Quote of the Day: The Difference between Marketists and Statists

At the Cafe Hayek, Professor Don Boudreaux differentiates free marketers "marketists" and collectivists "statists"

Here’s one difference between marketists and statists: We marketists understand (or think we understand) that the margins are many on which private people can adjust their actions in response to changes in constraints and in opportunities – be these changes caused by the market or by the state. And not only is the number of possible margins of adjustment large, many of these margins are so small in size or fleeting in their existence that they are undetectable by outside observers.

Statists, in contrast, seem me to suppose both that the number of margins on which private people can adjust their actions is relatively small, and that these margins are mostly detectable by outside observers.

This difference between marketists and statists results in marketists – compared to statists – being less pessimistic about markets and more pessimistic about state action.

Why more optimistic about markets? Because with many margins on which to adjust, private market actors have great scope to find or to craft market outcomes that are closely tailored to each actor’s individual preferences.

Why the pessimism about state action? Well, the large number of such margins and the invisibility of their details to everyone who is not ‘on the spot’ combine with the subjectivity of each person’s preferences to make it practically impossible for government officials to assess how well or how poorly markets are working. Too much is unseen – indeed, too much is unseeable – to render imposed collective decisions likely to improve the general welfare.

So my thesis is this: marketists understand, appreciate, and respect the enormous complexity of reality; statists do not. Statists believe reality to be far simpler than it is.

Perhaps statists are misled into such a misconception of reality by their theorizing. For example, the variables conventionally used in economic models to express economic relationships and connections are easy to mistake for being realistic and exhaustive representatives of real-world entities.

Or perhaps such people just do not think deeply. Perhaps they are misled by words used to describe collections of people – for example, “low-skilled workers”; “the steel industry”; “retailers”; “college students”; “smokers” – to miss the multitudinous differences that often separate the individual entities within any one of these categories from others within the same category.

Whatever the reason, the simpler one supposes reality to be, the greater are the prospects – one supposes – for outsiders to grasp reality fully enough to engineer it into a better state.

Here’s a related hypothesis: the simpler one supposes reality to be, the more readily one forgets Thomas Sowell’s observation that there are no ‘solutions,’ only trade-offs. Put differently, the simpler one supposes reality to be, the more prone one is to fall for a good-guy / bad-guy account of reality.

All problems are easily identifiable and are caused by evil-doers: deceitful business executives; hate-filled racist homophobes; stingy middle-class voters. The solution is to send in the good guys to defeat the bad guys; to exorcise the devil and undo his deeds, replacing Satan, if not with angels, with noble public servants bent on saving the day and doing what’s right.

When the economy is seen as a relatively simple mechanism – when society is viewed as one views a passion play or a Hollywood movie in which good and evil are unambiguous, and in which evil persists only because too few good people have yet to spring into action – then there seems to be a natural urge to call in a superhero to obliterate evil and misfortune.

Statists fail to appreciate the complexities of reality and, therefore, exhibit hubris when proposing public policies. Marketists, in contrast, do appreciate the complexities of reality and, therefore, are humble about prescribing government interventions.

Quote of the Day: The vision of the left is a vision of themselves

The vision of the left is not just a vision of the world. For many, it is also a vision of themselves -- a very flattering vision of people trying to save the planet, rescue the exploited, create "social justice" and otherwise be on the side of the angels. This is an exalting vision that few are ready to give up, or to risk on a roll of the dice, which is what submitting it to the test of factual evidence amounts to. Maybe that is why there are so many fact-free arguments on the left, whether on gun control, minimum wages, or innumerable other issues -- and why they react so viscerally to those who challenge their vision

This is from economist, author and political philosopher Thomas Sowell at the Townhall.com. 

Video: Mises Institute's Peter Klein on Bitcoin, Central Banking and Ideology

Peter G Klein, Mises Institute’s Executive Director and Carl Menger Research Fellow, explains of the importance of ideology in the evolution of cryptocurrencies.

(source Mises Blog)

As the great Austrian economist Ludwig von Mises wrote

The genuine history of mankind is the history of ideas. It is ideas that distinguish man from all other beings. Ideas engender social institutions, political changes, technological methods of production, and all that is called economic conditions. And in searching for their origin we inevitably come to a point at which all that can be asserted is that a man had an idea

Quote of the Day: The Glass Steagall Myth

From Washington Post’s Steve Pearlstein. (hat tip Bob Wenzel)

Repeal of Glass-Steagall has become for the Democratic left what Fannie Mae and Freddie Mac are for the Republican right — a simple and facially plausible conspiracy theory about the crisis that reinforces what they already believed about financial markets and economic policy.

But why let facts get in the way of a good screenplay?

Facts such as that Bear Stearns, Lehman Brothers and Merrill Lynch — three institutions at the heart of the crisis — were pure investment banks that had never crossed the old line into commercial banking. The same goes for Goldman Sachs, another favorite villain of the left.

The infamous AIG? An insurance firm. New Century Financial? A real estate investment trust. No Glass-Steagall there.

Two of the biggest banks that went under, Wachovia and Washington Mutual, got into trouble the old-fashioned way – largely by making risky loans to homeowners. Bank of America nearly met the same fate, not because it had bought an investment bank but because it had bought Countrywide Financial, a vanilla-variety mortgage lender.

