In his latest piece, Frank Shostak approvingly quoted Jeff Tucker’s earlier rhapsody as follows:-
But as wonderful as the daily shifts and movements are, what really inspires are the massive acts of creative destruction such as when old-line firms like Lehman and Merrill melt before our eyes, their good assets transferred to more competent hands…. This is the kind of shock and awe we should all celebrate. It is contrary to the wish of all the principal players and it accords with the will of society as a whole and the dictate of the market that waste not last and last. No matter how large, how entrenched, how exalted the institution, it is always vulnerable to being blown away by market forces — no more or less so than the lemonade stand down the street.
While I approve of the sentiments, I am forced to demur at their application. “More competent hands”? Do me a favour! More like hands privileged with more political clout, greater regulatory support and enshrouded in more opaque accounting regulations…
JPM has more risk on its books than any other (large) bank in America, both numerically and proportionately, yet it has somehow come thru’ with shining colours. Was this all due to the superlative entrepreneurial skill of its management? It hardly seems likely. Citi paid an enormous price to buy a hedge fund manager who promptly closed his old shop the minute the embarrassed departure of his ‘dancing queen’ predecessor left him in charge. BoA? Well, who knows whose mess it was they were actually covering up when they took on that nest of vipers which was Countrywide?
Nor have Merrill’s assets been ‘transferred to more competent hands’ either – they have been bailed into a more friendly fold where the same senior managers who got them into the mess (and who were probably selling much of their exposure to their new co-managers over the past few years) will still reap fabulous remuneration as the guiding lights of the new bastard offspring.
The US Govt has effectively decided that its corporatist national champions in the coming forced consolidation will be JPM, Citi, BoA and now GS and Morgan Stanley – the latter pair newly transformed into banks where the teat of succour runs more profusely and where the Fed/FDIC accounting regulations are less onerous than those of the SEC; where they can sit, jaws agape waiting, not to be explicitly bailed out from their funding difficulties, but to pick up cheap deposits from the authorities at the expense of an arbitrary denial of the contractual rights of debt and stock holders in those small fry firms who are seized the moment they totter.
I have to say this next piece of special pleading also made me involuntarily spit my Assam half way across the room, too:
‘Only a few weeks ago, we saw that the liquidation of a large bank such as Lehman Brothers and the sale of Merrill Lynch did not cause massive disruptions. In fact, the adjustment was swift and almost invisible. The reason for the smooth adjustment is that the market was allowed to do its job. If government and Fed bureaucrats had tried to intervene with bailouts, the whole process would have taken much longer and would have been very costly in terms of real resources.’
No massive disruptions?!? A ‘swift and almost invisible adjustment’? The god of the market doing its work?
We had a $200 billion run on money funds; a plunge in many commodity prices; a jump in credit risk premiums to unprecedented levels; renewed stresses at regional banks; bail outs in all of the UK, Russia, Iceland, Denmark, Belgium, Germany and, effectively, Ireland; a near global criminalisation of short selling; wild and damaging gyrations and more central bank interference in foreign exchange; what is feared will be the decimation of whole cohorts of hedge funds (many of whom have not only had their business model outlawed but had their assets frozen at Lehman, their prime broker); a further freeze of money and capital markets; the launch of government stock support schemes in Asia and, even before yesterday’s rout, what I think is now in excess of $1 trillion of global central bank injections to try – so far to no effect – to prevent the whole house of cards falling in one quick heap!
I confess that I don’t quite see where the ‘free market’ was at work in any of this. Moreover, I should well imagine that it might just prove ‘very costly in terms of real resources’, indeed, by the time its ramifications become clear. As Fritz Machlup once wrote: “the bust always starts as a monetary crisis and then becomes a real one”.
To call a spade a spade, Lehman was an ill-judged gamble at restoring a little macho credibility to a clueless team of dirigistes which has been swinging drunkenly between paying handsomely for Bear to be folded into JPM, putting FNM/FRE into ‘conservatorship’ (whatever THAT actually means in practice), semi-rescuing AIG, summarily dumping Lehman (on the ludicrous grounds that, unlike the others, the market ‘could see it coming’!), brokering a Merrill wedding, elevating Goldman to unimpeachability, expropriating WaMu debtors, then taking over Wachovia as a fictional ‘open bank’.
