60% of the Financial System Now Has a Bailout Guarantee by Jeffrey A. Miron

More than Half of Private Liabilities Are Backed By the Government.

According to many politicians and pundits, new financial regulation adopted since 2008 means that financial crises are now less likely than before. President Barack Obama, for example, has suggested,

Wall Street Reform now allows us to crack down on some of the worst types of recklessness that brought our economy to its knees, from big banks making huge, risky bets using borrowed money, to paying executives in a way that rewarded irresponsible behavior.

Similarly, Paul Krugman writes,

financial reform is working a lot better than anyone listening to the news media would imagine. … Did reform go far enough? No. In particular, while banks are being forced to hold more capital, a key force for stability, they really should be holding much more. But Wall Street and its allies wouldn’t be screaming so loudly, and spending so much money in an effort to gut the law, if it weren’t an important step in the right direction. For all its limitations, financial reform is a success story.

Krugman is right that, other things equal, forcing banks to issue more capital should reduce the risk of of crises.

But other things have not remained equal. According to Liz Marshall, Sabrina Pellerin, and John Walter of the Richmond Federal Reserve Bank, the federal government is now protecting a much higher share of private financial sector liabilities than before the crisis:

If more private liabilities are explicitly or implicitly guaranteed, private parties will at some point take even greater risks than in earlier periods. And experience from 2008 suggests that government will always bailout major financial intermediaries if risky bets turn south.

So, some of the new regulation may have reduced the risk of financial crises; but other government actions have done the opposite. Time will tell which effect dominates.

This post first appeared at

Jeffrey A. MironJeffrey A. Miron

Jeffrey Miron is a Senior Lecturer and Director of Undergraduate Studies in the Department of Economics at Harvard University, as well as a senior fellow at the Cato Institute.

The Bible and Hayek on What We Owe Strangers by Sarah Skwire

It’s so much easier to sympathize with our own problems and with the problems of those we love than with the problems of complete strangers.

Adam Smith observes in The Theory of Moral Sentiments that our ability to sympathize with ourselves is, in fact, so out of all proportion to our ability to sympathize with others that the thought of losing one of our little fingers can keep us up all night in fearful anticipation, while we can sleep easily with the knowledge that hundreds of thousands on the opposite side of the world have just died in an earthquake.

Hayek makes the same point in The Fatal Conceit:

Moreover, the structures of the extended order are made up not only of individuals but also of many, often overlapping, sub-orders within which old instinctual responses, such as solidarity and altruism, continue to retain some importance by assisting voluntary collaboration, even though they are incapable, by themselves, of creating a basis for the more extended order. Part of our present difficulty is that we must constantly adjust our lives, our thoughts and our emotions, in order to live simultaneously within different kinds of orders according to different rules.

It may not be the best part of our humanity, but it is a very human part. We care more about those we see more often, understand more thoroughly, and with whom we share more in common.

And maybe that’s not so bad. We treat family differently, after all. My daughter will get a giant pink fluffy stuffed unicorn from me on her birthday. I don’t believe that I am similarly obligated to provide fuzzy equines for all other eight-year-olds. Different treatment is a way of acknowledging different kinds of bonds between people and different levels of responsibility to them.

All of this is on my mind because the other night, after I gave a talk on liberty and culture, an audience member and I had a discussion about banking, debt, and interest rates during which he carefully explained to me how Jews lend each other money for no interest, but when they lend to Christians, the sky’s the limit. Everyone knows it, because it’s in the Bible.

He was right, sort of. It is in the Bible, sort of.

It’s right there in Deuteronomy 23:

You shall not give interest to your brother [whether it be] interest on money, interest on food, or interest on any [other] item for which interest is [normally] taken. You may [however], give interest to a gentile, but to your brother you shall not give interest, in order that the Lord your God shall bless you in every one of your endeavors on the land to which you are coming to possess.

But textual interpretation is a tricky business. And textual interpretation of a text that has existed for thousands of years and been wrangled with by millions of interpreters — well, it doesn’t get much trickier than that.

But it seems worth noting that the word used here (both in translation and in Hebrew) is literally “brother.” This has been interpreted over the years to mean “fellow Jew.” But the word, as given, is brother.

What I think the passage means to emphasize by using this word — regardless of whether we are talking about literal brothers, or just “brothers” — is the importance and of treating those who are closest to us with particular care and concern. The kind of business relationship that is part of Hayek’s extended order, or that is located in an outer ring of Smith’s concentric circles of sympathy, doesn’t come with extra moral responsibilities to one another. A price is agreed on. A bargain is struck. An exchange is made. Everyone is content. But in an intimate order — with brothers or sisters, husbands or wives, parents or children — we have a responsibility to give more and do more than in the extended order.

And so observant Jews are told that they should not pay or charge interest to brothers — whomever they consider those brothers to be.

Though it has been interpreted uncharitably by many over the years, this passage from Deuteronomy is not a passage about cheating the outsider. This is a passage about taking special care of those who are closest to our hearts. It’s hard to find anything to object to in that.

Sarah SkwireSarah Skwire

Sarah Skwire is the poetry editor of the Freeman and a senior fellow at Liberty Fund, Inc. She is a poet and author of the writing textbook Writing with a Thesis. She is a member of the FEE Faculty Network.

VIDEO: Be Suspicious of the Stories We Tell Ourselves by Scott Sumner

People like to think in terms of stories:

It’s a movie classic. The lovers are out for a walk when a villain dashes out of his house and starts fighting the man. The woman takes refuge in the house; having seen off his rival, the villain re-enters and chases after her. Yet the hero returns, pulling open the door so that the heroine can escape. The villain chases the lovers, until they finally flee, and he smashes his own home apart in fury.

Who are these characters? None of them ever made another movie, and you won’t find them in any directories of famous actors. They are, in order of appearance, a large triangle (villain), a small triangle (hero), and a circle (heroine). The animated film was made in 1944 by the psychologists Fritz Heider and Marianne Simmel of Smith College in Massachusetts, whose paper ‘An Experimental Study of Apparent Behaviour’ is a milestone in understanding the human impulse to construct narratives.

At one level, their movie is just a series of geometric shapes moving around on a white background. It appears to lack any formal elements of story at all. Yet study groups (of undergraduate women) who saw the film in 1944 were remarkably consistent in their judgment of what it was ‘about’. Thirty-five out of 36 decided that the big triangle was a mean, irritable bully, and half identified the small triangle as valiant and spirited.

That’s a striking result: near unanimity on the emotional journey of a bunch of shapes. Then again, how surprising were these findings? Abstract animation existed as early as the 1920s, and experimental animators such as the Hungarian Jules Engel had already shown in sequences such as the Mushroom Dance in Walt Disney’s Fantasia (1940) that very little visual information is needed to create characters and story. So perhaps research was just catching up with what the empiricism of art had already discovered.

I’ve found that stories get in the way of logical thinking in economics. When I try to explain that a tight money policy led to the recession of 2008, I have to contend with the fact that people have already interpreted the events of 2008 through a very different set of stories, ones much more consistent with Hollywood. (Indeed there is a new example in the theaters right now.)

People don’t like my claim that the Fed needed a more expansionary policy because:

  1. It would “bail out” foolish borrowers (or foolish lenders?)
  2. I would simply be “papering over” deeper structural problems (or perhaps the failures of the Obama administration.)
  3. It would be taking the “easy way out”, not making the hard decision to endure a period of austerity.
  4. “There’s a price to be paid” for the reckless excesses of the housing bubble.
  5. It would just be “kicking the can” down the road.

These metaphors do more to obfuscate than enlighten, but they appeal to our sense that society can be understood through stories. Trump and Sanders have cleverly exploited this human weakness, in their current campaigns.

At times it seems like the press is so enamored with stories that they don’t even need any facts. Consider this assertion in a recent WSJ “story”:

After substantially revaluing the yuan over a decade in response to protectionist threats, China now finds the strong dollar has left its currency grossly uncompetitive with the euro, the yen and all the rest.

The alarming recent devaluation of the yuan, while a sensible response for China, is creating strains throughout emerging economies and deep uncertainty through all global supply chains.

When you look at the numbers, this comment literally makes no sense. The Chinese yuan has been very strong in the last few years, and has strongly appreciated against the other emerging market currencies. But it seems to fit a deeply held narrative, which people cling to because it makes a good story. China’s a “big triangle,” trampling all over the “smaller triangles,” like Brazil and Indonesia and Vietnam.

Banking is another example. In the recent crisis, the biggest problems were in the small and mid-sized banks. The FDIC (i.e., we taxpayers) spent tens of billions of dollars paying off the depositors of the smaller banks, who made lots of reckless subprime mortgages. But it makes a better story to blame the biggest banks, so that’s become the standard narrative.

Then there was the orgy of predatory borrowing: people lying about their incomes to get mortgages. But that doesn’t make a good story, so let’s make it “predatory lending.” Sometimes their are competing stories, as when the right claims the police are a “thin blue line” protecting civilization from barbarism, whereas the left sees the police as powerful bullies, picking on the most downtrodden members of society.

Bernie Sanders sees a financial system where Grandma (Jimmy Stewart banks) was replaced by the wolf (Goldman Sachs).

In my view, Alice in Wonderland best captures the counterintuitive nature of monetary economics.

PS: I’m sure I stole part of this from the very first TED talk I ever saw, by Tyler Cowen:

Cross-posted from Econlog.

Scott SumnerScott Sumner

Scott B. Sumner is the director of the Program on Monetary Policy at the Mercatus Center and a professor at Bentley University. He blogs at the Money Illusion and Econlog.

The House That Uncle Sam Built by Peter J. Boettke & Steven Horwitz

The Great Recession (or the Great Hangover) that began in 2008 did not have to happen. Its causes and consequences are not mysterious. Indeed, this particular and very painful episode affirms what the best nonpartisan economists have tried to tell our politicians and policy-makers for decades, namely, that the more they try to inflate and direct the economy, the more damage the rest of us will suffer sooner or later. Hindsight is always 20-20, but in this instance, good old-fashioned common sense would have provided all the foresight needed to avoid the mess we’re in.

In this essay, originally published December 2009, we trace the path of the recession from its origins in the housing market bubble to the policies offered to cure the aftermath.

Download the PDF.

Listen to the audio file (MP3).


The theme of “The House that Uncle Sam Built: The Untold Story of the Great Recession of 2008” is that government policy, not a failure of free markets, caused the economic trauma we have been experiencing. We do not live in a free market. We live in a mixed economy. The mixture varies by industry. Technology is primarily free. Financial Services is primarily government. It is not surprising that the most government regulated and controlled segment of the economy, financial services, experienced the biggest problems. These problems were created by actions by the Federal Reserve combined with government housing policy (especially the government- sponsored enterprises – Freddie Mac and Fannie Mae). Misguided government interference in the market is the real culprit in laying the foundation for the Great Recession.

This paper provides a “common sense” and understandable outline of fundamental causes and cures. The analysis is based on long proven economic laws. Despite the wishes and hopes of politicians, economic laws are just as immutable as the laws of physics. If you jump off a ten story building, hitting the ground will not be pleasant. If the Federal Reserve holds interest rates below the natural market rate by rapidly expanding the money supply (“printing” money) as Alan Greenspan did, individuals and businesses will make bad investment decisions and there will be negative consequences to our long term economic well-being. There are no free lunches.

When a doctor misdiagnoses a disease, his treatment will likely make the patient sicker. If we misdiagnose the causes of the Great Recession, our treatment will reduce our long term standard of living. While the U.S. economic system is highly resilient, and we will likely have some form of economic recovery, almost every significant government policy action taken in response to the Great Recession will reduce the quality of life in the long term. Understanding that failed government policies, not market failure, caused our economic challenges is critical to defining the appropriate cures. Since government created the problem, i.e. caused the disaster, it is irrational to believe that more government is the cure. We owe it to ourselves and to our children and grandchildren to take these issues very seriously.

John Allison, Chairman, BB&T

The House That Uncle Sam Built

The man who parties like there is no tomorrow puts his body through an “up” and a “down” course that looks a lot like the business cycle. At the party, the man freely imbibes. He has a great time before stumbling home at 2:00 a.m., where he crashes on the sofa. A few hours later, he awakens in the grip of the dreaded hang- over. He then has a choice to make: get a short-term lift from another drink or sober up. If he chooses the latter and endures a few hours of discomfort, he can recover. In any event, no one would say the hangover is when the harm is done; the harm was done the night before and the hangover is the evidence.

The Great Recession (or the Great Hangover) that began in 2008 did not have to happen. Its causes and consequences are not mysterious. Indeed, this particular and very painful episode affirms what the best nonpartisan economists have tried to tell our politicians and policy-makers for decades, namely, that the more they try to inflate and direct the economy, the more damage the rest of us will suffer sooner or later. Hindsight is always 20-20, but in this instance, good old-fashioned common sense would have provided all the foresight needed to avoid the mess we’re in.

In this essay, we trace the path of the recession from its origins in the housing market bubble to the policies offered to cure the aftermath.

There is no better way to understand a crisis that began in the housing sector than to begin by thinking about a house.

A house must be built on a firm, sustainable foundation. If it’s slapped together with good intentions but lousy materials and workmanship, it will collapse prematurely. If too much lumber and too many bricks are piled on top of a weak support structure, or if housing material is misallocated throughout the house, then an apparently solid structure can crumble like sand once its weaknesses are exposed. Americans built and bought a lot of houses in the past decade not, it turns out, for sound reasons or with solid financing. Why this occurred must be part of any good explanation of the Great Recession.

