September 30, 2011

Ben Bernanke and Interest Rates

In early August of this year, Ben Bernanke and the Fed decided that they would artificially keep interest rates at or near zero percent for the next two years. Why would he do that?

The reason he is doing this is because he wants to maintain the rate of inflation. Or in other words, he wants to avoid deflation. I think deflation is exactly what this country needs. We need to get back to a system of savings. We need to under consume at the present so that we can allow for future consumption. We need to stop keeping interest rates at zero percent, and allow the market to establish a real rate of interest. You know what happens when interest rates are set below their natural rate? It encourages malinvestment; say for example, the housing bubble.

I am no expert on the matter but I feel that I have a strong grasp of the situation, and the main culprit is the Fed. Do people realize that the housing bubble was created because the Federal Reserve artificially lowered interest rates after 9/11 in an effort to increase the flow of capital? Well, it did just that, and when money was pushed into the economy, a large percentage of it was being pushed into the real estate market, and these low interest rates increased the demand in housing. Couple this with the fact that Fannie Mae and Freddie Mac were being sponsored by the government, and you have the formation of a bubble. Fannie and Freddie were able to take on risk because of their government sponsorship, and so they started selling their mortgages within a secondary market. Whoever chose to invest in these mortgages then took on all the risk, while Fannie and Freddie soaked up the profit. (And by the way, the people that were forced to take on the risk were the taxpayers)

Because there was no longer a risk for Fannie and Freddie to give out loans, the rates to do so were extremely low, enticing people to have a further increase in demand for buying a home. This caused subprime borrowers to take out loans that they couldn’t afford. People with no income and no assets to speak of were given the ability to buy houses. That’s like being able to buy a brand new Mercedes with a horrible credit rating and a lousy job. It doesn’t make any sense.

Well, then the economy started to turn bad and these subprime borrowers could no longer make their house payments, and no one wanted to buy these homes from those borrowers so they were forced to default. They couldn’t even haggle with their banks because mortgage-backed securities left people going on wild goose chases to find the original lender of the money. It was a total mess and it is all because of government interventionism. If we had a free market, then a subprime borrower would have to pay huge interest rates in order to buy a house, not the 1% interest with no money down. Or they would simply be turned away, which would have been better for the rest of us. There is a reason certain people do not own homes … it is because they cannot afford to do so!

I’ve said all of that so that I can say this; Ben Bernanke keeping interest rates at an artificially low rate will no solve our problems. It is interventionism. It is government regulation of a market that should be free-standing. He is destroying the value of our currency with these “easing” protocols. I think it is ridiculous that after two failed attempts he is going to do it again. The Federal Reserve is a large reason why our economy tanked in the first place, and by printing more and more money, Bernanke and the Fed are killing the value of our currency. How does printing more money and then spending it encourage savings? It doesn’t. And that is exactly what we need to be doing. We need to start living more within our means so that we can promote future consumption. We need to stop keeping interest rates at zero percent. And we need to stop printing money as if there are no consequences of doing so.

Take a look at this article below. It talks about a new plan that the Fed is implementing. The article states that “the central bank will sell $400 billion of its U.S. Treasury securities maturing in the next three years and replace them with longer-term bonds maturing in six to 30 years. The program is meant to drive down long-term interest rates to make borrowing cheaper.” My argument is that we need to stop borrowing money. All this plan will accomplish is increasing the incentive to do just that, borrow.

Does anyone agree with me that the government needs to stop keeping interest rates at an artificially low rate and that saving, not borrowing, needs to be encouraged? The argument appears sound, but then again, maybe I’m watching too many Peter Schiff videos on YouTube.

