Engineered Rise of Marx
Karl Marx proposed 10 points to centralize production in the hands of state authorities for the good of the people. I have read Karl Marx’s Communist Manifesto. I often wonder how many conservatives can actually say that. I’ll bet of those who can, the number would be actually quite low. Out of all the conservatives out there, I wonder how many have actually heard this quote from Marx’s manifesto which is point number five on his road to communism:
To bring about “… centralization of credit in the Banks of the State, by means of a National Bank with State capital and an exclusive monopoly…”
Because I’ve read the manifesto, Das Kapital and many other writings of Marx’s, I have a unique perspective on our favorite socialist theorist. Simplified, to combat one’s enemy, you must know your enemy. According to Reuter’s columnist Bernd Debusmann book sales and writings by Karl Marx are on the rise as the bastion of free market capitalism, the United States, would seem to be collapsing under its own weight of indebtedness. However, can we truly blame capitalism for the worst economic crisis since the Great Depression or perhaps this blame has been engineered in some small way?
If Karl Marx were to rise from the dead today, he would be pleased that most economist and financial commentators, including those who claim to support the free market, would agree with him. Indeed many commentators from the Main Stream Media including some from the Wall Street Journal, analyst from the Heritage Institute and even some on this very blog made declarations over the last two years in favor of injecting massive liquidity into our economic system and have argued that those injections should be engineered by the central bank. Many of the same voices were calling for the same intervention after the dot-com bubble burst in 2001 and got all the liquidity they needed in the form of artificially engineered low interest rates.
Any person walking down Main Street could stop and ask any random stranger whether they think there is anything wrong with our economic system and they would more than likely get an answer in the affirmative. However, that same person would be unlikely able to tell you exactly what is wrong. What this means is that absolutely all economists will agree that there is something wrong. Undoubtedly the bailouts, stimulus and liquidity kept many financial firms currently solvent, but the repercussions have simply been siphoned off capital/market resources and redirected towards unproductive sectors, killing job creation and making businesses less productive and therefore less successful at stimulating job growth. What all the bailouts stimulus money and high liquidity has done is create yet an even more burdened tax structure that is slowly or quickly heading towards insolvency, pending which economists you listen too. We also must remember that keeping the money supply large (market liquidity) through artificially low interest rates is no different than injected treasury cash. It is an invisible tax, or a tax with very little representation in the form of legislative oversight, that redistributes resources, just like bailout and stimulus cash, into the hands of debtors and those who made unwise investments in the 1st place.
For the reader, I hope a nice little tight picture is beginning to develop.
The rationale for the Government or the Central Bank to intervene or interfere with the free market is always the same, they fear reliving or rehashing the Great Depression. They will say:
If we allow our financial institutions to fail due to insolvency, there will be a general collapse of financial markets, followed by the drying up of credit and the catastrophic effect this would have on all sectors of production. ~ This is the opinion taken by most center-right economists, namely Bernanke and Paulson (Chicagoan School of Economics).
This opinion is based on Milton Friedman’s (whom I still like even tho his opinion here is flawed) thesis that the Fed aggravated the Depression by not pumping in enough money into the financial system following the market crash of 1929. The Fed follows this misguided policy of Friedman’s, which is Keynesian influenced, and couple this with bad government regulation and you have the perfect recipe for a crisis. This will then institute an artificial need for the government and the central bank, based upon Friedman’s opinion, to respond to this emergency by keeping markets running which will, of course, override or trump concerns about future tax burdens and an over inflated money supply. This is actually the view mostly associated with Chicagoan economists (Paulson and Bernanke); however, this is what is supposed to contrast with the left-leaning Keynesian approach, whose solutions are very similar despite a different view of the causes. However, there is an economic theory out there that won’t compromise free market principles and, surprise-surprise, coherently explains why we get into these bubbles and crash situations. This economic theory contrasts Marx’s proposal # 5:
Government Control of Capital
For over a century and especially the last few decades, Austrian School economists have warned what would happen if you have a currency not commodity backed (think gold or silver) coupled with a fiat central banking system that allows the economy to be easily manipulated.
The aspect that must be understood here is that fiat currency (money backed by nothing but good faith) has its obvious draw backs such as price inflation, debasement of the currency, ect. and what this means is that easy credit and artificially low interest rates send wrong signals to investors and exacerbate business cycles like a rubber band making the natural swing (think changing of the seasons) that much more pronounced and worse. The business cycle has a natural recession (winter) and a natural productive high (summer). Keynesians will be quick to point out that their inflationary policies have, since the institution of the Federal Reserve, kept us out of recession more than prior to their existence (Austrians will stipulate to this fact). However, we will be quick to point out and rebut this claim by showing that it actually institutes a rubber band effect whereby the recessions that we do enter into are much more severe, longer, than what the normal Free Market cycle would endure. Simplified, there was no such thing as a decade long Great Depression until the institution of inflationary policies that fiat currencies enable. This inflationary policy allows for the central bank to essentially create money out of thin air as if it grew on trees. On top of that, this thin air creation of money continues in the form of fractional reserve banking increasing credit supply many times over. When money creation is sustained, a financial bubble begins to form and feed on itself allowing higher prices, inflated prices, of property owners’ titles. These inflated prices allow more borrowing on inflated equity which allows the owner to spend and borrow more, leading to more credit creation and even higher prices.