But isn’t home ownership a great thing, the very essence of the vaunted “American Dream”? In the wealthiest country in the world, shouldn’t everyone be able to own their own home? What could be wrong with any policy that aims to make housing more affordable? Well, we may wish it were not so, but good intentions cannot insulate us from the consequences of bad policies.

Politicians became so enthralled with home ownership and affordable housing – and the points they could score by claiming to be their champions – that they pushed and shoved the economy down an artificial path that invited an inevitable (and painful) correction. Congress created massive, government-sponsored enterprises and then encouraged them to degrade lending standards. Congress bent tax law to favor real estate over other investments. Through its reckless easy money policies, another creation of Congress, the Federal Reserve, flooded the economy with liquidity and drove interest rates down. Each of these policies encouraged too many of the economy’s resources to be drawn into the housing sector. For a substantial part of this decade, our policy-makers in Washington were laying a very poor foundation for economic growth.

Was Free Enterprise the Villain?

Call it free enterprise, capitalism or laissez faire – blaming supposedly unfettered markets for every economic shock has been the monotonous refrain of conventional wisdom for a hundred years. Among those making such claims are politicians who posture as our rescuers, bureaucrats who are needed to implement the rescue plans and special interests who get rescued. Then there are our fellow academics – the ones who add a veneer of respectability – trumpeting the “stimulus” the rest of us get from being rescued.

Rarely does it occur to these folks that government intervention might be the cause of the problem. Yet, we have the Federal Reserve System’s track record, thousands of pages of financial regulations, and thousands more pages of government housing policy that demonstrate the utter absence of “laissez faire” in areas of the economy central to the current recession.

Understanding recessions requires knowing why lots of people make the same kinds of mistakes at the same time. In the last few years, those mistakes were centered in the housing market, as many people overestimated the value of their houses or imagined that their value would continue to rise. Why did everyone believe that at the same time? Did some mysterious hysteria descend upon us out of nowhere? Did people suddenly become irrational? The truth is this: People were reacting to signals produced in the economy. Those signals were erroneous. But it was the signals and not the people themselves that were irrational.

Imagine we see an enormous rise in the number of traffic accidents in a major city. Cars keep colliding at intersections as drivers all seem to make the same sorts of mistakes at once. Is the most likely explanation that drivers have irrationally stopped paying attention to the road, or would we suspect that something might be wrong with the traffic lights? Even with completely rational drivers, malfunctioning traffic signals will lead to lots of accidents and appear to be massive irrationality.

Market prices are much like traffic signals. Interest rates are a key traffic signal. They reconcile some people’s desire to save – delay consumption until a future date – with others’ desire to invest in ideas, materials or equipment that will make them and their businesses more productive. In a market economy, interest rates change as tastes and conditions change. For instance, if people become more interested in future consumption relative to current consumption, they will increase the amount they save. This, in turn, will lower interest rates, allowing other people to borrow more money to invest in their businesses. Greater investment means more sophisticated production processes, which means more goods will be available in the future. In a normally functioning market economy, the process ensures that savings equal investment, and both are consistent with other conditions and with the public’s underlying preferences.

As was made all too obvious in 2008, ours is not a normally functioning market economy. Government has inserted itself into almost every transaction, manipulating and distorting price signals along the way. Few interventions are as momentous as those associated with monetary policy implemented by the Federal Reserve. Money’s essence is that it is a generally accepted medium of exchange, which means that it is half of every act of buying and selling in the economy. Like blood circulating in the body, it touches everything. When the Fed tinkers with the money supply, it affects not just one or two specific markets, like housing policy does, but every single market in the entire economy. The Fed’s powers give it an enormous scope for creating economic chaos.

When central banks like the Federal Reserve inflate, they provide banks with more money to lend, even though the public has not provided any more savings. Banks respond by lowering interest rates to draw in new borrowers. The borrowers see the lower interest rate and believe that it signals that consumers are more interested in delayed consumption relative to immediate consumption. Borrowers then begin to invest in those longer-term projects, which are now relatively more desirable given the lower interest rate. The problem, however, is that the demand for those longer-term projects is not really there. The public is not more interested in future consumption, even though the interest rate signals suggest otherwise. Like our malfunctioning traffic signals, an inflation-distorted interest rate is going to cause lots of “accidents.” Those accidents are the mistaken investments in longer-term production processes.

“I want to roll the dice a little bit more in this situation toward subsidized housing.” – Barney Frank, 2003

Eventually those producers engaged in the longer processes find the cost of acquiring their raw materials to be too high, particularly as it becomes clear that the public’s willingness to defer consumption until the future is not what the interest rate suggested would be forthcoming. These longer-term processes are then abandoned, resulting in falling asset prices (both capital goods and financial assets, such as the stock prices of the relevant companies) and unemployed labor in sectors associated with the capital goods industries.

So begins the bust phase of a monetary policy-induced cycle; as stock prices fall, asset prices “deflate,” overall economic activity slows and unemployment rises. The bust is the economy going through a refitting and reshuffling of capital and labor as it eliminates mistakes made during the boom. The important points here are that the artificial boom is when the mistakes were made, and it is during the bust that those mistakes are corrected.

From 2001 to about 2006, the Federal Reserve pursued the most expansionary monetary policy since at least the 1970s, pushing interest rates far below their natural rate. In January of 2001 the federal funds rate, the major interest rate that the Fed targets, stood at 6.5%. Just 23 months later, after 12 successive cuts, the rate stood at a mere 1.25% – more than 80% below its previous level. It stayed below 2% for two years then the Fed finally began raising rates in June of 2004. The rate was so low during this period that the real Federal Funds rate – the nominal rate minus the rate of inflation – was negative for two and a half years. This meant that, in effect, banks were being paid to borrow money! Rapidly climbing after mid-2004, the rate was back up to the 5% mark by May of 2006, just about the time that housing prices started their collapse. In order to maintain that low Fed Funds rate for that five year period, the Fed had to increase the money supply significantly. One common measure of the money supply grew by 32.5%. A lot of economically irrational investments were made during this time, but it was not because of “irrational exuberance brought on by a laissez-faire economy,” as some suggested. It is unlikely that lots of very similar bad investments are the resut of mass irrationality, just as large traffic accidents are more likely the result of malfunctioning traffic signals than lots of people forgetting how to drive overnight. They resulted from malfunctioning market price signals due to the Fed’s manipulation of money and credit. Poor monetary policy by an agency of government is hardly “laissez faire”.

What About Housing?

With such an expansionary monetary policy, the housing market was sent contradictory and incorrect signals. On one hand, housing and housing-related industries were given a giant green light to expand. It is as if the Fed supplied them with an abundance of lumber, and encouraged them to build their economic house as big as they pleased.

This would have made sense if the increased supply of lumber (capital) had been supported by the public’s desire to increase future consumption relative to immediate consumption – in other words, if the public had truly wanted to save for the bigger house. But the public did not. Interest rates were not low because the public was in the mood to save; they were low because the Fed had made them so by fiat. Worse, Fed policy gave the would-be suppliers of capital – those who might have been tempted to save – a giant red light. With rates so low, they had no incentive to put their money in the bank for others to borrow.

So the economic house was slapped together with what appeared to be an unlimited supply of lumber. It was built higher and higher, drawing resources from the rest of the economy. But it had no foundation. Because the capital did not reflect underlying consumer preferences, there was no support for such a large house. The weaknesses in the foundation were eventually exposed and the 70-story skyscraper, built on a foundation made for a single-family home, began to teeter. It eventually fell in the autumn of 2008.

But why did the Fed’s credit all flow into housing? It is true that easy credit financed a consumer-borrowing binge, a mergers-and-acquisitions binge and an auto binge. But the bulk of the credit went to housing. Why? The answer lies in government’s efforts to increase the affordability of housing.

Government intervention in the housing market dates back to at least the Great Depression. The more recent government initiatives relevant to the current recession began in the Clinton administration. Since then, the federal government has adopted a variety of policies intended to make housing more affordable for lower and middle income groups and various minorities. Among the government actions, those dealing with government-sponsored enterprises active in mortgage markets were central. Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) are the key players here. Neither Fannie nor Freddie are “free-market” firms. They were chartered by the federal government, and although nominally privately owned until the onset of the bust in 2008, they were granted a number of government privileges in addition to carrying an implicit promise of government support should they ever get into trouble.

Fannie and Freddie did not actually originate most of the bad loans that comprised the housing crisis. Loans were made by banks and mortgage companies that knew they could sell those loans in the secondary mortgage market where Fannie and Freddie would buy and repackage them to sell to other investors. Fannie and Freddie also invented a number of the low down-payment and other creative, high-risk types of loans that came into use during the housing boom. The loan originators were willing to offer these kinds of loans because they knew that Fannie and Freddie stood ready to buy them up. With the implicit promise of government support behind them, the risk was being passed on from the originators to the taxpayers. If homeowners defaulted, the buyers of the mortgages would be harmed, not the originators. The presence of Fannie and Freddie in the mortgage market dramatically distorted the incentives for private actors such as the banks.

The Fed’s low interest rates, combined with Fannie and Freddie’s government-sponsored purchases of mortgages, made it highly and artificially profitable to lend to anyone and everyone. The banks and mortgage companies didn’t need to be any greedier than they already were. When banks saw that Fannie and Freddie were willing to buy virtually any loan made to under-qualified borrowers, they made a lot more of them. Greed is no more to blame for these bad mortgages than gravity is to blame for plane crashes. Gravity is always present, just like greed. Only the Federal Reserve’s easy money policy and Congress’ housing policy can explain why the bubble happened when it did, where it did.

Of further significance is the fact that Fannie and Freddie were under great political pressure to keep housing increasingly affordable (while at the same time promoting instruments that depended on the constantly rising price of housing) and to extend opportunities to historically “under-served” groups. Many of the new mortgages with low or even zero-down payments were designed in response to this pressure. Not only were lots of funds available to lend, and not only was government implicitly subsidizing the purchase of mortgages, but it was also encouraging lenders to find more borrowers who previously were thought unable to afford a mortgage.

Partnerships among Fannie and Freddie, mortgage companies, community action groups and legislators combined to make mortgages available to many people who should never have had them, based on their income and assets. Throw in the effects of the Community Reinvestment Act, which required lenders to serve under-served groups, and zoning and land-use laws that pushed housing into limited space in the suburbs and exurbs (driving up prices in the process) and you have the ingredients of a credit-fueled and regulatory-directed housing boom and bust.

All told, huge amounts of wealth and capital poured into producing houses as a result of these political machinations. The Case-Shiller Index clearly shows unprecedented increases in home prices prior to the bust in 2008. From 1946-1996, there had been no significant growth in the price of residential real estate. In contrast, the decade that followed saw skyrocketing prices.

It’s worth noting that even tax policy has been biased toward fostering investments in housing. Real estate investments are taxed at a much lower rate than other investments. Changes in the 1990s made it possible for families to pocket any capital gains (income from price appreciation) on their primary residences up to $500,000 every two years. That translates into an effective rate of 0% versus the ordinary income tax rates that apply to capital gains on other forms of investment. The differential tax treatment of capital gains made housing a relatively better investment than the alternatives. Although tax cuts are desirable for promoting economic growth, when politicians tinker with the tax code to favor the sorts of investments they think people should make, we should not be surprised if market distortions result.

Former Fed chair Alan Greenspan had made it clear that the Fed would not stand idly by whenever a crisis threatened to cause a major devaluation of financial assets. Instead, it would respond by providing liquidity to stem the fall. Greenspan declared there was little the Fed could do to prevent asset bubbles but that it could always cushion the fall when those bubbles burst. By 1998, the idea that the Fed would always bail out investors after a burst bubble had become known as the “Greenspan Put.” (A “put” is a financial arrangement where a buyer acquires the right to re-sell the asset at a pre-set price.) Having seen the Fed bailout investors this way in a series of events starting as early as the 1987 stock market crash and extending through 9/11, players in the housing market had every reason to expect that if the value of houses and other instruments they were creating should fall, the Fed would bail them out, too. The Greenspan Put became yet another government “green light,” signaling investors to take risks they might not otherwise take.

As housing prices began to rise, and in some areas rise enormously, investors saw opportunities to create new financial instruments based on those rising housing prices. These instruments constituted the next stage of the boom in this boom-bust cycle, and their eventual failure became the major focus of the bust.

Fancy Financial Instruments – Cause or Symptom?

Banks and other players in the financial markets capitalized on the housing boom to create a variety of new instruments. These new instruments would enrich many but eventually lose their value, bringing down several major companies with them. They were all premised on the belief that housing prices would continue to rise, which would enable people who had taken out the new mortgages to continue to be able to pay.

Mortgages with low or even nonexistent down payments appeared. The ownership stake the borrower had in the house was largely the equity that came from the house increasing in value. With little to no equity at the start, the amount borrowed and therefore the monthly payments were fairly high, meaning that should the house fall in value, the owner could end up owing more on the house than it was worth.