Dear Brazil, Thanks for going on strike this week so I could write about inflation. -Sarah

Bank workers in Brazil went on strike on Tuesday demanding 12.8% pay increases because of an inflation rate of 7.33%. In August, Brazil lowered its equivalent of a Federal Funds Rate (Selic interest rate) from 12.5 to 12%. They were hoping that the struggling economic climate would bring the prices of imports and commodities down enough to lower their inflation rate to 6.5%. Over the past month postal workers and metal workers have demanded higher wages due to inflation. Now the bank workers are asking for wages that are much higher than the inflation rate. This could possibly worsen the problem and increase inflation even further.

What would Austrian Economics say about this? The inflation rate is creating unfairness in the economy. People who receive the inflation money first will benefit by being able to afford the higher prices. Their income will increase, while most pre-inflation prices still exist. However, the rest of economy, whose incomes remain constant, will have to make sacrifices and buy less because of the new, higher prices. This has sparked the wave of strikes by metal workers, postal workers, and now bank workers.

The Austrian solution would be for the government to tax more instead of inflation, “There can be no secret way to the solution of the financial problems of a government; if it needs money, it has to obtain the money by taxing its citizens” (57). Taxes do not create a rise in prices. When taxes increase, consumers have less income to spend, which the government spends instead. There is no increase in prices, but the government can still get its money and achieve its goals.

September 29, 2011

Has the Affordable Care Act raised costs paid by the consumer?

The Government’s well intentioned Affordable Care Act, must now come to grips with a survey done by the Kaiser Family Foundation that reveals that the Act may have been counter productive in the aim to reduce the average cost of welfare across the nation.

The survey found that insurance premiums rose by 9 percent in 2011. Healthcare costs for a single worker went up on average from $5,049 to $5,429, and for a family, costs rose from $13,770 to $15,073, on average.

When confronted with damage from the report, the White House dismissed the report accusing it of, "looking backwards". Nancy- Ann DeParle, the White House Deputy Chief of Staff elaborated on the dismissal declaring  "When we look to the future we know that The Affordable Care Act will help make insurance more affordable for families and businesses across the country".

The act seems to have only changed whose name appears on the check. Instead of Joe employee paying for his own healthcare it is now Joe employer paying not only for Joe’s but all of his coworkers. This essentially serves as an intrusive wage increase not all that dissimilar from a minimum wage. The government in an effort to provide healthcare to all, just made it more expensive to hire workers and at a time when employment is at an all time high this could not have come at a worse moment.

Employers are now cutting back on existing workers and also hiring less workers because they simply cannot afford it. Since healthcare plans have gone up by nearly $400 per worker that reduces not only the number of workers they can employ but also the amount of hours existing employees can work.

It is not only interference with the relationship of employee and employer that has driven up the cost of healthcare either. As the act increases the amount of provision it will give for prescription drug plans such as medicare the ability to function with government financial support. I find this puzzling because I have always seen price as something that is prohibitive by nature. If the main reason of pricing a medicine at $10 exists so that the market will clear and that only x amount of people will purchase it, then won’t additional money necessitate a rise in price so that the price can remain prohibitive in nature?

Really all a government does by subsidizing anything is provide increase the money supply. This of course leads to inflation which does nothing to change the real price of the good but increases the nominal price paid by the consumer. The government has done nothing to increase the amount of product being produced or provisioned a more efficient means by which to produce the product at a cheaper price so really all they could hope to do is change how many pieces of paper are handed over in order for the average consumer to purchase the good.

It is a natural part of life that the most high tech drugs are often paid for by the people of society that are considered “rich or elite” this is just because it is these types of people that can afford a product at a high price that is charged for a drug that took millions to develop. What is wrong with allowing drug prices to stay high for a few years while the rich folks pay for them and being content to take part in the payoff when the price is at a level that can be more easily afforded? 

Since the government can really only be characterized by the use force, everything they are doing with this act involves forcing people to interact with each other in a certain way. While one could say that government is assisting its citizens with acting in an efficient way, seldom is this actually the case. Since the primary means of government intervention is subsidy or mandate, it seems to me that these practices are merely a means to make people feel like their being taken care of, while rampant inflation and cost increases occur in the background.

