I woke up in a new Moral Hazard melting down America

One day America, you’ll wake up on a Monday morning and by Friday America will not be the same. This is a niggling doubt that has haunted many of my close American Baby Boomer friends who know that they’ve experienced more prosperity, freedom, leisure and comfort than any other nation in recorded history ( well, at least since the 1940’s)

Is that Friday finally here? Are the financial crises, the Wall Street bailouts the first of the horsemen of the economic apocalypse? American Libertarians—who are ideologically distinct from the Democrats and Republicans because of their disdain for statist, monetarist and Keynesian economics to which both the mainline parties subscribe as part of the post New Deal Republocrat consensus – would say, We told you so and you wouldn’t listen.

For several decades, the Libertarians who have grassroots backing across many states among homegrown American folk, but which they have never been able to convert into national political muscle, have been warning that the Federal Reserve System, excessive borrowing, projection of American military muscle abroad, protection of corporate interests on Wall Street, market manipulations will be the undoing of the American dream, entrepreneurship, and innovation.

Five Years ago, Nelson Hultberg, a leading Libertarian thinker predicted: “At present the rest of the world's nations are fooling themselves into believing that the dollar still has worth and will somehow hold its worth into the future. But the rest of the world is beginning to get very nervous. Another year or two of the Greenspan-Bernanke inflationary policies (combined with the Demopublican spendaholics in Congress and our imperious pursuit of world hegemony) and serious repercussions will begin to shatter the veneer of normalcy now prevailing.
No way to know precisely when, or in what manner, the monster crisis will unfold. But it will indeed unfold. The structure is too rotted from within. Our policies and perspectives are too warped, our excesses too huge. Too much damage has been done to monetary integrity, ethical propriety, social congruity. Too many political humbugs and parasites, too many barnacles have accumulated on the ship's hull of our life's energy. The Rubicon was crossed in 1971. When Nixon closed the gold window to the world, he opened the lid to Pandora's Box. He tore down the last prevailing bulwark of economic sanity.

Most probably the monster crisis will be precipitated by the rest of the world's nations reluctantly withdrawing their support from the dollar in a last ditch effort of self-defense. They will con themselves into believing that somehow their dumping of dollars will be absorbed by the world market without terribly drastic consequences. Europe, China, and Japan will be like the holders of tech stocks in the Nasdaq in early 2000; there will come a time when it dawns on them that America is not going to be able to stop inflating and that therefore their dollar denominated reserves are ridiculously overbought pieces of paper headed for a big time plummet in value. They will then stop trying to slowly leak dollar conversions and U.S. bond sales into the market and will rush to dump many of their dollar holdings all at once in an effort to beat the crowd. This will suck millions of big money private investors into a rush for the exits also. The crash of the dollar, as it drags our stock and bond markets into oblivion, will be horrendous.

The Federal Government will panic and establish dictatorial controls over the major economic power centers such as banking, international trade, and critical corporations. Fascism will arrive in its naked form (we have it in a disguised form at present). Exchange controls will be enacted. It will be illegal to take money out of the country. The Patriot Act will be used more and more oppressively. Big Brother tactics will be heaped upon Americans. If terrorists capitalize on the turmoil, martial law will be put into effect. The beginning stages of Orwell's nightmare will descend upon us. Geographic blocks of nations will gradually form into major trading and defense zones -- e.g., CanAmerica, EuroRussia, Chinasia, etc.”

Yes, that was FIVE years ago. Mainstream American establishmentarians simply dismissed this type of thinking as just so much hooey. Hooey, baloney, or just plain bullshit, the point is that Libertarian thought remained, and still remains the only ideologically distinct political counterforce in America: Democrat Obama and Republican McCain may differ on the number of troops and where to deploy them, and how much to allocate for domestic social spending, and whether or not to support Gay Rights, but they remain wedded to mainstream American liberal beliefs on the role of the state and the Keynesian world economic consensus that celebrates the manipulation of demand, whereas the Libertarians see the world through the eyes of Austrian economics and Jean Baptiste Say and radically oppose the enlargement of the state and its intervention in most human activity and endeavor.

Where they were once ignored, today, Libertarian spokesmen are being eagerly pursued for their views and solutions and theories about the economic meltdown by mainstream media like CNN and CNBC. They won’t prevail, of course, the established economic order that caused this crisis is too powerful and globally entrenched, but they will, at least be heard, for they offer grassroots, common sense alternatives, and their critique of statist economies is as trenchant as Marx’s critique of early Capitalism.

