Time to End the FDIC

As most people are already aware, J.P. Morgan Chase lost some money. Well, maybe this is how the congress would put it, since $2 billion is chump change to them, but this is a big deal. Chase may go down for this one. They invested poorly and are now in pretty bad shape.

So what does this have to do with FDIC? Well, how many people who have money saved with Chase have looked into their business plan, their profit margin, their investments, or anything? They do not need to. Savers just put money into a bank and do not care how the bank is run because they are covered by FDIC. In essence, this allows banks to do whatever they want as long as the savers keep coming in. Banks then only need to market well to stay in business. Is it any surprise that the big banks have stayed as the big banks for as long as they have?

What does this mean for economic efficiency? If banks can do whatever they want, then they are not interested in making the best investments. This is a net loss for the capital structure of our economy. Instead of loans going to the best projects, it goes to whoever the banks like most. This is pretty similar to the problem that we have with government spending.

And the alternative? Without FDIC, savers would need to look at the business practices of banks to determine who is doing the best and where their money would be safest. This would ensure that at least we are tending toward optimal investment.

This is a great opportunity to open up a debate about the merits of FDIC. Without FDIC, would Chase have been big enough to have had this great of a loss? I doubt it. It is time for FDIC to end and allow for more competition in the banking industry.

What Would Happen Without Welfare?

Begin a thought process with me. Let's just look at medicare and medicaid. In 2010, the US government spent $793 billion on these programs. There is a lot more than medicare and medicaid to welfare, but let's just look at this. Now, imagine that instead of the government taking that money from business and people and giving it away that the money instead was left in the hands of those to whom it belongs. What then?

First and foremost, to be sure, many people would be left without health insurance. Even as the extremist libertarian that I am, I can admit that this is a bad thing. All other things being equal, people having health insurance is much better than them not having health insurance. Fortunately for libertarians, though, all other things are not equal in this case. We have to remember that money. What does this other money do? What is its purpose?

The extra money will either be spent or invested. The spent money increases profit margins and the increased investment provides the capital with which to furnish new jobs. So the people who have lost health insurance can now find new jobs because of that capital now being freed up.

But is this alternate scenario worthwhile? Is it better that the money is providing jobs instead of just directly going to pay for health insurance? From the point of view of the person who was taxed, the situation is much better, because now he is getting more for his money. From the point of view of the person who was getting the health insurance, he is now getting the money for insurance plus some spending money for himself. His situation is improved because of the change.

Yes, it is a simplistic analysis, but what do you think of it? Is this a worthwhile idea?

Did Cash for Clunkers Work?

A microcosm of the Keynesian idea of stimulating aggregate demand would have to be Cash for Clunkers. Here was an industry which experienced a tremendous crash because of the recession. The Keynesian cure would be to give people money to buy new cars. With this new demand, the auto industry would start making new cars, providing jobs, and those jobs would create demand in other industries, and so on and so on. It is the multiplier effect. Spending money prompts production prompts more spending. It is a net negative.

Of course, as with most Keynesian economic theories, it is seriously flawed. Keynesians do not understand capital markets. When a business experiences new demand, there is pressure to expand. That expansion, however, does not come from profit alone. Businesses must borrow money to meet the new demand. It would take too long to wait for profit to fund the expansion. This is where investment enters in. However, recall today that much of our capital is being used up by government. So even though interest rates are low, commodity prices are spiking. We cannot ignore scarcity; there is only so much capital to go around. Government is using all of that capital on its stimulus programs.

So in our current economic situation, what would happen when you try to stimulate demand? If it is too expensive for businesses to expand, the only result can be higher prices. This is where the example of cash for clunkers comes in. Look at what happened to the price of used cars as a result of the programs. But there was some growth in the auto industry as a result, but that has crawled to just 0.4% in the 2nd quarter.

But people might say that the benefits in this case outweigh the negatives. But alas, I did not discuss all of the negatives. The Broken Window Fallacy states that when money is spent on one thing, it is necessarily not spent on something else. Opportunity cost is a very real issue. So because consumption was driven in the auto industry, growth in other industries was necessarily stifled. These other industries, where consumers were actually demanding growth, must now comparatively shrink as compared to the situation we would have been in. We are worse off as a result since the products we demand are not produced as they can and should be. Is government intervention saving our economy? Not likely.

Related Articles
The Double Dip is Upon Us
Private Sector Job Growth: Before and After the Recovery
The Phillips Curve is Wrong, Stupid, and Bogus

The Double Dip is Upon Us

As you know, for a while I have been very doubtful about this recovery. The government figures were great. Unemployment was finally starting to fall and home prices were at least starting to steady. But then came the news yesterday that home prices in major metropolitan areas were starting to fall again, and today the news came that employment numbers were bleak. This double dip is on.

