Saturday, July 19, 2008

Media Keeps Flunking Economics, Rothbard Spins in His Grave

This article is a textbook example of how the media misrepresents economic issues - whether in this case from ignorance or bias, I don't know. Author David J. Lynch's Keynesian assumptions simmer beneath the surface of the whole article, so I'm leaning toward the latter.

Consider the conclusion. Because Lynch writes this without irony or criticism, we must conclude he silently approves of the implications:

One thing is clear: Government involvement in the financial system is expanding in ways that even the most fervent socialist could only have imagined one year ago. This week's federal proposal to help mortgage giants Fannie Mae and Freddie Mac, including opening the door to future government ownership stakes in the firms, is an "earthshaking event," Rogoff says.

And not an isolated one. It comes after the Federal Reserve has stretched its legal mandate and found creative ways to grease the financial system's levers. In March, the Fed midwived the sale of investment bank Bear Stearns to rival JPMorgan Chase in a bid to head off broader problems.

An era marked by regulators' light touch is at an end. "The system got carried away with financial innovation or financial engineering," El-Erian says. "Regulators didn't recognize how quickly things were moving. Now they're catching up."

"Regulators' light touch"? Really?

Our present economic turmoil is all down to the Fed's habit of cutting interest rates to unsustainable levels and inflating the money supply with reckless abandon! There is a clear cause and effect relationship between the government's manipulation of money and credit, and the booms and busts that ensue.

The Austrian theory of the business cycle was put forth years ago, and its message is as urgent as ever. If you're curious about the real reasons for our economic mess, please see the following:

Here's what bothers me about Lynch's article. USA Today is as mainstream as it gets. Articles like this are written every day, yet inevitably a false choice is presented: this much regulation, or that much. The underlying assumptions of Keynesian planning are never questioned. It is time to question them.

Forgive the length (as well as any copyright issues), but I'll close by quoting from the "Money" chapter of Congressman Ron Paul's "The Revolution: A Manifesto." These passages are worth quoting in full:

Central economic planning has been as discredited as any idea can possibly be. But even though we point to our devotion to the free market, at the same time we centrally plan our monetary system, the very heart of the economy. Americans must reject the notion that one man, whether Alan Greenspan, Ben Bernanke, or any other chairman of the Federal Reserve Board, can know what the proper money supply and interest rates ought to be. Only the market can determine that. Americans must learn this lesson if we want to avoid continuous and deeper recessions and to get the economy growing in a healthy and sustainable fashion. [p. 147]


For over a hundred years, the money issue has been absent from our political process. No political campaign has focused on it or even said much of anything about it. For most people, in fact, the Fed is a complete mystery, its operations incomprehensible. That seems to be just the way the Fed likes it. We are supposed to be bored by it. We are supposed to treat it as a given, like the air we breathe. We are supposed to have confidence in it - surely the experts who run our monetary system for us (and who of course have a vested interest in perpetuating the system we now have) couldn't be giving us bad advice! But point to it as the source of our eroding standard of living, the ravages of the boom-bust business cycle, and the financial bubbles that have ruined countless Americans? That is simply not to be found anywhere along the spectrum of allowable opinion in America. [p. 154]


Tinkering here and there is not the solution, but as I've said, it is the only proposal Americans are permitted to hear. It is long past time that we begin asking fundamental questions rather than trivial ones, that we educate the people rather than distract or confuse them. Simply trying to patch up monetary problems after they've occurred, whether it is the NASDAQ bubble or the housing bubble, neglects to treat the root of the problem and must therefore fail. We cannot solve the problems of inflation with more inflation. We need to ask: How did we get here? What causes these bubbles? Financial bubbles simply happen, the political establishment tells us; these bubbles are an unfortunate but inevitable side effect of a market economy. This is nonsense. But it is convenient nonsense for some people, and that's why it gets repeated so often. It gives the perpetrators of the financial debacle that now confronts us a chance to get off the hook. We shouldn't let them. [p. 156]