Bringing Back Gold

Thursday, October 02, 2008

Via Randex and HBL is an article in The Wall Street Journal that reads almost as if Ayn Rand herself had written it: "Loose Money and the Roots of the Crisis".

Here's an excerpt.

In the aftermath of this financial catastrophe, as we sort out causes and assign blame, with experts offering various solutions -- More regulation! Less complex financial instruments! -- let's not lose sight of the most fundamental component of finance. No credit-default swap, no exotic derivative, can be structured without stipulating the monetary unit of account in which its value is calculated. Money is the medium of exchange -- the measure, the standard, the store of value -- which defines the very substance of the economic contract between buyer and seller. It is the basic element, the atom of financial matter.

It is the money that is broken. [bold added]
The article is worth a full read and even manages to deal with former Objectivist Alan Greenspan's role as a central banker about as well as one could hope for a non-Objectivist proponent of capitalism.

After the article is the following blurb about its author: "[Judy] Shelton, an economist, is author of 'Money Meltdown: Restoring Order to the Global Currency System' (Free Press, 1994)."

Notice the year her book came out. I remember that year, and the heady (but mistaken) feeling that came with the Republicans winning control of Congress. It seemed at the time like we were finally about to make some progress towards reversing the decades-old trend towards a government-run economy.

Now, nearly a decade and a half later, we have not only failed to achieve even the beginning of a rollback, but have seen a massive increase in the size and intrusiveness of the federal government, and driven by a Republican President at that! For anyone urging a vote for McCain based on the notion that you "fight an election with the politicians you have", there might be a historical lesson here.

The fight for a sound financial system is too important for pro-capitalists to make the mistake of pledging loyalty to any one political party. Advocates of capitalism must instead present our arguments to the public at large, and make the parties vie for our votes in every election instead. The former will ensure that our numbers grow, and the latter will protect our political power from misuse by false allies (such as the religious right) for purposes at odds with freedom.

-- CAV


z said...

Gus, sorry for the length of this comment, but I have to write this because I think I’m going crazy. Not only do I have to be productive for myself and family, but I have an all-encompassing, obsessive, unending desire to, not only understand but, fully understand, and articulate the totality of this crisis, and share that understanding mutually with another person. Its that word ROOT, which I obsess over and I find it less than coincidence that an article YOU share, includes that word. Your blog has become a comfort zone for me over the last few years and I just was floored that after pacing back and forth thinking this morning I opened your blog and you had blogged that. I haven’t read it yet, but the word “root”, is driving me crazy. Everyone is saying “the root” of the crisis. No one really knows what a “root” is, I guess. A root is the beginning, something that underlies all else, but you get people saying things, for example like, “The root of this mess is the collapse of housing values.” I don’t need to point out to you, as an Objectivist who understands the concept that knowledge has hierarchy, that “the collapse of housing values” is not a root cause. Because if you have the root, no other questions should follow. What caused housing values to collapse? Theres a question, so that can’t be the root. So, in all the talk about this financial crisis, every commentator follows the trail back to the first thing they understand, and then call that the root. For instance, if you know that there exists a type of shyster-charlatan-snake-oil-salesman masquerading as a CEO in the world and that is the closest thing to the perceptual level you can understand, you’ll call that the root.

IMO, to get to the REAL root, you have to go all the way back and work your way forward, as AYN RAND did in “Egalitarianism and Inflation”, back before the concepts of “market”, “money”, “division of labor”. You have to go back to “primeval wilderness” and work forward as she did, IF you really want to understand. While I can’t do that in this comment, I’ll suggest what I’ve been able to conclude for myself. Heres a short version and I’m assuming a familiarity with that essay.

An underlying false assumption of central banking is as close as I’ve been able to come to understanding the ROOT. The fact is that banks, as part of the division of labor, magnify the productive power of “the savings of producers”. Productive persons save, and the bank takes the savings (capital) and specializes in finding productive uses of the savings. The false assumption is that by pumping the banks full of money, there is no limit to the amount of production you can generate. But just because a bank has shit-loads of money to lend, does not mean that there are shit-loads of entrepreneurs waiting to produce with that capital. That is the breakdown point. The limit established by reality is the number of men able to take the loans and use them for productive purposes. If you think that banks simply multiply money by lending it out, then you think that by lending out MORE money, that much MORE money will come back. The gov’t borrowed money (As Ayn Rand explained), not backed by savings, but backed by promissory notes of future tax receipts, and pumped it into banks thinking that banks will just “do what they do“. But since they could not control the number of ACTUAL productive demand for capital, they simply lowered the standards of what would count as a productive purpose of a loan! They created an ILLUSION, an illusion of production by mimicking the productive function of what a bank does. For a while, it worked. More people were working, construction boomed, houses were built. But it had to break down. It had to. Now, we’re in a real mess because the gov’t borrowed money on our behalf and lent it out for unproductive purposes and blew it all.

I know this is getting long for a comment but I have one more observation. People blame greedy businessmen, and there certainly were people who committed fraud along the way, i.e. lied about income on mortgage applications. I certainly wouldn’t want to try to justify the behavior of some of these people. But there is something to be said for the fact that the gov’t created a huge illusion, and it was encouraging people to buy into the illusion, and thereby the gov’t caused a lot of what passes for “the greed of Wall-Street.” It would have taken a very honest and thoughtful person to say “wait a minute, what’s going on here?” and try to go back to the root to understand that the shenanigans the gov’t were pulling couldn’t last, rather than just rubber-stamp the loan and collect a fat commission, as everyone else around was doing. I think that the government should take a lot of the blame for “spiking the kool-aid”, so-to-speak, with central-bank shenanigans, not Wall-Street for drinking it.

z said...

By the way, that article is freakin' awesome, the best I've read. It places the blame where it should be, on the idea of central banking. That's just what I was (trying) getting at.

Gus Van Horn said...

"So, in all the talk about this financial crisis, every commentator follows the trail back to the first thing they understand, and then call that the root."

That's an interesting observation. We can thank a combination of poor education and the influence of Pragmatism for the fact that the "roots" of so many people are so shallow.

Martin Lindeskog said...


I recommend you to read The Collapse of the Dollar and How to Profit from it by James Turk and John Rubino.

Gus Van Horn said...

Thanks. I'll take a look.