Getting Judge Napolitano’s “Freedom Watch” on the air

Fox News is considering putting Judge Napolitano’s “Freedom Watch” on the air. Napolitano would be a great spokesman to expose more people to libertarian ideas. Here's a sample of his show.

Please write Fox News at yourcomments@foxnews.com to ask them to put the show on the air. This is a great opportunity to get libertarian, freedom-loving ideas into the main stream media. Most freedom loving people have no love for Fox News, but encouraging them to put this show on the air will only help our cause.

Here's the email I sent them:

I wish to request that Judge Napolitano’s “Freedom Watch” be aired on Fox News Channel. I've been watching the show on youtube for a while and I absolutely am addicted to it.

There is a huge untapped freedom-minded audience that the mainstream media does not really cater to. While this started as a few hundred thousand people on the fringe following Ron Paul, it is now growing into a major nation-wide movement. Recent events only assure that this will continue. It's also likely where the Republican party will turn to in order to find a new voice now that the neo-conservative, social conservative agenda is dead.

I would definitely get my friends and family to watch the show. It would also be a chance for Fox News to change its image as being a mouthpiece for the Republican Party. Please put it on the air.

Austrian Economics in Action: Ron Paul versus Barney Frank

Here's a recent interview with Ron Paul on Morning Joe. Joe reads a prophetic speech that Ron Paul made in 2003 explaining Fannie Mae and Freddie Mac's roles in the housing bubble and predicting exactly what would happen.




Here's a speech from Barney Frank in 2005 (two years later) explaining how it was impossible for there to be a housing bubble.



For those of us who subscribe to the theories of Austrian Economics, it isn't surprising that Ron Paul could see in 2003 what Barney Frank still couldn't see in 2005.

By the way, guess which one of these politicians was one of the top recipients of campaign donations from Fannie Mae and Freddie Mac.

John Stossel's "You Can't Even Talk About It"

I like Stossel.

Part 1

Part 2

Part 3

Part 4

Part 5

Part 6

Peter Schiff on the Housing Crisis

Peter Schiff wrote a great article explaining how we got into this economic mess and how all the policies the government is making are just going to make things worse. He really nails it here:

Although both lenders and borrowers were acting in their own perceived self-interest, what can we say of our economic policymakers who are expected to protect the good of all? Their actions encouraged the whole sad circus. Were it not for the excessively low interest rates provided by the Fed, the lax lending standards and moral hazards supplied by Congress courtesy of Freddie, Fannie, and the FHA, and the many real estate subsidies built into the tax code, none of these predatory loans would have been possible.

Had lenders exercised better judgment and had borrowers avoided overly burdensome debt loads, both parties would clearly be in better financial positions today. Instead, as borrowers were demanding the credit to fuel their dreams of instant real estate riches, lenders were being ordered to accommodate them.

In past generations, homebuyers were required to save for down payments and postpone their purchases until they could actually afford conventional 30-year fixed mortgages. But in recent years, as home ownership became a matter of public policy, the government accused lenders of discrimination and urged lower standards and easier terms. With government guarantees in place, the mortgage industry was happy to both expand their revenues and promote a better society.

But by denying credit, even if it requires borrowers to forgo something they clearly want, lenders not only provide a valuable service to borrowers, but to society. Given the mess in which we now find ourselves, due to the bad loans made during the real estate bubble, this lesson should have been well learned. Unfortunately it hasn't, as the same dynamic is now playing out on a much larger scale.

Faced with a prospect of downgrading its lifestyle, the U.S. government is instead borrowing trillions of dollars to artificially inflate our deflating bubble economy. The money is being used to both expand the size of government and finance additional consumer spending. Given our financial position, this is the exact opposite of what we should be doing.

GMAC - so sad

Nice post from Denninger. 

In short, GMAC (financing arm of GM) borrows money from the government at 8% and lends it to customers with below average credit ratings at 0% in to let them purchase cars that GM will lose money on. 