As prices get distorted, mal-investment, or investment that would not occur under normal free market conditions, accumulates and accelerates. Despite some financial institutions knowing better, these institutions join in this feeding frenzy of easy credit expansion or irresponsible lending for fear of losing market share to competitors. With ‘liquidities’ in an abundant supply and burning a hole in the pockets of lenders and investors alike (the shark like feeding frenzy), this encourages more and more risky decisions to be made in the name of increased yields while leveraging begins to approach dangerous levels. All this feeding frenzy fueled by fears of losing market share and being out performed by competitors. Essentially, the inherent flaw in capitalism, greed, is used against its self and enabled by truly Keynesian economic theory, not pure free market Austrian.
During this manic phase, Keynesian and some Chicagoan economists populate the belief that this artificial stimulation or boom can go on forever, in essence, the so called sweet spot of inflation. Only Austrians warn that this artificial stimulation cannot last forever, as Hayek and Mises did before the 1929 crash and as followers have done for the first part of this decade.
When this ponzi scheme or if you prefer pyramidal scheme collapses, when (certainly not if) because of a series of cascading failures or when the Fed believes inflation is getting uncontrollable, what should be done? It is obvious credit will shrink and loans will be called back in order to reallocate assets into safer investments getting out of the ‘risky business.’ Mal-investments obviously should begin to be liquidated. This will allow prices to begin to return to realistic levels (market correction) and allow stuck resources to be reallocated into high demand productive sectors. This is assuming that Keynesians don’t interfere more with things like stimulus packages that keep assets and resources tied up in unproductive or politically motivated sectors of the economy. Only then will the economy begin to fire on all cylinders again. Stimulus combined with low interest rates will only keep it limping along in an artificial level recreating or at the very least attempting to reinflate a busted bubble. Biting the bullet and allowing the mal-investment to fail and the assets thereof to be bought up and in correlation with steadily increasing interests rates to a more market sustainable level will we see actual recovery, not artificial recovery, to take place.
Friedmanites, who have no conception of mal-investments and never raise any issue with the boom, also cannot understand why it inevitably leads to a crash. Keynesians also suffer from the same delusion perhaps even more so than Chicagoan economists. Both only see the drying up of credit and then blame the Fed for not injecting enough liquidity into the markets to prevent it, further stimulating/manipulating the artificial boom resulting in an even more tragic recession than the bullet we should have bitten; eventually resulting in the dreaded depression. Essentially and using the rubber band analogy, the farther you stretch a rubber band, the harder it snaps back and the lower and deeper the recession or eventual depression will become.
Central banks and governments cannot turn lead into gold or make unprofitable investments into profitable ones. Even though they may try through artificially low interest rates, they cannot force financial institutions into lending more, especially when they are so exposed (as we know a good amount of the bailout money just sat and for good reason). This is why calls for throwing more money at the situation is not only misguided, but absolutely ludicrous for it prevents a real recovery from ever occurring.
Injection of money into the problem started all the way back at the dot-com burst and has progressed all the way till today. At best, it has stabilized the situation and has artificially kept it from getting worse momentarily. Such measures can only delay the market correction and turn what should be a quick recession into a prolonged one. Friedman — who, contrary to popular perception, was not a foe of monetary inflation, but simply wanted to keep it under better control in normal circumstances, i.e. the sweet spot — was wrong about the Fed not intervening during the Depression. The Fed actually tried to repeatedly to inflate during the depression but credit still went down suffering the effects of the artificially stimulated mid 1920s (after Harding’s administration who had the right idea of how to combat a looming recession). This is a key difference in interpretation between the Austrian and Chicago schools of economics. Chicagoans, like Keynesians, like to throw money at the problem. Simplified, the old adage of chasing bad money with good is always thought to be a losing situation according to common sense, but not Keynesians.
As Friedrich Hayek wrote in 1932, “Instead of furthering the inevitable liquidation of the maladjustments brought about by the boom during the last three years, all conceivable means have been used to prevent that readjustment from taking place; and one of these means, which has been repeatedly tried though without success, from the earliest to the most recent stages of depression, has been this deliberate policy of credit expansion. ... To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about ...”
The confusion or perhaps better put, the misguided-ness, in the Chicago school economics on monetary issues is so profound as to lead its adherents to support the largest government grab of private capital in world history. By adding their voices to those on the left (Keynesians), these confused free-marketeers are not helping to “save capitalism”, but contributing to its destruction and what I conclude to be the engineered rise of Marxism.
