Mainstream’s Three “Wise” Monkey Solution To Social Problems

Say what you want
Say what you will
'Cos I find you think what makes it easier
And lies spread on lies
We don't care
Belief is our relief
We don't care

-Roland Orzabal, Tears For Fears, Ideas As Opiates

For the mainstream, our social problems can be simplified into three “wise monkey” solutions:

First, speak no evil-throw money at every problem.

Everyone desires a free lunch. Almost everybody believes that they deserve a special place in this world. Since society’s interests are divergent, such sense of entitlement should come at the expense of someone else. It’s usually dignified and justified with the word “right”. One man’s effort is another man’s privilege.

For them, scarcity of resources can only solved by forcible redistribution. It doesn’t really matter if there are limitations to the scale of taxation. It also doesn’t matter if redistribution reduces the incentives to produce and trade. It doesn’t matter if “picking winners” takes away resources meant for productive activities which have been meant to enhance livelihood. The only thing significant is to be at the receiving end. And it’s hardly ever been asked “when is enough, enough”?

Heck, it would even be politically incorrect to argue for prudence. ‘Moral’ justifications demand for immediate gratification. It’s almost always about NOW. Forget the future.

That’s why the intellectual classes long came up with varied theories in support of these political demands.

Importantly that’s why the political classes are enamoured with these concepts. Redistribution enhances only their power, esteem and control over the others. And that’s why “inflation” has long been a part of human nature, since the introduction of government.

For as long as the system is tolerant of such nebulous tradeoff, trouble can be kept at bay, ergo speak no evil.

The other way to see it is that while everyone wants to rule the world, in reality this isn’t feasible. It’s a mass delusion. The universal law of scarcity always prevails. By force of nature, artificially induced imbalances are resolved eventually.

Second, see no evil-elect or put in place a virtuous leader.

The popular redress to most social problems has been premised mostly on hope, cosmetically embellished by “specific” ennobling goals.

In times of frustrations, the next alternative has been to look for a saviour.

Yet hope is mostly anchored on symbolism. And these are what elections are mostly all about. Even if one’s vote doesn’t truly count, everybody believes they do. Elections are reduced to the polemic of self-import.

Hardly has the directions of policies been the context of any meaningful discussion. People’s arguments will always be simplified to what seems “moral” in the popular sense. Yet, a vote on a person to office is a carte blanche vote on the ensuing policies. But it’s hardly about stakes involved and the prospective costs, but mostly about emotions and the feeling of being in the winning camp.

And since the world has been condensed into strictly a “moral” sphere, political leaders are most frequently deemed to have been transformed into demigods.

Once in power, people mistakenly believe that these entities have transcended the laws of scarcity. People have assumed that they possess the superlative knowledge that is needed to effect the exigent balance on a complex and continuously evolving society. These leaders are presumed to know of our needs, our values, our priorities and our preferences, which lay as basis of our actions in response to ever changing conditions.

Not of only of knowledge, but people also expect leaders and officials to dispense justice and equity according to our sense of definition. Many see these leaders as reflecting on their values. And that’s why many fall for the dichotomous trappings of the well meaning “motivations”. Yet, motivations barely distinguish the role of “means” and “ends”.

Essentially genuflecting on hope to see one’s moral desires as represented by politics can be construed as refusing to see evil for what it is.

And it’s only when the rubber meets the road, from which people come to realize that their expectations have misaligned with reality-and usually through deepening frustrations or in the aftermath of some horrifying outcome.

Hardly has it been comprehended that politics and bureaucratic activities are merely HUMAN activities.

That leaders and officials are subject to the very same foibles as anyone else. That these people see things and act according to the incentives brought about by their interpretation of events, their existing limited and ‘biased’ knowledge and are swayed by influences brought about by cognitive biases, networks, familiarity, assessment of prevailing conditions, information relayed by the underlings, varying degree of stakes of involved and et. al.

Importantly like everyone else, their actions skewed based on personal values. So when a political or bureaucratic leader forces upon their sense of moral vision to a constituency and which has not well received, the result in some cases has been political upheavals.