This is wealth destruction at its finest. Every time GM produces a car, thousands of dollars  in wealth are destroyed since the costs of building the car are thousands of dollars more than the price customers are willing to pay for the car. In a normal market, this would quickly drive a company out of business and shift production to more efficient companies that are meeting customer demands. Instead, the United States government levels the playing field by subsidizing the worst companies. After all, it's no fair that GM can't compete -- clearly, the remedy for this is to have the productive members of society (tax payers) subsidize GM inability to compete. It's as if the government were using Atlas Shrugged as its playbook.

Cops raid house growing Christman Trees

This is so freaking awesome.

KopBusters rented a house in Odessa, Texas and began growing two small Christmas trees under a grow light similar to those used for growing marijuana. When faced with a suspected marijuana grow, the police usually use illegal FLIR cameras and/or lie on the search warrant affidavit claiming they have probable cause to raid the house. Instead of conducting a proper investigation which usually leads to no probable cause, the Kops lie on the affidavit claiming a confidential informant saw the plants and/or the police could smell marijuana coming from the suspected house.

The trap was set and less than 24 hours later, the Odessa narcotics unit raided the house only to find KopBuster’s attorney waiting under a system of complex gadgetry and spy cameras that streamed online to the KopBuster’s secret mobile office nearby.

Vintage Keynesian propaganda

Oh my goodness. This is hillarious. I can't wait for Bernanke to appear in an updated video that explains how great inflation is. Of course, this is pure Keynesian nonsense. Got gold?

Not to be outdone, the government later came up with the Whip Inflation Now campaign three decades later. I guess the government decided inflation wasn't that great after all.

Austrian economics matters more than ever

Lew Rockwell speaks about why Austrian Economics matters more than ever.

Interview with Nassim Taleb

An interesting interview with Nassim Taleb on Charlie Rose (HT Vijay). Talking about Bernanke and other economsts, he says

It's just that class of people who are into economics, and have this illusion, [who] provide us with these analytics that provide us with the illusion of understanding the world and that I find very dangerous. Because the economic establishment, as a class, has been extremely incompetent in history. It's like medieval medicine. Medieval doctors killed more patients than they saved.. they can't predict better than cab drivers...And I blame this crisis on economsts, financial economists particularly.

This is very much similar to what Mises talks about in Human Action, which I cover in another blog post. 

Mainstream economists today such as Krugman and Bernanke use macroecomomic theories and build complex mathematical models using “scientific principles” to model the economy. These aren't built on axioms about the fundamenetal nature of human behavior but rather built upon historical data and events. They use the methods of science by measuring all types of indices in the economy such as unemployment and prices and then plug them into their models and formulas to decide how to intervene in the market in order to accomplish some type of policy goal. They look like they know what they are doing because they use the facade of science, but in reality, their economics is pseudo-science and their models are worthless, as we just learned again for the millionth time.

Human Action by Ludwig von Mises (Part 1)

I started reading Human Action which is the magnum opus of Ludwig von Mises, the great Austrian economist. I recently finished part 1 and the work is nothing short of brilliant.

Human Action is not for the faint of heart. Comprising over 900 pages, it is a very dense and methodical treatise on the nature of economic activity. In many ways, it is like reading a math paper rather than the typical economics book. This is because Mises starts with a small number of axioms and builds his entire theory of human action and markets upon them. It reminds me of studying Euclidian Geometry in 8th grade where one could prove all kinds of interesting results with just a handful of axioms about the properties of parallel lines and right angles.

Human Action is not the work I would recommend for those who want an introduction to Austrian economics. It's a real commitment and it's more interesting to tackle after becoming familiar with the principles of Austrian economics by reading more accessible works. I generally recommend Economics in One Lesson by Hazlitt and What Has Government Done to Our Money by Rothbard as good introductions.

The first 100 pages of Human Action provide the philosophical underpinnings of Austrian economics. Mises rejects positivism, i.e. the scientific approach, for understanding Economics. At first, this might sound kind of strange. Why would one reject the scientific method for trying to describe how economic activity works? As an engineer with a background in science, I was skeptical the first time I heard this -- I was trained to use science to understand and manipulate the world. As an aside, Mises' younger brother was a very prominent applied physicist.

