Let Them Fail

An Ayn Rand Center op-ed:

Let Them Fail
By Amit Ghate

Everywhere today politicians are blaring that they must save America’s financial institutions, alleging catastrophic risk to the economy were any to fail. Paulson and the entire Bush administration, in a discernible panic, are now pouring $700 billion into the big banks, having already bailed out AIG, Fannie Mae, Freddie Mac, and Bear Stearns to the tune of $300 billion.

Capitalism doesn’t work, they declare, but fortunately the government is here to rescue us.

Sadly, they have it all backwards. The credit crisis is just more evidence that whenever the government supplants the free market and attempts to “manage,” i.e., control, the economy--disaster ensues.

Overlooked here is that in a free market business failures are not just normal, they’re crucial for the best products and ideas to emerge. Most restaurants fail in their first three years because customers have other preferences. Many mom-and-pop grocers go out of business because Walmart offers better selection and lower prices. Even whole industries--think typewriters, 8-tracks and horses and buggies--vanish because new inventions and competitors arise.

None of these failures are a problem, nor do they threaten the system. On the contrary, they are an inherent part of the progress which only capitalism makes possible.

So why would failures in the financial industry be any different?

Typically, the answer given is also the one used to rationalize the creation of the Federal Reserve, the FDIC, the FSLIC and any number of other government agencies and regulations intended to “manage” the banking system: financial firms carry systemic risks for the nation’s economy and therefore can’t be allowed to fail. As evidence, bank failures from 1870 to 1913 (pre-Fed) are cited, followed by the assertion that their number was simply “unacceptable.”

But every business forms part of the economic system and thus has “systemic” impact. If Microsoft were to fail, thousands of suppliers, customers, and workers would be affected, as would their customers, suppliers, workers, etc. Yet this would be no reason to bail them out. We know that new businesses would arise to fill the void, better for having learned from Microsoft’s mistakes.

And as a historical fact, the U.S. economy during the period 1870 to 1913 grew significantly faster than it did after the Fed was established. True, there were many bank failures in this period, but there were also many business failures in general: banks were actually less likely to fail than were other businesses. The number of bank failures speaks to the dynamism of the period, not to anything fragile in the financial system. Precisely because market mechanisms were permitted to work, depositors, creditors and counterparties all kept a close eye on banks, monitoring leverage and withdrawing funds at the first sign of problems.

When the free market functions--and failure is allowed--people become viscerally aware of risk, with the result that they voluntarily assume less of it.

Conversely, when the government tries to “manage” the economy--when the consequences of risky behavior are shifted from self-interested actors to taxpayers, as was done by the creation of the Fed and its various insurance programs, or when weak financial firms are propped up rather than being allowed to fail--people take on risks they would not otherwise. Banks are less careful, depositors no longer evaluate their institutions, and risks are concealed and amplified until they become catastrophic.

So pre-Fed we had runs on banks, some undoubtedly severe--but with the Fed we’ve had the Great Depression, the S&L meltdown and now perhaps the greatest worldwide credit crisis ever.

An analogy may be helpful here. Historically certain types of forests naturally experienced frequent, but small, wildfires. Because their frequency kept deadwood at a minimum, the fires never grew into large conflagrations. However, when government forestry services instituted fire suppression policies, they eliminated most small fires, but caused deadwood and other fuel to accumulate. When at last a fire came that could not be suppressed, it grew into a devastating inferno.

Learning from their errors, forestry services have abandoned fire suppression policies.

It’s time for our government to do likewise. First, by immediately abandoning its bailout binge, and then by phasing out all of the economic controls by which it attempts to “manage” the financial system--from the FDIC to the Federal Reserve itself. Nothing less can reestablish the freedom essential for a sound and vibrant economy.


Amit Ghate is a guest writer for the Ayn Rand Center for Individual Rights. The Ayn Rand Center is a division of the Ayn Rand Institute and promotes the philosophy of Ayn Rand, author of “Atlas Shrugged” and “The Fountainhead.”

