The Bush administration is going beyond its well-established record of intervention by implementing partial socialization of numerous financial firms. It does seem that we are at the crossroads. Will we move in the direction of Lange’s market socialism, or will we opt for greater freedom and prosperity?
Why would anyone have confidence in the federal government’s ability to direct matters of finance and investment? One need only look at the federal deficit and the burden of unfunded entitlements like Social Security to gauge the ineptitude of federal financial management.FULL ARTICLE
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What is wrong with borrowing money over two years at 1.58% (current 2 year T-bill rate) and investing it into banks? Looking at the current condition of the market, looks like a smart move to me and much better than spending money on useless government projects.
With the Fed playing “institutional investor” with banks, how is this not anything but socialism? As a shareholder, I may only exert control in proportion to the number of shares that I own (i.e. shareholder voting). However, the federal government has regulatory oversight of banks. Does anyone see the conflict of interest here?
Greg,
The time has come for you to reread Hazlitt and Bastiat. What unseen projects do not get funding because the government redirects those funds to its own shaky banking system?
Jim,
I have read Hazlitt, attended seminars with Hyeck and Friedman and obtained my degree in economics with a strong bias towards free market economics. But then I got out into the real world and built a successful business and now manage my own investment fund. The one thing I can tell you is the real world does not function quite like those books state. Or maybe they are right, but you just need to read between the lines.
My real world advice is “never be the sheep, strive to be the sheep herder”. In today’s market the sheep are running with their cash and buying US T Bills reflected in the low interest rate. They are freely giving the government money to do what the government sees fit! So the government is taking the sheep’s money and directing it into a market the sheep have vacated reflected by the low stock prices. The government will make money on these investments, but I am sure they will waste those funds on something really stupid.
The real problem today is the role of the speculator has been expanded by increased activity and the development of new markets. Funds allowed to leverage 40X has artificially pushed prices up. And when prices started to fall and margin calls came, forced sales basically artificially caused prices to fall too far.
Understanding the problem first is the key to capturing profits.
Greg,
The government is borrowing from investors across the world in order to fund the failing banks. It is not “useless government projects” that are being foregone by this bank bailout, but rather “useful private projects” that will not get funding.
It seems that opposite extremes resemble each other.
These nationalization policies being undertaken in the U.S. remind me to the purchases of populist governments such as Hugo Chavez of telephone companies, utilities, cement, etc. with the excuse of promoting the public good. Perhaps the far right and the far left are exactly the same thing because politics is a circle, not a straight line
The purchasing of shares in the banks is the next step in controlling the inflation of the money supply. The Federal reserve to date has only been able to reduce the discount rate and hold open market operations. The banks still had to actually borrow money from the Fed at the discount window to increase thier reserves. Borrowing from the Fed was seen as an indication of trouble, so banks avoid it. Bernanke “fixed” this by creating the blind auction. Now banks can “Bid” on funds to borrow using blind bids. The banks then had to make the loans, loaning up to the inverse of the reserve rate, currently a factor of 10.
But this is not enough control. The problem right now is that banks are nervous about making more loans against thier current reserves. With government ownership in the bank, they can now induce more borrowing from the Fed and compel the banks to loan it out. Since the credit market is “Frozen”, this compulsion will be welcome by the masses.
Soon the Fed will ask for and get approval from Congress to pay interest on the deposited funds at the Fed. This will allow the Fed to automatically grow the reserves of the banks at a controlled rate. This controlled growth is exactly what Milton Friedman advocated. This controlled growth will eliminate the need for the the Fed to induce banks to borrow from the discount window. If the Fed wants to increase the money supply, they will just increase the rate of interest on the deposits.
John Rolstead,
first, there is no credit freeze according to the very Fed that you are so enamored with. Secondly, Why does an economy need growth, who are we to say that is what the participants of the market desire? Any attempt at forced growth can only be the motivating factor behind a business cycle. If there is no real wealth generated in the lines of production desired by consumers when the production period is complete to back up the claims on wealth, a crash in value will inevitably occur after entrepreneurs are tricked into making poor business decisions by the very forced growth that you propose. How about we let the market decide how much it wants to grow? Lets keep the government out of the monetary policy business.
Greg,
I would be interested in hearing about how you “attended seminars with Hyeck and Friedman”. Hayek has been dead for about fifteen years and dropped out of the seminar scene in the 1970′s. Friedman has not been very accessible lately either. As for your comment about the real world, Austrian economics has tremendous applicability, once augmented by some Public Choice theory. The real world is driven the Federal Reserve bank and various regulations, and is well explained by Austrian theory. Think before you write…
DW MacKenzie
To John Rolstead: Banks are not lending because of liquidity issues more than “fear” of creditworthiness of borrowers. There is ample loan demand, but a lack of funds with which to meet it. Borrowing from the Fed is “normal” in the course of banking business, just as companies use banks for working capital in anticipation of accounts receivable, banks use the Fed for working capital in anticipation of deposit inflow or loan repayment.
Oh but don’t you know, you can just say you’ve been to the “real world TM” and thus excuse yourself for any errors in economic reasoning?
The (unverified) story is that Paulson summoned the leaders of the 5 major banks to his office and ordered them to sign the agreement to borrow the money or else. . . .
The (unverified) story is that Paulson summoned the leaders of the 5 major banks to his office and ordered them to sign the agreement to borrow the money or else. . . .
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