Hello, readers! The Torch and the Scale is moving to a new location. As part of a project on politics and society and general ramblings, I will now be putting up new posts at What We Really Think. My specific blog can be found here. I will keep all of my old posts here until I have finished moving all of them, but if you're looking for new articles, head over to the new website and check them out.
Signing out from the last post ever (possibly) at torch-scale.blogspot.com,
The slogans pour out of the mouths of politicians constantly, all claiming to hold the public's best interests at heart. And what's wrong with that? After all, politicians are society's "public servants". The problem with these sayings is that they are all rooted in a common philosophy called "collectivism". Collectivism is the belief that individual right is not an end to itself; rather, individual rights only exist to serve the broader society, or "collective". The group is the lowest common denominator, not the separate people that form the makeup of that group. As Dr. Andrew Bernstein said, "Collectivism is the political theory that states that the will of the people is omnipotent, an individual must obey; that society as a whole, not the individual, is the unit of moral value."
If your internal fire alarm went off when you read this, congratulate yourself. Collectivism sounds good on the outside, as it allegedly serves to benefit the majority of people. The core, however, is rotten. Collectivism is not benevolent, and it is not moral. Consider these quotes by some outstanding gentlemen:
"The unity of a nation's spirit and will are worth far more than the freedom of the spirit and will of an individual."
"We must abolish the cult of the individual, once and for all!"
This first quote is from Nazi Fuhrer Adolph Hitler, the second from Soviet Premier Nikita S. Khrushchev; these two men followed the collectivist ideal to the letter. The Jews? The German leadership and people perceived them to be a threat to "the group", in this case the German nation and the Nazi Party. It didn't matter that they were individually innocent, and that no Jew had hurt any German any more than a member of some other racial group. All that mattered was their collective, and the Jews were different. How about the bourgeoisie in the Soviet Union? They had done nothing morally wrong, but they were richer than the other dirt-poor peasants of the country; for the greater good to be served, their property had to be either distributed evenly, and their lives had to be shattered forever to ensure that they would never reach a higher status again.
Both Nazi Germany and the Soviet Union extensively cracked down on dissent. They had to in order to cement unity within their countries, because any dissent meant that there was something different in the group; the group was no longer the lowest common denominator. Collectivism could not be practiced if there was even a minor difference of agreement in the group. Dissent means individualism, and individualism is the enemy of collectivism.
Speaking of individualism, what exactly does individualism entail? Individualism is cemented in the principle of the right to self-ownership: you own yourself and your property, and no human being can take that away from you. The right to self-ownership logically leads to a second principle: the principle of non-aggression, which states that anyone may do anything they wish with their lives and their property, so long as they do not infringe on anyone else's lives or property. It is the political version of the Golden Rule: do unto others.
This is not a promotion of anarchism, nor a condemnation of teamwork. It is only involuntary "teamwork" that I write against, for in this is rooted coercion and force. Individualism is the only way to secure a free society; the only alternative is collectivism, and collectivism can only lead down the road to tyranny and injustice. There can be no true freedom and prosperity in a system in which everyone is in constant violation of each other's rights.
Individualism is responsible for the innovation and liberty that has created so much for those countries that follow it, while collectivist nations are consistently found in poverty and oppression. History warns us of this: deep into the past, individuals consistently surrendered themselves to their tribes/cities/kingdoms; their collectives. People reasoned that in order to ensure survival, they needed to band together into a strong group and clamp down on individuality. However, this merely mired those primitive people in the mud of the Dark Ages. It was only once society took the step of allowing the individuals to act freely in the late Middle Ages that civilization began to flourish. Do not listen to the so-called progressives who call for the world to return to collectivism. Collectivism is the philosophy of the past; individualism is the bold new leap into the future.
