How Libertarian Economic Theories Created Our Current Financial Disaster

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Please follow the bouncing ball….

On Wednesday, David Frum wrote:

“…Those estimates make intuitive sense as we assess the real-world effect of the crisis: the jobs lost, the homes foreclosed, the retirements shattered. When people tell me that I’ve changed my mind too much about too many things over the past four years, I can only point to the devastation wrought by this crisis and wonder: How closed must your thinking be if it isn’t affected by a disaster of such magnitude? And in fact, almost all of our thinking has been somehow affected: hence the drift of so many conservatives away from what used to be the mainstream market-oriented Washington Consensus toward Austrian economics and Ron Paul style hard-money libertarianism. The ground they and I used to occupy stands increasingly empty….”

Because of obscenely low interest rates brought about by Randian disciple Alan Greenspan, the US faced a housing bust based on idiots buying homes for outrageously over inflated prices they could not afford.  Because mortgage companies made these low interest rate loans, they went under, starting the banking crises.

People couldn’t afford to pay their loans because the libertarian fool theory about low interest rates stimulated an insanely week dollar.

When we have a weak dollar, we pay more for oil.

When we pay more for oil, people pay more for gas.

When people pay more for gas, they get kicked with an obscene inflationary cycle that leads to a bust because they don’t have money for other things.

Rolling Stone

And – that is what Randian disciple Alan Greenspan did to the American people.

“...In 2002 and 2003, the economy was still not recovering adequately despite the extreme rate cuts the Greenspan Fed initiated. Now Greenspan thought deflation— an overall decline in prices— was a far greater worry than inflation, which could result in financial turmoil. Debtors don’t pay back their loans because dollars are more valuable— they can buy more. Creditors take large losses. Greenspan always believed he could recharge the economy by cutting rates sharply. The financial markets had come to depend on this ever since his rescue in 1987, and it became known as the “Greenspan put”—a floor Greenspan would always place under securities prices. But now the lower rates were not working. As economist Mark Zandi said, Greenspan realized the only way out was to push interest rates even lower to ignite a housing boom. Perhaps he believed he could this time pull the plug just short of its becoming a housing bubble. If housing was stimulated, higher house prices in turn would encourage consumers to spend— the “wealth” effect, as it was called. Greenspan cut the target federal funds rate to 1 percent and kept it there until mid- 2004, the lowest since the early 1950s.

The low rates between 2000 and 2004 were the lifeblood of the housing boom. Thousands of new mortgage brokers, and twenty or so giant ones, were vying with one another to sell mortgages to lower- income Americans, relying in particular on adjustable rate mortgages, or ARMs. Buyers paid low interest rates in the first two years of the mortgages after which rates rose, usually substantially. But with house prices rising relentlessly, the homeowner could refinance with another ARM, or pay down some of the mortgage and reduce the monthly payments. A rapidly growing number of these were subprime mortgages, sold to home buyers with poor credit. But middle-income Americans also often took ARMs, to buy homes once out of their reach. With rates so low and no federal oversight, mortgage lending practices, long suspect, became widely abusive. Even the FBI warned in 2004 of an “epidemic” of fraud in subprime mortgage writing, but it had devoted so many of its resources to antiterrorist activities, it had little left to pursue unscrupulous mortgage brokers.

Greenspan knew about these loans, and was warned by associates at the Federal Reserve that abuses were mounting. He had the authority to investigate but chose not to. In 2004, remarkably, Greenspan himself spoke favorably of the ARMs. “Many homeowners might have saved tens of thousands of dollars had they held adjustable-rate mortgages rather than fixed- rate mortgages.” As economist Zandi wrote, such a comment was essentially an endorsement of the practice….”

Politics Daily

All I know about Keynes was taught to me in American History 102 by a professor who was a proclaimed socialist.  I know even less about Hayek, other than he was a libertarian economic god.  All this tells me is that if you balance the pair of them you might get something normal.

How hard can this be.  On Wednesday, while channel surfing, I encountered an interview with Ron Paul.  Since it was not on FOX, I listened to him whine for about two minutes.  That’s all I can stand of his tone of voice.  He reminds me of a petulant child who must continually whine because no one is listening to him.

Paul suggested freezing government spending.  Durn, but The Pink Flamingo actually agrees with him on that  Then he suggested we cut back government spending by 1%.  That’s when he lost me again.

That’s all – 1%?

Why not cut back 5%?

We’re all cutting back at least that, if not more.  That’s why we’re having this blasted recession.  Cut the clueless pontificating about dead economists and let’s try a little reality here.

Like I said, I don’t know much about economics, but it looks to me like much of the mess we are in is because of Ayn Rand acolyte Alan Greenspan.  You need to go back and search financial articles before the libertarians took over and began to lie about what is going on to protect Rand’s reputation as goddess all knowing.

