Monday, 29 September 2008

Dems and Reps

I was fascinated to read this thread over on the Housepricecrash site. The thread author writes:
Democrats Want The Bill, Republicans Don't, I'm confused.

I would have thought that the Republican Party would be the ones crying out for the Bill to go through, but it seems to be the Democrats.

Can anyone explain why?

A few of the contributors sort of get it but not properly. What "Jimothy" seems to think is that the Democrats are the party of the downtrodden working class while the Republicans are plutocratic, top-hatted bankers who flick cigar ash at the masses from the windows of their Cadillacs as they speed by on the way to Wall Street. Ah, the perils of trying to understand America through the prism of the BBC...

Maybe fifty years ago the Democrats were the party of the industrialised and unionised white working class. But there aren't too many of them left these days: those jobs are now in Shanghai. Nowadays the Democrats represent a coalition of rather disparate groups:

1. The minorities, especially blacks. And this isn't really anything to do with Obama: blacks vote overwhelmingly for the Dems at every election.

2. The intelligentsia. This is where most of the Democratic activist base is to be found. I'm thinking of teachers, professors, lawyers (especially lawyers), journalists, television folk and almost everyone in the entertainment industry - one of America's biggest. Subsets of this group are the gay and feminist lobbies.

3. Other government workers of all types, although not including too many members of the military.

4. Wall Street. Yes, and why not? Top bankers generally live in the same cities and neighbourhoods as the leading members of the liberal intelligentsia - in New York, Boston, Chicago, San Francisco and Los Angeles. They socialise with the entertainment elite. I note that even the Republican Paulson seems to have actively donated to typically leftist causes. People like to fit in.

What all of these groups have in common is the desire to use the state for their own class interests. Minorities want abominations like the Community Reinvestment Act that seems to be directly implicated in the current mess. Most of the intelligentsia hates the West and wants to bring it down by brainwashing future generations. Government workers have everything to gain from government expansion. And the Wall Streeters operate in an industry with extremely close links to the state. They all understood that their dodgy CRA loans would be bailed out by Fannie and Freddie and, if necessary, Ms Mae and Mr Mac would themselves be "saved" by the taxpayer, exactly as we've just witnessed. And I've not even mentioned the whole rotten system of GOVERNMENTAL central banking that empowers the Wall Street crowd who wouldn't know a free market if it hit them on the head.

And what of the Republicans?

The Christian fundamentalist element isn't that important, despite what the BBC might tell you. Essentially the Republicans are the millions and millions of normal middle class Americans who live in the suburbs and small towns and who work predominantly in the private sector. They do include professionals and business owners who are often wealthy but, unlike all too many rich Democrats, they've made their own way in the free market without any "help" from the government. It's hardly surprising that these cautious, taxpaying Republican voters bitterly resent being asked to hand over their lifetime savings to bail out the profligate. And that's the message that's been given to members of Congress today. Good and hard.

How Brown may dish the Nats

Suppose the government decides to nationalise all of the banks. Brown then announces that the new People's Bank will be based in Scotland. In the interests of decentralisation, of course. I suppose he'd base it in Edinburgh, but a huge back office operation could go to Glenrothes, could it not?

Sunday, 28 September 2008

Fractional Reserve Banking

A couple of weeks ago Knirirr wrote this comment:
Is money really made out of thin air? This article makes a good case that it is not, and that fractional reserve banking is not against libertarian principles. Click here. I agree with you about the state meddling, though. knirirr | 09.15.08 - 12:55 pm | #
The article's concludes:
In brief, I do not find any of the libertarian arguments against fractional-reserve banking compelling. The charge of fraud can be handled by clear deposit contracts and proper labeling of notes, while the other two charges I address are either empty or irrelevant. It may be that bank customers would reject fractional-reserve banks if fully informed about their operation—although, again, I doubt that is true—but that is only an argument for full disclosure, not for banning the practice.
In general I agree with Callahan's analysis. If I go out to my local shop and hand over a "Farrer Note" that's been crafted and signed by myself there is no fraud so long as I don't claim that the note is something other than what it is. If I sign the note with the word "Rembrandt" it seems clear that I have committed a fraud. The problem is that today's fractional reserve banking system is rather more complicated than a marketplace containing rival Farrer Notes, Bush Notes and Brown Notes all of which people take their chances with when accepting them. We have to consider the role of the central bank.

