Bailouts & The Monatary Policy of Fraud

There are many economists, politicians, and journalists that think they have a miraculous way to make bailouts work. Thus far, our government and Federal Reserve Bank have limited the bailout debate to who should get what money and how much. Yet, all this argument over how to best manipulate our economy is totally irrelevant if we don't recognize the fundamental problems our monetary policy creates in the first place. You can have a house made of gold, but it will surely sink if your foundation rests on quicksand.

To stabilize our markets, Congress should enforce strictly enforce basic principles. With strict adherence to the principle that one should not commit fraud, our government would not allow the Federal Reserve and other banking institutions to lend and print money it doesn't have. For example, for the Federal Reserve stimulated the housing market by droving down the interest rate. When interest rates fall, money becomes relatively cheap. So, people borrow more money and more houses are bought. Now there are all kinds of economic theories that advocate monetary expansion as a means to spur growth, and thus pose a net benefit to society, so they are necessary for the greater good. But, can we really support the greater good using fraudulent practices?

And how does the Federal Reserve lower the interest rate in the first place? Where does the Federal Reserve get the authority to print our money? It can only continue such lending practices with the cooperation of our congress. It is important to also note that the Federal Reserve is a private bank to emphasize the absurdity of its special privileges. Some congressmen have requested an audit of the Federal Reserve year after year, only to be denied each time.

To acquire new money to lend, the Federal Reserve must either 1) borrow, or 2) print the money. Either way, the loser is the taxpayer. In the event the Federal Reserve borrows the money, using the American taxpayer's labor as collateral, the interest on the debt is paid for by raising taxes. So, some people might get a sweet loan on a home, but everybody gets stuck with higher taxes. If the Federal Reserve prints the money, we can expect the same natural consequences because, whenever the money supply is increased, the value of money people already own (such as the money in their savings account) goes down. For example, if you own the only Babe Ruth rookie baseball card that exists in the world, it will probably be worth a lot. Imagine now that our government gave the Federal Reserve the special privilege to print "authentic" Babe Ruth rookie cards, identical to yours; the value of yours would naturally go down. This principle is no different with money. But when the Federal Reserve does it, it results in an indirect tax on everybody, called an inflation tax. Because the dollar is worth less, the cost of the things you buy goes up (just go to the grocery store to verify). Although most economists would have you believe inflation is the rise in prices, inflation is actually the increase in the money supply, that causes higher prices. When prices rise, real income drops, demand for goods drop, and our entire economy suffers.

So whose fault is it when high prices and real interest rates cause people to fail on their loans and our booming economy to bust? The people who got loans they couldn't afford? The lenders? The Federal Reserve? I would say all of them are responsible. But, the supreme responsibility is that of our congress. Had they not allowed the Federal Reserve to lend artificially cheap money, an act of fraud, there would have been no bubble to blow up.

So, who do our representatives make pay the bill? The taxpayer. Even the ones that were responsible and lived within their means. Even the banking institutions that only lent to qualified lenders. So first you pay an inflation tax blow up the housing bubble. Then, you are asked to bailout the financial industry when they pop it! Why? Because the rule of law is not strictly enforced. Our leaders claim that allowing a big bank to fail will hurt you more than losing your right to keep the fruits of your labor and be rewarded for your responsibility. Therefore, the "right to property" is reduced to, the "right to your property so long as banks don't get too big and irresponsible that their demise might cause a disruption in the normal financial markets, even if those financial markets perpetuated the problem."

Yet, aside from HR 2755, introduced to address concerns about the Federal Reserve and the inability of a central bank to stabilize markets and protect the value of our dollar, no answers from congress or our conventional economists deal with the fundamental problems in our monetary policy. The central bank and bailout advocates can try all they want, but when you have a system that is fundamentally built on fraud, central bank or not, it will surely fail.

Where Have Your Bailout Dollars Gone?

There is an interesting article from Bloomberg today on the Fed's refusal to identify the recipients of nearly $2 trillion dollars worth of emergency loans. This is why we need to measure the "need for a bailout" with the potential for corruption and waste that such a centralization of power and money creates (beyond the moral hazard of believing the government has the right to take the fruits of one person's labor to save an institutions and other person's from their own failures). We need to start thinking critically about better solutions, rather than allowing our emotions and fears lead us to place great authority into the hands of a select few that claim they know better how to use our money than we do.
In 2008, the IRS will collect about 1.2 trillion in personal income taxes, less than the total cost of government bailouts this year, and less than the amount Bloomberg claims the Federal Reserve is hiding.
Why wouldn't it have been a better decision to suspend the federal income tax for an entire year instead of bailing out the big boys? It would have been cheaper. Some may call this proposal crazy, I call it logical. What I call crazy is to trust the same people that encouraged the housing bubble to fix the financial crises the bubble-burst created. This would surely make your mortgage a little easier to pay, or a buying a new car more enticing. And, you would know where all your money went (or rather, stayed); in your pocket. Instead, we are left with a stock market still in turmoil, inflation knocking at our door, and a rat race to find out where all our money has gone.
For further reading, here's an excellent site on the history of the federal income tax and what your dollars are actually used for.