Mises rejected the scientific method for economics not because he rejected science. Mises rejected it because the scientific method can’t help us understand economics. The scientific method works when one can run repeatable and verifiable experiments to test hypotheses. We all learned about hypotheses, theories, and experiments in grade school. The laws of physics and chemistry are constant and our theories for explaining them can be tested and falsified with experiments. This is why the scientific method works for understanding the laws of nature. The ultimate test for our scientific theories is how well they can be used to make predictions about the world.

Economics, on the other hand, involves human actors participating in the passage of time. The scientific method cannot be applied because there is no way to run repeatable experiments to test our theories. What caused the Great Depression? The scientific method can't help us with that because we can't go back to 1929 and run a repeatable experiment where we change a single variable to see if we still get a Great Depression. Without the ability to run experiments that use controls and manipulate one variable at a time, there is no way to use the scientific approach to test economic theories. Using the scientific approach just doesn’t work.

Besides the fact that there is no way to run repeatable experiments, the scientific method also does not apply because the laws of human action are not fixed like the laws of science. There are billions of humans in the world and they each act according to their own free will. There is no theory or scientific model that can model the actions of billions of humans. The Federal Reserve tries to build models for economic activity and it's no surprise they never get it right. Their models just can't account for understanding the subjective desires and actions of billions of people. And this isn’t just a matter of needing better models and computers. The model cannot work because human beings react to the model. The laws of physics do not change because we build a model for understanding force and energy, but humans do react to what the Federal Reserve does. It is impossible to model human action because humans will change their behavior based on the existence of the model. It's the ultimate uncertainty principle.

Mises explains, “We are faced with the same main differences between physics and chemistry on one hand and the sciences of human action on the other. In the realm of physical and chemical events, there exist constant relations between magnitudes, and man is capable of discovering these constants with reasonable degree of precision by means of laboratory experiments. No such constants exist in the field of human action.” He goes on, “The impracticability of the measurement is not due to the lack of technical methods for the establishment of measure. It is due to the absence of constant relations…Statistical figures referring to economic events are historical data. They tell us what happened in a nonrepeatable historical case.” This reminds me of those models used by the rating agencies. They used historical housing prices to claim housing would not drop in price and to justify AAA ratings for all those CDOs.

The reason this subtle point is so important to understand is that it is the fundamental difference between mainstream economics and Austrian economics. Mainstream economists today such as Krugman and Bernanke use macroecomomic theories and build complex mathematical models using “scientific principles” to model the economy. These aren't built on axioms about the fundamenetal nature of human behavior but rather built upon historical data and events. They use the methods of science by measuring all types of indices in the economy such as unemployment and prices and then plug them into their models and formulas to decide how to intervene in the market in order to accomplish some type of policy goal. They look like they know what they are doing because they use the facade of science, but in reality, their economics is pseudo-science and their models are worthless, as we just learned again for the millionth time.

The approach Mises takes is one based on a priori axioms. He builds up the theory as a mathematician would. He defines a framework called praxelogy for understanding human action. His primary axiom is that humans are actors with logical thought and they take actions in order to decrease dissatisfaction. It's not relevant what the end goal of the individual is, just that it is based on the individual's own subjective values. Humans prioritize their dissatisfactions and take actions one a time to reduce uneasiness associated with their dissatisfactions. Mises writes, “Human life is an unceasing sequence of single actions. But the single action is by no means isolated. It is a link in a chain of actions which together form an action on a higher level aiming at a more distant end.”

Another axiom is that acting man ranks his desires on a scale of values in order to satisfy his highest priority desires over his lower priority desires. This scale of wants only exists and can be observed through a man’s actions. Mises says, “Action sorts and grades; originally it knows only ordinal numbers, not cardinal numbers.” In other words, man does not decide what the absolute values of two commodities are. He only decides between definite quantities when given a concrete choice. He writes, "Acting man is not in a position whether he must choose between all the gold and all the iron. Hs decision in choosing between 100 ounces of gold and 100 tons of iron does not depend at all on the decision he would make if he were in the highly improbable situation of choosing between all the gold and all the iron. What counts alone for his actual choice is whether under existing conditions he considers the direct or indirect satisfaction with 100 ounces of gold could give as greater or smaller than the direct or indirect satisfaction of 100 tons of iron. He does not express an academic or philosophical judgment concerning the “absolute” value of gold and iron; he does not determine whether gold or iron is more important for mankind; he does not perorate as an author of books on the philosophy of history or ethical principles. He simply chooses between two satisfactions both which he cannot have together.”