Meanwhile, J.P. Morgan and Wells Fargo — two large banks with big investment banking arms — resisted taking government capital and arguably could have weathered the crisis without it.

Did U.S. investment banks create a shadow banking system and derivatives market outside the normal regulatory framework that encouraged sloppy lending and created what turned out to be toxic securities? You betcha.

And did regular banks make some of those bad loans and buy up some of those toxic securities? Yes, they did.

But that was as much a problem at the banks and investment banks that combined as those that remained independent. More significantly, the bulk of the money that flowed through the shadow banking system didn’t come from government-insured bank deposits. It came from money market funds, hedge funds, pension funds, insurance companies, foreign banks and foreign central banks.

Confronted with these inconvenient facts, the conspiracists like to double-down and argue that the real damage caused by repeal of Glass-Steagall is that it triggered a wave of bank consolidation — which has now left more than half of the country’s banking assets under the control of a handful of institutions that are so big that the government has no choice but to bail them out if they risk a meltdown of the financial system.

No doubt about it — too-big-to-fail is a problem. It turns out, however, that it was also a problem in 1984, when Continental Illinois, the seventh-largest U.S. bank with a whopping $40 billion in assets, had to be rescued. It was a problem a few years later when the Fed quietly rescued Citicorp because of mountains of loans to Latin American governments that turned sour. It was a problem in 1998 when the Fed had to orchestrate the rescue of Long-Term Capital Management, a hedge fund with less than $5 billion in capital. And it was the reason behind the Fed’s 2007 rescue of Bear Stearns, with less than a quarter the size of its biggest Wall Street rivals.

Read the rest here

For the left, evidences that goes against them have simply been ignored.

The creed of the infallible moral authority of governments implies that all so-called “market failures” intuitively stem from the lack of government controls or oversight, the repeal of the Glass-Steagall act, notwithstanding.

Canada didn’t have a Glass-Steagall yet avoided the crisis of 2008 (Tom Woods). This only goes to show that, not only from the evidence perspective, their logic has been inconsistent or does not add up.

Reducing government, for the neo-liberals, essentially takes away the path to political nirvana. It would be senseless to argue against faith based political zealotry.

Progressive Ideology: The 10 Paths to Nirvana

Progressives or the neo-liberalsm who account for populist politics in the US, unwaveringly embrace big government

Professor Robert Higgs enumerates the Progressives’ 10 paths to nirvana.

An economist notes in particular that progressive ideology now embraces the following default conclusions:

1. If a social or economic problem seems to exist, the state should impose regulation to remedy it.
2. If regulation has already been imposed, it should be made more expansive and severe.
3. If an economic recession occurs, the state should adopt “stimulus” programs by actively employing the state’s fiscal and monetary powers.
4. If the recession persists despite the state’s adoption of “stimulus” programs, the state should increase the size of these programs.
5. If long-term economic growth seems to be too slow to satisfy powerful people’s standard of performance, the state should intervene to accelerate the rate of growth by making “investments” in infrastructure, health, education, and technological advance.
6. If the state was already making such “investments,” it should make even more of them.
7. Taxes on “the rich” should be increased during a recession, to reduce the government’s budget deficit.
8. Taxes on “the rich” should also be increased during a business expansion, to ensure that they pay their “fair share” (that is, the great bulk) of total taxes and to reduce the government’s budget deficit.
9. If progressives perceive a “market failure” of any kind, the state should intervene in whatever way promises to create Nirvana.
10. If Nirvana has not resulted from past and current interventions, the state should increase its intervention until Nirvana is reached.

The foregoing progressive predispositions, and others too numerous to state here, provide the foundation on which the state justifies its current actions and its proposals for acting even more expansively. Progressives see no situation in which the best course of action requires that the government retrench or admit that it can do nothing constructive to help matters. They see the state as well-intentioned, sufficiently capable, and properly motivated to fix any social and economic problem whatsoever if only the public allows it to do so and bears the costs.

The Philippine social democracy version can be reduced into three: namely, change the leader, tax and regulate, and finally, throw money at the problem. Anything beyond these have been deemed as blasphemy.

I wrote about them here.

Why Do People have Faith in Politicians?

Professor Don Boudreaux is puzzled and saddened by people’s unwavering faith in reprobate politicians,

Successful politicians – and particularly those who are successful on national stages – are, with exceptions too few to matter, master con artists.

Whatever is the reason why so many grown people respect holders of political office is, as it has always been, beyond my comprehension. I just don’t get it. Practitioners of no other profession are accorded more honor, respect, and (most importantly) power while at the same time being held to such low standards of ethical behavior. Actions that, when committed by the family dog, properly elicit scolding or muzzling or even eviction from the premises are, when committed by an elected official, greeted with oohs, aahhs, applause, and re-election to powerful office.

I share the same frustrations too.

Thanks to the principles of liberty, I have been enlightened that people who mattered most are those who put to risks their personal savings and capital and commit tremendous efforts to serve the consumers. Such people represent genuine public service.

Yet these wealth generating class of people are often unfairly painted as immoral or unethical by politicians, by their lackeys and their media mouthpieces.

Moreover, there has been little realization that while there will always be crooked people, corrupt and perverted behaviour are often an offshoot to arbitrary laws, excessive interventionism and burdensome taxes. Many unscrupulous actions are consequences of stifling regulations. And these have been the primary reasons for the proliferation of informal economies or black markets.