But how could this be? Stimulus and TARP were supposed to be the answers. Without TARP, our economy would have fallen to shambles, and without the stimulus programs, spending would have fallen and destroyed the economy. Let us not even imagine what would have happened had we allowed devaluation to prosper and did not engage in quantitative easing.

The only reasonable conclusion is that the public was swindled. TARP was not necessary. Stimulus was not necessary. Quantitative easing was not necessary. Even Cash for Clunkers was not necessary. Speaking of Cash for Clunkers, look at what has gone on in the used car market. Mises.org has posted about this problem many times. This post I believe explains the problem most clearly.

And if it happened to Cash for Clunkers, should we not expect the same things to have happened for these other programs? Is it any surprise that the price of gas is starting to rise? Is it at least possible that trying to stimulate demand and devalue the currency resulted in higher prices for most goods? We raised demand and provided a greater supply of money. Why should any of us be shocked by this?

This recession has been going on for years now, and it looks like it is only going to get worse. Stimulus and TARP and quantitative easing propped up those businesses that should have failed. We have capital being squandered by companies that have no right to be holding onto it. By giving money to those that ran their businesses into the ground, we effectively hurt those businesses that knew what they were doing. The housing market should have shrank. Instead we lent it more money and tried to get it to grow. We are not allowing our economy to correct to the demand of consumers. Until that happens, how can we ever expect to grow and see employment rise? Until we stop trying to fix the problem, the problem will not be fixed.

Related Articles
Private Sector Job Growth: Before and After the Recovery
Whom Should we Blame for High Gas Prices?
Why is the US not Growing as Fast as it has?
Inflation is a Problem and it is Here Now

Why is Inflation so Bad?

I intend to have a much more detailed answer to this question some time in the future, but for now I thought that I would try to answer the question in a somewhat limited fashion. The word inflation has a few different meanings. Today when most people hear the word they think about a general rise in prices, or about stagflation in the 1970s. It is easy to see why this definition is popular today. Price inflation hurts and it is obvious. It makes food and gas and all goods more expensive, and we feel the pinch directly. Back in the 1800s, though, the word inflation had a very different meaning. Rather than price inflation, it meant monetary inflation, that is, a general rise in the supply of money. Now this is interesting, because today monetary inflation happens and it happens to a great extent. No one is going to deny that fact. However, central banks think that they can get away with it because price inflation is not all that high. They think that they have fooled us.

I will not go into how price inflation is bad, because that is obvious. Monetary inflation, on the other hand, hurts us in a more indirect way. The easiest way to see this is with simple economic analysis. By the laws of supply and demand, we know that when supply has increased, price will decrease, all other things being equal. So when we have a higher supply of bills, therefore, the value of each of those bills will be lower. Now, some will point out that the all other things being equal stipulation is not always true, and granted, it usually is not true. However, the fact remains that the value of the bills is lower than they otherwise would be without that inflation. There is no way around that fact. Therefore, monetary inflation makes us poorer than we would be, and that is always true.

Though this seems bad, this is not the most sinister effect of monetary inflation. A more thorough analysis of the issues requires looking at the practical way that government have gone about instituting that monetary inflation. In the United States, at least, the monetary inflation comes about when the Federal Reserve purchases treasury bills (that is, the debt of the United States). The Federal Reserve, in essence, is lending money to the United States, but that money is newly printed (in effect). The government then goes out and spends this money, usually with new construction jobs. These jobs use up capital like machines and raw materials and labor. Now, inflationists like to say that this has no effect on interest rates. They are right, this aspect of the Federal Reserve does have no effect on interest rates. They then go on to say that capital markets are not affected. On that point, they are dead wrong. The new construction projects undertaken by the government necessarily use up capital, and this means that capital goods are more expensive for everyone. So even though interest rates have not gone up, businesses now need to get a bigger loan in order to cover the costs of their projects. Even if the price of capital goods has not gone up in time, they are necessarily higher than they otherwise would be. But why is this bad? Because government is necessarily less efficient than the private sector. They undertake projects based on what is politically favorable; they do not base it upon consumer demand. So the cost of the things we want, essentially, go up because the government is building things that we do not want as much. That makes us worse off.

So do not be fooled by Ben Bernanke prattling on about how prices are not rising, so his actions are not affecting us. He is lying. Monetary inflation is hurting us, both directly and indirectly. We are less wealthy than we otherwise would be without the inflation, and goods are more expensive than they otherwise would be because the price of capital has gone up. Just say no to monetary inflation. It is a recipe for destroying wealth.

Related Articles
Inflation is a Problem and it is Here Now
Annals of Well, Duh, but not so fast Paul
Whom Should we Blame for High Gas Prices?
Gallup's Economic Confidence Index is Terrible