The Myth of the Engineered Recession
Economics / Recession 2008 - 2010 Aug 21, 2010 - 06:17 AM GMTBy: Gary_North
There are lots of myths out there, but of all the recent financial myths that afflict the conservative movement, this one is the most preposterous: "The bankers engineered the 2008 financial crisis."
On first glance, the theory seems nutty. How did these people benefit from enormous financial losses? But when you examine it in depth, it seems even more nutty.
Why would the bankers create a crisis that destroyed some of the largest banks on earth? Wachovia went under. It was in the top five banks in deposits when it failed. The Royal Bank of Scotland also came close to failing. So did Anglo-Irish bank. Only government bailouts saved the latter two.
What would have been the motivation of the bankers who engineered the panic? If you are in control of politics and banking, why call worldwide attention to the fragility of the fractional reserve banking system? Isn't it a wiser policy to let things run smoothly? Why create a crisis so great that Congress must intervene?
The series of bank failures in 2008 called attention to the fact that bankers were in fact idiots. They had been completely taken in by promoters of toxic debt. The subprime mortgage market was a gigantic fraud. The various high-leverage risk-transferring contracts were equally fraudulent. The entire financial services industry looked like a casino run by imbeciles.
Warren Buffett said it best. There are three stages of financial development. The first is launched by the innovators. The second is extended by the imitators. The third is consolidated by the idiots. In 2008, we saw what the idiots had accomplished.
None of this is acknowledged by the conservative critic who proclaims: "It was a conspiracy. The bankers engineered the crisis."
For the conservative conspiratorialist, social change is to be explained as the result of a conspiracy. In his world "they" control everything. "They" call the shots. Social causation comes from the top. "They" are all-knowing.
The conservative conspiracy theorist shares with the socialist and the communist enormous confidence in the power of intellect to direct the affairs of society. They attribute to a central ruling committee the ability to foresee the future almost perfectly, to structure social institutions to alter this future to their advantage, and to implement their plans, despite the self-interest of billions of economic actors.
They believe in God. This God is the conspiracy.
Yet they are on to something. But before I get to this, I need to discuss another aspect of the conservatives' theory of an engineered financial crisis.
AUSTRIAN SCHOOL ECONOMICS
The theory of the engineered crisis calls into question Ludwig von Mises's 1912 theory of the business cycle, which is called the Austrian theory of the business cycle. Mises taught that the cause of the business cycle is fractional reserve banking, especially in nations that have central banks, whose function is to create a cartel for private banks. First the central bank inflates. This produces a boom. Then it slows the rate of monetary expansion because of rising prices. This causes the recession: a re-pricing of assets, especially capital goods.
Mises's theory solved the central theoretical problem of all recessions: why entrepreneurs make the same investment mistakes at the same time. Normally, we expect some entrepreneurs to be successful, but at the expense of other entrepreneurs. Some make good forecasts; others make bad ones. Some go long. Others go short. These plans offset. But not during economic recessions. Why not?
Mises offered an answer: because of the central bank's interference with the free market. It lowers interest rates by creating fiat money reserves by purchasing government debt. This lowers short-term interest rates. Businesses borrow to expand, because of these low interest rates. Then, when price inflation appears, the central bank reverses policy. It slows the rate of debt purchases. Short-term interest rates rise. Businesses lose money. They cut back on expansion. Bankruptcies increase.
This explanation is consistent with both general economic theory and the history of financial panics. It lays the blame on the central bank. For this reason, this explanation is universally rejected by academic economists, virtually all of whom support central banking, despite the fact that all central banks are government-created monopolies. The economists function as intellectual defenders of a bankers' cartel. They refuse to apply their theory of the inefficiency of cartels to central banking.
Pick up any college-level textbook on economics. Read the chapter on monopoly, oligopoly, and cartels. The textbooks say that most cartels are the creation of civil government. The chapter shows how monopolies are in restraint of trade. They operate so as to enrich the monopolists at the expense of customers.
Then read the chapter on the Federal Reserve System. None of the analysis of the first chapter is applied to the second. This is not random. This is marketing. Any textbook with an Austrian School analysis of central banking will not be published by a mainstream publisher. There has never been an exception to this rule. You can look it up.
In the field of economic theory, the academic economists' support of central banking is the best example of how political power, control over money, and the use of this money to silence academia by hiring thousands of economists as advisors have combined to neuter an entire profession.