And in contrast, politicians who live by the forcible appropriation of people’s efforts, have ironically, been portrayed as having the moral high ground over the productive economic class.

Many don’t understand that the precept of “it is not what you know but who you know” has been grounded on the politicization of the marketplace. Where entrepreneurs, business people and corporate managers have been frequently harassed or intimidated by onerous regulatory and tax requirements, political “connections” become a byword for the protection of one’s properties and the facilitation one’s economic interests.

And analogous to Stockholm Syndrome, where hostages develop personal attachments with their captors, the populace yield or surrender to the “realities” of interventionism. Thus, the popularity of those who possess social and political control over others—or the politicians and the political class because of the unwarranted dependency relationship built from oppressive politics.

Of course the indoctrination factor through mass media, and the state captured private (crony) institutions have been party to the promotion of interventionism, the latter serves as a reason for the existence of revolving door relationships with crony institutions.

In the Philippines many aspire to be lawyers, that’s because lawyers are perceived to be a heartbeat away from politics. And politics has been seen by many, if not most, as a paragon of public service and career success which is entirely a popular delusion.

People hardly understand the system of ethics from which democratic politics operates on.

Basically, in arguing for the protection of society’s welfare, politicians take away people’s freedom, which is used as basis for the second step, the arrogation of people’s property. Then, the state through incumbent political leaders redistributes plundered resources to their wards and gives some of the plundered resources back to the taxpayers (e.g. welfare, public infrastructures) and claim the moral high ground of being ‘compassionate’. Yet most of such actions have been meant at securing votes to keep them in office.

I am reminded by the pungent Bennett Cerf quote in Nathaniel Branden’s book Judgment Day: My Years With Ayn Rand

You have to throw welfare programs at people — like throwing meat to a pack of wolves — even if the programs don't accomplish their alleged purpose and even if they're morally wrong.

And of course, the rest of the taxed resources are kept for themselves in the form of salaries, perks, perquisites and other benefits (such as junkets), not to mention income from under the table transactions.

People hardly realize too that the political office have been magnet to people with sinister motivations. The great Friedrich von Hayek said the worst people usually get to the top of the political world.

Writes Doug French at the Mises Blog, (bold emphasis mine)

F.A. Hayek famously argued in The Road to Serfdom, that in politics, the worst get on top, and outlined three reasons this is so. First, Hayek makes the point that people of higher intelligence have different tastes and views. So, as Hayek writes, “we have to descend to the regions of lower moral and intellectual standards where the more primitive instincts prevail,” to have uniformity of opinion.

Second, those on top must “gain the support of the docile and gullible,” who are ready to accept whatever values and ideology is drummed into them. Totalitarians depend upon those who are guided by their passions and emotions rather than by critical thinking.

Finally, leaders don’t promote a positive agenda, but a negative one of hating an enemy and envy of the wealthy. To appeal to the masses, leaders preach an “us” against “them” program.

“Advancement within a totalitarian group or party depends largely on a willingness to do immoral things,” Hayek explains. “The principle that the end justifies the means, which in individualist ethics is regarded as the denial of all morals, in collectivist ethics becomes necessarily the supreme rule.”

The bottom line is that ignorance, indoctrination, propaganda, the belief in the politics of heaven (abundance) on earth (scarcity), the seduction of easy life from political redistribution, dependency on political relations as means to preserve one’s property, the popularity of social control or political power, traditionalism, peer pressures, and the Stockholm syndrome applied to political relations, among many others more, may have contributed to people’s undeserving faith in politicians.

Quote of the Day: Dogmatism

Great stuff from Professor Steve Horwitz,

If dogmatism is the continued arrogant adherence to a set of ideas regardless of the evidence to support them or arguments against them, the real dogmatists right now are those who continue to cling stubbornly to the belief, against the piled up evidence to the contrary, that more government is the way out of this mess. Liberals and progressives (as well as a good number of conservatives) who claim to believe in reason and evidence and to oppose dogma need to take a good long look in the mirror and decide whether they want to take the advice of Einstein who defined insanity as "doing the same thing over and over again and expecting different results.

Side note: quoted definition of insanity has been frequently misattributed to Benjamin Franklin, Mark Twain or Albert Einstein (according to Wikipedia.org). Most likely origin Rita Mae Brown

Quote of the Day: Living Out of a Myth

Excerpt from the always eloquent marketing savant Seth Godin

Myths allow us to project ourselves into their stories, to imagine interactions that never took place, to take what's important to us and live it out through the myth.

The quote comes in the context of a “myth” or vicarious brand based marketing strategy.

But I think this valuable quote applies to many aspects of social activities.

In my field, they are represented by the rigid mechanical chartists and micro fundamentalists in the financial markets, hydraulic econometric-statistics-quant based economics or in the political sphere—ideologies based on utopianism.

These people tend to live out or rationalize their morals or beliefs or their fantasies as reality.

The tragic bombing and shooting massacre which left 68 people dead in Norway by deranged Anders Breivik seems an example.