Building upon these axioms, Mises develops a theory of returns and marginal utility. In part 2, which I haven’t started yet, he addresses how human action works within the framework of society. My sense from what I've read is that I will learn how the market forms from the aggregation of each individual's ranking of scarce goods. Ths should ultimately set prices for commodities and labor. More to come as I read more.

Academia's War Against Free Market Money

Gary North wrote a beautiful essay on how mainstream economists marginalize followers of Austrian economics, the people who predicted the recession while the mainstream economsts were patting themselves on the back for all the wealth that was being created due to the increase in housng prices.

I love this little jab at Bernanke, Krugman, and the likes:

The real market test is not what a guild of self-accredited academic economists write in the tenured safety of their tax-funded ivory towers. It is not what a committee of equally subsidized peers determines is fit for publication in the guild's unread and unreadable academic journals. It is the market outside the insulated halls of ivy that determines what survives and what does not.

He then uses the debate between Peter Schiff and Arthur Laffer as an example of how the main stream economists who manage the economy just have no clue.

The debate goes on. This time, however, it is between two real-world economists. One has a Ph.D. from the University of Chicago. The other has no Ph.D. Neither is in academia. They both sell their services as forecasters. Schiff saw this bust coming and said so on national television in 2006. Laffer responded on-screen, dismissing this prediction as nonsense. The video is here.

Schiff said that America would enter a major recession in 2007 or 2008, and that it would be long and deep. Laffer was contemptuous of Schiff's forecast. "I don't know where he is getting this," he said.

He was getting it from Mises. He was getting it from Murray Rothbard. In short, he was getting it from Austrian School economics.

He concludes

The debate between Mises and Fisher, Mises and the Chicago School, and Schiff vs. mainstream economists in 2006 boil down to this: Can we trust the Federal Reserve System? The Austrian School's answer: no. Why not? Because the Federal Reserve System substitutes the judgment of monopolistic central planners for consumers and investors. It substitutes the decisions of people with job tenure and little accountability for the decisions of people who put their own wealth at risk. It substitutes the judgments of non-owners for owners. We find that academic economists, either tenured or seeking tenure, side with Fisher. The textbooks side with the academic economists.

You would be wise to side with Mises.

Officially in Recession

We're in a recession according to the NBER. As Vijay said, "They're like a weather bureau who tells you what the weather was yesterday." 

SEC Shuts Down Prosper

According to TechCrunch, the SEC outlined its reasons for shutting down Prosper, the peer-to-peer lending network. As Vijay said, at least now we can sleep more easily knowing our financial system is safe. Good thing those guys are on the job since Prosper clearly was a huge contributor to the credit crisis.

Laying the groundwork for the next war

The NY Times is reporting Iran Said to Have Nuclear Fuel for One Weapon. Funny how this comes out just after the election. Are the elites laying the groundwork for the next war? Isn't this how the last war started?

Merrill's David Rosenberg discovers Rothbard

Merrill's David Rosenberg discovers Rothbard (HT Vijay). Maybe one day we will hear the expresson "We're all Rothbardians now."

With this in mind, we were fortunate to have a client mail us a book titled America's Great Depression by Murray N. Rothbard. We think it is an absolute must-read, on the scale of Amity Shlaes' The Forgotten Man. In this book, you will learn that the New Deal machinery was established by Herbert Hoover, not FDR, and that the scale of the government incursion into the economy was so farreaching that the multi-year program actually ended up doing more harm than good. What is amazing is the chapter on the Reconstruction Finance Corporation (RFC), which was like the TARP in its efforts to bolster government equity stakes in banks, and therefore, to perpetuate the excess capacity in the system. The RFC provided money to groups from financials to farmers (cotton loans were big) to railroads ("some $264 million were loaned to railroads during the five months of secrecy") to state governments. Sound familiar?