The most common arguments for any political program are inevitably that it will "do a lot of good" or "fight poverty" or "help the children". All of these arguments may be true, but even then they ignore one of the most powerful lines of reasoning against expanding the size of government: that the power to do good always can be and often will be twisted to become the power to do evil. Take the recent debate over universal healthcare in America; even if the arguments in favor of the proposed plan were true (that the poor would all be covered, that the quality of healthcare would increase, that the plan would not bankrupt the country), I would still strongly oppose it, simply for the fact that it increases the power of government.
A historical example of this can be found by comparing the French and the English monarchies throughout the Middle Ages and early Modern Era. From the very beginning, the English people had very bad experiences with their monarches; these experiences grew and grew until the nobles of England forced King John to sign the Magna Carta in 1215. This document sealed England to a somewhat limited form of monarchy, preventing the king from domineering over the nobles or the people. The Magna Carta went down in history as an important symbol showing that the King, despite his power, was never above the law.
Contrast this with the French, who started out with a series of excellent rulers in the Carolingian Dynasty (840-987). The kings of France repelled invaders, secured peace, and did great services for their people, so as the centuries passed, the people and nobles of the country gradually gave over bits and pieces of their authority to the monarchy. The power of the king grew greater and greater, until finally, by the Capetian Dynasty (1589-1792), the kings had morphed into outright tyrants. The people had grown so used to having centralized power because of the good kings that they had had, and were unable to discern that the power to do good could always turn into the power to do evil, which the Capetian Dynasty of Louis XIV and others had in abundance.
Be wary of government programs that claim to "stimulate prosperity" or "help the poor" or in any other way create happiness out of thin air. Remember instead that the authority that the government holds is based on political coercion: the power to force others to go against their will. No other body holds this distinction; no corporation or private individual can truly and legally "force" someone to do something, only the government can.
Such are the explanations that surround the collapse of the financial and real estate markets from 2007 to 2008, shortly followed by a nationwide recession. Big banks and speculators had made too many risky investments, we are told, and lost their fortunes, putting at risk the entire economy. At the surface this is indeed what took place to set up the crisis. The whole truth, however, requires far more than a surface-level understanding of the boom and bust of the 2000's.To gain an understanding of what happened during the economic bust, one must first understand what took place beforehand--the economic boom This is the second of a three-part series detailing the complete failure of government intervention and the innocence of the free market in the buildup to the current economic crisis. Parts I and II can be found here and here.
In 1913, the Federal Reserve Act was passed by Congress and signed into law by President Woodrow Wilson. The Act created the Federal Reserve System, a central bank for the United States. The purpose of the Federal Reserve, colloquially known as "the Fed", was to stabilize the economy, particularly in the financial sector, by orchestrating controls over the supply and demand of money, also known as implementing "monetary policy." While the Federal Reserve Act was signed into law with good intentions, the Fed has since its inception been a horrific failure at achieving its goals of economic stability.
Business Cycle Goes Vroom
The business cycle is the wave-like motion the economy often seems to take; first, the economy is growing. Booming. Skyrocketing. Suddenly, however, the party comes to an abrupt stop. The economy shrinks down to normal size, unemployment rises, and poverty increases. Consumers slink back to reality, wondering how they could have thought the upward rise could last forever.
Economists have argued that the business cycle is a fact of life in capitalism. "It's something that just happens," they say, "like the coming of the tides or the crowing of the rooster." On the contrary, however, while slight upturns and downturns are a normal thing in a capitalist economy, the dramatic rises and falls that are associated with the business cycle are due to a decidedly un-capitalistic factor: expanded money supply, which takes place when a central bank or other regulatory agency forces the amount of money in circulation beyond normal levels in an attempt to spur on consumption and prosperity. The Federal Reserve, as the acting central bank of the United States, is the primary source of an expanded money supply.
The first main example of the Federal Reserve's harmful interventions into the economy takes place in the Roaring 20's and the subsequent Great Depression. Through the 1920's, the Federal Reserve increased the raw amount of money in circulation by over 60%. This increase in the amount of money available spurred spending and production; investors had plenty of new capital to invest in new businesses, consumers were able to buy more products, and economists proclaimed the world economy to be on a new path of prosperity and peace.