“If it ain’t broke, why do you want to fix it? Have the GSEs ever missed their housing goals?” – Maxine Waters, 2003

The large flow of mortgage payments resulting from the inflation-generated housing bubble was then converted into a variety of new investment vehicles. In the simplest terms, financial institutions such as Fannie and Freddie began to buy up these mortgages from the originating banks or mortgage companies, package them together and sell the flow of payments from that package as a bond-like instrument to other investors. At the time of their nationalization in the fall of 2008, Fannie and Freddie owned or controlled half of the entire mortgage market. Investors could buy so-called “mortgage-backed securities” and earn income ultimately derived from the mortgage payments of the homeowners. The sellers of the securities, of course, took a cut for being the intermediary. They also divided up the securities into “tranches” or levels of risk. The lowest risk tranches paid off first, as they were representative of the less risky of the mortgages backing the security. The high risk ones paid off with the leftover funds, as they reflected the riskier mortgages.

Buyers snapped up these instruments for a variety of reasons. First, as housing prices continued to rise, these securities looked like a steady source of ever-increasing income. The risk was perceived to be low, given the boom in the housing market. Of course that boom was an illusion that eventually revealed itself.

Second, most of these mortgage- backed securities had been rated AAA, the highest rating, by the three ratings agencies: Moody’s, Standard and Poor’s, and Fitch. This led investors to believe these securities were very safe. It has also led many to charge that markets were irrational. How could these securities, which were soon to be revealed as terribly problematic, have been rated so highly? The answer is that those three ratings agencies are a government-created cartel not subject to meaningful competition.

In 1975, the Securities and Exchange Commission decided only the ratings of three “Nationally Recognized Statistical Rating Organizations” would satisfy the ratings requirements of a number of government regulations.Their activities since then have been geared toward satisfying the demands of regulators rather than true competition. If they made an error in their ratings, there was no possibility of a new entrant coming in with a more accurate technique. The result was that many instruments were rated AAA that never should have been, not because markets somehow failed due to greed or irrationality, but because government had cut short the learning process of true market competition.

Third, changes in the international regulations covering the capital ratios of commercial banks made mortgage-backed securities look artificially attractive as investment vehicles for many banks. Specifically, the Basel accord of 1988 stipulated that if banks held securities issued by government-sponsored entities, they could hold less capital than if they held other securities, including the very mortgages they might originate. Banks could originate a mortgage and then sell it to Fannie Mae. Fannie would then package it with other mortgages into a mortgage-backed security. If the very same bank bought that security (which relied on income from the mortgage it originated), it would be required to hold only 40 percent of the capital it would have had to hold if it had just kept the original mortgage.

These rules provided a powerful incentive for banks to originate mortgages they knew Fannie or Freddie would buy and securitize. The mortgages would then be available to buy back as part of a fancier instrument. The regulatory structure’s attempt at traffic signals was a flop. Markets themselves would not have produced such persistently bad signals or such a horrendous outcome. Once these securities became popular investment vehicles for banks and other institutions (thanks mostly to the regulatory interventions that created and sustained them) still other instruments were built on top of them. This is where “credit default swaps” and other even more complex innovations come into the story. Credit default swaps were a form of insurance against the mortgage-backed securities failing to pay out. Such arrangements would normally be a perfectly legitimate form of risk reduction for investors but given the house of cards that the underlying securities rested on, they likely accentuated the false “traffic signals” the system was creating.

“I set an ambitious goal. It’s one that I believe we can achieve. It’s a clear goal, that by the end of this decade we’ll increase the number of minority homeowners by at least 5.5 million families. Some may think that’s a stretch. I don’t think it is. I think it is realistic. I know we’re going to have to work together to achieve it. But when we do, our communities will be stronger and so will our economy. Achieving the goal is going to require some good policies out of Washington. And it’s going to require a strong commitment from those of you involved in the housing industry.” – President George W. Bush, 2002

By 2006, the Federal Reserve saw the housing bubble it had been so instrumental in creating and moved to prick it by reversing monetary policy. Money and credit were constricted and interest rates were dramatically raised. It would be only a matter of time before the bubble burst.

Deregulation, a False Culprit

It is patently incorrect to say that “deregulation” produced the current crisis [See Appendix A]. While it is true that new instruments such as credit default swaps were not subject to a great deal of regulation, this was mostly because they were new. Moreover, their very existence was an unintended consequence of all the other regulations and interventions in the housing and financial markets that had taken place in prior decades. The most notable “deregulation” of financial markets that took place in the 10 years prior to the crash of 2008 was the passing during the Clinton administration of the Gramm-Leach-Bliley Act in 1999, which allowed commercial banks, investment banks and securities firms to merge in whatever manner they wished, eliminating regulations dating from the New Deal era that prevented such activity. The effects of this Act on the housing bubble itself were minimal. Yet, its passage turned out to be helpful, not harmful, during the 2008 crisis because failing investment banks were able to merge with commercial banks and avoid bankruptcy.

The housing bubble ultimately had to come to an end, and with it came the collapse of the instruments built on top of it. Inflation-financed booms end when the industries being artificially stimulated by the inflation find it increasingly difficult to buy the inputs they need at prices that are profitable and also find it increasingly difficult to find buyers for their outputs. In late 2006, housing prices topped out and began to fall as glutted markets and higher input prices due to the previous years’ race to build began to take their toll.

Falling housing prices had two major consequences for the economy. First, many homeowners found themselves in trouble with their mortgages. The low- or no-equity mortgages that had enabled so many to buy homes on the premise that prices would keep rising now came back to bite them. The falling value of their homes meant they owed more than the homes were worth. This problem was compounded in some cases by adjustable rate mortgages with low “teaser” rates for the first few years that then jumped back to market rates. Many of these mortgages were on houses that people hoped to “flip” for an investment profit, rather than on primary residences. Borrowers could afford the lower teaser payments because they believed they could recoup those costs on the gain in value. But with the collapse of housing prices underway, these homes could not be sold for a profit and when the rates adjusted, many owners could no longer afford the payments. Foreclosures soared.

Second, with housing prices falling and foreclosures rising, the stream of payments coming into those mortgage-backed securities began to dry up. Investors began to re-evaluate the quality of those securities. As it became clear that many of those securities were built upon mortgages with a rising rate of default and homes with falling values, the market value of those securities began to fall. The investment banks that held large quantities of securities were forced to take significant paper losses. The losses on the securities meant huge losses for those that sold credit default swaps, especially AIG. With major investment banks writing down so many assets and so much uncertainty about the future of these firms and their industry, the flow of credit in these specific markets did indeed dry up. But these markets are only a small share of the whole commercial banking and finance sector. It remains a matter of much debate just how dire the crisis was come September. Even if it was real, however, the proper course of action was to allow those firms to fail and use standard bankruptcy procedures to restructure their balance sheets.

“I think this is a case where Fannie and Freddie are fundamentally sound, that they are not in danger of going under.” – Barney Frank, 2008

The Recession is the Recovery

The onset of the recession and its visible manifestations in rising unemployment and failing firms led many to call for a “recovery plan.” But it was a misguided attempt to “plan” the monetary system and the housing market that got us into trouble initially. Furthermore, recession is the process by which markets recover. When one builds a 70-story skyscraper on a foundation made for a small cottage, the building should come down. There is no use in erecting an elaborate system of struts and supports to keep the unsafe structure aloft. Unfortunately, once the weaknesses in the U.S. economic structure were exposed, that is exactly what the Federal government set about doing.

One of the major problems with the government’s response to the crisis has been the failure to understand that the bust phase is actually the correction of previous errors. When firms fail and workers are laid off, when banks reconsider the standards by which they make loans, when firms start (accurately) recording bad investments as losses, the economy is actually correcting for previous mistakes. It may be tempting to try to keep workers in the boom industries or to maintain investment positions, but the economy needs to shift its focus. Corrections must be permitted to take their course. Otherwise, we set ourselves up for more painful downturns down the road. (Remember, the 2008 crisis came about because the Federal Reserve did not want the economy to go through the painful process of reordering itself following the collapse of the bubble.) Capital and labor must be reallocated, expectations must adjust, and the economic system must accommodate the existing preferences of consumers and the real resource constraints that producers face. These adjustments are not pleasant; they are in fact often extremely painful to the individuals who must make them, but they are also essential to getting the system back on track.

When government takes steps to prevent the adjustment, it only prolongs and retards the correction process. Government policies of easy credit produce the boom. Government policies designed to prevent the bust have the potential to transform a market correction into a full-blown economic crisis.

No one wants to see the family business fail, or neighbors lose their jobs, or charitable groups stretched beyond capacity. But in a market economy, bankruptcy and liquidation are two of the primary mechanisms by which resources are reallocated to correct for previous errors in decision-making. As Lionel Robbins wrote in The Great Depression, “If bankruptcy and liquidation can be avoided by sound financing nobody would be against such measures. All that is contended is that when the extent of mal- investment and over indebtedness has passed a certain limit, measures which postpone liquidation only tend to make matters worse.”

Seeing the recession as a recovery process also implies that what looks like bad news is often necessary medicine. For example, news of slackening home sales, or falling new housing starts, or losses of jobs in the financial sector are reported as bad news. In fact, this is a necessary part of recovery, as these data are evidence of the market correcting the mistakes of the boom. We built too many houses and we had too many resources devoted to financial instruments that resulted from that housing boom. Getting the economy right again requires that resources move away from those industries and into new areas. Politicians often claim they know where resources should be allocated, but the Great Recession of 2008 is only the latest proof they really don’t.

The Bush administration made matters worse by bailing out Bear Sterns in the spring of 2008. This sent a clear signal to financial firms that they might not have to pay the price for their mistakes. Then after that zig, the administration zagged when it let Lehman Brothers fail. There are those who argue that allowing Lehman to fail precipitated the crisis. We would argue that the Lehman failure was a symptom of the real problems that we have already outlined. Having set up the expectations that failing firms would get bailed out, the federal government’s refusal to bail out Lehman confused and surprised investors, leading many to withdraw from the market. Their reaction is not the necessary consequence of letting large firms fail, rather it was the result of confusing and conflicting government policies. The tremendous uncertainty created by the Administration’s arbitrary and unpredictable shifts – most notably Bernanke and Paulson’s September 23, 2008 unconvincing testimony on the details of the Troubled Asset Relief program – was the proximate cause of the investor withdrawals that prompted the massive bailouts that came in the fall, including those of Fannie Mae and Freddie Mac.

The Bush bailout program was problematic in at least two ways. First, the rationale for such aggressive government action, including the Fed’s injection of billions of dollars in new reserves, was that credit markets had frozen up and no lending was taking place. Several observers at the time called this claim into question, pointing out that aggregate new lending numbers, while growing much more slowly than in the months prior, had not dropped to zero.

Markets in which the major investment banks operated had indeed slowed to a crawl, both because many of their housing-related holdings were being revealed as mal-investments and because the inconsistent political reactions were creating much uncertainty. The regular commercial banking sector, however, was by and large continuing to lend at prior levels.

More important is this fact: the various bailout programs prolonged the persistence of the very errors that were in the process of being corrected! Bailing out firms that are suffering major losses because of errant investments simply prolongs the mal-investments and prevents the necessary reallocation of resources.

The Obama administration’s nearly $800 billion stimulus package in February of 2009 was also predicated on false premises about the nature of recession and recovery. In fact, these were the same false premises which informed the much-maligned Bush Administration approach to the crisis. The official justification for the stimulus was that only a “jolt” of government spending could revive the economy.

The fallacy of job creation by government was first exposed by the French economist Bastiat in the 19th century with his story of the broken window. Imagine a young boy throws a rock through a window, breaking it. The townspeople gather and bemoan the loss to the store owner. But eventually one notes that it means more business for the glazier. And another observes that the glazier will then have money to spend on new shoes. And then the shoe seller will have money to spend on a new suit. Soon, the crowd convinces them-selves that the broken window is actually quite a good thing.

The fallacy, of course, is that if the window was never broken, the store owner would still have a functioning window and could spend the money on something else, such as new stock for his store. All the breaking of the window does is force the store owner to spend money he wouldn’t have had to spend if the window had been left intact. There is no net gain in wealth here. If there was, why wouldn’t we recommend urban riots as an economic recovery program?

When government attempts to “create” a job, it is not unlike a vandal who “creates” work for a glazier. There are only three ways for a government to acquire resources: it can tax, it can borrow or it can print money (inflate). No matter what method is used to acquire the resources, the money that government spends on any stimulus must come out of the private sector. If it is through taxes, it is obvious that the private sector has less to spend, leading to losses that at least cancel out any jobs created by government. If it is through borrowing, that lowers the savings available to the private sector (and raises interest rates in the process), reducing the amount the sector can borrow and the jobs it can create. If it is through printing money, it reduces the purchasing power of private sector incomes and savings. When we add to this the general inefficiency of the heavily politicized public sector, it is quite probable that government spending programs will cost more jobs in the private sector than they create.

“This [Government Sponsored Housing] is one of the great success stories of all time…” Chris Dodd, 2004

The Japanese experience during the 1990s is telling. Following the collapse of their own real estate bubble, Japan’s government launched an aggressive effort to prop up the economy. Between 1992 and 1995, Japan passed six separate spending programs totaling 65.5 trillion yen. But they kept increasing the ante. In April of 1998, they passed a 16.7 trillion yen stimulus package. In November of that year, it was an additional 23.9 trillion. Then there was an 18 trillion yen package in 1999 and an 11 trillion yen package in 2000. In all, the Japanese government passed 10 (!) different fiscal “stimulus” packages, totaling more than 100 trillion yen. Despite all of these efforts, the Japanese economy still languishes. Today, Japan’s debt-to-GDP ratio is one of the highest in the industrialized world, with nothing to show for it. This is not a model we should want to imitate.