Yet in spite of the repeated errors, people never learn from George Santayana’s admonition that those who ignore the past are condemned to repeat it.

The third intuitive recourse to any social problems is to hear no evil by enacting new rules/laws.

Like any “throw the money” and “virtuous leader” syndromes, rules are little seen for its costs but nevertheless oftenly envisaged as preferred nostrums to existing problems as identified from the biased viewpoint of the observer/s.

Causal factors are hardly considered in the appraisal of the existing problems. What seems more important is to automatically blame market forces and unduly impose proscriptions. Never mind if the past ills have been caused by the same underlying dynamic-previous interventionism.

The act of simply “doing something” is meant to be perceptibly seen by the voting public for political purposes (extension of career by vote or by appointment). Thus the “hear no evil” therapy, which is merely adding rules for extant fallibilities, are simply props for more of the same malaise.

Many rules, regulations, edicts or laws are imposed upon the “populist demand of the moment”, without the realization that rules, which tend to realign people’s behaviour, can cause huge unintended consequences and likewise entails costs of enforcement. Hence when new rules create distortions in the political economic order, the instinctive response is to have more of rules or regulations.

Importantly, popular clamor for new rules/laws hardly differentiates “rule of laws” against “rule of men”.

Rule of Law are in effect, the guiding principles or the laws that had been a legacy from our forefathers, as the great Friedrich August von Hayek wrote, ``Political wisdom, dearly bought by the bitter experience of generations, is often lost through the gradual change in the meaning of the words which express its maxims[1]”. (underscore mine)

This means because these laws have been constant, are anticipated by all and easily observed or practiced, they become part of our heritage. Again we quote the Mr. Hayek, ``Stripped of all technicalities, this means that government in all its actions is bound by rules fixed and announced beforehand.[2]”

In stateless Somalia, customary laws serve as default laws after her government had been eviscerated,

Benjamin Powell writes[3], ``Somali law is based on custom interpreted and enforced by decentralized clan networks. The Somali customary law, Xeer, has existed since pre-colonial times and continued to operate under colonial rule. The Somali nation-state tried to replace the Xeer with government legislation and enforcement. However, in rural areas and border regions where the Somali government lacked firm control, people continued to apply the common law. When the Somali state collapsed, much of the population returned to their traditional legal system... But Somalia does demonstrate that a reasonable level of law and order can be provided by nonstate customary legal systems and that such systems are capable of providing some basis for economic development. This is particularly true when the alternative is not a limited government but instead a particularly brutal and repressive government such as Somalia had and is likely to have again if a government is reestablished.” [bold highlights mine]

That’s simply proof that “rule of laws” exists even outside of the realm of governments, which also goes to show that society can exist stateless. None of this is meant to say that we should be stateless, but the point is rule of law is what organizes society.

Importantly, “rules of law” have been passed through the ages as a means to protect the citizens from the abuses of the authority, again Mr. Hayek[4],

``The main point is that, in the use of its coercive powers, the discretion of the authorities should be so strictly bound by laws laid down beforehand that the individual can foresee with fair certainty how these powers will be used in particular instances; and that the laws themselves are truly general and create no privileges for class or person because they are made in view of their long-run effects and therefore in necessary ignorance of who will be the particular individuals who will be benefited or harmed by them. That the law should be an instrument to be used by the individuals for their ends and not an instrument used upon the people by the legislators is the ultimate meaning of the Rule of Law.” (emphasis added)

In short, the fundamental characteristics of respected and effective laws are those that to limited, steady or constant, designed for the benefit of everyone and importantly a law that is clearly enforceable.

Of course this doesn’t overrule the occasional use of arbitrary laws, but nevertheless arbitrary rules should compliment and NOT displace the essence of the “rule of law”.

Mr. Hayek quotes David Hume[5], ``No government, at that time, appeared in the world, nor is perhaps found in the records of any history, which subsisted without a mixture of some arbitrary authority, committed to some magistrate; and it might reasonably, beforehand, appear doubtful whether human society could ever arrive at that state of perfection, as to support itself with no other control, than the general and rigid maxims of law and equity.”