As always, Rothbard hits the nail on the head:

Indeed, Rothbard does no less than portray the Fed as a cartelizing device that limits entry into and regulates competition within the lucrative fractional-reserve banking industry and stands ready to bail it out, thus guaranteeing its profits and socializing its losses. Rothbard further demonstrates that not only bankers, but also incumbent politicians and their favored constituencies and special interest groups benefit from the Fed's power to create money at will. This power is routinely used in the service of vote-seeking politicians to surreptitiously tax money holders to promote the interests of groups that gain from artificially cheap interest rates and direct government subsidies. These beneficiaries include, among others, Wall Street financial institutions, manufacturing firms that produce capital goods, the military-industrial complex, the construction and auto industries, and labor unions
The Bank of England is unlikely to bail out any unlucky holders of "Farrer Notes" should it become apparent that are only worth the paper they are printed on. As we are seeing right now the Bush and Brown notes are being bailed out. So expect lots and lots of inflation, at least in terms of Bushes and Browns. Banks advance loans on a base of government issued money that gives them an unwarranted degree of credibility. Without a central bank I have little doubt that a fractional reserve bank wouldn't last very long in an unsubsidised marketplace.

Who's to blame?

Why, leftist politicians of course.

Unfortunately this video tells us the John McCain is the answer. I doubt that McCain would sort out the fractional reserve governmental monetary system about which only Ron Paul among politicians seems to have a clue.

The British press has been strangely quiet about the Community Reinvestment Act. Does anyone expect that David Cameron will tell the Conservative gathering in Birmingham about its contribution towards the sub-prime crisis? Will Cameron attack the fiat money system? Will pigs fly?

Enjoy the video:

Sunday, 21 September 2008

Were the short sellers to blame?

It seems very unlikely. Apparently they comprised 3% of the participants during Wednesday's collapse of HBOS shares.

Adopted Domain lays bare the economic ignorance at Holyrood:

Why did HBOS go down? If you listen to the Holyrood debating chamber led by the SNP, the recent blamestorm pointed almost unanimously toward the short-sellers - the spivs and the speculators - who took a one way bet against the public purse. Andy Cochrane and Holyrood Chronicles are surprised to see politicians from all the main parties lining up to have a populist dig at the short sellers, with the exception of the Greens, Patrick Harvie, who seemed to be the only one with any financial literacy whatsoever. This, despite the fact that many of the same short sellers who allegedly brought down HBOS, will have lost a great deal of cash when the market rebounded at the end of last week, largely led by financial stocks.

The act of shorting stock does not bring banks down, a lack of trust in the business model does. It seems much more likely to me that the fact the growing perception in the city that HBOS had become too dependent on the wholesale money markets, just like Northern Rock, and the fact that it had the biggest exposure to the bust balloon UK property market, may well have been much bigger factors in their demise. Yet no criticism from Labour, the SNP, the Tories or the LibDems on the management of HBOS. And Gordon Browns solution to the crisis? Make a yet bigger bank.

I wonder whether MSPs really are as financially uninformed as they appear to be. Perhaps they just hope that spouting off about "spivs" will appeal to the electorate, no matter how nonsensical that theory may be. I have the horrible feeling that they really are ignorant and that doesn't make me too optimistic about what the political class will get up to in the future. Needless-to-say there's no evidence of any greater sophistication at Westminster.

As for HBOS itself, here's a marvellous quote from today's Mail on Sunday. It's about HBOS chairman Lord Stevenson:

Awarded the CBE in 1981 and made a life peer in 1999, he likes to describe himself as "an unreconstructed 1960s Guardian-reading liberal."
If Stevenson had been an unreconstructed 1860s (Manchester) Guardian-reading liberal none of this would have happened.