I want to inject a personal note here. I have nothing but intellectual disdain for those Leftists who are gloating that the American meltdown is a crisis of Capitalism, and a failure of free markets. It is not. It signals, rather, the failure of statism, protectionism, monopolies, interventionism, and imperialism. Empirical data clearly show that Russia, India, China, Viet Nam, Cambodia, Brazil, Indonesia made economic progress (even though they did not eliminate poverty) only after state controls over their economies was loosened and new job opportunities were combined with entrepreneurial innovation and a changing hierarchy of needs and fresh ladders of upward mobility.

That’s what made America grow -- market initiatives that gave us the internal combustion engine, electricity, the light bulb, fibre optics, the computer chip, the Boeing passenger plane, air travel, computer search engines and , yes, earlier, when America was more innocent, the victory against Fascism.

The US financial market meltdown of today represents not the failure of Capitalism and free markets but a another failure of statism, in much the same way that Soviet-style Socialism crumbled under the weight of its own internal contradictions, economic profligacy promoted by state apparatchiks and commissars and the Czarist ambition of its leaders to perpetuate the imperial legacy of Katherine and Peter the Great.

Financial leaders of Asian countries, such as Harvard-trained P. Chidambaram, India’s Economic Minister are clucking their tongues over why American Congress is not acting more urgently to bail out Wall Street. Chidambaram may do well to listen to the Libertarians. Foremost among them right now is Ron Paul, Republican Member of the House of Representatives from Texas. Paul ran for President but made no headway against the Republocrats (Republican+Democrat) who have been the bulwark of Wall Street America.
For years, decades, Paul and has been screaming his head off about what’s wrong with the American system and the economy, but he was treated like Jonah shouting about the impending destruction of Nineveh from inside his whale. Now, they’re listening, and many in Congress, because of Paul, even wore sack cloth and ashes during the first vote that defeated the $800 billion Wall Street bail out plan. Let me summarise -- some of this is directly in his own words -- what he has been saying, for the world needs to listen to him:

· The value of the dollar is telling the whole story – America is over extended. It has drifted away from the first principles of providing a strong national defence, and preserving American liberty and free commerce. It has shifted from the intent of its own Constitution. The US has 700 bases in 130 countries. It must reject the notion of running an Empire. This is what has led to the worldwide economic crisis.
· The real problem is that budgets are seen as an accounting problem, rather than as a philosophy, in which spending becomes the main role of the government. Unfortunately, the US has seen as its proper role the need to police the whole world and overseas commitments have created a national debt of $600 billion dollars – a national obligation that will be passed on to future generations of Americans.
· The only difference between the two mainstream parties is one says raise taxes, the other say cut “earmarked” funds, but those opposing earmarks vote blindly to spend billions of dollars “earmarked” for American military spending overseas.

· The US Congress does not have any hesitation to give every cent the government demands to run a war that was never even declared. This year alone, the US spent one trillion dollars for overseas operations. Out of 3400 military leaders recently surveyed, more than 80 per cent said the US military was weaker than ever before despite all the expenditure.

· The US dollar has fallen as much as 1.2 percent in a single day. Why? DEFICITS. Deficits hurt the dollar. The government cannot borrow any more because of high interest rates, so it simply prints the money. The more it prints, the more the inflation.

· It is astonishing that Fannie Mae, Freddie Mac, AIG, Morgan Stanley, Bear Sterns approach the Federal Reserve to bail them out when it is really the job of the US Congress. The government “creates” $85 billion through behind-the-scene deals with a few people making big bucks out of the whole mess.

· The Freddie Mac Fannie Mae bailout was done in collusion with the Chinese who were getting worried because they held so many of the securities, “so we had to bail them out to protect our dollars.” The Chinese and US government were in bed together. This may have given a boost to the dollar, but it is only temporary. You cannot create money to support the dollar because ultimately it hurts the dollar. Buying up America with created money is simply putting more pressure on the dollar. The real answer is liquidation of debt.

· The problem starts with the Federal Reserve (the Fed) which is a monopoly and fixes artificially low interest rates and causes people to make mistakes. To compound this, the Housing Community Reinvestment Act actually told investors that they had to loan to risky borrowers, and the US Department of Housing and Urban Development and Federal Deposit Insurance Corporation (FDIC) contributed to this mess!

· This is called Moral Hazard – assuring people that we’ll take care of them,,,just go ahead and take the risk. This is the OPPOSITE of the marketplace. Yet people call this development a failure of Capitalism. This has nothing to do with Capitalism. This is interventionism in favor of special interests, and now it’s being socialized openly and the state suddenly “owns” failed mortgage and insurance companies.