Quoting Stratfor’s Scott Stewart, (bold emphasis mine)

Breivik also is somewhat unique in that he did not attempt to escape after his attacks or become a martyr by his own hand or that of the authorities. Instead, as outlined in his manifesto, he sought to be tried so that he could turn his trial into a grandstand for promoting his ideology beyond what he did with his manifesto and video. He was willing to risk a long prison sentence in order to communicate his principles to the public. This means that the authorities have to be concerned not only about other existing Justiciar Knights but also anyone who may be influenced by Breivik’s message and follow his example.

Living out of a myth can be fatalistic.

George Soros on Closing Hedge Fund: Do As I Say, Not What I Do

Sad to say that billionaire philanthropist George Soros does not practice what he preaches when it comes to ideology

He recently wrote,

“I have made it a principle to pursue my self-interest in my business, subject to legal and ethical limitations, and to be guided by the public interest as a public intellectual and philanthropist,” he wrote. “If the two are in conflict, the public interest ought to prevail,” he said.

Mr. Soros has been an strong advocate of government regulation/intervention which he blames on (market fundamentalism) or capitalism. Of course today’s world has not been operating on a laissez fair capitalism but rather a crony-state-corporatist-patron-client capitalism.

From Conservapedia

In a Der Spiegel interview in 2008, Soros advocates European-style socialism for America, "is exactly what we need now. I am against market fundamentalism. I think this propaganda that government involvement is always bad has been very successful -- but also very harmful to our society."

Soros's answer to America's problems involve more regulation and more government intervention in the marketplace. Soros pours billions of dollars into the following anti-USA causes

Well, ironically he recently announced the closure of his 4 decade long of hedge fund in protest of Dodd Frank bill, a regulation which he sees as not be beneficial for him.

From Bloomberg

Soros’s sons said they took the decision because new financial regulations would have made it necessary for the firm to register with the Securities and Exchange Commission by March 2012 if it continued to manage money for outsiders. Because the firm has overseen mostly family assets since 2000, when outside money accounted for about $4 billion, they decided it made more sense to run it as a family office, according to the letter.

The rule calls for hedge funds with more than $150 million in assets to report information about their investors and employees, the assets they manage, potential conflicts of interest and their activities outside of fund advising. Registered funds will also be subject to periodic inspections by the SEC.

“We have relied until now on other exemptions from registration which allowed outside shareholders whose interests aligned with those of the family investors to remain invested in Quantum,” the executives said in the letter, referring to its flagship Quantum Endowment Fund. “As those other exemptions are no longer available under the new regulations, Soros Fund Management will now complete the transition to a family office that it began eleven years ago.”

Mr. Soros’ stern reaction signifies a dose of his own medicine. So what happened to your so-called cardinal priority in the name of public interest, Mr. Soros?

As most socialists are, claims of upholding the interests of the collective are exposed as demagoguery, hypocrisy and a matter of convenience when actual cases are applied on them--yes only regulate those that do not apply to me!

After all, motherhood statements are almost always about projecting “feel good” or generating applause or ‘likes’ or portraying heroic self importance for social acceptability rather than reality.

George Soros Misrepresents F.A. Hayek

Billionaire and philanthropist George Soros attempts to pander to followers of the great F. A. Hayek, he writes,

Human beings act on the basis of their imperfect understanding — and their decisions have unintended consequences. That makes human affairs less predictable than natural phenomenon. So Hayek was right in originally opposing scientism.

At the time of the Economica articles, Popper was between Hayek and the socialist planners. He was just as opposed as Hayek to communism’s threat to individual liberty, but he advocated what he called piecemeal social engineering rather than laissez-faire.

Here I sided with Popper. But Popper and Hayek were not that far apart. I was influenced by both — and I also found fault with both.

By identifying Hayek’s inconsistency and political bias, I do not mean to demean him — but to improve our understanding of financial markets and other social phenomena.

When F. A. Hayek posited of a society that emerges from spontaneous order, what he meant was that there is no specific social or economic outcome set by anyone most especially by central planners, but of a system that emerges from interactions done by individuals.

To quote Hayek, (bold emphasis mine)

A spontaneous order is a system which has developed not through the central direction or patronage of one or a few individuals but through the unintended consequences of the decisions of myriad individuals each pursuing their own interests through voluntary exchange, cooperation, and trial and error.

Thus, it is plain nuts to say that Hayek has been plagued by political bias.

Political bias represents ideology which sees political and economic order as having specific socio-economic outcomes designed by various schools of thought on central planning, which is the opposite of what Hayek or his followers stand for.

Moreover, Soros says he is influenced by Hayek. But as Greg Ransom aptly points out,

Soros calls for a middle ground between Popper and Hayek, between the far left and Hayek. What Soros doesn’t explain is why there is no middle ground in his political activities — or why he funds so many fundamentally dishonest and hard left “Think Tanks”, people who have no problem mischaracterizing or even smearing the ideas of Hayek — and those who teach them — at the drop of a hat.

In short, what Soros says and what he does conflicts. It is Mr. Soros who seems to be plagued by inconsistencies and not Hayek.

Moreover, like typical believers in central planning, the common argument begins with a cart before the horse “strawman” argument; Soros favorite is to use “market fundamentalism” to typify Hayek’s supposed ideology.

Bob Wenzel exposes this fallacy,

The fact of the matter is that free market advocates understand that the free market system is about profits and losses, and that losses are just as important in directing an economy in a better direction as are profits. There is no belief that there are no errors in a market system.

