In an article in its present edition “In Knots Over Nationalization” (page 14) the Economist magazine writes the following about the many trillions of Dollars that President Barack Obama has pledged to spend over and above the wild spending of the hopeless incompetant President George Walker Bush.
…an honest attempt to put the recent stimulus in the context of a plausibly responsible medium term fiscal path
Of course the antics of President Obama are not “responsible” at all. If this increase in government spending, not just over this year but over the following years, is “responsible” what would the Economist consider “irresponsible”?
Of course there are other articles in the Economist in which the details of President Obama’s tax and spend policies come in for criticism – but the position of general support for his Administration, in line with the endorsement of then candidate Obama last year, would seem to be incomprehensbile for a publication that claims to be a supporter of free market “capitalism”.
However, the position of the Economist is not incomprehensible at all – but to understand their articles one must understand some other things first…
If I thought that it was a good idea for more money to be lent out than existed in real savings, i.e. all the complex things that are very loosely called “fractional reserve banking”, how would I defend the practice?
Actually I do not it is a good idea, I think that all borrowing should be one hundred per cent from income that people have chosen not to consume (real savings), but let us say I did. I would defend the expansion of credit in something like the following way… If the lending gets out of hand and becomes rash the banks concerned will go bankrupt and the credit/money bubble will self terminate.
I could go on to say that even the existence of a Central Bank or Federal Reserve sytem did not change this – that as long as banks that overextended themselves went bankrupt the system would be self correcting.
I repeat that I do not actually believe the above – but it is a plausible argument and the only way that someone can reasonably claim to be a free market person and a fractional reserve banking supporter, at the same time.
Whether one is a follower of the Austrian school of economics or an honest follower of the Chicago school of economics (and there are many such people – who totally oppose the present bailout and “stimulus” pig fests) this is the only way one can try and reconcile free markets and credit expansion via the banking system.
The great enemy of such a free market supporter of fractional reserve banking would be the political/financial establishment represented in Britain (and, to some extent, the United States) by the things like the Economist magazine. For such establishment entities are utterly opposed to allowing very big financial players to go bankrupt if they believe that such bankruptcies would put “the financial system” (i.e. the network of banks and politically connected corporations they represent) at risk.
In their defence such entities as the Economist point at the terrible consequences in terms of economic output and unemployment there are from a bust. But, of course, they never point out that their suggested policies for avoiding or mitagating such a bust delay or prevent recovery and produce even more suffering over time.
Whether one supports or opposes the various complex tactics to expand lending beyond real savings that go under the very loose heading of “fractional reserve banking”, once the bust has started one must allow the banks concerned to go bankrupt and the mal-investments to be liquidated. Of course this means that many good enterprises are dragged down along with the bad, and that a lot of good people suffer for something that was none of their doing – but, once the credit/money bubble has been created the best, or rather least bad, thing to do is to allow it to be liquidated as quickly as possible.
Suffering can only be mitigated by general economic policy. By radically reducing government spending (and taxes – but reducing taxes on its own will do little good) and radical deregulation to help markets, especially labour markets, clear. All this aid to recovery was done, for example, by the Administration of Warren Harding in the face of the bust of the World War One credit/money bubble in 1921 – this is the real reason (not the corruption, that was no worse than in most Administrations) that the Harding Administration is hated by establishment historians.
None of the above will be accepted by the establishment – for it destroys their vested interests.
On the contrary to such entities as the Economist allowing the banks concerned to go bust is not even an option, the only options are either to subsidize the banks concerned (with sweetheart “loans” from the Central bank and so on) or to nationalize the banks – and then subsidize them, perhaps before selling them off again.
In the United States such banks as Citi Group and Bank of America can not be allowed to go bankrupt – just as in Britain such banks as the Royal Bank of Scotland and HBOS (and with it now Lloyds) can not be allowed to go bankrupt. Not because their bankruptcy would lead to the bankruptcy of many small and medium sized enterprises (although it would), but because of their own importance to the people who control such publications as the Economist. After all the cost of keeping such banks going, either in private or state hands, will cause far more bankruptcies of such small and medium sized enterprises over time, and these bankruptcies are already happening.
And far from cutting government spending, it must be increased in order to “stimulate” the economy in accordance with the doctrines of Lord Keynes.
This involves terrible contradictions, after all if subsidizing banking is good and increasing government spending in general is good (at least during a recession) then why not subsidize all industries? But that is clearly absurd, so such publications as the Economist must tie themselves into “knots” in order to support a general increase in government spending (especially for their friends) whilst opposing just everyone (for example me) being given money by the government.
All the above must be understood before one reads an article such as “In Knots Over Nationalization” on page 14 of the present edition of the Economist.
If it is not understood the article can not be fully understood. For example, why does the Economist refer to Alan Greenspan, a man whose response to every economic problem from 1987 onwards was to increase the government credit/money supply, as part of “the free market right”.
This would have come as a surprise to the late Ayn Rand, who shoved a dinner plate in Alan Greenspan’s face, but the Economist has to describe Alan Greenspan as a free market person, even if he suggesting the nationalization of the banks, because to discuss real free market people would be a threat to the interests the Economist represents.
This is why, during the present crises (not at less risky times), when the Economist feels compelled to mention alternative economists to Lord Keynes and his followers it does not mention the Austrian School tradition of opposition to Keynesianism or even such neoclassical opponents fo Lord Keynes as W.H. Hutt. Instead the Economist dredges up Irving Fisher from the 1920’s – as it did in a recent issue. Why him? Because he to was an opponent of the evil “deflation”, and a supporter of bailing out the “system”. In short he is no alternative at all – and, therefore, a safe subject.
However, it does stop here. To maintain the vested interests (banking and nonbanking) that it represents the Economist must support those politicians who will support those interests – regardless of how much these politicians increase government spending.
Certainly details can be attacked – but the overall position of bailout and “stimulus” can not be. And, please remember, to the sort of creature that controls such corporations as General Electric even nationalization is preferable to bankruptcy.
And these creatures know perfectly well that if the big banks that are in trouble go down, their debt ridden overextended conglomerates go down with them.
Only about 75 banks (and financial institutions – such as Fannie Mae, Feddie Mac and AIG) in the United States have been given government aid – but they include most of the largest banks, the ones that the General Electric type of debt ridden, unprofitable, zombie corporation depend on.
And please remember that in spite of there, quite truthfully, pointing out that many small and medium sized enterprises would go bankrupt if certain big banks, and the politically connected corporations that depend on them, that is not the reason the Economist supports the bailouts and “stimulus” pig fests.
The people who write for the Economist are not morons, they know that costs have to be paid by someone, and they know that far more small and medium sized enterprises will go bankrupt to pay for the above than would have gone bust had it not been done.
But that is acceptable as long as the system of politically connected big banks and corporations (whether in formal private ownership of in open government ownership) is maintained.
The final irony is that if President Barack Obama is what his background and record suggest that he is, then he may prove to be far more of a threat to the various “businessmen” that such publications as the “Economist” represent than bankruptcy would be.