In essence, in contrast to mainstream thinking, the rule of law and not simply arbitrary regulations, serves as the central element to well functioning societies.

Former President Ronald Reagan nicely captures part of our “Three Wise Monkey” solution as seen by the mainstream, “The government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it”, from which I would add, “if subsidies are not enough, elect one who makes sure it would”.

---

[1] Hayek, Friedrich August von, Decline of the Rule of Law, Part 1, The Freeman April 20, 1953

[2] Hayek, Friedrich August von, Decline of the Rule of Law, Part 1, The Freeman April 20, 1953

[3] Powell, Benjamin; Somalia: Failed State, Economic Success? The Freeman

[4] Hayek, Friedrich August von, The Road To Serfdom

[5] Hume, David; The history of England, from the invasion of Julius Caesar to the revolution, we earlier quoted this see Graphic: Origin of The Rule of Law

Fear The Boom And Bust- Keynes versus Hayek Rap Video

Hayek and Keynes debate the Boom Bust cycle on a rap video made by Professor Russ Robert of Cafe Hayek.

Update here's the lyrics:

We’ve been going back and forth for a century
[Keynes] I want to steer markets,
[Hayek] I want them set free
There’s a boom and bust cycle and good reason to fear it
[Hayek] Blame low interest rates.
[Keynes] No… it’s the animal spirits

[Keynes Sings:]

John Maynard Keynes, wrote the book on modern macro
The man you need when the economy’s off track, [whoa]
Depression, recession now your question’s in session
Have a seat and I’ll school you in one simple lesson

BOOM, 1929 the big crash
We didn’t bounce back—economy’s in the trash
Persistent unemployment, the result of sticky wages
Waiting for recovery? Seriously? That’s outrageous!

I had a real plan any fool can understand
The advice, real simple—boost aggregate demand!
C, I, G, all together gets to Y
Make sure the total’s growing, watch the economy fly

We’ve been going back and forth for a century
[Keynes] I want to steer markets,
[Hayek] I want them set free
There’s a boom and bust cycle and good reason to fear it
[Hayek] Blame low interest rates.
[Keynes] No… it’s the animal spirits

You see it’s all about spending, hear the register cha-ching
Circular flow, the dough is everything
So if that flow is getting low, doesn’t matter the reason
We need more government spending, now it’s stimulus season

So forget about saving, get it straight out of your head
Like I said, in the long run—we’re all dead
Savings is destruction, that’s the paradox of thrift
Don’t keep money in your pocket, or that growth will never lift…

because…

Business is driven by the animal spirits
The bull and the bear, and there’s reason to fear its
Effects on capital investment, income and growth
That’s why the state should fill the gap with stimulus both…

The monetary and the fiscal, they’re equally correct
Public works, digging ditches, war has the same effect
Even a broken window helps the glass man have some wealth
The multiplier driving higher the economy’s health

And if the Central Bank’s interest rate policy tanks
A liquidity trap, that new money’s stuck in the banks!
Deficits could be the cure, you been looking for
Let the spending soar, now that you know the score

My General Theory’s made quite an impression
[a revolution] I transformed the econ profession
You know me, modesty, still I’m taking a bow
Say it loud, say it proud, we’re all Keynesians now

We’ve been goin’ back n forth for a century
[Keynes] I want to steer markets,
[Hayek] I want them set free
There’s a boom and bust cycle and good reason to fear it
[Keynes] I made my case, Freddie H
Listen up , Can you hear it?

Hayek sings:

I’ll begin in broad strokes, just like my friend Keynes
His theory conceals the mechanics of change,
That simple equation, too much aggregation
Ignores human action and motivation

And yet it continues as a justification
For bailouts and payoffs by pols with machinations
You provide them with cover to sell us a free lunch
Then all that we’re left with is debt, and a bunch

If you’re living high on that cheap credit hog
Don’t look for cure from the hair of the dog
Real savings come first if you want to invest
The market coordinates time with interest

Your focus on spending is pushing on thread
In the long run, my friend, it’s your theory that’s dead
So sorry there, buddy, if that sounds like invective
Prepared to get schooled in my Austrian perspective