In addition, to pin the blame on “inherent market instability” as the work of “market fundamentalism” or free market forces is totally misguided.

For instance, bubble cycles won’t occur without interventionism (inflationism), most especially from Central Banks. Since policies and regulations affect people's behavior and actions, the stimulus response mechanism constituting Soros' reflexivity theory comes to play.

In short, people respond to incentives which policies or regulations shape.

I would partly agree with Soros for his view on human action via the reflexivity theory (which I also use in analyzing the markets), but I think he has either misunderstood or misrepresented Hayek.

Lefties Flunk Economics

Daniel Klien in the Wall Street Journal writes, (hat tip: Mark Perry)

``Who is better informed about the policy choices facing the country—liberals, conservatives or libertarians? According to a Zogby International survey that I write about in the May issue of Econ Journal Watch, the answer is unequivocal: The left flunks Econ 101...

Why? Because ``the left has trouble squaring economic thinking with their political psychology, morals and aesthetics."

Read the rest here.

For me, the best explanation for this can be found from Immanuel Kant-- "I had therefore to remove knowledge, in order to make room for belief."

How Moralism Impacts The Markets

``Man, on the other hand, does not now possess a like set of instinctual do-nots: built-in prohibitions. Instead, he must enjoy or suffer the consequences of his own free will, his own power to choose between what's right and what's wrong. In a word, man is more or less at the mercy of his own imperfect understanding and conscious decisions.” -Leonard E. Read Find the Wrong, and There's the Right

WHENEVER someone quotes passages from the Holy Scriptures, in social media or in articles, in order to preach their version of morality, I would almost cringe out of cynicism. Quoting the Bible per se isn’t what I am averse at, but it is the excerpts meant to pontificate on one’s perceived sense of virtues.

Fundamentally, that’s because morality or our sense or perception of right or wrong has massive political implications. And being no stranger to the Bible, which is a daily fare for me, it is my understanding that “sacred words” can be construed or interpreted differently.

Moralism As False Reality

One of the worst things we see from self-designated moralists is reductionism, i.e. the oversimplification of reality as solely operating based on morally redeeming actions.

This view myopically ignores the role of scarcity (resources, time and spatial constraints), prices, individual scale of values, distinctive perception and interpretations of information depending on the sources or the accounts of events, cost of decisions (opportunity costs), cognitive biases, the impact of social mores, rules and regulation and authority, peer influences and the role of human action in adapting to a constantly changing environment.

It would always seem plausible to argue from a generalized standpoint on abstractions as honesty, fairness, equality and etc., but from a case to case basis such applications can exposed as being muddled or twisted or vastly misunderstood. For instance, people can all be honest in their actions, but conflicting opinions, based on interpretation of events or respective interests on how to distribute resources, can lead to conflicts[1].

The fact that conflicts are frequent occurrences even among family members, among friends, associates, or in other diverse types of social interactions reveals of human frailty which is not necessarily about the lack of virtues. Yet self-designated moralists ignore this reality.

As Gene Callahan writes[2], ``Abstraction can be an entertaining and useful activity. But every abstraction falsifies reality simply because it is an abstraction – it is a one-sided emphasis on certain aspects of the real at the expense of neglecting or even denying others. That is not necessarily harmful as long as we remember what we have done. But the abstraction, being simpler and more manageable than the real world, is a seductive fantasy, and the temptation to ignore messy reality and attempt to replace it with a clean and neat dreamworld.” (bold emphasis mine)

In other words, morality as a form of escapism will simply not work.

True, moralization is always melodious to hear. That’s why moralism is the primary staple of politics. Yet, a caveat is that one should vet if the incentives guiding such moralizers matches with their actions.

That’s because morality can be used as instrument for different goals, such as to ingratiate oneself to acquire group acceptance or to promote political agenda-outside of faith alone.

Murray N. Rothbard[3] explains how these are achieved, through the lens of the founder of modern political science Niccolò Machiavelli, (all bold emphasis mine)

`` Following straightaway from power as the overriding goal, and from his realism about power and standard morality being often in conflict, is Machiavelli's famous defense of deception and mendacity on the part of the prince. For then the prince is advised always to appear to be moral and virtuous in the Christian manner, since that enhances his popularity — but to practice the opposite if necessary to maintain power. Thus Machiavelli stressed the value of appearances, of what Christians and other moralists call "hypocrisy."

More from Rothbard on the major work of “Old Nick”,

``Niccolò Machiavelli is the same preacher of evil in the Discourses as he had been in The Prince. One of the first atheist writers, Machiavelli's attitude toward religion in the Discourses is typically cynical and manipulative. Religion is helpful, he opined, in keeping subjects united and obedient to the state, and thus "those princes and those Republics which desire to remain free from corruption should above all else maintain incorrupt the ceremonies of their religion."

It’s no different when applied to many ASEAN tycoons. Author Joe Studwell argues that one of the chinks of vulnerability of the economic elite group has been insecurity. And this has led to an “obsession with status” of which religion is part of assimilative “IN” character ASEAN tycoons has toiled to attain.

``What no godfather believer suggests, but what may also be true, is that evangelical Christianity allows them to have a strongly held belief where their daily lives are all about expressing no beliefs at all unless given a cue by a political power. It is also possible to believe in religion without upsetting Asian politicians, whereas to have independent political or social views is disastrous[4].” (bold highlights mine)

In short, the need to be seen as “moral” is understandably just part of peoples’ prestige seeking intuition or can be a source of fulfilment of social esteem needs.

