Economic Self-Defense

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Many prominent American figures claim to be proponents of free markets but in practice advocate neomercantilist, corporate welfare policies. These policies eventually, and unsurprisingly, lead to disastrous economic and social consequences. These catastrophes are then blamed on capitalism, free markets, and deregulation, at which point, socialists are easily able to convince the distraught public that capitalism is a failed experiment and only massive government intervention in the markets can save them. Such is the way that capitalism dies.
–Briggs Armstrong “The Enemies of Capitalism” 01-27-09

“I’ve abandoned free-market principles in order to save the free-market system.”
—George Bush on CNN

“I’m a market-oriented guy, but not when I’m faced with the prospect of a global meltdown.” —George Bush before the G-20 summit.

Armstrong continues:

When one of the nation’s most visible proponents of capitalism claims that he has abandoned it, because, without big-government policies, capitalism itself would be destroyed, there remains little work for those who desire socialism. Thus it is easy to see how those who believe Bush to be a true capitalist could be persuaded to accept the propaganda that the free market has failed, and that government must step in to save the day.

Before we try to untangle the causes of financial crises, or attempt to project the effect of proposed remedies, let’s get our definitions straight.

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Cycles of False Hope and Gloom

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Proposing almost $1 trillion in new spending, President-elect Obama said: “…at this particular moment, only government can provide the short-term boost necessary to lift us from a recession this deep and severe. Only government can break the vicious cycles that are crippling our economy…

…only government can provide the short-term boost ...”: What he means is: sensible people are changing their spending to fit their new expectations. So, government will force them to spend, against their best rational judgment.

…boost necessary to lift us from a recession this deep and severe…“: Government has only three sources of finance: taxes, borrowing, and creating new fiat money. Taxes only divert money from one person to another; the same with debt borrowed within the U.S. The two remaining sources are: debt borrowed abroad and money-creation. To whatever extent new money provides a boost, it is short-lived. Then we get higher prices, and we’re back to square one.

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Who’s Really to Blame for the Financial Crisis?

The conventional wisdom today lays the blame for today’s financial crisis on the free market. The mortgage market collapse is thought to be due to unscrupulous lenders who relaxed lending standards and then sold risky mortgages to unsuspecting investors. Both Presidents Bush and Obama used this narrative in justifying their policy actions. Closer examination reveals that government interference played a much more fundamental role. Specifically, the ballooning of the secondary mortgage market by government sponsored entities, followed by the “cheap money” policy of the FED created the basic structural distortions which would ultimately lead to the financial crisis.

Government sponsored entities [GSE] such as Freddie Mac and Fannie Mae are key players in home mortgage markets. They were created by and have a specific mandate from congress to help assure “affordable” housing. Although these entities operate as “private corporations” today, they receive favorable treatment by the government and their boards and hence their operating policies are primarily government controlled. Continue reading