The "prosperity" created by the expansion of the money supply was an illusion, however. All the newly available capital meant that businesses that normally never would have gotten off the ground due to inefficiency and lack of productivity were able to stand for a while. In addition to this, borrowing and spending must be backed up by saving and producing, while all the spending and consumption started in the 1920's essentially created a house of cards; one small error and the entire economy would collapse. That error came in 1929; the stock market slowly began to tumble, then freefall as investors realized that they had made too many investments, and that their investments were largely placed in very, very sick enterprises. Businesses began to fail, investors lost their money, and consumers lost their buying power.
Round and Round We Go Again
If the situation described above sounds eerily similar to the one the economy is currently in as of this writing, it's because it is. Throughout the late 1990's and early 2000's, the Federal Reserve manipulated interest rates to spur new borrowing for homeowners. Families that previously were unable to get a loan for a new home now found themselves able to purchase houses normally available only to the upper and middle classes. Construction companies and mortgage banks raked in enormous profits as business boomed.
Everything looked fine and dandy. Families had homes, companies made money, and everybody seemed happier. But underneath the surface, trouble loomed, as it always does. Right around the corner was an economic crisis so large that some would proclaim it the next Great Depression. Suddenly, the world would be forced to take off its rose-colored glasses and see the rotten, infested foundation of the American economy.
The housing market peaked in 2006; prices slowly began to seep downward, then freefall into 2007. In an attempt to prop up failing corporations, the federal government began to "bail out" various enterprises with billions upon billions of taxpayer money. The Federal Reserve began to lower interest rates even further, trying to stave off financial collapse. Both outgoing President George Bush and incoming President Barack Obama passed massive spending legislation to stimulate the economy.
Blame spewed from the mouths of every politico and commentator with someone to talk to; most of the blame centered "irresponsible bankers" and "predatory lending" and "financial deregulation". Sadly, very little of the blame was directed upon the root causes of the crisis: over-regulation of the financial sector, well-meaning housing initiatives, and ultimately the Federal Reserve. So few wish to focus on these institutions because of their role in bringing the happy times of the economic boom--indeed, they wish for them to bring the boom back-- but the truth of the matter is that the prosperity that America held in its hands for the better part of that decade was a sham, a sham that could only result in a collapse. Unfortunately, unless the federal government turns its path away from loose monetary and fiscal policy, the cycle of boom and bust will only continue. There is hope, however: Americans are waking up to the massive fraud of the current economic system. If the American people rise up and demand true revolution (not the phony hope-and-change jingle), the nation may very well return to a solid policy of economic liberty and prosperity.
Such are the explanations that surround the collapse of the financial and real estate markets from 2007 to 2008, shortly followed by a nationwide recession. Big banks and speculators had made too many risky investments, we are told, and lost their fortunes, putting at risk the entire economy. At the surface this is indeed what took place to set up the crisis. The whole truth, however, requires far more than a surface-level understanding of the boom and bust of the 2000's.To gain an understanding of what happened during the economic bust, one must first understand what took place beforehand--the economic boom This is the second of a three-part series detailing the complete failure of government intervention and the innocence of the free market in the buildup to the current economic crisis. Part I can be found here.
The Next Big Thing
Beginning in the 1990's, the Federal Government embarked on a campaign to make housing more affordable for low-income families and individuals via increased regulation to enforce lower lending standards. Loads of politicians and activists, eager to leave their mark during their time in D.C., hopped on board the affordable-housing train and enacted (or re-enacted) a host of regulation in the financial and housing sectors.
The Community Reinvestment Act
Chief among these new regulations was the Community Reinvestment Act (CRA). Born in the Carter administration to force banks to give more loans to potential homebuyers who otherwise would not be able to afford a home, it was resurrected during the Clinton administration and strengthened so it had even more authority over real estate and lending.The act exposed banks to lawsuits if they did not meet high quotas of minority and lower-class customers, lawsuits with hefty fines and fees.