At worst, moralism can be used as manipulative tools to acquire and or maintain political power or privileges.

And it is the latter aspect which our revulsion is directed to.

Yet, for all its alleged angelic purity, moralizers fail to account for institutional lapses of the Church which had engaged in a nearly 200 year war known as the Crusades (This involved 9 major “Crusades” expeditions plus minor Crusades against Tatars, Balkans, Aragonese Alexandrian and Hussite[5]), the French Religious Wars[6] and even today’s controversial supposed cover up by the Pope of a priest engaged in child molestations[7] and other sex based scandals.

And one of the stated reasons of the Crusades was due to “an outlet for an intense religious piety which rose up in the late 11th century among the lay public” which ironically implies self-righteous intolerance (“us against them” concept). [Whatever happened to the doctrine of forgiveness?]

If World War II was about extremist nationalism, the earlier religion based wars accounted for fatalistic zealotry, both of which vainly fought for idealistic but demented causes aimed at the realization of the universality of morals based on the interpretations and perceptions of their leaders.

And this has been no different for the failed grandest experiment of the 20^th century: communism, whose death toll took a horrendous (estimated) 94 million lives[8], in a futile attempt at establishing a communist Utopia!

As Tibor Machan rightly avers[9] (bold highlight mine), ``Does morality need to be reconceived? If one considers what horrible deeds have been perpetrated in the name of serving others, there is little doubt that morality needs a serious reexamination. All the major tyrannies have been carried out in the name of making us serve others instead of ourselves. The very call to submit to czars and tyrants goes hand in hand with the idea that everyone needs to serve something bigger than himself in his life! That would be God or society or humanity. The individual certainly comes off as deserving little love from himself. From commencement speeches to sermons and political oratory galore, one's self doesn't much matter, only other people do. As the poet W. H. Auden quipped, "We were put here on earth to serve other people, what the other people were put here for I don't know."

Moralistic Policies of Redistribution and Inflation Nostrums

What has this got to do with markets? Everything.

Markets are simply mechanisms or platforms of social interactions, via property rights, contractual obligations and voluntary exchanges, meant to fulfil the needs and wants of individuals, which comprise a society, based on the principle of scarcity.

Where the moralists tends to fixate on certain angles, for instance in the flows of money from which exposes some or certain moral shortcoming, the desire to attain a moralist “utopia” or agenda means a call to action for political authorities to close on such gaps. Yet the political act of doing so translates to the curtailment of someone’s property rights or liberty in order to achieve a benefit for another. In short, someone’s benefit is another man’s burden or simply, redistribution.

The booming markets of today are manifestations of such redistribution.

The forcibly lowering of interest rates by global central banks punishes savers, depositors and lenders/creditors and rewards borrowers and speculators. It’s bizarre and dichotomous situation.

For the current crop of moralists, who mostly wears the hat of the regulators and their academic followers, a fixation on short term patches guided by economic theories based on government dicta of money printing and spending, essentially conditions the public’s mindset to engage in wanton immoral acts (of greed and speculation) from which they rail against. It’s like handing a child a bunch of porno magazines while telling him/her that nudity or reading sex magazines is immoral. Yet the mainstream hardly upbraids the skewed incentives provided for by today’s policymakers.

Yet since there is no free lunch, the effective price control coursed through interest rates, like the previous experience, should lead to a massive production and resource allocation distortions in the global economy, which should also be manifested on market pricing. And an eventual capital consumption would occur, following the transition of the boom-bust cycle, once the manipulations of the laws of economics becomes overstretched and snaps backs.

The central bank of Indonesia, which has determined that her markets are presently in a state of a bubble or “Whatever methodology we use” shows an excess valuation”, should be a clear example.

From Bloomberg[10], (bold highlights mine)

``Bank Indonesia board members last year discussed the risks posed by an influx of foreign funds, and the bank did a study on the feasibility of imposing capital controls, Warjiyo said. For now, the bank is “confident” Indonesia can cope.

There is “no need to put capital controls” in place now, Warjiyo said. “The existing framework of monetary policy through setting the benchmark interest rate, foreign-exchange intervention and managing expectations is able to manage monetary and financial stability.”

``At the same time, “if the market behaves irrationally, the study has some reference of measures that can be used to put sand in the wheel on capital flows on a temporary” basis, he said. Mulya said in his e-mail that the bank “reaffirms that there is no plan for capital control.” He also said the bank has a “cautious stance towards large capital inflow of late.”

While Indonesia’s central bank acknowledges that one of its primary or key policy tools is the benchmark interest rates, there will hardly be attributions that interest rates shape the public’s expectations and that the bubble cycles are manifestations of the artificially suppressed interest rates.

As you can see, policymakers are always portrayed as beyond reproach, always need to be seen in control and panders to the public’s impression that they can successfully shape or nurture the laws of economics to their whims....until the basic laws of economics unravels such pretentions.

Yet forcing savers to speculate out of the economic doctrine to spend is simply to rob the public of money, through inflation and eventual capital losses, via the said misplaced policies.