Saturday, 20 September 2008

Courts! How very quaint

Readers may know that some of FDR's New Deal legislation was challenged in the American courts on the grounds of being contrary to the Constitution.

How much more civilised things are today:

Sec. 8. Review.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

From the LEGISLATIVE PROPOSAL FOR TREASURY AUTHORITY TO PURCHASE MORTGAGE-RELATED ASSETS

Libertarian Alliance

The Libertarian Alliance's Annual Conference is coming up shortly. Note the presence of Hans-Hermann Hoppe and David Friedman.

And here are the thoughts of LA Director Dr Sean Gabb on the current financial crisis.

Will we see the end of ageism?

When I was a simple Finance Director I'd face an audit every year.

You say there's £258,784.18 in the bank; naturally we'll write to Lloyds just to confirm that balance.

We see that you claim to have 30 company cars; let's pick these three at random and actually look at them.

According to the accounts your clients owe the company £2,396,148.69. It's OK if we write to the top five just to get their confirmation, isn't it?

This invoice for a new computer. Which one, exactly, is it? And who authorised its purchase?

And your balance sheet claims that there's £3,253.26 in the petty cash box (this was an ad agency!); you don't mind if we count it right now, do you?

Etc. Etc. Etc.

The problem as I see it is that the people running all too many of today's financial institutions remind me more of the copywriters and art directors with whom I used to work rather than my fellow finance guys. Now those creative types were very nice people and, despite what some may think, earned their money through hard graft. But I'd never dream of trusting them with the company's money.

How on earth can anyone audit the fearsomely complicated financial products that are now falling to bits all around us? Actually, Enron showed that we couldn't.

It's time for a return to simplicity. To the days when one had to save for a few years before (perhaps) being offered a mortgage of 2.5 times evidenced income. And perhaps it's time for the banks to keep on board some of the oldsters who remember previous hard times.

Good Evening Comrades

Following the US financial nationalisations I thought this might be of interest:

John McCain's Top 5 Contributors, 2003-2008

Merrill Lynch $293,010
Citigroup Inc $251,851
Goldman Sachs $223,995
Morgan Stanley $212,821
AT&T Inc $187,673
Barack Obama's Top 5 Contributors, 2003-2008
Goldman Sachs $689,280
University of California $531,070
JPMorgan Chase & Co $449,671
Citigroup Inc $411,504
Harvard University $407,452
Rep. Ron Paul's Top 5 Contributors 2003-2008
US Army $78,255
US Navy $60,226
Google Inc $57,901
US Air Force $56,955
Microsoft Corp $49,323
From Mike Shedlock's blog

Wednesday, 17 September 2008

United We Stand

Who'd have thought that we'd see Newcastle United sponsored by the Bank of England and Manchester United by the Federal Reserve?

Tuesday, 16 September 2008

HBoS and RBS

Shares in HBoS and the Royal have been severely hit in the last two days. Along with Standard Life and Scottish Widows, these companies comprise the cream of Scotland's financial sector and are two of the largest employers here in Edinburgh.

I have no idea what the real underlying strengths and weaknesses of these banks may be, but I am certainly worried. I have an ISA with HBoS although I withdrew 40% of it a year ago when the last panic took place. That money was subsequently invested in a Euro deposit account that's done quite well since then.

I don't really expect that either HBos or the Royal would be allowed to go under: such an outcome would lead to a collapse in the British economy from which recovery would be extraordinarily difficult. But what if either company were to be taken over? Perhaps by HSBC who seem to be the soundest bank in the UK at present? Surely the Edinburgh economy would suffer. Loss of top jobs is always a problem and just how much back office work would remain? Some, but perhaps not all. The knock-on effect would be huge.

Then there's the political question. Would the loss of one or both of Scotland's banks benefit Labour or the SNP? Surely Labour would argue that such an event showed that the Union was all the more necessary. A Scotland that was unable to keep its major financial institutions would need to look to London for its security. Or would Scots blame Labour for what had happened and be even more likely to want to go it alone? I don't know but the situation sure is interesting.