This RFC began with government capital of $500mn in 1932. Eventually, that grew nearly eight-fold, which is why we think the current TARP is really TARP1. You read this book and you get a glimpse of Hoover's "war on the stock market, particularly on short-sellers" and the new Federal bankruptcy law of 1932, which served to "weaken the property rights of creditors ... states also joined in the attack on creditors" ... as in most depressions, the property rights of creditors in debts and claims were subjected to frequent attack, in favor of debtors who wished to refuse payment of their obligations with impunity ... many states adopted compulsory debt moratoria in early 1933.

And get this, "the banks also received their share of Hoover's ire for their unwillingness to expand in those troubled times". Hoover actually lodged a complaint in the New York Times that "banks have not passed the benefits of these relief measures on to their customers". So, in the end, Hoover (Roosevelt, remember, inherited and expanded on this infrastructure) "and Congress agreed to transform the RFC from a generally defensive agency aiding banks and railroads in debt, to a bold 'positive' institution, making capital loans for new construction".

First Joseph Nacchio, now Mark Cuban

Joseph Nacchio was the only CEO of a telecommunications company to demand a warrant for the NSA wiretapping. He was later charged with insider trading. Many people believe he was prosecuted because he did not cooperate with the government.

Mark Cuban is now being charged with insider trading. Naked Capitalism has an article connecting the dots about how this may be retributon for his criticism of the financial industry bailout.

Fed's newest lending facility: ABCPMMMFLF

From Bloomberg, the Federal Reserve launched the ABCPMMMFLF. That stands for Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility. It could buy up to $1.8 trillion dollars of short-term debt. This just boggles the mind. As I said in a previous post, the Fed is getting desperate and will do anything to prevent deflation. It looks more and more to me that they will destroy the nation's currency in the process. 

The Fed is getting really desperate

The Fed tells banks to lend or else. I wonder, "Or else what?"

The agencies expect all banking organizations to fulfill their fundamental role in the economy as intermediaries of credit to businesses, consumers, and other creditworthy borrowers. Moreover, as a result of problems in financial markets, the economy will likely become increasingly reliant on banking organizations to provide credit formerly provided or facilitated by purchasers of securities. Lending to creditworthy borrowers provides sustainable returns for the lending organization and is constructive for the economy as a whole.

...

The agencies will continue to take steps to promote programs that foster financial stability and mitigate procyclical effects of the current market conditions. However, regardless of their participation in particular programs, all banking organizations are expected to adhere to the principles in this statement. We will work with banking organizations to facilitate their active participation in those programs, consistent with safe and sound banking practices, and thus to support their central role in providing credit to support the health of the U.S. economy.

This is so interesting on multiple levels. On one level, the banks got into this mess by making bad loans to people who couldn't afford to pay them back. The Fed never complained while that was happening. In fact, it outright encouraged it. It set interest rates far below market rates and below the rate of inflation which punished savers and subsidized debtors. This resulted in investors taking excessive risks in order to keep up with inflation. Greenspan even encouraged exotic mortgages like pay-option ARMs. So now that the Fed helped create this mess by encouraging the banking system to lend to people who couldn't afford these loans, it now is coming down hard on banks for being conservative and trying to rebuild their reserves.

On another level, it is so clear that the Fed is just terrified -- absolutely terrified -- of deflation. And they can't reinflate the money supply without more lending and borrowing. But the Fed is not able to make that happen because attitudes toward debt are changing. There is a psychological shift going on where people are starting to reject debt. The Fed will do everything in its power to prevent this, but so far, it has been pushing on a string. The more vehicles the Fed creates to lend money to the private sector, the more it makes the private sector dependent on the Fed. Why should a company borrow from a bank at the risk-adjusted interest rate when the Fed will lend it money at below-market rates?

Finally, what we're headed towards is nothing less than full nationalization of the banking system. The banking system and the housing sectors are already the most regulated and manipulated parts of the US economy -- it's no surprise that this is where disaster stuck. Now that the banks have taken money from the Treasury, the next step will just be the Treasury and Fed ordering banks to do exactly what they say. The Fed and the Treasury can ultimately make the banks do what they want, but the results won't be good for the economy. They are trying to fight the market which is begging for liquidation, structural change, and ultimately the shift of capital from malinvestment to where it's actually needed. The more the government tries to prevent this, the more they are going to turn the US into Japan and create the deflation they so want to avoid.

