and the Laws of Supply and Demand has a particular influence based upon what type of money is used. In terms of fiat currency, there will generally be a higher price reflected in the economy because the money loses its purchase value as the economic inhibitor, in this case, inflates it the Federal Reserve. In a normal free market based upon sound money, an increase of money will, as stated before, bid against itself until production increases and prices stabilize or, as in most cases, fall due to an increase in production.

Thus Rothbard states, with a particular brilliance: “Those who approach business cycles from a statistical point of view and try in that way to arrive at a theory are in hopeless error. Any historical-statistical fact is a complex resultant of many causal influences and cannot be used as a simple element with which to construct causal theory. The point is that credit expansion raises prices beyond what they would have been in the free market and thereby creates the business cycle. Similarly, credit expansion does not necessarily lower the interest rate below the rate previously recorded; it lowers the rate below what it would have been in the free market and thus creates distortion and mal-investment.”

The fact is that the Law of Human Action only exists within human action itself, and this involves, in an essential relationship, the Law of Choice.

“Men do not willingly read unpalatable truths of themselves. The people like those best who fool them most by pandering to their vices and flattering their foibles”—Admiral Raphael Semmes.

It would really help me to be able to promote the ideas of liberty and laissez faire economics if someone could clear this up for me. For example, Dr. Paul says companies like Frannie and Freddie should have never gave loans to people with not so great credit. Isn't it a form of government regulation if you tell a company who they can and can't give credit to?

Most people I talk to blame the free market on the current crisis we are in. Are there any rebuttals to this argument? Like I said it would help me better spread the message of liberty if I understood this better.

Fortune Favors the Bold

the role of govenrment basically is to deter violence and enforce contracts.

Now, people might do unethical things, but that isn't the government's responsibility.

If a company is committing fraud (or in other words, lying in their contracts) people have every right to bring those companies before a court.

I forget who said it, but it was a pretty good quote- if a company is "too big to fail", then that company is too big to exist. The reason these crazy schemes can get so big is because the government creates expansion of credit and debt, as well as creating market distortions (like fannie and freddie, government created insurers) that result in the illogical alocation of capital.

See Austrian Theory of the Business Cycle.

To put it in much simpler terms, people wouldn't bet their life savings at a casino if the government didn't fuck with the roulette wheel.

we must confront Congress and the Senate as a mass and not individuals, and perhaps the mass should be armed as well as their protectors.

This isn't accurate. We are in a "world economy" because of our economic behavior. Get rid of foreign debt and foreign dependency and that doesn't exist. We would be free.

What an excellent notion. Have you any dates in mind?

The Freedom Formula: Au + Ag + Cu + Pb