Tuesday, March 15, 2011

The Wrath of Keynes, or, The Fall of the House of Hayek, Part VIII

Today's Wall Street Journal reported that, in defense of consumers, Elizabeth Warren is taking on the financial services industry — "the banks." ("Banking's Scourge On Charm Offensive," WSJ, 03/15/11, A1, A14.) Naturally, the Journal has flown to the defense of the financial services industry, suggesting that the concern for consumers is little more than a way of buying votes at the expense of Wall Street. ("Review and Outlook: More Mortgage Mischief," WSJ, 03/15/11, A16.)

Unfortunately, the Journal is probably right on the mark. The effort seems geared toward protecting consumers from the consequences of their own folly, purchasing things on credit that they couldn't pay for out of existing accumulations of savings or current income, and that didn't generate their own repayment out of future profits. Something that struggling debtors see as a solid gain can't help but benefit the current administration, which increasingly is perceived as lacking a coherent vision to address growing problems throughout the world.

Of course, the Journal is as guilty of Ms. Warren of only looking at half the story — and of making the same basic assumptions. The financial services industry recklessly extended credit, creating massive amounts of money for non-productive uses. This made it even more difficult for people who desperately need to become owners of capital to borrow money for productive purposes. Instead, Wall Street focused all its efforts — then as now — on speculation and gambling at the expense of production.

Consistent with the presumably iron dictates of both Keynesian and Austrian economics, both Ms. Warren and the financial mavens of Wall Street are looking only at existing accumulations of savings, and trying to figure out how to divide up a rapidly shrinking pie. Do we follow Keynes and redistribute through inflation via a debt-backed elastic currency and confiscatory taxation to stimulate demand? Or do we maintain an inelastic, asset-backed currency to stabilize the dollar, prevent inflation, and stimulate supply?

Why does the line from Mark Twain's Huckleberry Finn pop into my head as I examine the alleged differences between Keynesian and Austrian economics? You know — after Jim is captured, and the people insane enough to think slavery is normal looking at all the bizarre, even surreal things that Tom Sawyer, fed on a steady diet of novels by Sir Walter Scott and other romances, talked poor Jim into doing as the "proper" behavior for "a captive heart," busted or not, and exclaiming, "That [bleep] must be crazy!"

We could, of course, get wild and crazy ourselves and go with an elastic, asset-backed currency as the Federal Reserve was originally established to provide by rediscounting qualified paper and engaging in limited open market operations in private sector commercial paper. That, however, 1) restricts the role of the State to regulating the currency and setting its value, forcing the government to live within its means, and 2) breaks the monopoly of the rich over the means of acquiring and possessing private property.

If we did something as nutty as use the financial system the way it was designed to operate, all new money created would be to finance new capital formation, not redistribution through inflation. Adding a requirement that all new capital financed in this way must be broadly owned in order to stimulate consumer demand ensures that both sides of Say's Law — supply and demand — are satisfied at the same time.

On the other hand, maybe we should just wait around for a deus ex machina to solve everything for us by freeing the wage and welfare slaves with a wave of a magic wand, just as Miss Watson freed Jim in her will . . . as Tom Sawyer finally informed everybody once he'd had his fun forcing people, especially Jim, to jump through all his hoops and play his weird games.

Or not. We could end up waiting a very long time.

#30#

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