View Full Version : Best concise liberty synopsis of what caused the recent economic crisis?

09-14-2009, 08:34 AM
In my capital markets class tomorrow, we're discussing the causes of the meltdown. I have a good basic idea of what I'm going to say (too much debt, which leads to too much inflating and borrowing, which leads to a market correction. Federal Reserve over-reacted by setting interest rates too low, etc)

There's invariably gonna be some people who disagree, so I want to have a tight argument and all my sources memorized. I'm also going to be cautious in how I present it. For instance, I'll probably say "I have a lot of reservations about the way the Federal Reserve operates in secret and fixes prices on interest payments instead of allowing the free market to do it", but not "The Fed caused the recession and needs to be abolished immediately"

I'm going to pull out my copy of Tom Woods Meltdown. Is there anywhere online that has the last chapter of the updated Ron Paul book? I got a launch copy, but not a re-release one.

09-14-2009, 09:01 AM
the rise of keynesian economics in America

09-14-2009, 10:54 AM

09-14-2009, 10:58 AM
Perhaps some of this may be useful:

I absolutely think government is the main culprit. In fact, a great deal of lack of accountability was created by government. I was amused as well as dismayed to read stories such as this one, shortly after the initial part of the crisis: http://www.bloomberg.com/apps/ (http://www.bloomberg.com/apps/news?pid=20601087&sid=ah5qh9Up4rIg)news?pid=20601087&sid=ah5qh9Up4rIg. As if Greenspan, probably the greatest economic interventionist in the country, had somehow been a free marketeer all along.

Suppose I had had the equivalent of Greenspan's job in the banking industry, but with law firms. That is, suppose I were appointed the "economic manager" of all law firms. I manage a pool of money taken from law firms (by force), and my job is to ensure the economic success of law firms across the nation. Now, I make the promise to cover any losses incurred by losing cases, especially if the cases are very large -- after all, enough large losing cases could bring down entire firms, which would damage the stability of law careers everywhere. If a case is successful, however, the law firm involved keeps the profits. I'll tax the firms if necessary, to keep this program afloat.

Now, what is your firm's best strategy? If it acted responsibly, only taking solid cases, it would not gain any proceeds from risky lawsuits that succeed. Yet, it would still have to pay its share of the failed suits. If, on the other hand, it began filing numerous, borderline frivolous suits, it could keep the profits of the ones that succeeded, and it could count on me to cover those that fail. With privatized profits, and my promise to intervene if losses mount, irresponsibility becomes the best strategy.

Now, I notice that companies are beginning to file tons of frivolous suits, and I am forced to bail out firms nationwide who have acted irresponsibly. I make a statement, "I really thought that the free market would work. I thought that these firms could select worthwhile cases on their own, without oversight or regulation. I was very disappointed. From now on, all decisions about which cases are worth taking will be made by my office, to avoid irresponsible behavior in the future."

Of course, if firms were responsible for losses, as well as profits, "freedom" really would have worked. It would have been in their best interests to act responsibly, for fear of bankruptcy. In the system I have concocted, however, perhaps decisions would have to be regulated. Freedom and authoritarianism do not mix, and we have had nothing coming anywhere close to a "free" market in a long time -- what we have now is corporatism. Lobbyists write laws in congress today, which are often voted on before being even fully read by our congressmen. The "patriot" act, for example, was 342 pages long -- yet house members were given 30 minutes to read the bill. Oh, and that $700 billion bailout? Written mostly by banking lobbyists. Lobbyist written bills and "regulations" keep competition out, and give special favors and privileges taylor made for the lobbyists' companies.

Other than these corporatist loopholes, regulations, and special treatments, how is our market not free? Let me count the ways:

1. Manipulated interest rates. Normally, if there are too many loans going out, limited money remains, and so interest rates must rise. This encourages banks to fund only worthwhile investments. With interest rates set by the Fed, often far below what the market rate would be, cheap money allows massive malinvestment, as we saw with the housing boom. Instead of loans being available mainly as startup or expansion capital leading to increased industrial production or commercial productivity, we now have loans for housing, for cars, for boats, and even for everyday consumption. This has directly led to the extreme level of indebtedness this nation suffers -- our economy has been dependent on ever expanding credit and increasing debt.

2. FDIC. Here's president Taft speaking on the proposed FDIC:
http://online.wsj.com/public/ (http://online.wsj.com/public/resources/documents/info-audioPlayer_image.html?mp3File=taft1_1011.mp3&h=200&w=200%27,%27imageShell07%27,%27200%27,%27200%27,%2 7off%27,%27true%27,40,10)resources/documents/info-audioPlayer_image.html?mp3File=taft1_1011.mp3&h=200&w=200%27,%27imageShell07%27,%27200%27,%27200%27,%2 7off%27,%27true%27,40,10)

Please listen to this link closely. Taft exactly fingers the danger of this arrangement, and that it will lead to irresponsibility in banking.

It used to be that banks had to be responsible and transparent, or people would not trust them with their money. Now, responsible banks, and taxpayers themselves, are forced to pay of the irresponsibility of reckless banks, creating the incentive for maximum risk taking. Irresponsibility is rewarded, and bank depositors no longer consider the solvency or stability of banks when finding a place for their money.

3. Implicit or explicit guarantee of debt. Fannie and Freddie are examples of explicit guarantees by the government. These were "private" organizations, with stockholders and profits, whose debts were guaranteed by the federal government. Fannie and Freddie were two of the largest buyers of sub prime mortgages in the country -- owning pieces of over half of all sub prime mortgages. There are interviews with mortgage brokers saying that they thought subprime mortgages were a bad idea -- but Fannie and Freddie were taking them, so what the hey -- they collected them, bundled them together, and sold them to F&F.