All of this, too, despite a long litany of expressed false optimism and prevarication, not to mention the subtle diplomatic pressure aimed at inveigling America’s long-suffering foreign creditors into pouring more money into these sumps of moral corruption and managerial ineptitude. Failing a positive response from their would-be ‘marks’ abroad, the domestic authorities have meanwhile broken every rule and violated every custom in the urge to lend to them on ever easier terms, all without once demanding that they account consistently for what is on their books as a quid pro quo.
Therefore, to add to liquidity problems, deep suspicions about the asset side of the balance sheet, and worries about the future income stream, all this flip-flopping has now engendered an even more debilitating opaqueness about the regulatory treatment of the whole legal ranking of liabilities, to the extent that proper market solutions seem, sadly, ever more remote.
In addition, the investment world has become paralysed between what it sees as a starkly binary outcome; a crushing debt deflation if the banks fail (one made inconceivably difficult to unravel thanks to the $700 TRILLION web of derivatives which enmeshes them), or a highly inflationary rebound due to the extreme fiscal and monetary overkill being committed during the rescue and surely not to be redressed any time soon thereafter. In such a world, not only is further credit expansion being precluded (Hip hooray!), but the flow of capital from savers to promising entrepreneurial prospects is also being staunched – a matter for the most intense concern, not sophomore celebration.
So while you might cheer all this, let’s not pretend that it has been serene and untroubled or else our ideological foes are going to be able to strike back to good effect by quoting such La-la land outpourings of joy when the bankers’ problems become those of a whole host of otherwise blameless enterprises and families, as they inevitably will.
In a ringing condemnation of Wall St welfare I am fourquare behind you: in singing false paeans to an impossibly Panglossian reading of events and in trying to gloss over the wrenching – if ultimately salutary – consequences of a collapse, I suggest you are being naively counterproductive.
Our enemies are on the run, so a little less hysteria and a deal more calm ratiocination and sober exegesis might prove far more profitable than all these ill-judged – and, frankly, jejune – bromides which are being loosed off willy-nilly by people who – judging from both the blog and the mailist – are in many cases not in any way current with either the institutional framework, the policy implications, or the international repercussions of what is going on and who (perhaps understandably) reveal themselves to be totally unversed in the perverse functioning of modern financial markets, for all these same commentators’ undoubted academic brilliance.
It seems that a sizeable faction of the Mises group has become so intoxicated at the chance of getting a date at last with the girl of its dreams, that it has dipped too deeply in the punchbowl of ‘I told you so’ and has ended up goosing her mother instead, in front of all the family. Come on guys, get real – and leave the empty hosannahs to the Collectivists!
I am sorry if this sounds abrasive, but I strongly feel that, in many instances, the rush to print is being undertaken amid a rush of blood and I fear that immoderate language and the blind quotation of Misesian scripture during what is clearly one of THE great upheavals of our irretreviably flawed monetary and political system can only be to the detriment of the cause over the longer haul.
{ 18 comments }
Excellent post and an excellent point. This will truly be a time of ‘I told you so’ moments for the Austrian school, but we must be very careful in their application.
sounds like someone lost alot of money…
Pesonally, I found Jeff Tuckers post (which Frank quoted) too celebratory. However much what is going on is contributing to sifting all the malinvestments out of the system that have built up after decades of monetary mismanagement, people’s jobs, homes and families are on the line. Hence I find it hard to “celebrate” (to use Jeff’s words) such an event.
This probably wasn’t Sean’s point but I thought it was worth mentioning anyhow.
Lehman’s failure caused massive money market funds to ‘break the buck’ which saw 60% redemptions within 2 days of the countries largest mmkt fund. Paulson responded by guaranteeing existing mmkt fund holders. To therefore say ‘the liquidation of a large bank such as Lehman Brothers and the sale of Merrill Lynch did not cause massive disruptions. In fact, the adjustment was swift and almost invisible. The reason for the smooth adjustment is that the market was allowed to do its job. If government and Fed bureaucrats had tried to intervene with bailouts,…’ displays an ignorance as to what actually happened.