Church and State: A Marriage Not Made in Heaven

An Ayn Rand Center press release:

Church and State: A Marriage Not Made in Heaven
October 31, 2008

Washington, D.C.-- Californians will soon have the chance to vote on Proposition 8, which would define marriage in the state constitution as being only between a man and a woman, denying marriage to same-sex couples. The proposition is heavily supported by the religious community. Said one religious leader who supports the measure, “We believe it is a religious issue as well as a political issue. That’s where we feel the Church must have a word.”

According to Yaron Brook, executive director of the Ayn Rand Center for Individual Rights, “Regardless of how one thinks ‘marriage’ should be defined, there’s a much graver issue at stake: this is a flagrant attempt to inject religion into politics.

“As our Founders understood, religion is properly a private matter--not a legitimate basis for government action. The government’s only role is to protect our rights to life, liberty, property, and the pursuit of happiness. Under our secular political system, individuals are free to hold any religious views they wish, but they cannot impose their views on the rest of us. That is the meaning of freedom of religion.

“Once we accept the view that the ‘Church must have a word’ in the political sphere, we are accepting a principle completely opposed to freedom. If gay marriage can be barred because, as one supporter of Prop. 8 put it, ‘I don’t think God has ordained it,’ then why, for instance, can’t speech that similarly offends religionists also be banned? Indeed, this is the very principle that motivates the religious right’s crusade against broadcast ‘indecency’--and the brutal principle that recently led the Afghani government to sentence a journalism student to 20 years in prison for blasphemy.

“The separation of church and state is a cornerstone of liberty. It protects our right to live by our own judgment, free from the dictates of ministers and mullahs. To protect that right, we should oppose any attempt to bring religion into politics.”

Been there, done that.

Some people are just so behind the curve:

A Computer Program That is Pure Evil

A group of scientists is building the world’s most evil computer program. This isn't a B-movie setup: A team at Rensselaer Institute’s AI & Reasoning Lab is bringing personified evil to virtual life in the hope that they'll unlock the secrets of human morality.

Well, obviously none of these people have read Ayn Rand.

Um, hello? You want the secrets of human morality? Have you tried reading Atlas Shrugged? The Virtue of Selfishness?

Connecting the Disconnect

An exception to the disconnect between the American people on the one hand - who are vehemently opposed to the bailout, and the government and the media on the other - who are trying to pretend that the American people and their opposition don't exist, and even if they do, if people would just do as they're told and let the government fix everything it will all be just fine - no, really! - is this excellent piece in Friday's Wall Street Journal:

Another Bubble Bursts

EXCERPTS:

Testifying before Congress yesterday, Mr. Greenspan pinned the crisis on mortgage securitizers, risk modelers and lending institutions, thus contributing to the Washington narrative that government had little to do with it. The Fed's monetary policy apparently gets a pass. The media and Members of Congress will use Mr. Greenspan's testimony to impugn the very free market principles that the former Ayn Rand protégé has spent his life promoting. It was a painful spectacle to watch.

As for the second bubble, this one began in August 2007 with the onset of the credit panic. This is Ben Bernanke's creation. The Fed chose to confront the credit crunch as if it were mainly a problem of too little liquidity, not fear of insolvency. To that end it flooded the economy with money, while taking short-term interest rates down to 2% from 5.25% in seven months. The panic only got worse, and this September's stampede finally led the Treasury and Fed to address the solvency problem by supplying public capital and numerous guarantees to the financial system.

. . .

The tragedy of the second bubble is that it has left the economy in a weaker position to ride out the housing slump and credit panic. The American consumer has been whipsawed with $4 dollar gas and food inflation, while entire industries have been put on the edge of bankruptcy. Detroit's auto makers have spent the last year taking down their truck and SUV assembly lines while gearing up to make hybrids and electric cars, even as their cash flow has been ravaged. Their new investments are based on the expectation that oil will stay high permanently, but will the market for hybrids exist if oil is $50 a barrel?