The only academic commentators who have identified this systematic use of money to corrupt academia are the Austrian School economists, the Marxists, and the New Left allies of the Marxists. These are fringe groups in academia. They have little influence. They never have had much influence inside the self-screened academic guild.
The conservatives who theorize that the 2008 crisis was an engineered crisis have a better understanding of the power of central banking in politics than the economists do. But the critics fail to understand that central bankers are constrained by free market competition. Bankers do not understand or accept Mises's theory of the business cycle. They do not understand monetary cause and effect. They are either Keynesians or Chicago School monetarists, and both schools of opinion are supportive of the concept of central banking. So, they don't know what they are doing.
Every once in a while, their policies produce a financial panic and recession. But they do not learn from experience. They do not go looking for a new theory to explain their policy failures. They are committed to faith in government and government's licensed monopoly, the central bank.
This is inconceivable to the conspiracy theorist. The conspiracy is above the law – not just civil law but economic law. For the conspiracy theorists, there is no economic law. There is only the all-seeing eye of the conspiracy.
Then how did Austrian School forecasters foresee the recession of 2008? Are they part of the conspiracy? Were they tipped off by David Rockefeller that the recession was being planned at the highest levels?
I saw it coming and said so in print. So did Peter Schiff. How did we know? Because we had read Mises and Rothbard. Because we believed them. And, in my case, because I always predict recession when the inverted yield curve appears. What is this? Whenever 90-day T-bill interest is higher than 30-year T-bond interest, the curve is inverted. A recession always follows. Other non-Austrian forecasters know of this relationship, but because of their enormous faith in central banking, they conclude, "This time it will be different." It never is.
INSIDERS' BRAGGING RIGHTS
I have said that the conspiracy theorists are on to something. There is a group of world leaders who make decisions for the way the world works. The best introduction to this group is David Rothkopf's book, "Superclass." He is part of the group, not because of his wealth, but because of his contacts. They trusted him to tell the story in a non–Alex Jones way: no bullhorn and lots of footnotes. He is on the inside, and he lets some of the story – the part he was allowed to see – get out.
A conspiracy theorist would not believe that the Insiders would allow any non-believer into the inner sanctum. But the fact is, they do, and they have.
Over three decades ago, Cleon Skousen hired a researcher to produce a series of book-sized magazines on the world's leading Insider groups. Skousen made them an offer: "We will publish anything you provide to us without comment." The groups did this. Skousen kept his end of the bargain. He published a series of reports in his magazine, The Freemen Digest, which was published by his Freemen Institute. I possess a set of these reports. They are invaluable. The list of organizations covered is here.
The series ceased, Skousen informed me years later, because of a dispute with his researcher. The man had finally gotten inside the inner sanctum: The Bank for International Settlements (BIS). He was given access to 20,000 documents. He told Skousen that the Freemen Institute had to write a critical attack on the BIS. Skousen said no: a deal's a deal. So, Skousen fired him. He could not publish what would have been by far the most important issue of the magazine.
Here is the corker. The Council on Foreign Relations ordered 3,000 copies of his report on the CFR to make available in libraries around the world.
Skousen was the author of The Naked Capitalist (1970). That book was a long commentary on the 20 crucial pages in Carroll Quigley's 1966 book, Tragedy and Hope. These were the pages where he exposed the connection of leftist political groups with the Morgan and Rockefeller banking interests, going back to 1900. So, Skousen was well known to these groups. But they cooperated. Why? Because they wanted to get part of their story to the public. Skousen saw his opportunity. They might reveal far more than he could discover as an outsider. They authorized him to publish this. He succeeded.
I wish those issues of The Freemen Digest were online. Almost no one in the conservative movement has ever seen them. If Glenn Beck could persuade the copyright holder to let him post them, they could get the publicity they deserve. They would also provide Beck's research team with gems.
PARETO'S LAW
Pareto's law was discovered by sociologist-economist Vilfredo Pareto in the late 19th century. He studied the distribution of wealth in various European nations. He discovered that this distribution centralizes wealth. About 20% of the population owned 80% of the value of a nation's capital. It did this all the way up.
If 20% of the population owns 80% of the value of the nation's capital, then 4% (20% of 20%) own 64% (80% of 80%) of the value of the capital. This has turned out to be the case. So, about 1% of the population would own a little over half. This has turned out to be the case.