Thank you for your courage Mr. Corrigan. Perhaps many of us have often been tempted to parlay our theoretical superiority to simplistic solutions which are not merely inadequate or inapplicable but often do marginalize our voice and the principles on which we stand.
At the risk of sounding Panglossian, this is why I love Mises.org. Thank you for the post Mr Corrigan, and thank you Mises.org for not censoring it!
Thanks, Sean, for your excellent post.
A cloud may have a silver lining but it is still a cloud. The unsustainable boom has turned into the inevitable bust. However, there is no reason to see this as a victory of market forces, let alone “the free market” (which we have not).
The collapse of the Soviet Union was not caused by market forces, free or otherwise, but by its own internal contradictions — to borrow a phrase from Marx. The same thing can be said of the announced collapse of the “American [monetary and financial] system”.
It is, however, still too early to tell whether the monetary and financial turmoil will sweep away the political structures and practices that created and sustained that so-called “system”. If it does not, the market order will make little, if any, progress. If it does, it remains to be seen what will replace it.
Interesting post but to speak of courage is, umm, overwrought. To disagree with a few phrases from something I wrote hardly amounts to “fighting the power.”
Whether you think the meltdown is terrible or great all depends on your point of view. The point that is undeniable is that this is reality prevailing over illusion. There are always lots of things to like about illusion and lots not to like about reality.
With respect, Mr. T, I, too, am for the dispelling of all illusions. What I am against is giving people anxious for their livelihoods and property the impression that we are exulting in their pain. Nor am I reassured by the lack of attention to ‘reality’ displayed in many of the hymns to the ongoing crisis.
To go around gleefully humming Siegfried’s Funeral March is perhaps only an error of taste – to get the notes wrong is to open us up to the charge of shallowness and a lack of understanding of what is stake here.
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Most of us are drawing from lessons of the 30s here. As I read Rothbard, two important points stand out. 1) The “liquidationist” position was blamed for the meltdown but in fact was never tried. Bernanke stands up day after day claiming that the Fed just let the system unravel without doing anything. His version of history is manifestly false: Hoover tried bailouts. We need to do everything possible now to point that the the Fed has been attempting bailouts for two years; what we see now is happening despite the bailouts, not because the bailout hasn’t happened. 2) Rothbard is very clear on a point that was almost entirely lost on that generation and continues to be now: the depression was not universally awful; in fact, one of the best aspects of it were the low prices that FDR kept trying to raise. Not only had FDR confused the symptom with the cause; he didn’t see that the symptom was actually the only meritorious economic trend of the 1930s.
This is the prism through which I see the current moment. First, all bailout measures must be stopped by all means possible. Second, prices of all kinds must be allowed to fall and fall, whether that is stocks or homes. Third, the bad debt and investment must be washed away before recovery can begin. If we can hold on and let it happen, we can look forward to a period of outstanding growth. But first people must hold on, which means not panicking and understanding that what is happening is a result of previous mistakes. Understanding creates calm, and calm is the key to looking past the state’s propaganda at this point.
Sean,
I appreciate your post since a reality check is good every once and a while. But …
Had (say) the Patriot Act failed to pass and I celebrated, would you have stood aside and enumerated the litany of injuries and usurpations currently on the books?
I would hope so as those offenses would have still existed. But my celebration over the no vote would not have meant that I was blind to your observations. It would have only meant that I saw a glimmer of hope in a fallen world.
Keep pointing out the goal, but allow the rest of us some leave. We know the course of human events in these times. We know the fundamentals of government from Mises, Hayek, and Rothbard. And we know that the unseen is more important than the seen. Trust us.
By the way … When the troops come home – if they come home from Iraq, I will celebrate despite the bases that remain in 100+ countries. Small steps at a time.
fedako’s analogies are not quite the same as this situation, unless there were some unfortunate event that was directly established as a consequence of the remaining 100+ bases, and additionally a fictious account of the event which memory-holed that fact.