Moreover, it was well known that the government would step in to rescue irresponsible banks, as demonstrated in the savings and loan crisis (if you're not familiar: http://en.wikipedia.org/wiki/ (http://en.wikipedia.org/wiki/Savings_and_loan_crisis)Savings_and_loan_crisis). This further encourages irresponsibility.

Also, here's a good segment done by public radio on some of the nuts and bolts of the morgage crisis:
http://www.thislife.org/radio_ (http://www.thislife.org/radio_episode.aspx?episode=355)episode.aspx?episod e=355

4. Laws requiring bad morgages be accepted:
http://www.answers.com/topic/ (http://www.answers.com/topic/community-reinvestment-act-of-1977)community-reinvestment-act-of-1977
It should be noted that this particular law had limited scope, and was certainly not responsible for the majority of the mortgage crisis (as some have claimed) -- but it was a notable contributor.

There were and are responsible banks who did not participate in the subprime bubble and crisis. These banks should be rewarded, they should be running the system now, and the large irresponsible investment banks should go belly up. This would reward responsibility, ensure that our financial stability is in wiser hands, and send a clear signal that foolish greed will not pay. The same is true of the auto industry. If we really want a competitive auto industry, we would let them go bankrupt, let the assets be sold, and let new, more nimble companies come in and buy up the assets and hire the workers (of course, this might mean that some of the ponderous UAW benefits would fall by the wayside). Instead the government is stealing from the taxpayer in order to insure that the same irresponsible billionaires will remain in power, and to insure that banks will have even less motivation to be responsible in the future. Mr. and Mrs. taxpayer will bail me out if I fail? Heck, put it all on black!!

By the way, here's how Bush's top 20 donors in 2004 look:

1. Morgan Stanley
2. Merrill Lynch
3. PricewaterhouseCoopers (financial accounting firm)
4. UBS
5. Goldman Sachs
6. MBNA Corp (became part of Bank of America in 2005)
7. Credit Suisse Group
8. Lehman Brothers
9. Citigroup
10. Bear Stearns
11. Ernst & Young (financial accounting firm)
12. Deloitte Touche Tohmatsu (financial accounting firm)
13. US Government
14. Wachovia
15. Ameriquest Capital
16. Blank Rome (Law and government affairs firm)
17. Bank of America
20. JP Morgan Chase

Obama and McCain's lists from 2008 weren't a whole lot better. Yet, we are apparently to believe that giving our and our childrens' money to banks, and burying us in debt, was all for our own best interest.

The problem is not that we need more laws prohibiting this kind of influence peddling. The problem is that government officials have too much power in the first place. The power to make business fail or succeed, and the power to forcibly take money from some and give it to others -- such power has always been bought, sold, and corrupted, and always will be. They will find away around laws, especially laws enforced by the very bureaucrats who are already influence peddling ...

The solution is to stop manipulating people's lives, start respecting their choices, and restore fiscal and personal liberty. The solution is to stop coercing people who have not harmed others.

09-14-2009, 11:05 AM
good words, t!

Liberty Star
09-14-2009, 11:08 AM
Massive wealth exited US as a result of Iraqi freedom, deficit got worse and optimism decreased as domestic artificial lending prop up eventually failed causing masssive bank losses. Things like fear fatigue, bloodshed and abu ghraib guilt and lack of confidence in direction of countary also did not help in morale and hope. Ultimately, it probably can be traced to lobbies that have put welfare of foreign states in mideast ahead of America's and influence our policies to fund occupation of arab land in holy land and interfere in democratic process of other countries. Silverlining is that more and more people are realizing that supporting foreign occupations, dictators is not good policy in the long run if we consider total direct/indirect costs.

09-14-2009, 11:08 AM

The overstretched markets and debt just created the setup -

Check the history of all major recessions and depressions - the crisis is intentionally triggered by the behind the scene bankers in control when they think the time is right.

09-14-2009, 11:47 PM
You could also note Ron Paul's remarkable statements in the congressional record.

Opposition to changes in Glass Steagal due to moral hazard: http://www.house.gov/paul/congrec/congrec99/cr110899-glb.htm

Introduction of bill to remove Government backing of Fannie-Freddie: http://www.house.gov/paul/congrec/congrec2002/cr071602.htm

Or if they allow media you could have Joe Scarborough read it for you (@1:30) to the class.

YouTube - Ron Paul discusses Austrian vs. Keynesian economics on Morning Joe 05/15/2009 (http://www.youtube.com/watch?v=MQ3JNcMDWwg)

09-15-2009, 12:07 AM
I think Johan Norberg sums it up pretty well in 7 steps here:


The video is really informative. Of course I'm sure you can find a bunch of Thomas Woods videos that explain it, too.

09-15-2009, 01:04 AM
This is pretty good and you might like the outline style way this is written:
For those who deny the Fed caused the housing bubble by keeping interest rates too low for too long, here are 3 heavy hitters to counter with:
William White, former chief economist of the Bank of International Settlements, tried to warn Greenspan but was ignored:
Geithner's Revelation
He concedes that monetary policy was 'too loose too long.'
Catherine Austin Fitts, former Assistant Secretary of Housing - Federal Housing Commissioner: The Fed Did Indeed Cause the Housing Bubble