Will officials reverse the policies to curb from apparent “bubbles”? From their tones, they seem to be dithering. Hence the answer is no.

Moreover, with elevated asset prices reflecting economic “recovery”, short term triumphalism is likely to be the path dependency for the prospective actions policymakers: what worked in the recent past should work again (past performance equals future outcome)!

As you can see authorities are merely human beings subject to the same cognitive biases as everyone else.

Do policymakers really set the tone for interest rates?

We think and argue not (see figure 1)

Figure 1: Economagic: Markets Lead Policymakers In Setting Interest Rates

Using the US as example, for every bottom phase (black arrow) of the interest rates cycle, the 10 year constant maturity (red) leads the Fed Fund Rate (blue) higher. The same holds true for the inflection points of an interest rate peak, except during 1981.

In other words, authorities only respond to the rate increases as seen in the markets; they are reactive and not proactive agents. They hardly determine interest rates policy.

Why should government policies lag and not lead the markets?

The answer should be quite obvious, governments through central banks always find low interest rates as an attractive way to finance their spending through borrowing instead of taxation, thereby favor (or would be biased for) extended period of low interest rates.

As Dr. Max More wrote[11], ``The state expands its power largely through taking more of the wealth of productive individuals. Taxation provides a means for funding new agencies, programs, and powers. Raising taxes generates little enthusiasm, so governments often turn to another means of finance: Borrowing and expanding the money supply. Only a legally-enforced monopoly on currency has allowed governments to cover deficits by issuing money. Taxation and deficits are related: If tax rate categories are not adjusted for inflation, inflation pushes people into higher tax brackets: their nominal but not real income rises, giving the government a way of increasing tax revenues seemingly without raising tax rates. Unexpected inflation also reduces the real value of the government's debt.” (bold highlights mine)

In the most recent bubble cycle, the boom was financed by quasi government institutions GSEs, as Fannie Mae and Freddie Mac, which massively underwrote mortgage underwriting activities out of artificially depressed interest rates.

According to Dr. Richard Ebeling[12],

``The monetary expansion and the artificially low interest rates generated wide imbalances between investment and housing borrowing on the one hand and low levels of real savings in the economy on the other. It was inevitable that the reality of scarcity would finally catch up with all these mismatches between market supplies and demands. This was, of course, exacerbated by the Federal government’s housing market creations, Fannie Mae and Freddie Mac. They opened their financial spigots through buying up or guaranteeing ever more home mortgages that were issued to a growing number of uncredit worthy borrowers. But the financial institutions that issued and then marketed those dubious mortgages were, themselves, only responding to the perverse incentives that had been created by the Federal Reserve and by Fannie Mae and Freddie Mac.”

Lessons From The Moralists

So what have we learned from the moralists?

One, it is a misguided belief for anyone to oversimplistically think that central banks will wilfully tighten because it isn’t their interest to do so. If there is a possibility that low rates can stay forever, officials will attempt to do so, because this should be the most politically palatable among other options.

From the mainstream gospel of John Maynard Keynes[13],

``Thus, the remedy for the boom is not a higher rate of interest but a lower rate of interest! For that may enable the boom to last. The right remedy for the trade cycle is not to be found in abolishing booms and thus leaving us in a semi-slump; but in abolishing slumps and thus keeping us permanently in a quasi-boom.”

Unfortunately, at the end of the day, the universal laws of economics always prevail.

Second, the tightening of interest rates will come as reactions to the markets which has been experiencing heightened competition for resources via higher prices.

The so called “inflation expectations” are simply nonsense peddled by authorities to hoodwink the public: if the exchange value of one apple is 2 oranges, and if the number of oranges has been doubled then the new exchange ratio of one apple is 4 oranges. Just replace oranges with pesos or dollars you get the same math. The difference is that is the use of money, which functions as a medium of exchange, but does not contain the supernatural powers of Harry Potter.

Athough the moralists imagine that the “expectations” works, in reality they are only defying basic economic laws. Thus, prices will adjust accordingly overtime against their expectations.

Three, rising interest rates doesn’t necessarily or automatically mean a market collapse. Interest rates function as key integral component of business cycles. The peak and troughs of the business cycles largely depends interest rate fluctuations largely manipulated by governments for political reasons.

In a boom phase of the business cycle, markets are thus, sensitive to the rate of increase and the level of increase of the interest rates.

Since rising interest rates reflect on market forces than from government policies, the rate of increases exhibits the degree of competition for resources used on misdirected projects and by the consumers. This should reflect on the moralists’ perverse intention to create a state of permanent but unsustainable boom from unimpeded monetary expansion.

Whereas, the level of rate increases eventually exposes unviable projects to losses, which emerged into existence out of artificially suppressed rates. This will not be uniform though. The tipping point is when interest rate increases would have reached the levels where malinvestments or business errors have massively been clustered.

Fourth it’s not just interest rates. Higher commodity prices from credit or monetary inflation could also impact on the expected returns of unviable projects. Economist James Hamilton argues that an oil shock had also been a major factor in the recent crisis.

We quote Mr. Hamilton[14], ``It is also interesting that the observed dynamics over 2007:Q4-2008:Q4 are similar to those associated with earlier oil shocks and recessions. The biggest drops in GDP come significantly after the oil price shock itself. What we saw in earlier episodes was that the drops in spending caused by the oil price increases resulted in lost incomes and jobs in affected sectors, with those losses then magnifying other stresses on the economy and producing a multiplier dynamic that gathered force over subsequent quarters.” (bold highlights mine)

Today both the interest rates markets and commodities are reflecting the boom phase of what we deem as a new bubble cycle (see figure 2).