“would you have stood aside and enumerated the litany of injuries and usurpations currently on the books?”
i sort of fail to see how one couldn’t, once the evidence is all told. isn’t that the point?
Re Jim Fedako’s comment:
The purpose of this site as I see it is to help explain the theories of Austrian Economics to the uninitiated (e.g., me!) with a view to persuading them to become adherents and maybe, long term, influence public policy. Such a purpose is fatally undermined when peole on this site tell us to celebrate what is happneing in the economies and financial markets at the moment even though the implications for many people will may be dire to say the least (and I am not just talking about fat cat bankers). Its seen as heartless and uncaring and reinforces the image that market economics is a bourgeois luxury totally irrelevant to wider society and the fortunes of the less well off.
For this reason I don’t entirely see the relevance of the Patriot Act analogy.
Jon,
“i sort of fail to see how one couldn’t, once the evidence is all told. isn’t that the point?”
I absolutely agree. That is why I wrote, “I would hope so as those offenses would have still existed.”
I think Jeff’s point is that the market *can* obviously take care of this problem, if only the politicians and bureaucrats would let it to do so. I am strongly in favor, however, of pointing out that the FDIC, for example, is not the market. They appear to be strapping the losses of these banks on taxpayers and selling off the good stuff to the big, well-connected banks.
Sean,
Upon rereading, I note that I wasn’t clear regarding my initial comment.
My celebration is in response to the no vote on the bailout — I do not think that was obvious in my initial comment.
I understand your statements as this is a difficult time. But we have to be careful so as to not fall into the intellectual abyss, just like many so-called libertarian and free market sites have when they came out in support of a bailout.
In essence, we are seeing Schumpeter’s “creative destruction” in action. And, to your point, we are not seeing the political machinations under the surface.
Political machination will always exist. It was political machinations that created this country and its Constitution.
I guarantee that my representative did not vote no based on ethics. It was political. He wants to keep his seat and, upon reelection, it’s back to business as usual — his office will again be filled with lobbyists and assorted rent seekers.
But such is our condition.
Among various factions of libertarians, none suffer so badly as the self-identified Misesians from the continuing influence of Rothbard’s nearly uniformly rotten strategic advice. It’s sad that this post would be necessary to keeping the whole thing on track, but there it is, all the same.
I’m glad you put it out Mr. Corrigan.
I should like to elaborate on the above point some. First, Rothbard’s theoretical insights, whether originally his or not, were at the very least worth considering and at the very greatest of the most profound significance. However his practical advice was with rare exception utterly rotten.
Starting with the attempt to reach out to the Randians, he ignored what he already knew, and up aboard the disaster express he went. The flirtation with the New Left was mixed at best, with some libertarians becoming leftists, abandoning their previous commitment to individualism and private property. The founding of the Cato Institute, and the subsequent domination of libertarian efforts by the funding of the Koch machine (which Konkin rightly predicted would lead to the very disaster it did) was something almost unforgivable. Once that poison ripened, another was ready to explode right with it…(Gordon on Rothbard’s involvement with Koch, 1 & 2, Raimondo’s biography of Rothbard also contains relevant material)
Alongside this horrid muck, and deeply intertwined with it, came the Libertarian Party. That disaster is finally unwinding itself at present, and really the Nolan/Hospers bunch are to blame, but Rothbard’s hands were all over it. The essentially Leninist organization that Rothbard tried to build was bound to fail; he wasn’t working with Marxists.
Last, but definitely not least disastrous was the Rothbardian attempt to reach out to right wing populists. The attempt, the entire ‘Paleo’ thing, was a disaster from word one, and it shouldn’t have been hard to figure out by those responsible. It attempted to reach out to a kind of thinking which was fundamentally unlibertarian, wasn’t about to become so, and didn’t. The work with Pat Buchanan was also a disaster; one of the Buchanan men, Richard Viguerie, is now doing to the LP what he did to the Reform Party. That anyone seriously thought to integrate racism, hatred of homosexuals, defenses of police brutality, xenophobia and irrational hostility to immigration into something that is fundamentally against all of those things was beyond stupid. It was obscenely, unforgivably stupid. The sooner that part of his writing is ignored, the better.
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