We’ve been going back and forth for a century
[Keynes] I want to steer markets,
[Hayek] I want them set free
There’s a boom and bust cycle and good reason to fear it
[Hayek] Blame low interest rates.
[Keynes] No… it’s the animal spirits

The place you should study isn’t the bust
It’s the boom that should make you feel leery, that’s the thrust
Of my theory, the capital structure is key.
Malinvestments wreck the economy

The boom gets started with an expansion of credit
The Fed sets rates low, are you starting to get it?
That new money is confused for real loanable funds
But it’s just inflation that’s driving the ones

Who invest in new projects like housing construction
The boom plants the seeds for its future destruction
The savings aren’t real, consumption’s up too
And the grasping for resources reveals there’s too few

So the boom turns to bust as the interest rates rise
With the costs of production, price signals were lies
The boom was a binge that’s a matter of fact
Now its devalued capital that makes up the slack.

Whether it’s the late twenties or two thousand and five
Booming bad investments, seems like they’d thrive
You must save to invest, don’t use the printing press
Or a bust will surely follow, an economy depressed

Your so-called “stimulus” will make things even worse
It’s just more of the same, more incentives perversed
And that credit crunch ain’t a liquidity trap
Just a broke banking system, I’m done, that’s a wrap.

We’ve been goin’ back n forth for a century
[Keynes] I want to steer markets,
[Hayek] I want them set free
There’s a boom and bust cycle and good reason to fear it
[Hayek] Blame low interest rates.
[Keynes] No it’s the animal spirits

“The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”

John Maynard Keynes
The General Theory of Employment, Interest and Money

“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”

F A Hayek
The Fatal Conceit

F.A. Hayek Interviewed By John O'Sullivan

F.A. Hayek Interviewed By John O'Sullivan from FEE on Vimeo.

Video: Friedrich Hayek's The Road To Serfdom

During desperate times, people have the penchant to put their faith in political "saviors" in the hope of relief. Unfortunately as history shows, embracing this path typically leads to tyrannical rule.

So this cartoon video of Friedrich August Von Hayek's inspirational "The Road To Serfdom" should serve as a reminder- for us not to relinquish the fight for liberty or freedom...

or you can view the original layout by pressing on the image...

How Math Models Can Lead To Disaster

The crash of Wall Street had been aggravated by people looking for rationales to confirm their beliefs. And there was no better source of inspiration than one modeled after a seemingly impervious mathematical formula.

An article from Wired.com on “Recipe for Disaster: The Formula That Killed Wall Street” by Felix Salmon, gives a splendid narrative.

Some excerpts (all bold highlights mine),

``For five years, Li's formula, known as a Gaussian copula function, looked like an unambiguously positive breakthrough, a piece of financial technology that allowed hugely complex risks to be modeled with more ease and accuracy than ever before. With his brilliant spark of mathematical legerdemain, Li made it possible for traders to sell vast quantities of new securities, expanding financial markets to unimaginable levels.

``His method was adopted by everybody from bond investors and Wall Street banks to ratings agencies and regulators. And it became so deeply entrenched—and was making people so much money—that warnings about its limitations were largely ignored….

``It was a brilliant simplification of an intractable problem. And Li didn't just radically dumb down the difficulty of working out correlations; he decided not to even bother trying to map and calculate all the nearly infinite relationships between the various loans that made up a pool. What happens when the number of pool members increases or when you mix negative correlations with positive ones? Never mind all that, he said. The only thing that matters is the final correlation number—one clean, simple, all-sufficient figure that sums up everything.

``The effect on the securitization market was electric. Armed with Li's formula, Wall Street's quants saw a new world of possibilities. And the first thing they did was start creating a huge number of brand-new triple-A securities. Using Li's copula approach meant that ratings agencies like Moody's—or anybody wanting to model the risk of a tranche—no longer needed to puzzle over the underlying securities. All they needed was that correlation number, and out would come a rating telling them how safe or risky the tranche was…

``As a result, just about anything could be bundled and turned into a triple-A bond—corporate bonds, bank loans, mortgage-backed securities, whatever you liked.