It is also the same mistake the United States made in the Great Depression, when both the Hoover and Roosevelt Administrations attempted to fight the deepening recession by making extensive use of the federal government and only made matters worse. In addition to the errors made by the Federal Reserve System that exacerbated the downturn that it created with inflationary policies in the 1920s, Hoover himself tried to prevent a necessary fall in wages by convincing major industrialists to not cut wages, as well as proposing significant increases in public works and, eventually, a tax increase. All of these worsened the depression.

Roosevelt’s New Deal continued this set of policy errors. Despite claims during the current recession that the New Deal saved us from economic disaster, recent scholarship has solidly affirmed that the New Deal didn’t save the economy. Policies such as the Agricultural Adjustment Act and the National Industrial Recovery Act only interfered with the market’s attempts to adjust and recover, prolonging the crisis. Later policies scared off private investors as they were uncertain about how much and in what ways government would step in next. The result was that six years into the New Deal, unemployment rates were still above 17% and GDP per capita was still well below its long-run trend.

In more recent years, President Nixon’s attempt to fight the stagflation of the early 1970s with wage and price controls was abandoned quickly when they did nothing to help reduce inflation or unemployment. Most telling for our case was the fact that the Fed’s expansionary policies earlier this decade were intended to “soften the blow” of the bust in 2001. Of course those policies gave us the inflationary boom that produced the crisis that began in 2008. If the current recession lingers or becomes a second Great Depression, it will not be because of problems inherent in markets, but because the political response to a politically generated boom and bust has prevented the error-correction process from doing its job. The belief that large-scale government intervention is the key to getting us out of a recession is a myth disproven by both history and recent events.

The Future That Awaits Our Children

Commentators have had a field day adding up the trillions of dollars that have been committed in the Bush bailout, the Obama stimulus, and the administration’s proposed budget for 2010. The explosion of spending and debt, whatever the final tab, is unprecedented by any measure. It will “crowd out” a significant portion of private investment, reducing growth rates and wages in the future. We are, in effect, reducing the income of our children tomorrow to pay for the bills of today and yesterday. Large government debt is also a temptation for inflation. In order for governments to borrow, someone must be willing to buy their bonds. Should confidence in a government fall enough (China, notably, has expressed some reluctance to continue buying our debt), it is possible that buyers will be hard to come by. That puts pressure on the government’s monetary authorities to “lubricate” the system by creating new money and credit from thin air.

So, even if the economy gets a lift in the near-term from either its own corrective mechanisms or from the government’s reinflation of money and credit, we have not recovered from the hangover. More of what caused the Great Recession of 2008 – easy money, regulatory interventions to direct capital in unsustainable directions, politicians and policy-makers rigging financial markets – is not likely to produce anything but the same outcome; asset price inflation and an eventual “adjustment” we call a recession or depression. Along the way, we will accumulate monumental debts which accentuate the future downturn and saddle us with new burdens.

Unless we can begin to undo the mistakes of the last decade or more, the future that awaits our children will be one that is poorer and less free than it should have been. With politicians mortgaging future generations to the tune of trillions, running and subsidizing auto and insurance companies, spending blindly and printing money hand- over-fist – all while blaming free enterprise for their own errors, we have a great deal to learn.

As Albert Einstein famously said, doing the same thing over and over again and expecting different results is the definition of insanity. The best we can hope for is that we learn the right lessons from this crisis. We cannot afford to repeat the wrong ones.

“The basic point is that the recession of 2001 wasn’t a typical postwar slump…. To fight this recession the Fed needs more than a snapback… Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.” Paul Krugman, 2002

Appendix A: The Myth of Deregulation

Appendix B: Government Interventions During Crisis Create Uncertainty

Appendix C: Suggested Readings

Cole, Harold and Lee E. Ohanian. 2004 New Deal Policies and the Persistence of the Great Depression: A General Equilibrium Analysis, Journal of Political Economy 112: 779-816.

Friedman, Jeffrey. 2009. A Crisis of Politics, Not Economics: Complexity, Ignorance, and Policy Failure, Critical Review 21: 127-183.

Higgs, Robert. 2008. Credit Is Flowing, Sky Is Not Falling, Don’t Panic, The Beacon, available at

Marenzi, Octavio. 2008. Flawed Assumptions about the Credit Crisis: A Critical Examination of US Policymakers, Celent Research, available at

Prescott, Edward and Timothy J. Kehoe (Editors). 2007. Great Depressions of the Twentieth Century, Minneapolis. Federal Reserve Bank of Minneapolis.

Taylor, John. 2009. Getting Off Track: How Government Actions and Interventions Caused, Prolonged, and Worsened the Financial Crisis, Stanford, CA: Hoover Institution Press.

Woods, Thomas. 2009. Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse, Washington, DC: Regnery.


Lawrence W. Reed is president of the Foundation for Economic Education – – and president emeritus of the Mackinac Center for Public Policy.

Steven Horwitz is the Charles A. Dana Professor of Economics at St. Lawrence University in Canton, NY. He has been a visiting scholar at Bowling Green State University and the Mercatus Center at George Mason University.

Peter J. Boettke is the Deputy Director of the James M. Buchanan Center for Political Economy, a Senior Research Fellow at the Mercatus Center, and a professor in the economics department at George Mason University.

John Allison served as the Chief Executive Officer of BB&T Corp. until December 2008. Mr Allison has been the Chairman of BB&T Corp., since July 1989. He serves as a Member of American Bankers Association and The Financial Services Roundtable.

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Peter J. BoettkePeter J. Boettke

Peter Boettke is a Professor of Economics and Philosophy at George Mason University and director of the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center. He is a member of the FEE Faculty Network.

RELATED ARTICLE: Housing Policies That Led to 2008 Collapse Still in Place, Says Freddie Mac Economist – PJ Meda June, 2017

Everyone Is Talking about Bitcoin by Jeffrey A. Tucker

I’m getting a flurry of messages: how do I buy Bitcoin? What’s the best article explaining this stuff? How to answer the critics? (Might try here, here, here, and here.)

Markets can be unpredictable. But the way people talk about markets is all too predictable.

When financial assets go up in price, they become the topic of conversation. When they go way up in price, people feel an itch to buy. When they soar to the moon, people jump in the markets — and ride the price all the way back down.

Then while the assets are out of the news, they disappear from the business pages and only the savviest investors buy. Then they ride the wave up.

This is why smart money wins and dumb money loses.

Bitcoin Bubbles and Busts

It’s been this way for seven years with Bitcoin. When the dollar exchange rate is falling, people get bored or even disgusted. When it is rising, people get interested and excited. The challenge of Bitcoin is to see through the waves of hysteria and despair to take a longer view.

In the end, Bitcoin is not really about the dollar exchange rate. It is about its use as a technology. If Bitcoin were only worth a fraction of a penny, the concept would already be proven. It demonstrates that money can be a digital product, created not by government or central banks but rather through the same kind of ingenuity that has already transformed the world since the advent of the digital age.

When the Bitcoin white paper came out in October 2008, only a few were interested. Five years would pass before discussion of the idea even approached the mainstream. Now we see the world’s largest and most heavily capitalized banks, payment processing companies, and venture capitalists working to incorporate Bitcoin’s distributed ledger into their operations.

In between then and now, we’ve seen wild swings of opinion among the chattering classes. When Bitcoin hit $30 in February 2013, people were screaming that it was a Ponzi-like bubble destined to collapse. I’ve yet to see a single mea culpa post from any of these radical skeptics. It’s interesting how the incessantly wrong slink away, making as little noise as possible.

For the last year, the exchange rate hovered around $250, but because this was down from its high, people lost interest. What is considered low and what is considered high are based not on fundamentals but on the direction of change.

What Is the Right BTC Price?

The recent history of cryptocurrency should have taught this lesson: No one knows the right exchange rate for Bitcoin. That is something to be discovered in the course of market trading. There is no final answer. The progress of technology and the shaping of economic value knows no end.

On its seventh birthday, Bitcoin broke from its hiatus and has spiked to over $350, on its way to $400. And so, of course, it is back in the news. Everyone wants to know the source of the last price run up. There is speculation that it is being driven by demand from China, where bad economic news keeps rolling in. There has also been a new wave of funding for Bitcoin enterprises, plus an awesome cover story in the Economist magazine.

Whatever the reason, this much is increasingly clear: Bitcoin is perhaps the most promising innovation of our lifetimes, one that points to a future of commodified, immutable, and universal information exchange. It could not only revolutionize contracting and titling. It could become a global currency that operates outside the nation state and banking structures as we’ve known them for 500 years. It could break the model of money monopolization that has been in operation for thousands of years.

Technology in Fits and Starts

Those of us in the Bitcoin space, aware of the sheer awesomeness of the technology, can grow impatient, waiting for history to catch up to technical reality. We are daily reminded that technology does not descend on the world on a cloud in its perfected form, ready for use by the consuming public. It arrives in fits and starts, is subjected to trials and improvement, and its applications tested against real world conditions. It passes from hand to hand in succession, with unpredictable winners and losers.

Successful technology does not become socially useful in the laboratory. Market experience combined with entrepreneurial risk are the means by which ideas come to make a difference in the world at large.

Bitcoin was not created in the monetary labs of the Federal Reserve or banks or universities. It emerged from a world of cypherpunks posting on private email lists — people not even using their own names.

In that sense, Bitcoin had every disadvantage: No funding, no status, no official endorsements, no big-name boosters. It has faced an ongoing flogging by bigshots. It’s been regulated and suppressed by governments. It’s been hammered constantly by scammers, laughed at by experts, and denounced by moralists for seven straight years.

And yet, even given all of this, it has persisted solely on its own merits. It is the ultimate “antifragile” technology, growing stronger in the face of every challenge.

What will be the main source of Bitcoin’s breakout into the mainstream? Commentary trends suggest it will be international remittances. It is incredible that moving money across national borders is as difficult and expensive as it is. With Bitcoin, you remove almost all time delays and transaction costs. So it is not surprising that this is a huge potential growth area for Bitcoin.

The Economist takes a different direction. It speculates that Bitcoin technology will be mostly useful as a record-keeping device. It is “a machine for creating trust.”

One idea, for example, is to make cheap, tamper-proof public databases — land registries, say, (Honduras and Greece are interested); or registers of the ownership of luxury goods or works of art. Documents can be notarised by embedding information about them into a public blockchain — and you will no longer need a notary to vouch for them.

Financial-services firms are contemplating using blockchains as a record of who owns what instead of having a series of internal ledgers. A trusted private ledger removes the need for reconciling each transaction with a counterparty, it is fast and it minimises errors.

We Need Bitcoin 

No one knows for sure. What we do know is that we desperately need this as a tool to disintermediate the world, liberating us from the governments that have come to stand between individuals and the realization of their dreams.

In 1974, F.A. Hayek dreamed of a global currency that operated outside governments and central banks. If governments aren’t going to reform money, markets would need to step up and do it themselves. Bitcoin is the most successful experiment in this direction we’ve yet seen.

And that is true whether or not your friends and neighbors are talking about it.

Jeffrey A. Tucker

Jeffrey A. Tucker

Jeffrey Tucker is Director of Digital Development at FEE, CLO of the startup, and editor at Laissez Faire Books. Author of five books, he speaks at FEE summer seminars and other events. His latest book is Bit by Bit: How P2P Is Freeing the World.  Follow on Twitter and Like on Facebook.

Market Corrections Inspire Dangerous Political Panic by Jeffrey A. Tucker

Some kinds of inflation people really hate, like when it affects food and gas. But now, with the whole of the American middle class heavily invested in stocks, there is another kind inflation people love and demand: share prices that increased forever.

Just as with real estate before 2008, people seem addicted to the idea that they should never go anywhere but up.

This is the reason that stock market corrections are so dangerous. The biggest danger is not economic. It is political. Such corrections push politicians and central bankers to undertake ever-more nutty political in do order to fix them.

To make the point, Donald Trump immediately blamed China, which has the temerity to sell Americans excellent products at low prices. Bernie Sanders blamed “free trade,” even though the United States is among the most protectionist in the world.

Nothing in this world is more guaranteed to worsen a correction that a trade war. But so far, that’s what’s been proposed.

Tolerance for Downturns

It was not always so. In the 1982 recession, the Reagan administration argued that it was best to let the market clear and grow calm. Once the recession cleaned up misallocations of resources, the economy would be well prepared for a growth path. Incredibly, the idea was sold to the American people, and it proved wise.

That was the last time in American history we’ve seen anything like a laissez-faire attitude prevail. After the 1990s dot com boom and bust, the Fed intervened in an effort to repeal gravity. After 9/11, the Fed intervened again, using floods of paper money to rebuild national pride. That created a gigantic housing bubble that exploded 7 years later.

By 2008, the idea of allowing markets to clear became intolerable, and so Congress spent hundreds of billions of dollars and the Fed created trillions in phony money, all to forestall what desperately needed to happen.

Now, with dramatic declines in stock markets around the world, we are seeing what happens when governments and central banks attempt to counter market forces.

Markets win. Every time. But somehow it doesn’t matter anymore. There’s no more science, no more rationality, no more concern for the long term, so far as the Fed is concerned. The Fed is maniacally focused on its member banks’ balance sheets. They must live and thrive no matter what. And the Fed is in the perfect position now to use public sentiment to bolster its policies.