Forbes

Evidently, Greenspan’s libertarian policies created the fine mess we are in.  One of the problems was the insanely low interest rates the fed has been using for ages.

“…Greenspan’s monetary excess was also crucial in setting off a chain of bad government policies. As Taylor argues, Greenspan Loose was amplified by the popularity of subprime mortgages, especially adjustable-rates, which promoted risk taking. And it made for a lethal brew in a pot of policies to promote homeownership.

Greenspan pulls out many stops in his defense. He even quotes the great Milton Friedman’s approving assessment of Fed policy between 1987 and 2005. Well, Friedman died in 2006 and, in 2009, his equally great colleague, Anna Schwartz, has this to say: “There never would have been a subprime mortgage crisis if the Fed had been alert. This is something Alan Greenspan must answer for.” As for Greenspan’s argument that the whole mess is China’s fault, she says tartly: “This attempt to exculpate himself is not convincing. The Fed failed to confront something that was evident. It can’t be blamed on global events.”….”

Greenspan’s libertarian policies created the easy interest rates that led to the housing boom, that has led to our current problems.

“…But consider how your own life has changed over the past few years. How have Greenspan’s actions affected your stock portfolio, 401(k) or mortgage? Will you be better off for having lived through the Greenspan era, or will you be much poorer for having done so?

The truth is that the majority of Greenspan’s decisions as Fed chairman from Aug. 11, 1987, to Jan. 31, 2006, were not beneficial to you, nor did they leave the country better off, despite Greenspan’s glowing self-critique in his latest book, “The Age of Turbulence.” In reality, the overwhelming majority of people in the United States will be worse off in the years ahead as a result of his stewardship.

Some might ask, “He was the Fed chairman — how could he have been wrong?” My response is: Greenspan erred by continually picking an interest rate that was too low. Then he solved the turmoil that resulted from that decision with another period of interest rates that were again too low….”

Even Steve Forbes said that Greenspan is responsible for the mess we are in.  All you need to do is read this little Wiki summery of some of his time at the Fed and it is obvious the libertarian policies Greenspan used were an abject disaster.  He created the low dollar.  The low dollar causes us to pay more for gas. When we pay more for gas, people can’t pay for other things.  High gas prices started in the summer of 2008.  They are higher now.  The recession is getting worse.  How hard can this be?

“...During the Asian financial crisis of 1997–1998, the Federal Reserve flooded the world with dollars, and organized a bailout of Long-Term Capital Management. Some have argued that 1997–1998 represented a monetary policy bind—as the early 1970s had represented a fiscal policy bind—and that while asset inflation had crept into the United States, demanding that the Fed tighten, the Federal Reserve needed to ease liquidity in response to the capital flight from Asia. Greenspan himself noted this when he stated that the American stock market showed signs of irrationally high valuations. While presenting the Federal Reserve’s Monetary Policy Report in July, 2002, he said that “It is not that humans have become any more greedy than in generations past. It is that the avenues to express greed had grown so enormously.” and suggested that financial markets need to be regulated.

In 2000, Greenspan raised interest rates several times; these actions were believed by many to have caused the bursting of the dot-com bubble. However, according to the Economist Paul Krugman “he didn’t raise interest rates to curb the market’s enthusiasm; he didn’t even seek to impose margin requirements on stock market investors. Instead, he waited until the bubble burst, as it did in 2000, then tried to clean up the mess afterward.” In autumn of 2001, as a decisive reaction to September 11 attacks and the various corporate scandals which undermined the economy, the Greenspan-led Federal Reserve initiated a series of interest cuts that brought down the Federal Funds rate to 1% in 2004. His critics, notably Steve Forbes, attributed the rapid rise in commodity prices and gold to Greenspan’s loose monetary policy which he believed had caused excessive asset inflation and a weak dollar. By late 2004 the price of gold was higher than its 12-year moving average….”

We are in this economic mess because of libertarian theories.

Rolling Stone

If David Frum is correct, and we are trying not to say that we are in a depression (and The Pink Flamingo thinks we are), then government spending is not going to get us out of this mess.  We’re simply watching history repeat itself.  There were several crashes during the Depression.   World War II began to bring us out, but at the end of the war, we were headed toward another one.

Dwight Eisenhower is the one who managed to get the US out of the Great Depression.  He did not do it through libertarian stupidity.  What he did is contrary to both the Dems and the GOP, and certainly contrary to what the libertarians want.  For one thing, he fought inflation.  Right now we’re battling obscene inflation created by high gas prices and low interest rates.

“...Eisenhower believed that a free enterprise economy should run itself, and he took little interest in domestic policy. While his 1952 landslide gave the Republicans control of both houses of the Congress, Eisenhower believed that taxes could not be cut until the budget was balanced. “We cannot afford to reduce taxes, [and] reduce income,” he said, “until we have in sight a program of expenditure that shows that the factors of income and outgo will be balanced.” Eisenhower kept the national debt low and inflation near zero.