``In the world of finance, too many quants see only the numbers before them and forget about the concrete reality the figures are supposed to represent. They think they can model just a few years' worth of data and come up with probabilities for things that may happen only once every 10,000 years. Then people invest on the basis of those probabilities, without stopping to wonder whether the numbers make any sense at all.

``As Li himself said of his own model: "The most dangerous part is when people believe everything coming out of it."

Some observations:

One. This is another example of people how people (including the majority of experts and professionals) fall prey to cognitive biases, such as the confirmation bias, in order to buttress their beliefs.

Two. This also shows of people’s penchant to trustingly espouse mathematical models to address the concerns of social structures especially in markets.

The illustrious Friedrich A. Hayek (1899–1992) in his Nobel Prize speech The Pretence of Knowledge warned of this, ``A theory of essentially complex phenomena must refer to a large number of particular facts; and to derive a prediction from it, or to test it, we have to ascertain all these particular facts. Once we succeeded in this there should be no particular difficulty about deriving testable predictions — with the help of modern computers it should be easy enough to insert these data into the appropriate blanks of the theoretical formulae and to derive a prediction. The real difficulty, to the solution of which science has little to contribute, and which is sometimes indeed insoluble, consists in the ascertainment of the particular facts.”

For pundits, math models elicit intellectual attraction of a system that can be deliberately controlled. However, the sad reality is that they hardly capture all variables required out of the complexity of the environment. And over reliance thereof may lead to disastrous consequences, similar to the LTCM fiasco.

And this applies not only to Wall Street but to the general economics or even to the environment.

Broken Window Fallacy: The Vicious Hidden Costs of "Holiday Economics"

``There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.

``Yet this difference is tremendous; for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Whence it follows that the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil.”- Bastiat, Frédéric (1801-1850)

In the tradition of Frédéric Bastiat’s Parable of the Broken Window or the precept of “That Which is Seen and that Which is Unseen”, we apply this analytical methodology to the so-called “Holiday Economics”.

That Which is Seen

Public Holidays are declared to commemorate dates of historical, religious or cultural significance.

But by virtue of the current administration’s “Rationalizing the Celebration of National Holidays (R.A. 9492), public holidays have been made adjustable. The promulgated reason behind this law is to “to reduce disruption to business and production schedules, encourage domestic tourism and give employees long weekends.” (inq7.net)

In addition, the administration using moral justification, says the law would “encourage quality time” among members of Filipino families.

That Which is Not Seen

The zeitgeist of this law has been primarily economics, hence called as “holiday economics”. Weekends juxtaposed with holidays have been alleged as encouraging domestic tourism.

If one goes by the contribution share of the tourism industry to the Philippine economy we note of the following data from World Travel and Tourism Council:

In terms of GDP share, `` Philippines's T&T Direct Industry is expected to contribute 3.9% to Gross Domestic Product (GDP) in 2008 (PHP285.2 bn or US$6.8 bn), rising in nominal terms to PHP646.6 bn or US$10.9 bn (3.7% of total) by 2018. The T&T Economy contribution (% of total) should decline from 8.8% (PHP636.4 bn or US$15.1 bn) to 8.7% (PHP1,522.1 bn or US$25.7 bn) in this same period.”

In terms of employment, ``Philippines's 1,377,000 T&T Direct Industry jobs account for 4% of total employment in 2008 and are forecast to total 1,564,000 jobs or 3.7% of the total by 2018.The contribution of the Travel & Tourism Economy to employment is expected to fall to 3,541,000 jobs in 2008, 10.3% of total employment, or 1 in every 9.7 jobs to 4,119,000 jobs, 9.7% of total employment or 1 in every 10.4 jobs by 2018.”

Additionally, the Philippine government economic agency, the National Statistical Coordination Board (NSCB) further says that in 1994-1998, ``The share of internal tourism consumption to GDP was 5% and 7% in 1994 and 1998, respectively.”

In short, Holiday Economics arbitrarily promotes an industry which contributes to only about 9% of country’s GDP (5-7% of domestic tourism) and 10.3% (direct and indirect) to total employment coming at the expense of the OTHER industries with larger contribution to the domestic economy!!!