The Right and Wrong Question 

In the event of a large crash, the public discussion going forward will be: What can be done to re-boost stock prices? This is the wrong question. The right question should be: What were the conditions that led to the unsustainable boom in the first place? This is the intelligent way to address a global meltdown. Sadly, intelligence is in short supply when people are panicked about losing their retirement funds they believed were secure.

Back when people thought about such things, the great economic Gottfried von Haberler was tapped by the League of Nations to write a book that covered the whole field of business cycle theory as it then existed. Prosperity and Depressioncame out in 1936 and was republished in 1941. It is a beautiful book, rooted in rationality and the desire to know.

The book covers six core theories: purely monetary (now called Chicago), overinvestment (now called Austrian), sudden changes in cost (related to what is now called Real Business Cycle), underconsumption (now called Keynesian), psychological (popular in the financial press), and agricultural theories (very old fashioned).

Each one is described. The author then turns to solutions and their viability, assessing each. The treatise leans toward the view that permitting the recession (or downturn or depression) run its course is a better alternative than any large policy prescription applied with the goal of countering the cycle.

Haberler is careful to say that there is not likely one explanation that applies to all cycles in all times and in all places. There are too many factors at work in the real world to provide such an explanation, and no author has ever attempted to provide one. All we can really do is look for the primary causes and the factors that are mostly likely to induce recurring depressions and recoveries.

He likened the business cycle a rocking chair. It can be still. It can rock slowly. Or an outside force can come along to cause it to rock more violently and at greater speed. Detangling the structural factors from the external factors is a major challenge for any economist. But it must be done lest policy authorities make matters worse rather than better.

The monetary theory posits that the quantity of money is the key factoring in generating booms and busts. The more money that flows into an economy via the credit system, the more production increases alongside consumption. This policy leads to inflation. The pullback of the credit machine induces the recession.

The “overinvestment” theory of the cycle focuses on the misallocation of resources that upsets the careful balance between production and consumer. Within the production structure in normal times, there is a focus on viability in light of consumer decisions. But when more credit is made available, the flow of resources is toward the capital sector, which is characterized by a multiplicity of purposes. The entire production sector mixes various time commitments and purposes. Each of them corresponds with an expectation of consumer behavior.

Haberler calls this an overinvestment theory because the main result is an inflation of capital over consumption. The misallocation is both horizontal and vertical. When the consumer resources are insufficient to realize the plans of the capitalists, the result is a series of bankruptcies and an ensuing recession.

Price Control by Central Banks

A feature of this theory is to distinguish between the real rate of interest and the money rate of interest. When monetary authorities push down rates, they are engaged in a form of price control, inducing a boom in one sector of the production structure. This theory today is most often identified with the Austrian school, but in Haberler’s times, it was probably the dominant theory among serious specialists throughout the world.

In describing the underconsumption theory of the cycle, Haberler can hardly hide his disdain. In this view, all cycles result from too much hoarding and insufficient debt. If consumer were spend to their maximum extent, without regard to issues of viability, producers would feel inspired to produce, and the entire economy could run off a feeling of good will.

Habeler finds this view ridiculous, based in part on the implied policy prescription: endlessly inflate the money supply, keep running up debts, and lower interest rates to zero. The irony is that this is the precisely the prescription of John Maynard Keynes, and his whole theory was rooted in a 200-year old fallacy that economic growth is based on consumption and not production. Little did Haberler know, writing in the early 1930s, that this theory would become the dominant one in the world, and the one most promoted by governments and for obvious reasons.

The psychological theory of the cycle observes the people are overly optimistic in a boom and overly pessimistic in the bust. More than that, the people who push this view regard these states of mind as causative of economic trends. They both begin and end the boom.

Haberler does not deny that such states of mind are important and contributing elements to making the the cycle more exaggerated, but it is foolish to believe that thinking alone can bring about systematic changes in the macroeconomic structure. This school of thought seizes on a grain of truth, and pushes that grain too far to the exclusion of real factory. Interestingly, Haberler identifies Keynes by name in his critique of this view.

Haberler’s treatise is the soul of fairness but the reader is left with no question about where his investigation led him. There are many and varied causes of business cycles, and the best explanations trace the problem to credit interventions and monetary expansions that upset the delicate balance of production and consumption in the international market economy.

Large-scale attempts by government to correct for these cycles can result in making matters worse, because it has no control over the secondary factors that brought about the crisis in the first place. The best possible policy is to eliminate barriers to market clearing — that is to say, let the market work.

The Fed is the Elephant in the Room

And so it should be in our time. For seven years, the Fed, which controls the world reserve currency, has held down interest rates to zero in an effort to forestall a real recession and recreate the boom. The results have been unimpressive. In the midst of the greatest technological revolution in history, economic growth has been pathetic.

There is a reason for this, and it is not only about foolish monetary policy. It is about regulation that inhibits business creation and economic adaptability. It’s about taxation that pillages the rewards of success and pours the bounty into public waste. It is about a huge debt overhang that results from the declaration that all governments are too big to fail.

Whether a correction is needed now or later or never is not for policymakers to decide. The existence of the business cycle is the market’s way of humbling those who claim to have the power and intelligence to outwit its awesome and immutable forces.

Jeffrey A. Tucker
Jeffrey A. Tucker

Jeffrey Tucker is Director of Digital Development at FEE, CLO of the startup, and editor at Laissez Faire Books. Author of five books, he speaks at FEE summer seminars and other events. His latest book is Bit by Bit: How P2P Is Freeing the World.  Follow on Twitter and Like on Facebook.

The Slow-Motion Financial Suicide of the Roman Empire by Lawrence W. Reed & Marc Hyden

More than 2,000 years before America’s bailouts and entitlement programs, the ancient Romans experimented with similar schemes. The Roman government rescued failing institutions, canceled personal debts, and spent huge sums on welfare programs. The result wasn’t pretty.

Roman politicians picked winners and losers, generally favoring the politically well connected — a practice that’s central to the welfare state of modern times, too. As numerous writers have noted, these expensive rob-Peter-to-pay-Paul efforts were major factors in bankrupting Roman society. They inevitably led to even more destructive interventions. Rome wasn’t built in a day, as the old saying goes — and it took a while to tear it down as well. Eventually, when the republic faded into an imperial autocracy, the emperors attempted to control the entire economy.

Debt forgiveness in ancient Rome was a contentious issue that was enacted multiple times. One of the earliest Roman populist reformers, the tribune Licinius Stolo, passed a bill that was essentially a moratorium on debt around 367 BC, a time of economic uncertainty. The legislation enabled debtors to subtract the interest paid from the principal owed if the remainder was paid off within a three-year window. By 352 BC, the financial situation in Rome was still bleak, and the state treasury paid many defaulted private debts owed to the unfortunate lenders. It was assumed that the debtors would eventually repay the state, but if you think they did, then you probably think Greece is a good credit risk today.

In 357 BC, the maximum permissible interest rate on loans was roughly 8 percent. Ten years later, this was considered insufficient, so Roman administrators lowered the cap to 4 percent. By 342, the successive reductions apparently failed to mollify the debtors or satisfactorily ease economic tensions, so interest on loans was abolished altogether. To no one’s surprise, creditors began to refuse to loan money. The law banning interest became completely ignored in time.

By 133 BC, the up-and-coming politician Tiberius Gracchus decided that Licinius’s measures were not enough. Tiberius passed a bill granting free tracts of state-owned farmland to the poor. Additionally, the government funded the erection of their new homes and the purchase of their faming tools. It’s been estimated that 75,000 families received free land because of this legislation. This was a government program that provided complimentary land, housing, and even a small business, all likely charged to the taxpayers or plundered from newly conquered nations. However, as soon as it was permissible, many settlers thanklessly sold their farms and returned to the city. Tiberius didn’t live to see these beneficiaries reject Roman generosity, because a group of senators murdered him in 133 BC, but his younger brother Gaius Gracchus took up his populist mantle and furthered his reforms.

Tiberius, incidentally, also passed Rome’s first subsidized food program, which provided discounted grain to many citizens. Initially, Romans dedicated to the ideal of self-reliance were shocked at the concept of mandated welfare, but before long, tens of thousands were receiving subsidized food, and not just the needy. Any Roman citizen who stood in the grain lines was entitled to assistance. One rich consul named Piso, who opposed the grain dole, was spotted waiting for the discounted food. He stated that if his wealth was going to be redistributed, then he intended on getting his share of grain.

By the third century AD, the food program had been amended multiple times. Discounted grain was replaced with entirely free grain, and at its peak, a third of Rome took advantage of the program. It became a hereditary privilege, passed down from parent to child. Other foodstuffs, including olive oil, pork, and salt, were regularly incorporated into the dole. The program ballooned until it was the second-largest expenditure in the imperial budget, behind the military.It failed to serve as a temporary safety net; like many government programs, it became perpetual assistance for a permanent constituency who felt entitled to its benefits.

In 88 BC, Rome was reeling from the Social War, a debilitating conflict with its former allies in the Italian peninsula. One victorious commander was a man named Sulla, who that year became consul (the top political position in the days of the republic) and later ruled as a dictator. To ease the economic catastrophe,Sulla canceled portions of citizens’ private debt, perhaps up to 10 percent,leaving lenders in a difficult position. He also revived and enforced a maximum interest rate on loans, likely similar to the law of 357 BC. The crisis continually worsened, and to address the situation in 86 BC, a measure was passed that reduced private debts by another 75 percent under the consulships of Cinna and Marius.

Less than two decades after Sulla, Catiline, the infamous populist radical and foe of Cicero, campaigned for the consulship on a platform of total debt forgiveness. Somehow, he was defeated, likely with bankers and Romans who actually repaid their debts opposing his candidacy. His life ended shortly thereafter in a failed coup attempt.

In 60 BC, the rising patrician Julius Caesar was elected consul, and he continued the policies of many of his populist predecessors with a few innovations of his own. Once again, Rome was in the midst of a crisis. In this period, private contractors called tax farmers collected taxes owed to the state. These tax collectors would bid on tax-farming contracts and were permitted to keep any surplus over the contract price as payment. In 59 BC, the tax-farmer industry was on the brink of collapse. Caesar forgave as much as one-third of their debt to the state. The bailout of the tax-farming market must have greatly affected Roman budgets and perhaps even taxpayers, but the catalyst for the relief measure was that Caesar and his crony Crassus had heavily invested in the struggling sector.

In 33 AD, half a century after the collapse of the republic, Emperor Tiberius faced a panic in the banking industry. He responded by providing a massive bailout of interest-free loans to bankers in an attempt to stabilize the market. Over 80 years later, Emperor Hadrian unilaterally forgave 225 million denarii in back taxes for many Romans, fostering resentment among others who had painstakingly paid their tax burdens in full.

Emperor Trajan conquered Dacia (modern Romania) early in the second century AD, flooding state coffers with booty. With this treasure trove, he funded a social program, the alimenta, which competed with private banking institutions by providing low-interest loans to landowners while the interest benefited underprivileged children. Trajan’s successors continued this program until the devaluation of the denarius, the Roman currency, rendered the alimenta defunct.

By 301 AD, while Emperor Diocletian was restructuring the government, the military, and the economy, he issued the famous Edict of Maximum Prices. Rome had become a totalitarian state that blamed many of its economic woes on supposed greedy profiteers. The edict defined the maximum prices and wages for goods and services. Failure to obey was punishable by death. Again, to no one’s surprise, many vendors refused to sell their goods at the set prices, and within a few years, Romans were ignoring the edict.

Enormous entitlement programs also became the norm in old Rome. At its height, the largest state expenditure was an army of 300,000–600,000 legionaries. The soldiers realized their role and necessity in Roman politics, and consequently their demands increased. They required exorbitant retirement packages in the form of free tracts of farmland or large bonuses of gold equal to more than a decade’s worth of their salary. They also expected enormous and periodic bonuses in order to prevent uprisings.

The Roman experience teaches important lessons. As the 20th-century economist Howard Kershner put it, “When a self-governing people confer upon their government the power to take from some and give to others, the process will not stop until the last bone of the last taxpayer is picked bare.” Putting one’s livelihood in the hands of vote-buying politicians compromises not just one’s personal independence, but the financial integrity of society as well. The welfare state, once begun, is difficult to reverse and never ends well.

Rome fell to invaders in 476 AD, but who the real barbarians were is an open question. The Roman people who supported the welfare state and the politicians who administered it so weakened society that the Western Roman Empire fell like a ripe plum that year. Maybe the real barbarians were those Romans who had effectively committed a slow-motion financial suicide.

Lawrence W. Reed

Lawrence W. Reed

Lawrence W. (“Larry”) Reed became president of FEE in 2008 after serving as chairman of its board of trustees in the 1990s and both writing and speaking for FEE since the late 1970s.

Real Hero James U. Blanchard: You Can’t Keep a Good Man Down by Lawrence W. Reed

Great movements are marked by the dedication and accomplishments of steadfast individuals who make the most of every moment, every opportunity, and every available resource. When those great men and women pass from the scene, they leave behind untold numbers of friends and followers who derive comfort from their memory and inspiration from their deeds.

Such a man was James U. Blanchard III, who died on March 20, 1999, at the age of 56.