There were three recessions during Eisenhower’s administration — July 1953 through May 1954, August 1957 through April 1958, and April 1960 through February 1961. Real GDP growth averaged just 2.5% over those eight years. Eisenhower allowed the recessions to occur, to wring out the inflation of wartime.[7] Under the Eisenhower administration the economy had greatly expanded, with the DOW beginning at 288 and soaring all the way to 634…

…Eisenhower promoted the Federal-Aid Highway Act of 1956, which created the United States’ Interstate Highways. It was the largest public works program in U.S. history, providing a 41,000-mile highway system. Eisenhower had been impressed during the war with the German Autobahn system, and also recalled his own involvement in a military convoy in 1919 that took 62 days to cross the U.S. Another achievement was a 20% increase in family income during his presidency, of which he was very proud…’

“…Although conservatism was riding on the crest of the wave in the 1950s, and Eisenhower shared the sentiment, his administration played a very modest role in shaping the political landscape. Instead of adhering to the party’s right-wing orthodoxy, Eisenhower instead looked to moderation and cooperation as a means of governance.This was evidenced in his goal of slowing the growth of New Deal/Fair Deal-era government programs, but not weakening them or rolling them back entirely…”

It is quit obvious that we had a big problem in 2008.  When the Dems went on their spending spree they made it horribly worse. If Obama had actually done something honest, and not pandered to his liberal cronies, and committed to actual infrastructure repairs, he may have made a difference.  If they had committed to greatly expand our nation’s space effort it would have helped.

Instead we get the tea party “patriots” and their billionaire enablers, playing alongside the liberal billionaire enablers.  They are manipulating their followers in order to increase their bank accounts and bottom lines.

 

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13 thoughts on “How Libertarian Economic Theories Created Our Current Financial Disaster

  1. My head is spinning. I fear your conclusion is correct. You are basically saying we are being played from both ends. Sounds about right to me. But then again, I KNOW NOTHING!

    We need a Man with a Plan.

  2. YOUR head is spinning, I listened to 3 chapters of the book you sent me last night…! This morning my mother reminded me that my grandfather never could stand Greenspan. Said if he were ever put on the Fed he would destroy our economy with is policies.

    We are being played for fools.

    SJR

  3. Well put together — am with your Dad never liked Greenspan — never trusted him. How could anyone be married to Andrea Mitchell and be trusted? Sorry couldn’t help myself.

    Libertarians are all over the place trying to wave their magic wand but they are going to have trouble digging out of this mess they put us in with the low interest rates. Never could understand changing the formula for dealing with inflation either by taking out gas and groceries either. Excuse me but those are the two biggest inflation items.

    Couldn’t believe it when Bush reappointed Greenspan and then we got Geithner which is like a clone. He would have been so much better if he had followed his own instincts and now listened to his Dad.

    Give me some common sense. Senator Portman had a great article on the WSJ which now seems to be turning around since the Murdoch clone had to resign about how if we just do a equal cut for every dollar raised by the debt ceiling by 2020 we will be in the black because the cuts are in the outyears. Very good article that made sense versus ‘sky is falling crowd!’

  4. Did Libertarian-ist theories cause the problems that led to the Economic nightmare? Or does America deserve the Economic collapse?

    We (the people) are on the brink of passing Joseph Stalin’s murder record. America will soon pass the 61 million Aborted mark. Before long we (as a Nation) will be the BIGGEST MURDERERS IN HISTORY!

    Americas Moral decline has accelerated to the point to where SODOM and GOMORRAH like great cities to raise children in compared to San Fransisco, LA, Boston, Seattle, New York and many other American cities.

    Most Americans are little different than the Baal/Moloch worshipers (Canaanites, Amelekites, Ammorites, Molochites, ect..) that God destroyed before the Israelites settled in the promised land.

    OK I am being a bit too harsh! The Canaanites only sacrificed a few thousand children, total, and we do that every 12 hours. Also we have indoor plumbing, cell phones and IPods but other than that there is very little difference.

    Can you name the 10 commandments? Go ahead and try? OK fine, you can do it but I doubt that you can find a single person at work who can name even one of them without thinking hard.

    Thou Shalt have No other Gods? Americans have millions of false Idols. America is a PAGAN Nation that worships money, sex, celebrities, politics…

    The bottom line is that we (the people) deserve to be Obamatized for our many sins! And if Sarah Palin (or one of those other kooks) is elected we will probably deserve her too!

    So don’t let it get you down if another Communist is elected President or if a Tea Pagan is elected. You might not deserve to be Obamatized or to be Palinaited, you might not deserve this horrible economy, but most people do.

