On the Great US Crash

A reader, Oindri Mitra, has written in asking for my views on the US government’s bailouts of Fannie Mae, Freddie Mac and now AIG.

What is the “Antidote” view on these?

Let us begin with the basic truth – and that is, there can never be any guarantee of profit in a free market. Any such guarantee constitutes a “moral hazard,” and promotes reckless behaviour.

This means that, just as profits are a positive signal for any business, so are losses a negative signal. The negative signal of losses on the balance sheet indicates that a course correction is necessary. With government bailouts, this course correction never happens. It is back to crooked business as usual.

But the question arises: Why is the US economy on a perpetual boom-and-bust cycle? Why do such huge financial disasters occur?

This is where the artificially low interest rates set in an earlier period by the US Fed come in. A businessman invests after making a back-of-the-envelope calculation of his costs and the possible profits expected. Artificially low interest rates mean that the costs of borrowing are low – and expected profits are therefore that much higher.

Businessmen therefore respond to a wrong signal (of low borrowing costs, which is the cost of capital) – and there is an artificial boom. In the US, this occurred especially in housing. Consumers also borrowed recklessly and invested in housing: the “sub-prime” mortgages reflect this fact.

As all bubbles must burst, so did the housing bubble.

At that point of time, the correct decision to take would have been to liquidate all bad investments. The US government opted for a bailout of Fannie Mae and Freddie Mac instead. Now, it is bailing out AIG. This does not solve anything. It merely postpones an inevitable bigger crash.

As Lew Rockwell writes in a post entitled “How to think about the Crash”:

“The damage is done during the Boom. That's when, thanks to the Fed, the malinvestments and other wealth destruction take place. The Bust is when the errors are recognized, and the rebuilding can begin (to the extent that McCain-Obama do not delay it with a Newer Deal). This is a disaster for the State and its pals in banking and on Wall Street, and the military-industrial complex. The dollar could go down as the world reserve currency, which also means the end of the empire. The Fed-financial complex has done a lot of damage to the rest of us too, of course, and we need to defend the market and finger the villains. Start with Greenspan and Bernanke, and the whole Federal Reserve monster. Then the SEC and all the other regulators who warp the market for the benefit of the power elite. Blame fractional reserves and all the academics and think tanks who have promoted them and central banking. We need to hang this disaster around their necks.”

The CPM is blaming the crash on the free market.

Kamal Nath is laughing at those who preach to him the virtues of free trade.

The US government is not a good poster-boy for free markets. All the good work done by libertarians in promoting free markets and free trade in India is in danger of being undone.

We should blame the crash on the Keynesian fiat money system run by The US State.

After all, where The State guarantees profit, there cannot be anything like a free market, in which losses must be booked too.

The globalizing world needs a sound monetary system. I am glad that this point of view is emerging strongly in America – thanks to Ron Paul.

Sound money based on gold is the only way out if we want to secure a stable prosperity. There will be profits, there will be losses, growth will be steady, and prices will keep falling with sound money. Most importantly, the poor of today will accumulate capital; they lose this ability with inflationism.

The US Crash is happening because of The US State.

So don’t blame it on the market. This is not what would happen in a truly free market scenario.

And don’t call for “more regulation.”

Call for sound money – and the abolition of the Fed.