The causes to which he devoted ceaseless energy and with which his name will always be associated are liberty and sound money. Jim knew that neither is long safe without the other. Few American entrepreneurs in the second half of the 20th century did as much as he did to promote them both. The opening sentence of his family’s formal notice of his passing summed him up well: “James U. Blanchard III was a man who accomplished much against great odds and changed more people’s lives than he ever knew.”

I was privileged to know Jim Blanchard for the last 15 years of his life. For two years, I served as chief economist for his firm. I spoke at many of his conferences. I traveled with him to Brazil, Nicaragua, and Kenya. Though many others knew him better, it didn’t take much acquaintance with him for anyone to marvel at what a man in a wheelchair can get done if he puts his mind to it.

Jim was nearly killed in a tragic automobile accident at the age of 17 and was unable thereafter to walk. But if anything, his handicap only spurred him on.

Not once did I hear Jim bemoan his physical plight. If he talked about it at all, it was to relate how sitting in a wheelchair gave him time to read. In his 20s, he read voraciously. Introduced to the writings of Ayn Rand by a medical student friend, he became an unabashed defender of laissez-faire capitalism. Rand’s influence on Jim is perhaps best exemplified by the name he gave his oldest son: Anthem. Jim also became a devoted reader of the Freeman and of books by FEE’s founder, Leonard Read.

In 1974, Gerald Ford signed a bill that restored the right of Americans to own gold. The real hero of that moment was Jim Blanchard, who had formed the National Committee to Legalize Gold in 1971 and spearheaded a nationwide grassroots campaign. He knew that governments don’t like gold because they can’t print it. He saw gold ownership as a fundamental human right, a hedge against government mismanagement of money, and a first essential step down the long road to monetary integrity.

True to his spirit, some of Jim’s efforts were dramatic and unconventional. He arranged for a biplane to tow a “Legalize Gold” banner over President Nixon’s 1973 inauguration. He also held press conferences around the country at which he would brandish illegal bars of gold and publicly challenge federal officials to throw him in jail. These and many other stories about Jim’s colorful career can be found in his 1990 autobiography, Confessions of a Gold Bug.

Once gold became legal, Jim held his first annual investment conference in New Orleans. Expecting 250 attendees, he was stunned to see 750 show up. More than 40 years later, Blanchard’s New Orleans Investment Conference carries on and has drawn tens of thousands of individuals from all 50 states and dozens of nations. Investment advice comprised most of the 25 programs Jim assembled, but he always made sure that attendees were provided a hefty dose of sound-money and free-market ideas. His speakers included Milton Friedman, F.A. Hayek, Robert Bleiberg, Walter Williams, and many other great economists. Ayn Rand’s last public appearance was at a Blanchard conference. (In October 2015, I’ll be speaking again at the conference myself.)

In the meantime, Jim’s original $50 investment to begin a coin business in the 1970s grew into a giant within the industry. When he sold the business 15 years later, it was a $115-million-a-year precious-metals and rare-coin company. He cofounded the Industry Council for Tangible Assets to combat unscrupulous business practices in the coin and bullion industry, and he helped to reverse several burdensome laws and regulations that afflicted American investors.

Jim’s adventurous instincts and love of liberty combined to put him on the front lines of important struggles around the world. On my return in 1986 from visiting with activists in the anti-communist underground in Poland, I went to Jim with a request. I advised him that for $5,000, pro-freedom forces in Warsaw could translate Milton Friedman’s Free to Choose into Polish and then print and distribute hundreds of copies throughout the country. He wrote that check on the spot, and many others for similar causes behind the Iron Curtain. Not content only to fund these worthy endeavors, he often transported illicit, pro-freedom literature himself when he visited communist countries.

One of Jim’s favorite foreign projects was assisting anti-communist rebel forces inside war-torn Mozambique in the 1980s and early 1990s. He once sent a colleague and me on a clandestine journey inside the country to live for two weeks with the rebels in the bush and help to spread a pro-freedom message. Once the war was over and Mozambique adopted policies friendly to private property and free markets, Jim pitched in to assist in reconstruction.

“I remember my father as the bravest and most adventurous person that I have ever known to this day,” Anthem recently told me.

He never let anyone tell him no. He was fearless in his belief in the goodness of the human spirit. He understood that the path to personal betterment is best shepherded by free enterprise, and [he understood] the importance of balance between natural rights and property rights protected by a responsible, accountable, made-as-limited-as-possible government.

If Jim were alive today, he would beam with pride in his son, who carries three famous names: Anthem Hayek Blanchard is founder and president of Anthem Vault, a Nevada-based company pioneering a gold-backed cryptocurrency called HayekGold after Nobel laureate and Austrian economist F.A. Hayek. (Browse through the news items on the company’s web page and you’ll learn more about the currency that wouldn’t even be legal today had it not been for the work of Anthem’s father.)

Anthem says his father taught him “above all else” that true freedom can only be achieved once the world experiences a Hayekian choice in currency that technologies like bitcoin, HayekGold, and other virtual assets are wonderfully making a rapidly growing reality. I know Pop would be the most excited person in the world about all of these new technology developments enabling Austrian economics to flourish in a modern digital society.

Jim Blanchard overcame personal tragedy to become a powerful figure for liberty and sound money. His indomitable spirit lives on in all those who know that the noble causes to which he devoted his life require both hard work and eternal vigilance.

Video from FreedomFest: Remembering James U. Blanchard III with Lawrence Reed


Jim Blanchard’s 1990 autobiography, Confessions of a Gold Bug

Jim Blanchard’s 1984 interview of Austrian economist F.A. Hayek

Steve Mariotti’s 2014 interview with Anthem Hayek Blanchard

Lawrence W. Reed

Lawrence W. (“Larry”) Reed became president of FEE in 2008 after serving as chairman of its board of trustees in the 1990s and both writing and speaking for FEE since the late 1970s.

EDITORS NOTE: Each week, Mr. Reed will relate the stories of people whose choices and actions make them heroes. See the table of contents for previous installments.

Paul Krugman Is Even Wrong about What Paul Krugman Thought by Steve H. Hanke

Paul Krugman, “Killing the European Project”, NY Times, July 12, 2015:

The European project — a project I have always praised and supported — has just been dealt a terrible, perhaps fatal blow. And whatever you think of Syriza, or Greece, it wasn’t the Greeks who did it.

Paul Krugman has always praised and supported the European project? Really? Here’s Prof. Krugman in his own words on the centerpiece of the European project, the euro:

  • Paul Krugman, “The Euro: Beware Of What You Wish For”, Fortune, December 1998: “But EMU wasn’t designed to make everyone happy. It was designed to keep Germany happy — to provide the kind of stern anti-inflationary discipline that everyone knew Germany had always wanted and would always want in future.So what if the Germans have changed their mind, and realized that they — along with all the other major governments — are more worried about deflation than inflation, that they would very much like the central bankers to print some more money? Sorry, too late: the system is already on autopilot, and no course changes are permitted.”
  • Paul Krugman, “Can Europe Be Saved?”, NY Times, January 12, 2011: “The tragedy of the Euromess is that the creation of the euro was supposed to be the finest moment in a grand and noble undertaking: the generations-long effort to bring peace, democracy and shared prosperity to a once and frequently war-torn continent.But the architects of the euro, caught up in their project’s sweep and romance, chose to ignore the mundane difficulties a shared currency would predictably encounter — to ignore warnings, which were issued right from the beginning, that Europe lacked the institutions needed to make a common currency workable. Instead, they engaged in magical thinking, acting as if the nobility of their mission transcended such concerns.”
  •  Paul Krugman, “Greece Over The Brink”, NY Times, June 29, 2015: “It has been obvious for some time that the creation of the euro was a terrible mistake. Europe never had the preconditions for a successful single currency…”
  • Paul Krugman, “Europe’s Many Economic Disasters”, NY Times, July 3, 2015: “What all of these economies have in common, however, is that by joining the eurozone they put themselves into an economic straitjacket.Finland had a very severe economic crisis at the end of the 1980s — much worse, at the beginning, than what it’s going through now. But it was able to engineer a fairly quick recovery in large part by sharply devaluing its currency, making its exports more competitive. This time, unfortunately, it had no currency to devalue. And the same goes for Europe’s other trouble spots. Does this mean that creating the euro was a mistake? Well, yes.”

When reading Prof. Krugman’s works, it’s prudent to fact check. Prof. Krugman has always been in the Eurosceptic camp. Indeed, the essence of many of his pronouncements can be found in declarations from a wide range of Eurosceptic parties.

This post first appeared at

Steve H. Hanke

Steve H. Hanke is a Professor of Applied Economics and Co-Director of the Institute for Applied Economics, Global Health, and the Study of Business Enterprise at The Johns Hopkins University in Baltimore.

“Green Banks” Will Drown in the Red by Jonathan Bydlak

Why does federal spending matter? There are many reasons, but perhaps the most fundamental is that free markets allocate resources better than governments because markets rely on price instead of politics. Many industries show this observation to be true, but the emerging field of “green banks” offers perhaps one of the clearest recent examples.

A green bank is a “public or quasi-public financing institution that provides low-cost, long-term financing support to clean, low-carbon projects by leveraging public funds…to attract private investment.” Right now, only a handful of green banks are scattered across Connecticut, California, New York, Rhode Island, and Hawaii.

Free marketers rightly doubt whether public funds should be used to finance private startups. But regardless of where one stands in that debate, the states’ struggles serve as a valuable testing ground for future investments.

The State of Connecticut operates under a fairly significant budget deficit. California has been calculating its budgets without taking unfunded pension liabilities into account, and it’s gambling with its ability to service its debt. New York continues to live beyond its means. Rhode Island’s newest budget does little to rehabilitate its deficit spending addiction, and, despite having a balanced budget clause in its state constitution, Hawaii has a pattern of operating at a deficit.

In fact, a state solvency report released by the Mercatus Center has each of these five states ranked in the bottom third of the country, with their solvency described as either “low” or “poor.”

This all raises the question of whether these governments are able to find sound investment opportunities in the first place. Rhode Island couldn’t even identify a bad investment when baseball legend Curt Schilling wanted $75 million to make video games about something other than baseball!

Recently, though, there have been calls to extend the struggling green banking system to the federal level. Mark Muro and Reed Hundt at the Brookings Institute argued in favor of federal action in support of green banks. Somewhat paradoxically, they assert that demand for green banking institutions and the types of companies they finance is so strong that the existing state-based green banks cannot muster enough capital to meet demand.

Wherever there is potential for profit and a sound business plan, lending institutions are likely to be found, willing to relinquish a little capital for a consistent and reasonable rate of return. So where are the private lenders and other investment firms who have taken notice and are competing for the opportunity to provide loans to such highly sought-after companies and products?

Even assuming that there is demand for green banking services, recent experience shows that a federally-subsidized system would likely lead to inefficiency, favor trading, and failure. For instance, the Department of Energy Loan Program is designed to facilitate and aid clean energy startup companies. Its portfolio exceeds $30 billion, but following a series of bad investments like Solyndra, Inc., new loan guarantees have been few and far between. The program has already lost over $700 million.

Even the rosiest measurements do not show particularly exciting returns from this system. The Department of Energy itself estimates that over the lifetime of the loans it’s guaranteed, there exists the potential to see $5 billion in profit. However, those estimates also depend on the peculiar accounting methods the DoE itself employs.

This problem is apparent in other government sectors. For instance, determining how much profit the federal government makes off of student loans depends on who is asked. Some say none, while others say it’s in the billions. Gauging the economic impact or solvency of government programs is notoriously difficult, and different methods can yield what look like very different results. Add to that the consistently uncertain nature of the energy market, and profits are hardly guaranteed.

Examples abound of wasteful federal spending, and the growing green technology and renewable energy industry is no exception. The DoE Loan Program has already faced issues that go well beyond Solyndra: Abound Solar, a Colorado-based solar panel manufacturer, was given a $400 million DoE loan guarantee, only to later file for bankruptcy, potentially costing taxpayers $60 million. The Ivanpah Solar Electric Generating System, a 175,000 unit heliostat array in California, received a $1.6 billion federal loan and, because it failed to produce the amount of power estimated, was forced to later request more than$500 million in federal grants from the Treasury Department. A recent Taxpayers Protection Alliance study showed that risky investments in heavily subsidized solar energy could even lead to a bubble similar to the disastrous 2008 housing bubble.

Those who want to expand the government’s role in green banking likely want to see more clean and renewable energy reach the consumer market, and a lot of people probably applaud that goal — but the real question is whether the proposed means can reliably achieve that end. A wise manager with a solid business plan can find investors who will willingly take a chance. Considering the struggles of several states, trusting the federal government to build an even bigger system would exponentially increase that risk.

In contrast, the market offers opportunity to entrepreneurs in the green technology and renewable energy industries. For instance, GreatPoint Energy, a company specializing in clean coal, successfully went the route that other companies do: Design a product or service, find investors, and compete in the marketplace.

SolarCity, a California-based and publicly traded corporation of over 2,500 employees, entered the industry before many government loan programs were established. Thanks to a sound business model and subsequent horizontal and vertical expansion, it has become a leader in the industry. SolarCity’s success, however, cannot be touted by the Department of Energy’s Loan Program, which declined to invest in the company, leading SolarCity to try — and succeed — in finding private investment.

If GreatPoint or SolarCity had failed, only those who willingly participated in the startup would suffer the consequences. The issue with green banking — and indeed government “investments” more generally — is that taxpayers are not party to the negotiations but are the ones ultimately on the hook for failures.