As Congress plumbs the causes of our current mess, the main one is hiding in plain sight: Reckless monetary policy that did so much to create the credit mania and then compounded the felony with a commodity bubble and run on the dollar whose damage is now becoming apparent. The American people intuitively understand what's been done to them, which is why they are so angry. If the next President ignores the monetary roots of our troubles, he is courting the same fate as George W. Bush.

(Emphases mine.)

More on Greenspan

Skimming through the comments to a blog post about Greenspan at the NY Times - mostly the usual rabidly anti-Capitalist emotionalism from people who are completely clueless about economics - I came across the following:

Missing from the analysis is that the government with ideologues of every stripe, whether libertarian Greenspan or the most oversight-averse (for Fannie Mae and Freddie Mac) Democrats, would be far worse arbiters and managers of risk.

After creating a $53 trillion unfunded liability and a $10 trillion deficit that will bankrupt this nation, launching an immoral and irrational bailout (opposed by over 100 economists from Ivy League schools), starting the Iraq War, severely undermining individual and civil liberties by voting in domestic surveillance and trying to foist on us the Real ID, and not to mention, injecting toxic loans into the financial system backed and promoted by government sponsored enterprises, lets not jump to the conclusion that government regulations subject to the whims of vote-pandering or special-interest owned or even well-intentioned (and hell-bound) politicians would be better. We cannot trust that free people will not indulge in irrational exuberance. But we do have a right to hope that the government won’t be the prime initiator and major cause of the problem.

Nothing that the private sector has ever done to the people of this country (even leaving aside the fact that it has created 100% of our wealth) can compare to the horrors of centralized power and decision-making.

— Filby

Alan Greenspan

Last night, after reading - with growing incredulity - some of the news stories about Greenspan's testimony before Congress yesterday, I wrote a draft of a blog post about it which I ultimately became dissatisfied with. Today I am relieved to see that there is no end of Objectivists blogging about this, and so, rather than posting something of mine which I regard as inadequate, I will simply refer you to Gus Van Horn, whose effort on the subject may be even more strongly worded than what I came up with last night. It is entitled, simply,

Alan Greenspan, Coward and Traitor

Hat tip to NoodleFood, where Diana Hsieh put it quite nicely when she wrote

Gun Van Horn gives Alan Greenspan a much-needed ass-kicking for his repudiation of free markets.

Yes, indeedy, many Objectivists, myself included, are extremely unhappy - to put it mildly - about Mr. Greenspan, who is still publicly associated with Capitalism and Ayn Rand, even though his actions tend to reflect and foster the opposite.

Thus, when Alan Greenspan falters, Capitalism and Rand get the blame. As Hsieh put it:

By continuing to associate himself with the free market ideas of his former mentor, even while thoroughly contradicting them in word and deed as Fed Chairman, and then publicly repudiating them based on a government-created financial crisis, the man has done more damage to Objectivism than Barbara and Nathaniel Branden.

Here's the Ayn Rand Center press release:

Greenspan Has No Free Market Philosophy
October 24, 2008

Washington, D.C. --Opponents of the free market are giddy at Alan Greenspan's declaration that the financial crisis has exposed a "flaw" in his "free market ideology." Greenspan says he is "in a state of shocked disbelief" because he "looked to the self-interest of lending institutions to protect shareholder's equity"--and it didn't.

But according to Dr. Yaron Brook, executive director of the Ayn Rand Center for Individual Rights, "any belief Greenspan ever had in truly free markets was abandoned long ago. While Greenspan long ago wrote in favor of a truly free market in banking, including the gold standard that such markets always adopt, he then proceeded to work for two decades as leader and chief advocate of the Federal Reserve, which continually inflates the money supply and manipulates interest rates. Advocates of free banking understand that when the government inflates the currency, it artificially increases prices and causes booms in certain sectors of the economy, followed by inevitable busts. But not only did Greenspan lead the inflation behind the .com bubble and the real estate boom, he blamed the market for their treacherous collapses. Greenspan should have recognized that what he wrote in 1966 of the boom preceding the 1929 crash applied here: 'The excess credit which the Fed pumped into the economy spilled over into the stock market--triggering a fantastic speculative boom.' Instead, he superficially blamed 'infectious greed.'