Figure 2: stockcharts.com: Broadening Inflation Signs

The commodity markets are not only influenced by expansion of credit and massive government spending but likewise influenced by government restrictions to access more supplies. With oil, 88% of global reserves are held by state and state owned companies[15].

So the missives promoted by moralizers that greed or speculation drives oil or commodity prices has hardly any merit; government owns the printing press that fosters extraordinary demand, while supply is equally constrained by government restrictions basically monopolized by governments. 1+1=2.

While there are other factors involved such as government subsidies, the export land model, strategic petroleum reserves, Hubbert Peak curve for conventional oil, lack of investments for over 2 decades (especially for gasoline refineries in the US), technology and etc.., the cocktail mix of these two forces alone are enough to send towering high energy prices.

Lastly, markets do not react mechanically. They represent human response to ever changing conditions. Today’s market has been more responsive to financial innovation given the more liberal or freer and deeper markets underpinned by rapid technology enhancements and the integration of global markets.

In the chase for the profits, today’s business cycle probably means an attendant credit cycle which would undergird interest rates.

Essentially this means a reflexive self-reinforcing feedback loop between borrowing appetite and state of collateral values-where higher prices raises the collateral value from which encourages more borrowing and vice versa.

Moreover, financial innovation is likely to compel a transition of the credit cycle to what we see as Mr. Hyman Minsky’s model of hedge, speculative and ‘ponzi’ economy.

We quote Mr. Minsky[16], (all bold highlights mine)

“Three financial postures for firms, households, and government units can be differentiated by the relation between the contractual payment commitments due to their liabilities and their primary cash flows. These financial postures are hedge, speculative, and ‘Ponzi.’ The stability of an economy’s financial structure depends upon the mix of financial postures. For any given regime of financial institutions and government interventions the greater the weight of hedge financing in the economy the greater the stability of the economy whereas an increasing weight of speculative and Ponzi financing indicates an increasing susceptibility of the economy to financial instability.”

Bubble policies are likely to encourage a transition from risk averse, to bigger risk taking appetite to outright gambling.

This means that investors at the start of the cycle will engage in hedging (borrow to expand from which the income is used to pay for outstanding interest and principal), will turn to speculators (borrow and use the income to pay only interest rates) and ultimately peak with the transformation to Ponzi phase (borrow to chase rising prices).

And guess what? As in the previous boom, this will be encouraged by the moral hazard provided by big governments.

Back to Mr. Minsky[17] (all bold emphasis mine)

``It should be noted that this stabilizing effect of big government has destabilizing implications in that once borrowers and lenders recognize that the downside instability of profits has decreased there will be an increase in the willingness and ability of business and bankers to debt-finance. If the cash flows to validate debt are virtually guaranteed by the profit implications of big government then debt-financing of positions in capital assets is encouraged. An inflationary consequence follows from the way the downside variability of aggregate profits is constrained by deficits.”

In short, all the recent government backstops would only stimulate a greater and far larger bubble, despite all the “regulatory reforms” being mulled today.

While it isn’t clearly evident where all the money has been flowing to yet or where the next concentration of misdirected investments would be, everything as we have discussed above simply points to a formative bubble.

This means that yes, markets and the global economy will likely be headed for a positive surprise for 2010. And yes, moralizers will probably achieve what they had hoped over the short to medium term. But no, this isn’t a sustainable economic growth, but a continuation or a sequel of the spectacle of serial bubbles.

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[1] See Is Honesty Enough For A Society To Succeed?

[2] Callahan, Gene; The Abstract and the Concrete, ThinkMarkets

[3] Rothbard, Murray N.; Who Was Niccolò Machiavelli? Mises.org

[4] Studwell, Joe; Asian Godfathers: Money and Power in Hong Kong and Southeast Asia, p.51. Grove Press.

[5] Wikipedia.org, Crusades

[6] Wikipedia.org, French Religious Wars

[7] New York Times, Vatican Priest Likens Criticism Over Abuse to Anti-Semitism

[8] Courtois, Stéphane et. al., The Black Book of Communism, Harvard Press Wikipedia.org

[9] Machan, Tibor, Lessons in Freedom: A Bit of Nietzsche Will Help; weblogbahamas.com

[10] Bloomberg, Indonesia Stocks in Bubble, Central Bank Study Shows

[11] More, Max; Denationalisation of Money, Friedrich Hayek's seminal work on Competing Private Currencies, Maxmore.com

[12] Ebeling Richard M. Market Interest Rates Need to Tell the Truth, or Why Federal Reserve Policy Tells Lies, Northwood University

[13] Keynes, John Maynard, The General Theory of Employment, Interest and Money (p.20-21)

[14] Hamilton, James D., Oil prices and the economic recession of 2007-08; voxeu.org

[15] See Peak Oil: Where Art Thou?

[16] Minsky, Hyman; Finance and Profits: The Changing Nature of American Business Cycles, 1980

[17] Minsky, Hyman; "Inflation, Recession and Economic Policy", 1982 (page 43)