Monday, 15 September 2008

Crisis of capitalism - you must be joking

But that's what millions of fools will be told and will believe.

Vox tells it like it is:

This isn't a failure of free market capitalism. It's precisely the opposite, it's the failure of government-controlled faux market capitalism.
Exactly.

Mises explained what's now happening decades ago. Rothbard put it in easy to understand terms:

Rothbard not only argues for the gold standard; he shows how it can be restored in a practical, step-by-step plan. No other system will stop the seemingly endless monetary inflation of the Federal Reserve system. He also makes his strongest case against fractional reserve banking. This essay was written in 1962 and this edition includes Rothbard's sweeping introduction from 1991, in which he argues that the true gold standard is more viable than ever.
It really is quite straightforward. Any banking system that allows the creation of money out of thin air will go bust eventually. And such a regime is always the product of a socialised central bank. Capitalism is based on property rights that relate to real assets and that's exactly what we need right now. We should no longer allow the predator class to use the state to steal from those who produce real wealth.

Financial News

A good site to look at for financial news is Calculted Risk.

This post has an amazing 658 comments...

Sunday, 14 September 2008

Breaking News: Sitemeter buys Lehman Brothers

Why not? The world has gone mad.

First they came for the smokers...

And then for the horizontally challenged:
A TEAM of NHS nurses is patrolling Scotland's streets to target pot-bellied members of the public and tell them how to lose weight.

Armed with measuring tapes to check waists and equipment to test blood pressure, the "Street Nurses" are policing busy shopping centres, supermarkets and community centres.

Any man with a paunch, or woman with an "apple-shaped" body whose waist measurement is higher than recommended limits is given diet and lifestyle advice or referred to local slimming classes.

What can one say? Why did my father fight against the Nazis?

But some useful idiots are quite relaxed it seems:

People are generally OK about us talking about their weight
But some of us aren't. Not because we've had a few too many pints but because our size is none of the government's business. I have reluctantly come to the conclusion that we are approaching a total breakdown of civilised life in the not too distant future. Whether a Hayekian spontaneous order will be allowed to evolve I don't know. But it's certainly exciting to sit back and watch the endgame.

Tuesday, 9 September 2008

The Joy of Film

I imagine that everyone's seen Gordon Brown's Downfall courtesy of Guido.

Here's another one for those of us old enough to remember film cameras:

Scots Law and the economy

I'm in the middle of reading The Legal Foundations of Free Markets, which is the latest book from the IEA.

One chapter is by Cento Veljanovski and is titled The Common Law and Wealth.

He concludes:

Some laws are more efficient or more conducive to facilitating economic activity and growth than others. It appears that the common law may do this better than civil law systems, at least in some areas and in some jurisdictions.
Under "Europe" the author lists Cyprus, England, Ireland and Wales as common law jurisdictions. Scotland isn't mentioned and has a mixed system with less use of the common law than elsewhere in these islands.

The question is this: Does Scotland's legal system harm economic growth?

I honestly don't know.

Monday, 8 September 2008

Fannie and Freddie

The Daily Mash puts it this way:
US BECOMES WORLD'S BIGGEST COUNCIL ESTATE
Not quite, but not that far off.

This is one of those bailouts that attract the "socialism for the rich and capitalism for the poor" comments. I'm not too comfortable with that expression: a government bailout of western banks and eastern governments isn't an example of "capitalism" but it is the sort of thing that gives capitalism a bad name. Fannie and Freddie should have been allowed to go bust. That's what the market said. Instead we see the shares of British banks (they're heavily involved in this mess as well) leaping up today, especially the ones most into the mortgage market. All this will end in tears and the more these bailouts continue the worse the final crash will be.

Sunday, 7 September 2008

Is oil peaking?

I don't know, but I think that it may be. Of course, the peak oil concept doesn't mean that there isn't going to be any more but that that production has reached its maximum level and that severe consequences will follow.

I recommend listening to this broadcast from the excellent Financial Sense Online. The first half is an interview with James Howard Kunstler. That's followed by Paul Mladjenovic, an Austrian School financial advisor.