    We need to stop being so selfish! Most Americans deserve these economic problems. Obama is actually doing a great job of punishing the evil doers.

  5. Carpenter, you speak like one who is convicted. I am right there with you, for the most part. We are sinful and convicted from our very first breath… or from the very first collision of a sperm and an egg.

    All we can do is pray. And give thanks for our salvation through grace, purchased with the blood of Christ. Not by any action we have ever, or will ever, undertake individually or collectively. If we had to rely on our actions to earn what we have or to hold our nation together, we’d never have become the United States in the first place.

  6. When people say, “God Bless America”
    I think why! Why should he.

    Seriously! Why should God bless this country with prosperity when God is not allowed in the classroom? Why should God bless America when this country is filled with SIN and evil from sea to shining sea?

    Two out of the 3 main political parties are thieves, liars, pro-gay, pro-perversion, pro-child sacrifice and the 3rd one isn’t much better!

    The News Media is just a mouth piece for the Devil. Most Colleges are Satanic requirement zones. Most American TV programming is unsuitable for anyones eyes.

    So why should God bless America with a good Christian President and economic prosperity? When we had a good Christian man in the Whitehouse most of us complained about him non-stop for years.

    Like I previously stated we are reaping what we sowed.

  7. The beauty of the Lord is that He forgives. I’ve been working on a project tonight, reading about David. No matter how badly he screwed up, he would ask for forgiveness and the Lord always forgave him. Our problem is the fact that the so called “Christian” backbone of this nation is following Rand instead of Christ. I think we need a revival.

    SJR

  8. yeah but King David asked God for forgiveness. Israel repented of its sins and asked for forgiveness. Israel was spared God’s judgment at that time.

    But shortly after the reign of David’s son King Solomon Israel becomes a divided kingdom. Judah and Israel were then often war with each other. They now had EVIL Kings for many generations. The people worshiped Baal and Ashtoreth and some even fed their babies to Moloch.

    The Israelites were conquered by the Assyrian Empire and the Babylonians who enslaved them. Why? Its because they turned to foreign Gods.

    Thats were we are today. The USA was conquered from within because Americans are IDOLATROUS! America worships everything except God! We (the people) are no different than the people who worshiped Baal and fed their babies to Moloch. We might have Cable TV and indoor plumbing but we are no different than the Canaanites.

    Has the United States asked for forgiveness? NO!
    Has the United States repented of its many sins? NO!

    We are experiencing a well deserved divine judgment and no politician can save us from ourselves.

  9. Sigh.

    Let me tell you a true story. There was a reporter doing a story on a couple who had fostered hundreds of children. They were dying of cancer and was about to celebrate what would probably be their last wedding anniversary.

    From all over the world came their “kids” and their families. Some could not come for they may be in jail, on the streets, not all could be saved, but the majority were successful, numbering among this large group: doctors, lawyers, city councilmen, senators, a few mayors.

    The reporter asked the mother: “You and your husband took in troubled and abandoned children, are pillars of the community and church leaders…yet first your husband comes down with cancer, then you. Is this how God rewards your service?”

    The woman smiled. “You don’t understand. My husband and I have had over 40 years of a good, solid marriage. We’ve managed somehow to feed and shelter all who God brought to our doors. We’ve HAD our wonderful blessings. Having cancer isn’t for us; it’s for THEM, for this has caused many to come back to Him and to ask for prayers from their family and friends and THAT has caused them to come back to Him.”

    I spent most of my life wondering why the Good seems to get punished and the Bad skates free–or, as the Jews of old, who believed that blindness was God’s punishment for past sins, I too would wonder “what had that person done to God?”. It took that lady for me to put God’s love and gift of free will into perspective.

    I think that if God was in the habit of punishing sinners, then we really wouldn’t have free will for every punishment would teach us to be good and we would be no better than dogs being trained to do what the master wants.

    This economic nightmare was not “earned” by those who greatly sin against mankind as the Holocaust was not punishment for the sins of God’s chosen people; it IS the results of some selfish people with very little intellect who believe that out of the ashes of the GOP will rise their Losertarin party. It is the results of a bunch of power hunger talk show hosts who joined their counterpart in telling Independents how crappy the GOP was.

    They gave the Independents no where to go because who wants to belong to a party that has no loyalty among their principles?

    They made GWB spend his political capital on Illegal Immigration instead of Fannie and Freddie…this caused the lost of the minorities who saw the GOP as racist…and these very stupid people almost cost the destruction of America’s and the world’s entire economy.

    And if you (the GOP) don’t do something, they will cause America to experience another 4 years of Obama.

    Then you WILL deserve it–but not by the hand of God.

  10. with the bible in your hand spreading ignorance across the land! how about picking up an economic book for a change? you are totally incompetent to write about economics

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