All of the mandates on how care is rendered constrains economic liberty, and hinders the market from working properly. Instead of telling me who should pay for my healthcare and how it should be payed for, shouldn’t the government focus on enforcing legal contracts that are established by me, my provider and my insurance company so that I can seek out what combination offers me the most competitive combination of price and quality?

The governments role in healthcare should be protecting the free market, allowing new methods and technologies to arise so that the price can come down through competition.

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September 28, 2011

Who Protects the American Consumer?

In these troubling economic times of unemployment and stagnation, Americans are looking for answers. Why is the economy so bad? Who can fix it and how? And who's looking out for us, the little guy, the consumer? President Obama's new jobs bill and protesters' continuation of operation Occupy Wall Street in opposition of what they view as an unfair economic environment that favors corporations at the expense of consumers reinforce such questions. So how can we protect consumers from the evil, exploitative corporations who seek only to profit at our expense?

It's a sad fact of life that the answer these days is so counter-intuitive to most folk. But in fact the greatest protection we consumers have in a capitalist economic system is capitalism. Capitalism is what allows consumers to choose among the best and cheapest products available. If I don't like a product or the practices of the corporation who make that product, I don't have to buy from them. In a truly capitalist system, no one is forced at the end of a gun to buy one product over another. Corporations rely on consumers. If businesses do not sell products that consumers want and need at a price competitive with other firms, that business will go broke. Corporations are ultimately subject to the wants of consumers, and in a true capitalist market consumers may choose to stop spending their money on one business's product because they either dislike the product or dislike the business, and take their money to another business that better suits their desires. We, the consumers, have the final check on corporate power.

So why the anti-business climate in America today? Well, the American political system and expanding government has merged with what used to be our free, capitalist economic system so that it has become difficult to tell when one ends and the other begins. Businesses and entrepreneurs respond to incentive. The incentive to produce goods that satisfy the wants and needs of consumers is what brings us cheap, quality products from a number of competitors. But when the government steps into the economic process, it creates a whole new set of incentives for the entrepreneur and business owner to respond to. If a government creates a number of new regulations in an industry in hopes of "protecting" the consumer, it creates incentives for large businesses to put their foot into the door of government. They pay off elected officials to waive these regulations specifically for them, and to win contracts for all the big public projects the growing government funds. Government also creates the environment which brings about unnatural monopolies. As regulations increase, so too do barriers to entry into many industries, and it becomes harder for new firms to compete with the corporate giants who already have the officials in their pockets and have collected all the market power. Why should a corporation care about sound financial practices and protecting the interests of their shareholders when the government will bail them out when they're in financial trouble? They wouldn't when the government has created an incentive for irresponsibility. And who could blame GE and others for jumping at the opportunity to pay 0% corporate income taxes when our intervening government presented them that opportunity?

We must not forget that in our dynamic economy, we do not assume only one economic role for the rest of our lifetime. A consumer is a producer, and a producer is a consumer. We are all "workers" and without the entrepreneurs who have invested their time and capital into the businesses we work for, we would have no income to buy goods from other producers, who then pay workers so they may be consumers as well. The market has an uncanny ability to regulate itself and capitalism is the best means of ensuring that we all prosper and that wealth and resources are allocated fairly and productively so that our economy may continue to grow. It is intervention from the government and the unholy marriage between it and businesses that offsets that balance which true capitalism instills. The state hurts the consumer despite its best efforts to protect him. If we really want to see economic prosperity and employment we need only leave the economy alone and allow the plans of many individuals to again trump the larger plan of the bureaucratic few.

September 26, 2011

How many ways can we get the Solyndra Scandal Wrong?