In absolute terms, these billions of dollars are a lot of money. But in the grand scheme of government spending, the amount of money invested in green banks and renewable energy production is relatively small. If Social Security is the Atlantic Ocean, and wasteful defense appropriations are the Mediterranean, then green energy investments fall somewhere in the range of the Y-40 pool: easily measurable but certainly not insignificant.

Your odds of drowning may be smaller in the pool than the ocean, but that doesn’t make the drowning itself any more pleasant. The federal government is already under water; adding new liabilities on the hope that politicians can guess the future of energy is merely a step towards the deep end, not the ladder out.

Jonathan Bydlak

Jonathan Bydlak is the founder and president of the Institute to Reduce Spending and the Coalition to Reduce Spending.

Paul Krugman Is Clueless about Bitcoin by Max Borders

In this video clip, Paul Krugman demonstrates once again that prizes don’t make you an expert on everything. Indeed, his poor prognostications happen so frequently that one wonders if Krugman is an expert on anything. I don’t say that to be unpleasant. If you’re going on TV and enjoying a lavish lifestyle by pretending to know what you’re talking about, shouldn’t you be held to a higher standard?

Let’s pass over for a moment how woefully wrong Krugman was about the Internet. What about the internet of money?

Krugman first says: “At this point bitcoin is not looking too good.”

It is true that investment often follows the Gartner hype cycle. So bitcoin has indeed fallen from great heights and is probably just now making its ascent out of the “trough of disillusionment.”

But so what? There is nothing inherently wrong with bitcoin. In fact, some very savvy, patient people are building an unbelievable set of technologies within and around the blockchain. And if you believe Gartner, most really interesting tech goes through this cycle.

Let’s look back at the Internet. When the dotcom bubble and subsequent burst looked like this:

Do we conclude that because in 2002 the Internet wasn’t “looking so good” that TCP/IP was not viable? That would have been a very short-sighted thing to say, particularly about a system that is a robust “dumb network“ like the internet.

Bitcoin is also a dumb network. But don’t let the “dumb” part fool you, says bitcoin expert Andreas Andronopoulos. “So the dumb network becomes a platform for independent innovation, without permission, at the edge. The result is an incredible range of innovations, carried out at an even more incredible pace. People interested in even the tiniest of niche applications can create them on the edge.”

Then Krugman goes on to ask, “Why does a piece of paper with a dead president on it have value?” Answering his own question he says “Because other people think it has value.”

And this is not untrue. But the problem with this line of thinking is — subjective value notwithstanding — the value of money is also contingent. You might say the value of fiat money is too contingent — especially upon political whims, upon the limited knowledge of the folks at the Federal Reserve, and upon the fact that its unit of account is no longer anything scarce, such as gold.

By contrast, bitcoin has standard of scarcity programmed into it. So, bitcoin is in limited supply, thanks to a sophisticated algorithm.

In a fully decentralized monetary system, there is no central authority that regulates the monetary base. Instead, currency is created by the nodes of a peer-to-peer network. The bitcoin generation algorithm defines, in advance, how currency can be created and at what rate. Any currency that is generated by a malicious user that does not follow the rules will be rejected by the network and thus is worthless. (To learn more about this algorithm, visit “Currency with a Finite Supply.”)

Perhaps you don’t trust this algorithm. Certainly Paul Krugman does not. That’s okay, because digital currencies compete, so you can find one you do trust. One crypto currency is backed by gold and funnily enough, it’s called “the Hayek” after the Nobel laureate who wrote about competing private currencies.

Now, what shall we make of the magic of the dollar? Krugman says it is “the fact that you can use it to pay taxes.” That’s sort of like saying that the Internet works because of eFile. Let’s just assume Krugman was kidding.

But Krugman thinks, without irony, that bitcoin “levitates.” That is to say, he’s okay with the idea that the dollar has value because other people value it, but he’s not okay with the idea that bitcoin has value because other people value it, which is a rather curious thing to say in the same two-minute stretch. He goes on to argue that bitcoin is built on libertarian ideology, and that it doesn’t do anything that digitizing the dollar hasn’t done.

And that’s when we realize that Krugman doesn’t have any earthly clue about bitcoin.

But Freeman columnist Andreas Antonopoulos does:

Open-source currencies have another layer that multiplies these underlying effects: the currency itself. Not only is the investment in infrastructure and innovation shared by all, but the shared benefit may also manifest in increased value for the common currency.

Currency is the quintessential shared good, because its value correlates strongly to the economic activity that it enables. In simple terms, a currency is valuable because many people use it, and the more who use it, the more valuable it becomes.

Unlike national currencies, which are generally restricted to use within a country’s borders, digital currencies like bitcoin are global and can therefore be readily adopted and used by almost any user who is part of the networked global society.

What Krugman also fails to appreciate is that bitcoin and the bitcoin network is disintermediated. That’s a fancy way of saying it’s direct and peer-to-peer. This elimination of the mediating institutions — banks, governments, and credit card companies — means bitcoin transactions are far, far cheaper. But that also means these institutions could be far less powerful over time. And that’s precisely why it’s being adopted most quickly by the world’s poorest people and countries with hyperinflation.

Hey, look, I understand. In many ways, Krugman is a twentieth-century mind. Keynesian. Unhealthy obsession with aggregates and dirigisme. He believes in big central solutions to problems that robust, decentralized systems are far better equipped to tackle. And he’s not terribly plugged into tech innovation. In fact, here’s that well-played Internet quote in case you forgot:

The growth of the Internet will slow drastically, as the flaw in “Metcalfe’s law” — which states that the number of potential connections in a network is proportional to the square of the number of participants — becomes apparent: most people have nothing to say to each other!

By 2005 or so, it will become clear that the Internet’s impact on the economy has been no greater than the fax machine’s.

To grok the power decentralization, you have to have a twenty-first century mind.

Max Borders

Max Borders is the editor of the Freeman and director of content for FEE. He is also co-founder of the event experience Voice & Exit and author of Superwealth: Why we should stop worrying about the gap between rich and poor.

Europe Needs Regime Change in Greece: They Won’t Get It by Stephen Davies

It seems the saga of negotiations between the Greek Government and its creditors has arrived at a denouement but almost certainly not a final conclusion, and we may expect this show to return to the stage at some point, probably in the near future. The reason for this is the real nature of the ultimate problem facing both parties, something of which the creditors are still unaware.

The negotiations over the last few months have been marked by a remarkable degree of acrimony. Most of the other eurozone governments have become increasingly (and publicly) exasperated with the Greeks, and the expressions of hostility towards the Greek government from members of national parliaments have grown ever more outspoken.

Some of the reasons for this are well known — above all, the lack of a true European demos: there simply is not the kind of solidarity or shared interest in Europe that one finds in, for example, the United States.

However, there is another reason for the acrimony that has not received much attention. The creditors misunderstand what it is they are asking the Greek government and society to do. This lack of understanding is why any deal made now is likely to prove a disappointment.

The impression given by media reports is that this is all about debt, specifically the debts run up by the Greek state before 2009. Certainly there is a problem, but it is one that is soluble and does not require the kind of fraught negotiations we have seen.

The difficulty is that the fiscal state of Greece before the first bailout in 2010, and the underlying state of the Greek economy, are symptoms of a much more serious underlying problem. This is one not of debt but of competitiveness.

Quite simply the Greek economy is not productive enough to support the levels of income and public spending that it now has, without significant capital inflows from outside Greece. Before 2008 these came in the form of private loans, since then by government bailouts (even if much of this has been recycled back to private creditors).

Greek firms and labour are simply not competitive with their counterparts elsewhere in Europe, above all in Germany. Being in the euro means that they cannot adopt the traditional way of regaining at least some competitiveness by devaluing their currency. Instead, they have to deflate internally, and the attempt to do this has devastated economic life in Greece.

This is all well known. It is the reason why the creditors are demanding that, in return for a third bailout, the Greek government introduce a series of reforms to public spending, the tax system, and the machinery of the Greek state, particularly it’s tax collecting apparatus. Successive Greek government have either refused to do this or promised to do it and then failed. This is why the rest of the eurozone is becoming ever more exasperated. It here however that the misunderstanding comes in to play.

What the creditors think they are asking for is a major shift in public policy. They recognise that the shift they are asking for is radical, and many also realise that what would be involved would be a shift in the general ideological basis of Greek politics, towards a more market liberal direction. However, they are actually, without realising it, asking for something much more fundamental and drastic.

One question that should be asked is why Greece got into a position that was so much worse than that of other “peripheral” economies. Also, why has the performance of the Greek economy been so much worse than that of other countries that have had bailouts and austerity, such as Spain, Portugal, and Ireland? The answer lies in the fundamental nature of the Greek state and the political economy of Greece.

Greek political culture is dominated by practices and institutions that certainly exist elsewhere in Europe but are not as dominant. The state has a narrow tax base, with powerful interests such as the Orthodox Church effectively exempt. The revenue collection apparatus is completely ineffective so that tax evasion is endemic at every level of income.

This means that simply raising or extending VAT for instance is not enough because so many transactions are off the books. At the same time, the Greek state provides generous pensions and other benefits, which it cannot fund.

The political system appears to be a modern democracy but is in fact a much older model. The key institution is clientelism, in which political actors give out rewards to their clients in the shape of handouts and sinecures in the very large public sector. This is done much more directly than with the kind of interest group politics that we find in most democratic countries, and it is central to the whole way that politics works.

The extent of patronage means that the Greek government (whoever they are) does not have a modern, Weberian, bureaucracy to call on. Instead, most of the people in the public service owe their positions to networks of patronage and these command their loyalty.

The economy is highly regulated in ways that entrench settled interests and inhibit innovation. In particular, a very wide range of occupations are subject to rules that make it very difficult for new entrants into those sectors. Because of the inefficiency and the existence of a plethora of rules that are irksome but ultimately unenforceable, corruption is endemic and widespread throughout Greek society.

This system cannot maintain anything like the standard of living to which most Greeks aspire and as such it means that, via membership of the euro, we have seen the development of an economy that depends upon inward transfers — to a much greater degree than is the case in countries such as Spain and Ireland.

Given all this, it becomes clear that what the creditors are asking for is much more than a shift in policy, no matter how sharp and dramatic. Policy shifts of that kind are part of the normal or regular political process that take place infrequently, but still regularly, in most polities. The shift brought about by Margaret Thatcher’s election in 1979 is an example.

What is needed in Greece, and what the creditors are asking for without realising it, is something more fundamental, a change in the very nature of the political system and in the entire nature of politics and government, rather than a change of policy within a system. This is a regime change in the original and correct use of that term.

The point of course is that changes of this kind are extremely difficult and only happen extremely rarely. Sometimes it requires a revolution, as in France; on other occasions, it takes place in the context of a fundamental crisis such as defeat in a major war. Very rarely it can happen when there is a near consensus in a society over what to do, as in Japan in the 1870s.

The current Greek government is almost certainly aware of this, but, apart from ideological objections to part of the list of reforms, they are quite simply unable, rather than unwilling, to do what is asked because a change in the political order is simply very, very hard.

So the creditors are likely to be disappointed and will then become even more enraged. Moreover, being in the euro makes any attempt at systemic change in Greece even more difficult than it would be already, because if removes a range of policy options that could alleviate some of the transition costs.

As most economists of all persuasions now think, the best option is a managed Greek exit from the euro. If this does not happen (as seems likely) then this farce is a production that will run for some time.

Stephen Davies

Stephen Davies is a program officer at the Institute for Humane Studies and the education director at the Institute for Economics Affairs in London.

Is Michelle Obama a Brilliant Experimental Economist? by B.K. Marcus

A consensus is emerging among advocates of personal freedom and economic literacy that the Healthy, Hunger-Free Kids Act, passed in 2010 with the support of Michelle Obama, is a typical failure of the nanny state.

Reason’s Robby Soave writes, “Like so many other clumsy government attempts to make people healthier by forbidding the consumption of things they like, the initiative is a costly failure.”

But I’d rather imagine the first lady is conducting a sophisticated empirical test of economic theory. All she needs are a few more interventions to correct the “unintended consequences” of the 2010 law, and we’ll be swimming in data.

As Ludwig von Mises explained in “Middle-of-the-Road Policy Leads to Socialism,” each round of intervention into voluntary exchange leads to consequences the interventionists find undesirable. Over and over, the officials are confronted with a choice: undo the initial intervention or initiate the next round of laws and regulations in an attempt to undo the effects of the previous round. Rinse, lather, repeat.

Testifying before the House Subcommittee on Early Childhood, Elementary, and Secondary Education, school administrator John S. Payne from Hartford City, Indiana, told Congress about some of the supposedly unintended consequences in evidence at his area’s public schools.

“Perhaps the most colorful example in my district is that students have been caught bringing — and even selling — salt, pepper, and sugar in school to add taste to perceived bland and tasteless cafeteria food.”

“This ‘contraband’ economy,” says Payne, “is just one example of many that reinforce the call for flexibility” on the part of local government officials.

While laissez-faire liberals may call for the scrapping of government-managed school lunches altogether, and federalists might join Payne in advocating the efficacy of decentralized, local authority over dietary central planning from Washington, DC, those who care more about economic science than nutrition or freedom should look forward to the next several rounds of loophole-closing, ratcheting coercion, and other adjustments needed to isolate students from their remaining lunchtime alternatives.

