Wednesday, September 16, 2009

Actions Speak Louder than Words: The Obama Show on Wall Street (Act II)

When our president espouses free markets and trade during a speech to Wall Street, I have to question his sincerity. Anyone who is favorable to economic freedom, such as myself, should find it difficult to accept words alone when Obama begins to advocate free markets and free trade. The latter, more specifically, was stated as trade under "conditions" as a necessary path to continue "free trade".

At best, Obama has a completely different view of the free market as do pro free-marketers express, and at worst his comments are nothing more than buzzwords insincerely thrown about in an attempt to deceive those who oppose his policies. In either case, the evidence contradicts the spoken words.

The specific statement made to Wall Street, and main street, was that the president is clearly now and always has been a promoter of the free market. Recent actions taken by the White House and previous pronouncements by the president himself indisputably negate such a proclamation. When judging a person's sincerity you must look at their actions, not just their words.

Over the past 12 month period, although most all of these anti-market sentiments go back much farther, Obama has called for and or enacted the following anti-market programs / measures; Government stimulus, equitable redistribution (via tax laws and government programs), higher corporate taxes, rewarding firms who keeps jobs in America (anti-globalization / protectionism), increased union powers, bailouts, cap and trade legislation, and government-run health care. Moreover, on January 8th of this year, Obama stated, "Only government can break the vicious cycles that are crippling our economy". While the list of contradicting anti-market sentiments does not necessarily stop there, this should be sufficient evidence that our president is not sincere in claiming adherence to free market principals. In fact, each of the above programs and claims are the antithesis to a freely functioning market.

Mixed economies are hardly stationary, that is often moving either toward or away from central planning. And, planning under the guise of market mechanisms does not constitute a free market. As Mises eloquently stated, "If people speak of "planning" they mean, of course, central planning, which means one plan made by the government -- one plan that prevents planning by anyone except government". Free markets, of course, work under the mechanism of everyone planning toward meeting their own desired goals through freedom of mutual exchange.

The idea of government interference as a "solution" to economic problems leads, in every country, to conditions which, at the least, are very unsatisfactory and often quite chaotic. If the government does not stop in time, it will bring on socialism - Ludwig von Mises, Economic Policy; Thoughts for Today and Tomorrow.
After mentioning a proclivity toward free markets, the president went on to state that in order to encourage and continue "free trade" we must strictly adhere to current trade agreements. The only agreement necessary in a freely globalized economy, or bilateral free trade, is the commitment to allow the free movement of goods and services across borders - that is in addition to upholding laws that protect private property.

Again, we seem to have either a disconnect in the understanding of free trade versus "managed trade", or simply another instance of insincerity. Further evidence for the latter is the recent passing of a 35% tariff on imported Chinese tires. As stated by IBD editorials earlier this week, "This protectionist move, meant to please a single labor union, takes a big bite out of our global trade credibility, making us look like a country that can't compete in global markets".

The imposition of tariffs by governments both interferes with free markets and free trade. We eliminate means of consumer choices by limiting freedom of voluntary exchange. Moreover, actions by our government such as this have the effect of supporting the public's otiose "anti-foreign bias" toward trade imports.

At the end of the day, after the show is over, we seem to be only left with one option. We must accept that, at least for now, we have been deceived, and the only compromise made in Washington will be our economic freedom. Tomorrow is likely not to bring us any closer to freedom from intervention, but rather closer to central planning.


Tuesday, September 15, 2009

Regulation Mysticism: The Obama Show on Wall Street (Act I)

One thing is for certain, the current administration does not fail in providing ample theatrical events. Monday's speech on Wall Street was again a success in providing some of the same "entertainment", along with being complete with errors and fallacious notions regarding the laws of economics that we have come to expect from the Obama administration. Much like the speech last week to Congress on the health care issue, this week we witnessed much theater but little substance.

Three acts of insincerity that stood out specifically, to me, in Obama's speech were the president's constant calls for "common sense regulations", portrayal of free-market advocacy, and his statements on free trade. I will cover regulation here, and will touch on the other two topics in a separate piece.

The pronouncement of regulation and reform seem to be never ending. However, what type of regulation, how past regulation created the current economic mess, and at what cost we are willing to tolerate for new regulations is constantly lacking in clarity. Moreover, financial market regulation in the context provided by the White House is at best a euphemism for government control, and at worst a government-sponsored, non-market path toward special privileges.

My proclivities in the science of economics are aligned with the Austrian School's explanation that the laws of economics are a priori, thus these laws cannot be changed from day to day or year to year - nor from one administration to another.

Government imposed regulations do not change the way in which rational people respond toward economic incentives. Rather, poorly designed government-created incentives lead to new avenues of risk, uncertainty and market distortions. IBD editorials on Tuesday, in an article titled Lessons Unlearned, stated in simple terms how foolishly inaccurate the premise of calls for "reregulation" in the financial markets is at preventing another market meltdown. "Bad government, not Wall Street, caused the crisis - not a popular sentiment, but true nevertheless".

According to Obama's speech, deregulation of the past is specifically what had caused irresponsible behavior and excess. Aside from a congressional act in 1999 that allowed bank holding companies / institutions to provide and own non-banking financial services (a repeal of the Glass-Stegal Act of 1933), the deregulation of the financial markets is largely a myth.

The largest contributing factors of the financial mess beginning in late 2007, starting in the housing sector via risky packaged loan derivatives and Fed's easy money policy from 2003 to 2004, were the new incentives created and championed by our government. Specifically, the congressional calls for "housing for everyone".

A sharp Boom and bust in the housing markets would be expected to affect the financial markets, as falling house prices led to delinquencies and foreclosures. Those effects were amplified by several complicating factors, including the use of subprime mortgages, especially the adjustable-rate variety, which led to excessive risk taking. In the United States such risk taking was encouraged by government programs designed to promote home ownership, a worthwhile goal but overdone in retrospect,
explains John B. Taylor in Getting Off Track.

Enter laws of economics. People respond to incentives, and when government changes or makes new regulations pertaining to our financial sector, such as encouraging housing for everyone via prodding Freddie and Fannie to take on a larger portion (pouring in loads of money for loans) of the secondary mortgage market and the Fed's role in making money extremely cheap, what you end up with are new incentives not a lessening of risky behavior.

Obama's comment about "common sense regulation" implies risky behavior and excess can be regulated out of existence, and this is where he is both misleading and inaccurate.

In order to prevent moral hazard (externalized risk), we must eliminate bailouts, implied government backing and sponsorship, special favors to coveted financial institutions (by the Fed and Treasury), end the notion of "too big to fail", and reinstate the rule of being responsible for your own actions --- upholding laws that respect and protect private property (including the fruits of one's labor). In other words, allow necessary failures, a much necessary part of capitalism as are profits, to take place to ensure optimal allocation of resources and speedier correctional periods.

Regulation should not and does not imply good behavior or efficient markets, just as "ought does not imply can". This is false, and recent history proves it. Therefore, it is a foolish statement to suggest that new regulation will prevent, if not eliminate future economic distress - of any level or scope, even when the proposed new regulations are professed as "common sense".