"Should it be any shock that Greenspan now blames the free market for today's meltdown--rather than the Fed's policies, which fueled an inflationary housing boom, which rewarded reckless lenders and borrowers from Wall Street to Main Street? Greenspan didn't mention the word 'inflation' once in his testimony.

"Whatever Greenspan's economic philosophy is, it is not anything resembling a free market."

Objectivist Round Up

The latest Objectivist Round Up is now online at Nick Provenzo's "Rule of Reason"!

It includes my post: "My latest LTE"!

Dysfunctional?

Comment by Robert Walker, Chairman, Wexler and Walker Public Policy Associates, at a panel at the International Symposium for Personal and Commercial Spaceflight 2008 (from notes taken by Clark Lindsey for HobbySpace):

Congress has gotten so dysfunctional, can't even get budgets done on time. This is a big problem for companies with govt. contracts and are trying to arrange their own budgets and spending schedule.

50-to-1

Tom Coburn was in Oklahoma City today for a "town hall meeting".

Here's the story from the AP in The Oklahoman:

U.S. Sen. Tom Coburn defends bailout vote
By The Associated Press
Published: October 20, 2008

U.S. Sen. Tom Coburn rigorously defended his vote in favor of the economic rescue plan Monday as he faced hard questions at a town hall meeting in Oklahoma City.

Coburn, R-Okla., told a crowd at the Oklahoma City campus of Langston University that he would vote to same way "time and time again," remembering the failure of the country's leaders to act soon enough to head off the Great Depression.

Coburn said, like it or not, the country already "is in the midst of a recession" that would "probably last for several quarters." He said the bailout was needed to put money into the financial system so funds could be made available for lending to everyday citizens and to hopefully reduce job losses.

Some members of the audience at Langston expressed their displeasure with the bailout.

"We should have let it go. We should have let it fail," shouted one man.

"Your option is way too painful," Coburn said.

He said there was danger that a without the bailout, the nation's economy could have dipped to its level in 1960.

"How many of you think you'd still have a job?" he asked.

"We got the best deal we could and it stunk," he said of the bailout. He said his mail, e-mails and telephone calls from constituents are running more than 50-to-1 against his vote.

Coburn, who is known for his conservative approach to funding issues, defended holding up bills to expand small business programs and other projects.

He said he would oppose such measures until Congress includes criteria to determine if the programs work.

Coburn said most federal programs are funded and reauthorized without adequate oversight by Congress.

"That's 80 percent of the federal government. They don't know what they are doing," he said.

On another subject, Coburn said he is "a good friend" of Democratic presidential candidate Barack Obama, though he is a vigorous supporter of John McCain, the Republican nominee.

He called Obama "a good man" who "just has a different philosophy than I do."

Here's the comment I left at The Oklahoman's website:

Coburn was wrong to vote for the bailout and he is wrong to support Paulson, who should be fired. Paulson's armtwisting of healthy banks who don't need the government's help will make matters worse not better.

Fannie Mae and Freddie Mac can't be reformed and should be closed: so long as they are around they will be in the sights of politicians who want to further their careers by promoting the fantasy of home ownership without responsibility.

And how can Coburn rail about pork - which makes up less than one percent of the federal budget - and say nothing about the out-of-control growth of Social Security and Medicare, which account for one-third of the federal budget?

All this scare-mongering about credit is nothing but an excuse for a power grab on an unprecedented scale, and Coburn is a willing accomplice. He knows nothing about free markets or principles and is no defender of Capitalism.

AND I posted the URL for Repeal the Bailout!

If you scroll down to the beginning of the comments section for the story in The Oklahoman, you can read a letter Coburn is sending to his constituents containing his excuses for his vote on the "economic stabilization legislation", a.k.a. the bailout.

Those with stock seed having no trouble getting more stock seed

This story in the Journal Record would seem to indicate - when considered along with reports that smaller banks are relatively healthy - that the banking industry is not quite as threatened with imminent collapse as the government would have us believe:

Oklahoma ag producers having no issues securing operational capital