Proposition 8 and Voluntary Contracts

Last Tuesday, California's voters passed a constitutional amendment stripping the ability of gay persons to enter into a marriage contract. The final ballots have been tallied, but the heated debate over gay marriage is far from over. There is an important underlying issue related to this proposition, and it concerns the right for two persons to enter into a voluntary contract. This is an argument California courts will have to face with regard to Proposition 8's constitutional implications.
Per Article 4, Section 3 of California's Constitution, the United State Constitution is the supreme law of the land. Looking first to the United States Constitution, consider the effect Proposition 8 will have on gay marriages that have already been recognized by the state. Pursuant to Article 1, Section 10, No State shall...pass any...ex post facto Law, or Law impairing the Obligation of Contracts. And, under California's Constitution in Article 1, Section 9, a bill of attainder, ex post facto law, or law impairing the obligation of contracts may not be passed.
Is there really room for interpretation here? Over 18,000 gay marriages have been officially recognized as legal contracts between two consenting persons. Besides, the state would face strong opposition if it attempted to nullify pre-recognized marriage contracts and open the door for a major class-action lawsuit.
But what about future contracts?
The First Amendment was established to further prevent the passage of laws that would limit the establishment of religion or prohibit the free exercise thereof. Yet, if the government establishes a universal definition of marriage, while some religions accept gay marriage under their definition, it is establishing a law prohibiting the free exercise of religion.
Proponents of Proposition 8 will argue that the government is not banning religious unions, and thus does not restrict the free exercise of religion; it just does not recognize such unions as legal contracts. Therefore, the proponents argue, that the government is not restricting the free exercise of religion. Then, purely in terms of contractual rights, on what basis does the state accept some marriage contracts and refuse those between gay couples? If it is based on the gender of the persons getting married, it is restricting such contracts based on sex. Thus, should we uphold the constitutionality of Proposition 8, our legal system will set a precedent for the state to not recognize voluntary contracts based on the gender of the parties of a contract.
Based on the aforementioned precedent, what would stop an initiative from changing our constitution by restricting a woman from purchasing a car from a man? Or a man from selling a house to another man? As ridiculous as such initiatives sound, Proposition 8 paths the way for the validity of a contract to be determined by the gender of the persons entering the contract. All voters would have to do is pass another initiative.
That brings us to the validity of the initiative process itself. Should a majority vote be sufficient to amend the most precious and important law of the state?
If segregation were left to the vote of the majority, blacks would have had to wait a lot longer to receive equal protection under the law. It was the courts that extended such rights, not the voting majority. Yet, if Proposition 8 is written into our constitution, the initiative process supposes that, given 51% of the people support it, the government can restrict any voluntary contract based on gender, regardless of the court's opinion. What if the South, not content with the court's decisions a few decades ago, simply passed an initiative over-ruling the court's rulings on segregation?
In fact, California repudiated a ban on interracial marriage on the basis of racial discrimination in 1959 as did the United State's Supreme Court in 1967. How would the same state and country claim a ban on same-sex marriage does not constitute the same kind of discrimination, this time on the basis of sexual orientation?
Our founders, as stated in Article 4, Section 4 of the Constitution, warned against exactly the form of majority governance we are now recognizing as a legitimate legislative process, when they guaranteed every state a republican form of government; one that respected the checks and balances of the judicial, executive, and legislative branches over pure democracy. The founders may have had conflicting opinions about gay marriage, but they would agree that something as sacred as a constitution should not be amended by simply passing an initiative.
Supporters of Proposition 8 may really believe they are protecting the sanctity of marriage, but is California willing to sacrifice the sanctity of our US and State Constitution to uphold their will?

There are many economics and self proclaimed geniuses that think they have a miraculous way to make a bailout plan work. Whether its to give the interest in the bad debt to taxpayers, leave is (and our money) in the hands of wall street, or to turn our entire banking system and discretion up to the federal reserve. This is all totally irrelevant and pontificated over in vain if we don't recognize the fundamental problems. You can have a house made of gold, but it will surely sink if your foundation rests on quicksand.

Congress should enforce the rule of law. Property right and fraud are already protected by the rule of law, but not enforced. It was not a lack of regulation that caused deregulation to fail or the financial markets, it was the unwillingness of FERC in the case of CA's deregulation crisis, and congress in the "recent" case of Wall Street's failure to enforce fundamental rules of law. If we don't have a respect for the basic principles, there is no way anybody will have any respect for the regulations we try to enforce. At the end of the day, any law that is not a fundamental law, can be dodged with slick lawyers and tricky tactics. They will be dodged by those with the most power, the most money, the least respect for the rule of law, and the worst of ethics.

For example, is lending something to people that you don't have fraud? I think fundamentally, that is fraud. If I cannot give a loan of X dollars to someone when I dont have X dollars, why can the government? As such, fractional reserve banking is fraud. Printing money is fraud. Yet, no bailout plan, aside from Ron Paul's HR 2577, deals with the fundamental problems in our markets and economy. So the planners can try all they want, but when you have a system that is fundamentally built on fraud, it will surely fail.