Most subsequent studies indicate that this same distribution applies to every society studied. It does not matter whether the countries were pre-social democratic nations (pre-1900), or where, or how socialistic they are. The same distribution exists. No one has offered a cogent explanation for what does not conform to anyone's economic or social theory.
For a recent assessment of wealth distribution in the United States, read G. William Domhoff's article, "Wealth, Income, and Power." He has been studying this for over three decades.
The socialists attack capitalism's unequal distribution of wealth. But whenever socialists have come to power, this distribution has not changed. So, they refuse to discuss Pareto. In contrast, free marketers insist that capitalism tends toward the equalization of wealth. It hasn't so far. So, they don't talk about Pareto, either.
This is a deliberate oversight. Pareto's mathematical presentation known as Pareto optimality is beloved of welfare state economists. His entire presentation is conceptually flawed, because it assumes that your scale of economic values is the same as mine and everyone else's. Murray Rothbard refuted this idea back in 1956, but still Pareto's theorem is discussed as relevant.
Any time you read a report on the evil of capitalist wealth distribution that cites a recent study on this inequality, you can be sure it will not cite a study of any socialist or high-tax nation. The author probably does not imagine that the distribution is Pareto-normal. He wants only to persuade voters to implement his favored reform.
What is really maddening is that Pareto's 20–80 rule applies to all sorts of institutional statistics that have little to do with wealth distribution. About 20% of a police force makes 80% of the arrests. About 20% of first-year subscribers to a newsletter resubscribe. (How we publishers wish it were 80%!) About 20% of recipients of a free e-letter actually open it. (Why not 80%?) And so it goes.
I wish I knew why. If I knew why, maybe I could find a way to get the 80% on my side . . . at least until I got imitated.
DON'T ROCK THE BOAT!
This means that the existing distribution of wealth and influence favors the existing hierarchy. The distribution does not change. An individual's position in the hierarchy can change – usually for the worse. After all, it's easier to slide down life's gravy train than to climb higher.
If you were at the top of the heap – in the top 1% or maybe even the top two-tenths of a percent – would you want to engineer a crisis?
Think about this. If the system has made you the top dog, why would you risk shaking the foundations? Why would you rock the boat? Why would you get Congress involved in bailouts of the biggest institutions?
The theory of the engineered crisis makes no sense, given a theory of a top-down conspiracy. If those at the top are really in control, but can lose control, why would they want anything to change? Change is the enemy of those on top.
The conspiracy theorists say that "they" did it. "They are after the people's wealth!" But "the people" don't have enough wealth to go after. The people in the bottom 80% own 20% of the wealth.
The conspiracy theorists overestimate their importance – politically, economically, and socially. They think that they can take over if only they can expose the conspirators. But the cost of doing this is astronomical. Besides, the effect of such a revolution only would be to change the people at the top. The masses would not benefit.
What works? Economic growth. A rising tide raises all boats. Liberty provides economic growth.
What people need – "people" defined as those in the bottom 80% – is liberty. The distribution of wealth is not going to change. The ethics of the way to wealth should therefore be this: "Thou shalt not steal," not "thou shalt not steal, except by majority vote."
CONCLUSION
The Insiders did not engineer the economic crisis except insofar as they have used central banking to further their advancement, beginning in 1914 in the United States.
Central banking inevitably produces financial crises. Central bankers try to avoid crises by inflating, then stabilizing, then inflating, and in so doing, they create crises. This is the teaching of Mises. One intervention leads to the next.
The Insiders engineered the crisis of 2008 by building the flawed machine in 1914. They are now trapped. So are we.
The money machine will break. The political order will change when the money machine breaks. There will be different people on top after the money machine is replaced. Let us work to see that the money machine is not put in any governmental agency's hands. Congress would be worse than the Federal Reserve System, contrary to Ellen "web of debt" Brown and the other gold-hating Populists, whom I call false flag infiltrators.
These people call for "sovereign money." Whenever you hear "sovereign money," think "Nancy Pelosi dollars, Barney Frank dollars, and Obama dollars."
Let the free market choose the monetary unit. Let depositors determine which banks survive and which banks perish. In short, get government out of the money business.
Gary North [send him mail ] is the author of Mises on Money . Visit http://www.garynorth.com . He is also the author of a free 20-volume series, An Economic Commentary on the Bible .
© 2010 Copyright Gary North / LewRockwell.com - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.