Here's Kunstler:

Some regions of the country will do better than others. The sunbelt will suffer in exact proportion to the degree that it prospered artificially during the cheap oil blowout of the late 20th century. I predict that the Southwest will become substantially depopulated, since they will be short of water as well as gasoline and natural gas. I'm not optimistic about the Southeast either, for different reasons. I think it will be subject to substantial levels of violence as the grievances of the formerly middle class boil over and combine with the delusions of Pentecostal Christian extremism.

All regions of the nation will be affected by the vicissitudes of this Long Emergency, but I think New England and the Upper Midwest have somewhat better prospects. I regard them as less likely to fall into lawlessness, anarchy, or despotism, and more likely to salvage the bits and pieces of our best social traditions and keep them in operation at some level.

There is a fair chance that the nation will disaggregate into autonomous regions before the 21st century is over, as a practical matter if not officially. Life will be very local.

These challenges are immense. We will have to rebuild local networks of economic and social relations that we allowed to be systematically dismantled over the past fifty years. In the process, our communities may be able to reconstitute themselves.

Now Kunstler is a bit of a leftist. He sees government solutions that I don't think are right or that would work. But that doesn't mean that there isn't a problem. Whether oil is peaking or not is an empirical matter but solutions are subject to a priori considerations. Libertarianism is a philosophy of private property rights and such rights are inherently conservative, with a small "c" of course. I see no contradiction between libertarianism and solving of any challenge from peak oil; indeed property rights are the only possible way forward.

What I find really interesting is how this would affect Scotland.

At first sight it doesn't look too good. Declining oil production would adversely affect Scotland's finances, whether independent or not. On the other hand an independent Scotland might chose to reduce production so as to conserve an increasingly valuable capital asset. But there are other considerations.

Peak oil is terrible news for airlines (listen to Kunstler) and Scotland is way out on the edge of Europe and even of the UK. Would Edinburgh's financial industry be as robust if air services to London were cut back? And what about tourism?

But there's more isn't there? Here's Kunstler again:

The economy of the mid 21st century may center on agriculture. Not information. Not the digital manipulation of pictures, not services like selling cheeseburgers and entertaining tourists. Farming. Food production. The transition to this will be traumatic, given the destructive land-use practices of our time, and the staggering loss of knowledge. We will be lucky if we can feed ourselves.

From this point of view Scotland comes out quite well. We can certainly feed our population of five million from local production should that become necessary. And water and non-oil energy resources are plentiful. England, especially the South, may be quite another matter.

Tuesday, 2 September 2008

Targeted tax cut

Guido notes that the stamp duty holiday isn't going to benefit many in the southeast of England.

Quite.

But what about Glenrothes?

The exploiters and the exploited

Almost a year ago I opened a Euro deposit account. So am I happy to read that the pound has now plunged to an all-time low against the Euro? No I'm not.

I see this morning that my Euros have made a gain of 17% since last October and despite some recent turbulence my gold shares are worth more than double what I paid for them. Am I some kind of mini-Soros figure whose aim is to bring down the pound and the government? No, I'm just a guy who is trying hard to protect his savings against a rapacious political class. Unlike some, I don't have a gold-plated, inflation-linked pension guaranteed by the government taxpayer. I have to rely on my wits and that means spreading my investments around a bit.

Writing on a possible housing bailout, Alice Cook has this to say:

The title is very telling: "Government must act on property market now". The RICS didn't say "sellers must act", or "Estate agents must act". It didn't even point to themselves and say perhaps we, the RICS should act. No, the RICS said that the "housing market on its knees, the RICS is calling on the Government to act swiftly and decisively on a range of proposals to help the buying and selling process - now and in the future - for both consumers and business."
What this demonstrates is that the political class that I mentioned above does not consist solely of MPs, MSPs and the like. It also includes well-heeled professionals - in this case the surveyors - who use the state for their own private ends. The real class struggle is between those who live on the free market and those who look to the state to further their own private ends. The enemy class extends far beyond the politicians.

Monday, 1 September 2008