I'll admit it, I am a news junky. I have been watching the news about Solyndra with a chuckle at how foolish the current Administration was for it's actions in regards to this company. But as I look at the issue through a pair of Austrian eyeglasses....I see a few things becoming clear so I would like to take a moment to examine this issue from a bit different perspective....
We have one planet ( for now), and it is in every humans best interest to preserve and protect it for future generations. On that fundamental principle I think all people would agree in theory. But when it comes to the "green job" hype, I have some concerns and the Solyndra scandal has brought it forefront to my mind.
The political hype about "green jobs" and investment of tax dollars into it has a few problems. Entrepreneurs have to bid away resources from other production functions and relocate them to produce a new product. In the case of Solyndra and other "green jobs"..this presents us with a couple of different issues. Relocating these resources within the economy carries with it risk. Clearly the entrepreneurs at Solyndra thought the risk would pay off at profitable rate of return. But I question why they thought this. We all know the current political prevalence for subsidizing "green jobs"...but I wonder how this governmental involvement is incentivize entrepreneurs to take risks that in an uninhibited and free market they may evaluate differently.
While bidding away the resources from production of energy via fossil fuels to solar power is making the economy move in a different direction, is the political power (force) via subsidies to cause the reallocation of these resources what would naturally happen in an unhindered market? I do not think so. Of course the entrepreneur is free to make his mistakes and learn from them, such is the nature of liberty and economic processes. But it begs the questions; Are we better off for this reallocation of resources, or would we be better off if those same resources were freed to be invested elsewhere...perhaps somewhere that the entrepreneur was free to make the judgment about the profitability and risk of his/her venture without the interventionism of the government. In THAT case I believe we would all be better off.
The second issue that tickled my fancy was this article in particular about the protectionist expressions by members of Congress about China's investment into American companies. Based on what we just read in Mises Lecture 5...I think they have it all wrong. But again, I do not believe the free market was at work in either the decision to take a risk by the entrepreneur OR by the foreign investment made by China. It appears as though these actions were prompted by interventionist policies of the government. Where would the foreign capital have flowed to barring the governmental support for green company investment? We can't know. But we can believe based on Austrian principles that it would have been allocated to a circumstance that may have made us better off rather than worse. I am sure we will have more to discuss on this point after class tomorrow. :)
As Mises wrote about the problems we perceive with our economic reality being caused by bad policy, I think this is a perfect example. The interventionist actions of the governments, while they may be well intentioned, in the end, make us all worse off in the end.

For the 27th

September 27th has some quite interesting reading. Particularly interesting was Mises' remark that bad ideas can be fought by good ones; I can't criticize that. Really, I can't criticize anything that he has to say. Any criticism that I could point to could easily be brought down by the fact that the government has applied force to influence the market's course. I recall asking about if intervention in what are called natural monopolies, suppliers of those goods and services that gravitate towards a single producer, with utilities being the classic example. When I think of utilities, I think primarily of electricity and water. In the late 19th century, I probably would have thought of the railroads, because they were the most economical way to travel across the width of the United States. However, in the 20th century, the advent of affordable cars and air travel shattered that monopoly. Similar events are happening to water and electricity, with the advent of more efficient water using technologies, and electricity may be generated by private solar panels. Amazing what innovation can do in the absence of force.

It is also amazing what inflation can do in the absence of force. Or is that "with the backing of force"? The example that Mises lists of inter-war Germany having to completely change its currency because inflation was so bad that even the most perishable good held its value better is horrifying. It's interesting how this unique example makes for the first good argument that I have ever heard in favor of the gold standard for backed currency, because backed currency checks inflation. It makes me wonder, why is it that rapid deflation is what is called a currency crisis? Aside from the cynic's answer that it gives the World Bank an excuse to intervene, that it's all politics in its definition.

I really have no answer for any of these charges that Mises levels at policies that influence the market. Everything can, it seems, and I am forced to agree in the absence of evidence indicating otherwise, be traced to policy. Mises' lighting of the dark with new ideas depends on there being no force to oppose them. Free markets for all!