Fannie and Freddie...Again
In conjunction with the Community Reinvestment Act, Fannie Mae and Freddie Mac began in September 1999 to lower its standards for creditworthiness in the homebuyers that banks gave loans to. As a result, banks began giving more and more loans to people whose credit was not normally up to par, and Fannie and Freddie got more loans to buy, repackage, and sell as mortgage-backed securities to investors. Banks then had even more money to use in even more subprime loans.
Andrew Cuomo and Henry Cisneros, who were secretaries of President Clinton's Department of Housing and Urban Development, both lowered mandatory restrictions on loans from private lending institutions; Cuomo even went so far as to bring vicious legal charges on banks that didn't meet his standards for what even he admitted was "affirmative action."
Political pressure ultimately led to lowered standards in the banking industry; suddenly, anyone could get a mortgage, and "anyone" included those who simply could not afford to buy a house, with or without a loan. Demand for housing skyrocketed, suppliers surged into the real estate sector, and prices shot upward. This upward turn, however, would have been merely a blip on the economic radar of history if not for the misguided, unscrupulous, and sometimes downright sinister actions of the Federal Reserve, the central bank of the United States. While the housing bubble would indeed have taken place without the Federal Reserve, the intensity of the boom and subsequent bust were created by this institution's actions, which will be detailed in part III.
Such are the explanations that surround the collapse of the financial and real estate markets from 2007 to 2008, shortly followed by a nationwide recession. Big banks and speculators had made too many risky investments, we are told, and lost their fortunes, putting at risk the entire economy. At the surface this is indeed what took place to set up the crisis. The whole truth, however, requires far more than a surface-level understanding of the boom and bust of the 2000's.To gain an understanding of what happened during the economic bust, one must first understand what took place beforehand--the economic boom This is the first of a three-part series detailing the complete failure of government intervention and the innocence of the free market in the buildup to the current economic crisis.
Boom and Bust Normally, there are two parties principally involved in the process of purchasing a house: the buyer and a lending institution of some sort. The buyer, unless he is filthy rich, needs to get a loan with which to buy the house, and the lending institution is more than willing to provide him with that loan, with interest. The buyer takes the loan, buys a house, and spends several years slowly paying the mortgage.
The times from 1998 to 2006, however, were not "normal." Housing prices increased dramatically. Houses became the "best investment," because "they never lose value." Speculators and house-flippers bought low and sold high, riding the waves of the economy. Precious few suspected the boom was merely a bubble, prone to popping at one point or another. Yet, despite the doubts of the vast majority, the minority was proven correct. In 2006, home prices and stocks began to decline, then freefall. By 2009, multiple bailouts of failing industries, "stimulus packages" for the groaning economy, and increased regulation of the financial industry were deemed necessary to "save capitalism."
Fannie and Freddie
Most everyone assumed that the collapse was due to the wild swings of a normal, free-market economy. Yet, as I stated before, nothing was normal in the usual sense of the word during the housing bubble. Government intervention ran rampant during this time period, and two key pieces to the government puzzle are the corporations known as Fannie Mae and Freddie Mac. These corporations, known as "government sponsored enterprises", were technically private but were given governmental powers over the housing market.
Their primary function was to purchase mortgages from lending institutions. Lending institutions would then receive a large sum of money up front, while Fannie and Freddie would receive the steady income from the debtor and hold responsibility for that loan and the possibility of default. Once Fannie and Freddie had accumulated a large number of loans, they would repackage them as "mortgage-backed securities." These were essentially several loans bundled together and sold on the market to investors. Critical to these securities was the diversity of the loans packaged inside them; there had to be a wide variety of loans, some safe, others much riskier.