Inflationary Impact

Moreover, such distortive law is obviously inflationary or can contribute to higher prices of goods and services to the society and the further impoverishment of the society.

How?

In a non-working holiday, if a business decides to operate, it would have to absorb increases in labor wages as mandated by law. On the other hand, forced vacations mean suspensions of business activities in compliance to the fiat.

In other words, the said policy affects the production structure of the Philippine economy by

1) skewing capital investment incentives heavily to one industry,

2) increasing the costs of doing business,

3) lowering profit margins,

4) diminishing labor productivity and

5) reducing relative output.

The obvious economic implication is that of higher risk premium for the economy and stiff hurdle rates which diminishes the attraction of capital investments thereby raising the prospects of unemployment levels. Moreover, the policy induced economic imbalances will reduce production output which means pressures of HIGHER prices of goods and services.

Worst of all, the accrued negative impacts would suggest for GREATER government spending and MORE future interventions, as media will focus on the effects than the cause which will generate popular demand and pressure policymakers to oblige, and from which, politicians will willfully administer. But, beyond public knowledge, this should translate to the prospects of higher taxes, lower purchasing power of the Peso and lower standards of living.

On the government side, more intervention and more government budget for “welfare or entitlement” spending means more opportunities for corruption and the never-ending farcical investigations (turned into soap operas) aside from the economic dislocations emanating from such skewed political policy.

Moreover, the truth is that domestic tourism will be limited to the income capacity of Filipinos. Lengthening of vacations do not automatically translate to hefty progress in the domestic tourism industry if the citizenry's incomes remain marginalized. And any advances of the industry based on credit instead of genuine wealth creation will only lead to temporary booms followed by a nasty bust. Profligacy isn’t a sound way to enrich a country. Besides, the squeezing of other industries will only put a kibosh to Filipino incomes.

Think of it, instead of promoting education, Filipino children with reduced school hours will be cultured towards indolence, intellectual inertia and hedonistic lifestyles, which runs contrary to the avowed objective of attaining quality family time. The derivative value formation from such policies doesn’t signify as sound economics or translate to better economic prospects over the long run.

Fatal Conceit

Besides, “quality time” accounts for as a fallacious argument of “begging the question”. More vacations do not automatically guarantee more quality time for the family. Quality time stems from personal virtues of responsibility and time management than from government’s controlling of people’s action. If a person insists on staying with a paramour than with the legal or connubial partner and or the family, no amount of “vacation” will change the person’s preference or priorities. More vacation may, on the other hand, even further such an immoral lifestyle.

And it goes the same with business, the idea that government knows the interest of business more than the industry itself is a concrete example of the Hayekian “Fatal Conceit”. The law’s stated aim of reducing “disruption to business and production schedules” runs contrary to its goals. Raising the cost of business disrupts production schedules instead of facilitating them. And some business groups as the American Chamber of Commerce have raised this issue.

Finally there is also a cultural dimension for the “holiday economics” debate. The major reason for such holidays is mainly for the celebration of the historical significance of the particular dates. By moving these, with the aim of attaining tenuous economic goals, vastly erodes the meaning of such rites. What good is it to remember history, if we only opt to look beyond its very essence?

Holiday Economics is representative of the inflationary, distortive and bad economics which is what Frédéric Bastiat admonished against. At worst, it is prejudicial to the Filipino heritage. The unseen costs look patently greater than its superficial and immediate benefits. The law deserves to be repealed or revoked.

Is Ben Bernanke Turning The US Federal Reserve Into A Dictatorship?

``The deepest policy errors are lodged in the public’s expectation and belief that central banks and governments can alleviate recessions and in the public’s giving these organizations the legal power to do what they do (or tolerating their power grabs). Further errors lie in listening to mistaken experts who continue to justify these counterproductive methods and laws, and in failing to learn from experience that the policies that central banks and governments use to fight recessions make them worse and turn them into deeper recessions and depressions.”- Michael S. Rozeff, The Fed’s Exploding Balance Sheet: What It Means and Reviving the Revolution

Dictatorship means absolute rule.