September 20, 2011

Fixing the Global Economy

A recent article I saw online caught my attention with its doom and gloom title "World economy enters 'dangerous new phase'. The article goes on to say what is needed to "fix" the global economy. Strong policies ranging from tax cuts to improving infrastructure should provide the stimulus needed to get the economy back on track. Well this article is clearly written with the mindset of the economy being an old clunker or rusty bolt. All that is needed is a little WD 40 to loosen it up or a little more gas and it will be up and running again. Oh by the way all this spending or decreasing of revenue is supposed to happen while the looming U.S. deficit and debt needs to be reduced according to the IMF to return the economy to health. However what I think is needed to return to health is not more injections but to allow healing to occur. While infrastructure may be key to any economy it should not be done at increasing debt. Allowing the economy to move on its own according to a plethora of plans rather than one might allow for growth. Many entrepreneurs working on many individual projects would seemingly outpace one plan by the government for jobs and ultimately growth. This would require no further spending and increased sales would bring in tax revenue. Perhaps not fixing the economy, maybe letting it recover would be a better course of action.

September 16, 2011

European Economy vs. the US Economy

Recently, a meeting of European finance ministers and international financial institutions took place in Poland. They were trying to decide whether or not to provide additional tranche of bailout money to Greece. Europeans, unlike Americans, are very conservative about their economic decisions. However, first time in the history of those meetings, the US sec. of treasury Tim Geithner was present at that meeting. Guess what his message was to the EU: "BAILOUT EVERYBODY" and do it as soon as possible. He encouraged them to print more money and "jump start" the economy like they did in the US in 2008-09. Lo and behold, the US economy is very far from being anywhere close to stability, and the future of the economy is not bright for sure. Nevertheless, Geithner is proclaiming that printing more money and bailing everybody out is the best way to artificially "stimulate" the economy, which is the "natural" ecosystem and cannot be artificially stimulated without causing pain somewhere else. Thanks God, Germans are wiser and more conservative people who will not be swayed by Geithner so easily because they lived through hyperinflation before and know what that means. I've lived through it myself. I don't think that it's any better than depression. However, since most of the US economists and politicians have no clue about Austrian Economics, I think that US is destined to repeat German path of hyper inflation. Europe, on the other hand will go through this pain now and emerge as a much stronger Economy.

September 12, 2011

$447B-$239B+$10B-Constitution+Obama=Job Creation...duh

Obviously if you add fiscal stimulus to the economy society's aggregate demand curve will shift to the right increasing the demand for foreign trade which will shift the IS curve to the left which means that net imports will increase which means that the LM curve will shift three growth units to the right which clearly results in job creation and an increase in GDP...wait, WHAT!? This clear as mud explanation is what many politicians use to justify passing legislation. If you read the article I attached to this blog post, the tone of the article is as if the economy is a mathematical equation. If you add two parts here then you'll increase by two parts in another area, but in our model of Austrian economics this explanation does not fly. The mainstream media talk about our economy as a machine or an engine, but our job is to analyze the economy as an organism or ecosystem. The President is so sure that his job creation plan will work because his image of the economy is a machine that can be tweaked and primed to perform better. I have a few points that people should think about when considering this article from an Austrian school of thought: 1) In what time frame will these jobs be "created" 2) What is "creating jobs?" 3) How is additional money being distributed throughout the economy going to create additional opportunities for employees and employers to agree to exchange labor for compensation? (aka jobs). The President's plan for "creating jobs" seems to tell me that President Obama and his advisors see the economy as more of a stationary machine rather than a living, growing organism. This is dangerous because dangerous assumptions are made about the behavior of our nation's economy. Instead of thinking about the economy as a bunch of "jobs" and GDP's and IS/LM/BP curves, we should instead try to think of the economy as a market consisting of buyers and sellers who are interested in bettering their own interests. Instead of trying to "stimulate" the economy, with our Austrian school of thought we should be more concerned about preserving the future prosperity of our nation by thinking of the world as an ever changing and adapting organism that is not subject to the mathematics that we often apply to it.