· This will lead dangerously to the rejection of the dollar as a worthless piece of paper, and the US Congress has been turning a blind eye to this crisis even as the dollar was steadily weakening. The Fed has been busy monopolizing and maneuvering for the benefit of special interests, but ultimately the market wins out and the market is saying, this is serious and we better be prepared to protect the money. In developing countries serious inflation wipes out the middle class. Today the US middle class is being jeopardized by unlimited spending, unlimited debt, unlimited creation of new credit. This is against the basic principles of the marketplace.

· When the original $85 billion package was created even the President was not present. It was done by the Treasury Secretary and some officials, like going to a pawn shop. This bailout was not appropriated by Congress, it was created. They’re stealing value from the dollar. By increasing the supply of money they devalue your currency and you pay the tax through higher prices.

· The US has eroded the fundamentals and the economy is on the verge of a collapse. If the government continues to nationalize as is now happening through bailouts, the world may give up on the dollar. Right now the US is still benefiting from the privilege of issuing the reserve currency of the world. The irony is they’re cooperating with the US.. So many people hold the dollar that they’re cooperating with the US on this fraud!

· Is the system being set up by special interests? Treasury Secretary Paulson was a big guy at Goldman Sachs. They all know each other. It’s the Old Boy network at work, and they cant be that stupid that they don’t know what they’re doing. But the market is ultimately more powerful than all who do this planning, whether Central, Economic, Banking, or Monetary affairs. The market is shouting, You’ve overstepped your bounds and you cant do it an longer.

· But this is also a global problem now. It always has been since 1971 by the total fiat currency created by Breton Woods when the world accepted the dollar s a world currency. It literally said, everybody’s in bed together, so if you think the dollar’s going down in value and you can protect yourself by going to the Euro or Yen, it’s not going to work. Only hard assets will protect you because prices are going up.

· The world economy is global. Global economies are good when they’re market driven, but when they’re driven artificially by Central Banks, the disequilibrium sets in. The Central Bankers all talk to each other and Congress can’t even audit them. They’re more secretive than the CIA.

· The US is losing everything small, and retaining everything that’s big, global and powerful and “we’re handing them even more power. We have to devise a new plan. The CEO’s are not suffering. They have their golden parachutes. We’re moving toward bigger government and control by big banks and big corporations”.

· What then is the answer to prevent the recession? Nothing, really. When the system and the government cause the problem of overinvestment, malinvestment, and excessive debt you cant solve the problem unless you do the liquidation. And that’s what no one is waking up to, that’s the painful part nobody wants to accept..

· What’s got to change is a federal reserve system that increases the money supply and credit from thin air and artificially fixes the price of money. In the 1920’s this caused the Great Depression and “we’re simply keeping that system afloat. For instance, we’re trying to keep housing prices up and stimulate building – but we’ve got too many homes, that’s the problem. Bernanke’s solution is we need more credit. But the more credit you create out of thin air, the more pressure on the dollar. In the 1930’s it was not really the challenge to the dollar as it is today.”

· “We are told vote for the bail out or things will get worse. We hear these threats all the time. Actually if don’t bail these institutions out, the risk will be less. As the dollar depreciates, everybody’s real savings will go down. The problem is that the government is buying up assets that have no value. They call them liquid. But no one else wants to buy them. Let the price go down, let people decide what’s valuable and then buy them. Lehman Brothers got taken care of and that should be the model. AIG should have been taken care of.”

If you do it Ron Paul’s way you might have a serious recession for a year. But the government is prolonging what has to be done. Bad assets and bad debts have to be liquidated but now they’re not allowing that to happen and that’s what happened during the Great Depression. It lasted for a decade. But in 1921, the US had a bad recession because of expenditures of World War I but it was over in a year and people hardly remember it.

Destroying the dollar is far worse than saving some companies. Instead of the bail out, the fundamentals of the system should be changed or it will perpetuate itself. A)Allow the liquidation of debt as in the case of Lehman Brothers; B)Cut spending by government; C)Bring American troops home; D)Lower taxes; E)Balance the budget; F)Live within your means.

The malinvestments occurred not because of any lack of regulation the fault of appraisers or mortgage companies but because of excess credit. Let the market make the adjustment. Enron was taken care of by the market. Its stock went to zero. People were charged with fraud. They were prosecuted. You need strong fraud laws. The real fraud today is the Fed because it debases the currency.

To Repeat: The most serious mistake would be to blame free market capitalism for this problem. It has nothing to do with capitalism but rather with a managed economy, a corporate interest system, a special interest system. Yet, the US is resorting to more government. It’s pumping in $800 billion. This is disastrous. We’re destroying the dollar. Yes, Wall Street is in trouble but if you destroy the dollar you’ll destroy the worldwide economy. This is the crisis, not of American Capitalism, but of American Socialism.