Despite the fact that the risky loans were packaged together with the good loans, the security as a whole was considered to be safe, or "AAA", by investors and advisers. Why? Political pressure from various government branches pushed independent rating agencies to certify those risky investments in order to stimulate more homebuying; the more mortgage-backed securities sold on the market, the more money banks got from Fannie and Freddie, the more loans those banks could make to potential homeowners.
As will be detailed in Parts II-III of this series, this pressure placed on private rating agencies is just the beginning; political power in its various forms, from Fannie and Freddie to regulation to monetary policy, formed the bedrock of the boom and subsequent bust, and will likely shape the global economy for decades to come.
Starting in December 2007, the United States entered a recession that soon affected the entire industrialized world. Fierce debate has surrounded the Federal Government's response to this downturn. In addition to adjusting financial regulations and monetary policy, the Bush Administration proposed a bill called the Emergency Economic Stabilization Act allowing for $700 billion of assets to be bought from failing banks; the legislation easily passed through Congress. Later, the Obama administration passed the American Recovery and Reinvestment Act through Congress, a $787 billion "stimulus" package, in addition to extending credit to failing automakers even to the point of nationalizing General Motors.
While the Obama administration predicted that the unemployment rate from the recession would never get higher than 8.1% thanks to his and his predecessor's spending(1), the official unemployment rate had leaped up to 9.7% by August 2009, and unofficial studies said the rate was actually 16.8%, over twice as high as the original estimates(2). What happened? Why did the government spending fail to improve economic conditions?
First, proponents of Keynesian spending (such as Bush's and Obama's) fail to realize that government spending to "create or save" jobs only creates temporary employment. Unemployed people who are put to work thanks to government projects such as highways and other infrastructure will work for a few months, then suddenly be back out of a job again after the spending on that project stops. As a result, jobs created thanks to the government are never permanent unless the spending is also permanent.
Second, any government's spending is vulnerable to corruption and abuse. In November 2009, a massive scandal erupted regarding the locations where the Federal government had put the stimulus money from the ARRA. At the White House's own website, recovery.gov, reports could be found of stimulus money going to congressional districts that didn't even exist. Billions went to places such as the "0th District of New Hampshire" and the "15th District of Arizona", which are completely nonexistent(3). This is to be expected when a group of individuals with special interests, such as politicans, are given the authority to deal with large amounts of money.
Lastly, Keynesianism ignores the fact that private investment is much more effective than government investment. Because the government is rarely subjected to a price mechanism as often as the private sector and does not necessarily need to balance its budget, the government can spend and spend and spend without having the slightest impact on the economy. Private individuals, who have a bottom line to meet and a budget to follow, are more likely to target the places they spend and invest in with care, doing business with ventures that provide superior products and services or are most likely to succeed and therefore deserve investment most, while leaving badly-run businesses to fail.
In light of this last observation on private investment, tax cuts provide an excellent mechanism for the private sector to invest more money during an economic downturn. Tax cuts also provide benefits aside from leading to more efficient investments. First, tax cuts provide a 100% assurance that people will be able to spend on things that they want. If the ultimate purpose of growing an economy is to improve the quality of life of a large portion of the populace, tax cuts are the most definite way of doing so.
Finally, tax cuts give back to the people what is already theirs. Stealing is considered morally reprehensible in nearly every culture, yet it is somehow excused when it is done by government and approved by at least 51% of the people. Yet the presence of a government changes nothing; taking someone's hard-earned private property is stealing regardless of whether the thief wears a mask and lives on the streets or wears a suit and works for the IRS. There are indeed benefits to government such as public services and the defense of justice that can only take place with taxation, but they are still funded by wholesale robbery that should be kept to a minimum. The morality and economic practicality of tax cuts simply go to show, once again, that a hands-off approach to the economy and indeed to society as a whole is both the most practical in terms of improving quality of life and the most moral in that it recognizes private property. Liberty is, and always will be, the best policy for a government to follow.