Currently, according to Payne, some of the parents in his district are signing their children out in the middle of the school day and taking them out for a quick fast-food meal. Those without the option of escape simply choose to eat less during the day. “Whole-grain items and most of the broccoli end up in the trash,” Payne told the subcommittee.

While exit and abstention are of some interest to economic theorists, the real intellectual treat is in seeing what happens when an isolated and otherwise powerless community is reduced to black markets and barter.

In “The Economic Organisation of a POW Camp” in the November 1945 issue of Economica, former prisoner of war R.A. Radford described the economic laboratory of German prison camps:

POW camp provides a living example of a simple economy which might be used as an alternative to the Robinson Crusoe economy beloved by the text-books, and its simplicity renders the demonstration of certain economic hypotheses both amusing and instructive.

In Radford’s camp, everyone received the same rations from both the prison and the Red Cross. Some prisoners also received private parcels, but these were less reliable. At first, barter exchange among the prisoners made them all subjectively better off: the lactose-intolerant smoker will feel richer from trading his tinned milk for the nonsmoker’s cigarettes.

While those who weren’t hooked on tobacco were at first happy to trade their extra smokes for more appealing products, over time, “cigarettes rose from the status of a normal commodity to that of currency.”

This means that all goods could be exchanged directly for cigarettes. There was no longer any need to find another prisoner who both (1) had a surplus of exactly what you needed and (2) wanted just what you had in excess. Everything took on a “price” in cigarettes, eventually listed on “an Exchange and Mart notice board in every bungalow, where under the headings ‘name,’ ‘room number,’ ‘wanted’ and ‘offered’ sales and wants were advertised.”

The public and semi-permanent records of transactions led to cigarette prices being well known and thus tending to equality throughout the camp, although there were always opportunities for an astute trader to make a profit from arbitrage.

Cigarettes were the best money in the context of a POW camp. A good commodity money is valuable, countable, and fungible — divisible in such a way that it retains proportional value. A half an ounce of gold, for example, is worth about half the value of a full ounce of gold. Cutting a diamond in half is not only difficult; it could render two smaller stones whose combined value is far lower than the one you began with.

Cigarettes are somewhere in between gold and diamonds: a single cigarette isn’t as easily divisible, but a half carton probably trades for half the value of a full carton. And the cigarette itself plays the same role with its tobacco contents as coinage does with precious metals: it establishes a countable unit that makes trade more convenient and prices easier to establish and track. And in a POW camp, where the supply is limited and relatively predictable, price inflation isn’t a problem.

Today’s Hartford City schools have not yet developed the economic sophistication of Radford’s German stalag. Students smuggle in packets of salt, pepper, and sugar, and trade them directly for consumption. But if a few more rounds of intervention can reduce students’ lunch options, we can expect to see a new medium of exchange emerge. I’m betting on salt, which already has a long history as commodity money throughout the ancient world.

But if the nanny-state nutritionists are forced to back off and allow either more flexibility or more freedom, we will lose an excellent opportunity to study the evolution of basic monetary economics in a controlled setting.

Won’t someone please think of the science?

B.K. Marcus

B.K. Marcus is managing editor of the Freeman.

Money Will Be Digital — But Will It Be Free? by Andreas M. Antonopoulos

Bitcoin offers a glimpse into the future of money — a purely digital form of money that is individual, private, global, and free (free as in speech, not as in beer). Bitcoin is often compared with the existing banking system, juxtaposing its futuristic capabilities with the slow, antiquated, and cumbersome world of wire transfers, checks, “banking hours,” and restrictions.

But the future will not be a choice between “old money” and cryptocurrency. Instead, it will be a choice between two competing visions of digital money: one based on freedom and choice, the other based on control and surveillance, a dystopian totalitarian system of control from which no one can escape.

We are now at the crossroads, and we must choose the future of currency wisely.

Cash, checks, and other forms of tangible money have been gradually disappearing for decades. We are now rapidly moving toward a cashless society where all money is purely digital. In the past, cash payments were expected and preferred; credit transactions were suspect. But as we turned into a debt-based society, cash became the oddity. The inscription “for all debts public and private” no longer rings as true. Today, if you try to buy a car with cash, you’ll be treated with extreme suspicion. Large amounts of cash are now associated with criminal activity and the definition of “large” is getting smaller each day. This is how we arrive at a cashless society: by making cash itself suspect, then criminal.

The transition from cash to digital money is not just a change in form. It is a transition from transactions that are private, person-to-person, and decentralized to transactions that are monitored, intermediated, and under centralized control. In the last two decades, digital payments have become a powerful surveillance tool. Citizens who are concerned about their government monitoring their telephone calls are simultaneously oblivious to the fact that every transaction they make with a plastic card or an online payment network can be scrutinized without suspicion of a crime, without warrants or any form of judicial oversight. Most national governments, under the guise of counterterrorism laws, have empowered their law enforcement and intelligence agencies with unfettered access to financial data. It shouldn’t surprise you to learn that these powers are used far more broadly every day, increasingly removed from the originally stated intent.

What a strange world we now live in. Total surveillance of every citizen’s transactions, without any basis or suspicion, is not just normal but presented as a virtue, a form of patriotism. Using cash or wishing to retain your financial privacy is inherently suspect, a radical position, soon to be a crime.

A future where all payments are trackable is terrifying, but a world with centralized control over transactions would be even worse. Digital currency with centralized control means the eradication of property as a right. Instead, your money exists only as a database entry where the balance is controlled entirely by a third party.

By managing the payment networks, a government has effective control over all participants, including banks, corporations, and individuals. Already, banks are extorted into adopting global financial blacklists for fear of being disconnected from networks like the Society for Worldwide Interbank Financial Telecommunication (SWIFT) and Automated Clearing House (ACH). This web of control is expanding and is used more and more frequently as a weapon of geopolitics.

The future of digital central currencies will make this control entirely individualized and easy to target. Attended the “wrong” protest? Your bank balance is now zero. Bought a suspicious book? Expect a visit from the police. Annoyed someone in power? They can trawl through your transactions until they find something juicy enough to leak.

Your movements can be tracked, your friends identified, your political affiliations analyzed and cross-correlated to your reading habits. No part of your life is private when every form of money is digital and every transaction can be tracked, blocked, seized, and deleted. Your life savings are yours only as long as you don’t offend someone in power. When money is centrally controlled, ownership of anything is a privilege the government can revoke. Property is not an inalienable right, but an advantage afforded to the those who acquiesce to the system. Combining surveillance of communications with complete control over money will result in tyranny the likes of which the world has never known.

Totalitarian surveillance of money is toxic to democratic institutions, and the power of surveillance erodes the social contract and corrupts those in power. There cannot be self-determination, freedom of expression, freedom of association, or freedom of conscience in a society where every penny you spend is monitored and controlled.

Even if you believe that your government is benevolent and will only use these extreme powers against “terrorists,” you will always live one election away from losing your freedoms. Even the supposedly benevolent governments in liberal democracies are already using their power over money to harass journalists and political opponents, while allowing their friendly bankers to finance tyrants, warlords, and militias across the world.

Bitcoin offers a fundamentally different future for currency. Bitcoin is digital cash; its transactions are person-to-person, private, and decentralized. It combines the best features of cash with the convenience, speed, and flexibility of a digital medium.

Bitcoin enables an alternative future of personal freedom and privacy that revokes the surveillance-state developments of the last few decades and reintroduces financial emancipation through the power of mathematics and cryptography. Through its decentralized global network, Bitcoin provides no central point to control, no position of power to enable censorship, no ability to seize or freeze funds through a third party without due process, no control over funds without access to keys.

Lacking a center of control, bitcoin resists centralization. Lacking concentration of power, it resists totalitarian domination. Lacking identifiers, bitcoin promotes privacy and makes total surveillance impossible. Disregarding political borders as network-irrelevant, it eschews nationalism and geopolitical games. Dispersing power, it empowers individuals.

Bitcoin is a protocol of free commerce, just as the Internet’s transmission control protocol/Internet protocol, or TCP/IP, is a protocol of free speech. Bitcoin’s design can be replicated to create myriad forms of decentralized money, all superior to the dystopian future we are otherwise headed for.

We can live in a world where money operates like any other medium on the Internet, free from control or interference. In a decentralized digital future, money will be controlled by individuals, banking will be an “app,” and governments will be as powerless to stop the flow of money as today they are powerless to stop the flow of truth.

In this future, money will be a tool of freedom from tyranny, an escape hatch from corrupt banks, a haven from hyperinflation. Four to six billion people without access to international financial services will be able to leapfrog the banking system and connect to the world economy directly. Individuals will not have to choose between directly controlling their own money and participating in a global financial network. They will enjoy global peer-to-peer finance, where trusted third parties and endless lines of bankers and intermediaries are things of the past.

While the future of currency is undoubtedly digital, it can take two radically different forms. We can live in a financial panopticon, a straitjacket of surveillance and tyranny. Or we can live in an open society where our privacy is protected by cryptography, not subject to the whim of every petty bureaucrat — where our digital money is global, borderless, anonymous, and controlled by the individual. The choice between financial freedom and financial tyranny is a choice between fundamental freedom and tyranny. Choose financial freedom: choose freedom.

Andreas M. Antonopoulos

Andreas M. Antonopoulos is a technologist and serial entrepreneur who advises companies on the use of technology and decentralized digital currencies such as bitcoin.

Greeks Prepare to Be Pillaged by Jeffrey A. Tucker

In the world of banking, a “holiday” means you can’t get your money. It’s been a few years since we’ve seen that happen in any developed world economy, but that is exactly what the Greek government is doing, starting now, to stop a massive bank run.

Greece owes the International Monetary Fund a payment of $1.5 billion, due tomorrow, from the last time the government was bailed out. But, of course, governments can’t make wealth, and the money didn’t just magically materialize. They have to beg, borrow, and steal to get it, and Greece has finally found those limits.

Athens had hoped that it could once against tap the European Commission. But drained and fed up, other governments refused to extend yet another loan to Greece unless they agreed to reform their bloated and corrupt welfare state.

Unfortunately for Greeks, the ruling coalition in Greece swept into power in January on the platform of stopping “austerity” and rolling back budget cuts. They balked at the EU’s (and especially Germany’s) conditions for the next round of bailout money.

As a result, Athens has really and truly run out of money, and they will default on their debts starting tomorrow — and the European Central Bank has said it will cut off emergency credit to Greek banks if the government fails to pay its debts.

The news that no deal would be reached sent bank depositors into a panic, and thousands have been lined up at ATMs all over the country since Friday.

Prime Minister Alexis Tsipras announced that he was closing all banks for at least a week as a way to stem the tide. Many ATMs are empty; the rest, by government order, will only dispense €60 per person per day. The government is now imposing capital controls to stop cash from leaving the country.

One thing needs to be said about this frantic authoritarian approach: It never works. Bank closings add to the atmosphere of panic. They are often followed by an announcement that the government is going to devalue or outright steal people’s money. Whatever trust remains in the system is drained away along with the value of the currency.

But there’s another factor in play, for the first time. People are looking at Bitcoin as a way to store and move money.

There is now a Bitcoin ATM in Athens that is reportedly doing a brisk business. Redditors are sharing tips. And, of course, the exchange rate of Bitcoin is on the move again.

This past week, I was out of touch of the news entirely because I was at the New Hampshire liberty retreat, Porcfest. There you can buy almost anything with Bitcoin, so I was checking the price often. I noticed the upward price pressure, and I had an intuition that something serious was happening.

Sure enough, this morning I was awakened by a call from Russia Today. They wanted me on a two-hour segment today to talk about the meltdown in Greece. I turned them down because I haven’t followed it closely enough (though that doesn’t usually stop most commentators!).

But when I looked into it, I suddenly understood: Sure enough, Bitcoin is on the move for a reason.

Many price watchers are predicting another spike in the exchange rate if Greece actually defaults and leaves the euro. Maybe, maybe not. It actually doesn’t matter. The exchange rate can be anything; it doesn’t affect the utility of having access to a global currency and payment system that is outside regional banking systems — one that can’t be closed, controlled, confiscated, or devalued at the whim of desperate regimes.

Cryptocurrency is here to stay. It is the world’s new safe haven, displacing the role that gold once played. The reasons are rather obvious: Bitcoin is more liquid than gold. It takes up no space, weighs nothing, and is more secure. Once you are an owner, nothing can take away what you own — and you don’t have to rely on a third party such as a gold warehouse or a bank (or a government) to take care of your money.

Given all of this, there is supreme irony in the announcement made by the Greek central bank last year that consumers should be wary of Bitcoin. Bitcoin is vastly more safe and reliable than any national currency, including the euro and the dollar.

There is no government anywhere that would decline to shut the banks if their ruling class feared financial meltdown. That’s what’s happening in Greece. That could happen in any European country, and it could happen (and has happened) in the United States, too.

In the end, government regards itself as the ultimate owner of all a nation’s currency and the wealth it carries.

It’s wise to have another option, and people have long known that. The question is: What is that option? Today, not for the first time, and not for the last, Bitcoin is here to save the day.

Jeffrey A. Tucker

Jeffrey Tucker is Director of Digital Development at FEE, CLO of the startup, and editor at Laissez Faire Books. Author of five books, he speaks at FEE summer seminars and other events. His latest book is Bit by Bit: How P2P Is Freeing the World.