Given the recent turn of events, it is noteworthy to point out that the recent actions undertaken by the US Federal Reserve appear to be evolving towards such an end.

While one may argue that given today’s emergency conditions, rapid responses from central authorities may be required to help ease the crisis, such assumption is fallaciously grounded on the infallibility of the central authority, where wrong decisions may present as systemic risk for our globalized society.

To quote Friedrich A. Hayek in Pretense of Knowledge, ``To act on the belief that we possess the knowledge and the power which enable us to shape the processes of society entirely to our liking, knowledge which in fact we do not possess, is likely to make us do much harm. In the physical sciences there may be little objection to trying to do the impossible; one might even feel that one ought not to discourage the overconfident because their experiments may after all produce some new insights. But in the social field, the erroneous belief that the exercise of some power would have beneficial consequences is likely to lead to a new power to coerce other men being conferred on some authority. Even if such power is not in itself bad, its exercise is likely to impede the functioning of those spontaneous-ordering forces by which, without understanding them, man is in fact so largely assisted in the pursuit of his aims.” (italics mine)

Some of the recent events indicative of the dictatorial tendencies:

One, the Fed has activated the use of its emergency powers to bypass legal requirements or procedures,

This from Bloomberg, ``The Federal Reserve took advantage of emergency powers to authorize the auctions that officials felt were necessary to ease a credit squeeze, concluding it otherwise lacked legal permission to do so.

``The Fed bypassed requirements for prior notice and public comment when writing the regulations to implement today's agreement with the European Central Bank and three other central banks. The Fed's official notice today said any delay caused by following standard procedures would have been ``contrary to the public interest.''

``Such actions, while used ``sparingly'' over the years, were justified today because the new rules probably carry few costs, a former Fed attorney said. The action today was part of a coordinated effort with other central banks to alleviate a global growth slowdown, acting after interest-rate cuts failed to allay concerns that banks will reduce lending.

``It's something that they normally don't do,'' said Oliver Ireland, who worked as a Fed counsel for more than two decades and is now a partner at Morrison & Foerster in Washington. ``If you look at doing things to stabilize volatile markets, I don't think it's very hard to find good cause. There's no tangible harm to anybody.''

``The Fed uses the bypass powers regularly when changing the rate on direct loans to banks, though rarely when publishing broader rule changes. The Administrative Procedure Act requires federal agencies to give public notice and solicit comments on regulatory changes though with exceptions, Ireland said.

Two, the Federal Reserve has used its ‘war powers’ to also bypass its organization’s hierarchal decision making process.

Again from Bloomberg (italics mine), ``The district chiefs’ authority over borrowing costs has been marginalized in the past two months as Chairman Ben S. Bernanke and the Fed Board of Governors in Washington made their own decisions on emergency measures to flood the economy with cash.

“The Board has usurped authority,” said William Poole, former president of the St. Louis Fed and now a senior fellow at the Cato Institute in Washington. “This dramatic change in policy direction has not been announced or even acknowledged.”…

``A conference call last month showed how little say the central bank’s 12 regional presidents now have in some of the Fed’s biggest decisions…

``Regional bank presidents don’t have a vote when the Board uses emergency powers to lend to firms other than banks in “unusual and exigent circumstances,” as it’s done repeatedly this year.

``The district-bank chiefs by design are supposed to offer a counterbalance to the Board, and in the past haven’t been shy about challenging chairmen. In February 1994, former chairman Alan Greenspan had to argue against four presidents who wanted to raise rates at least a half percentage point, compared with his own preference for a quarter-point move.

Three, the Federal Reserve has remained intransigent to repeated requests for transparency or the disclosures on the recipients of the recently extended loans.

Again this from Bloomberg, ``The Federal Reserve refused a request by Bloomberg News to disclose the recipients of more than $2 trillion of emergency loans from U.S. taxpayers and the assets the central bank is accepting as collateral.

``Bloomberg filed suit Nov. 7 under the U.S. Freedom of Information Act requesting details about the terms of 11 Fed lending programs, most created during the deepest financial crisis since the Great Depression.