I don't know why anybody at this point would want to own equity in a bank. This letter from the Fed makes it clear that the banks serve the US government, not their shareholders. And if that means destroying their balance sheets even further, that is what the banks must do.

Lew Rockwell on the Right's intellectual bankruptcy

Great article from Lew Rockwell about how conservatives sold out to the Bush administration.

But this reliable support by conservatives for the Republican president confronts what psychologists call “cognitive dissonance,” which is to say that people will not forever live with a massive contradiction between what they do and what they believe. Eventually, the beliefs come around. So it has been for the conservatives who, in the 1990s, blasted Clinton’s big budgets and nation-building and then ended up celebrating far larger budgets and a vaster military empire around the world. The result has been an amazing intellectual bankruptcy on the Right.

The culminating event was the financial bailout of the Wall Street plutocrats, which contradicts everything that conservatives allegedly stand for. It was socialistic in every way. It rewarded market failures. It ripped off average families for the sake of billionaires. It was the worst form of Keynesian planning. It was an open conflict of interest, as the ex-CEO of Goldman Sachs funneled vast sums to Goldman Sachs. It had exactly zero chance of helping the economy. In fact, by draining productive private resources necessary for economic recovery, it makes a bad situation worse.

And yet, no surprise, conservatives came around. You could check in with the Heritage Foundation or National Review Online and find rousing endorsements of this outrage, complete with pieties: “In normal times, we’ve been against government intervention, but these are not normal times…” And what did they get out of it? Nothing but the satisfaction of knowing that they helped sanitize and baptize what may be the worst piece of legislation in half a century

The Moral Hazard of Regulation

Wise words from Ron Paul.

The Moral Hazard of Regulation

by Ron Paul

Since the bailout bill passed, I have been frequently disturbed to hear "experts" wrongly blaming the free market for our recent economic problems and calling for more regulation. In fact, further regulation can only make things worse.

It is important to understand that regulators are not omniscient. It is not feasible for them to anticipate every possible thing that could go wrong with whatever industry or activity they are regulating. They are making their best guesses when formulating rules. It is often difficult for those being regulated to understand the many complex rules they are expected to follow. Very wealthy corporations hire attorneys who may discover a myriad of loopholes to exploit and render the spirit of the regulations null and void. For this reason, heavy regulation favors big business against those small businesses who cannot afford high-priced attorneys.

The other problem is the trust that people blindly put in regulations, and the moral hazard this creates. Too many people trust government regulators so completely that they abdicate their own common sense to these government bureaucrats. They trust that if something violates no law, it must be safe. How many scams have "It's perfectly legal" as a hypnotic selling point, luring in the gullible? Many people did not understand the financial house of cards that are derivatives, but since they were legal and promised a great return, people invested. It is much the same in any area rife with government involvement. Many feel that just because their children are getting good grades at a government school, they are getting a good education. After all, they are passing the government-mandated litmus test. But, this does not guarantee educational excellence. Neither is it always the case that a child who does NOT achieve good marks in school is going to be unsuccessful in life. Is your drinking water safe, just because the government says it is? Is the internet going to magically become safer for your children if the government approves regulations on it? I would caution any parent against believing this would be the case. Nothing should take the place of your own common sense and due diligence.

These principles explain why the free market works so much better than a centrally planned economy. With central planning, everything shifts from one's own judgment about safety, wisdom and relative benefits of a behavior, to the discretion of government bureaucrats. The question then becomes "what can I get away with," and there will always be advantages for those who can afford lawyers to find the loopholes. The result then is that bad behavior, that would quickly fail under the free market, is propped up, protected and perpetuated, and sometimes good behavior is actually discouraged.

Regulation can actually benefit big business and corporate greed, while simultaneously killing small businesses that are the backbone of our now faltering economy. This is why I get so upset every time someone claims regulation can resolve the crisis that we are in. Rather, it will only exacerbate it.