``The Fed responded Dec. 8, saying it’s allowed to withhold internal memos as well as information about trade secrets and commercial information. The institution confirmed that a records search found 231 pages of documents pertaining to some of the requests.

These acts of suppression of the access to information signify as common traits for dictatorships. To quote Ronald Wintrobe in “The Political Economy of Dictatorships”,

``Democratic institutions (such as freedom of speech, freedom of information, elections, a free press, organized opposition parties and an independent judiciary) all provide means whereby dissatisfaction with public policies may be communicated between citizens and their political leader. The dictator typically dispenses with these institutions and thus gains a freedom of action unknown in democracy.”

Lastly, the Federal Reserve is now mulling the path to issue its own debt instruments,

This from Wall Street Journal, ``The Federal Reserve is considering issuing its own debt for the first time, a move that would give the central bank additional flexibility as it tries to stabilize rocky financial markets.

``Government debt issuance is largely the province of the Treasury Department, and the Fed already can print as much money as it wants. But as the credit crisis drags on and the economy suffers from recession, Fed officials are looking broadly for new financial tools.

``Fed officials have approached Congress about the concept, which could include issuing bills or some other form of debt, according to people familiar with the matter.

``It isn't known whether these preliminary discussions will result in a formal proposal or Fed action. One hurdle: The Federal Reserve Act doesn't explicitly permit the Fed to issue notes beyond currency.

Figure 2: St. Louis Fed: Federal Reserve Bank Credit and Federal Reserve Holdings of US Treasuries

While others don’t see anything sinister to the possible intent of the Fed to issue debts in lieu of the rapidly depleting holdings of the US treasuries in its portfolio (see figure 2) or to “destroy” some of the paper it has recently been printing or as added arsenal for contingent use, the obvious consolidation of power seems to be giving rise to an all powerful “omnipotent” institution.

Why is this important to us even when are about 7-8,000 miles apart?

Because the world’s monetary system is anchored upon the de facto international currency standard in the US dollar. And anything that impacts the state of the US currency will likely send ripples across the world.

To quote Axel Merk of Merk Investments, ``The only leadership that seems to be emerging is from the Federal Reserve determined to print not just billions, but trillions of dollars to provide the backstop to all economic activity; at the same time the policies are an insult to any potential buyer of securities the Fed has targeted, as the intervention keeps yields artificially low. As China has been one of the premier buyers of these securities, namely Treasury bonds and agency securities, this is a clear message by the Fed that Chinese investments to finance U.S. deficits is no longer welcome; why else would the Fed depress the return for potential buyers during a time when unprecedented amounts of debt need to be raised? While we are provocative in our allegation, it is at best an unintended consequence, at worst highly deliberate. Intentional or not, it may coerce Asian buyers of U.S. debt to reduce their holdings to allow the U.S. dollar to weaken. The Fed may believe that it does not need the free market to set rates as it can use its own balance sheet to set economic policy; this ill-perceived view is also shared by economists that believe modern central banking is stronger than market forces.” (bold emphasis mine)

Figure 3: BIS: Central Bank Assets and Open Market Operations

And as we have long predicted, all these point towards more evidences of a seismic shift towards politically based actions than just targeted at economic concerns.

Central banks all over the world have been seemingly desperate enough to resort to “saving” the status quo, an attitude founded on the modern day central banking paradigm of economic growth brought about by credit or inflation and foisted to the public, by flooding the world with money (see figure 3), absorbing much these losses and adopting more innovative “socialistic” means to flex its recently acquired muscles in order to salvage a rapidly festering system.

As Jesús Huerta de Soto, professor of economics at the Complutense University of Madrid, wrote in Financial Crisis and Recession, “…nothing is more dangerous than to indulge in the "fatal conceit" — to use Hayek's useful expression — of believing oneself omniscient or at least wise and powerful enough to be able to keep the most suitable monetary policy fine-tuned at all times. Hence, rather than soften the most violent ups and downs of the economic cycle, the Federal Reserve and, to a lesser extent, the European Central Bank, have most likely been their main architects and the culprits in their worsening.”