William Anderson Absolutely Nails It!

A fabulous article by William Anderson is posted over at Mises.org. He shows exactly what Americans need to see: that the housing crisis and financial shenanigans on Wall Street are not the cause of the present economic downturn, they are an effect. It begins with a criticism of Paul Krugman, a typical mainstream pundit and modern voice of the deceased John Maynard Keynes.

Like so many other economists and pundits, Krugman sees the effect and interprets it as the cause. He writes,

The financial services industry has claimed an ever-growing share of the nation's income over the past generation, making the people who run the industry incredibly rich. Yet, at this point, it looks as if much of the industry has been destroying value, not creating it. And it's not just a matter of money: the vast riches achieved by those who managed other people's money have had a corrupting effect on our society as a whole.

Let's start with those paychecks. Last year, the average salary of employees in "securities, commodity contracts, and investments" was more than four times the average salary in the rest of the economy. Earning a million dollars was nothing special, and even incomes of $20 million or more were fairly common. The incomes of the richest Americans have exploded over the past generation, even as wages of ordinary workers have stagnated; high pay on Wall Street was a major cause of that divergence.

Translation: the financial services industry is the cause of wage stagnation elsewhere, as Wall Street has "diverted" wealth that would have gone to other workers. How did "they" manage to pull off such a scheme?

According to Krugman, and everyone else it seems, it was deregulation and those darned Republicans that caused the crisis:

But that was not enough for these greedy free-marketeers. They then promoted free trade and outsourcing, which meant that hard-working Americans were thrown out of work in manufacturing industries and forced either to go on welfare or work at — horrors! — Wal-Mart, which then further abused them by holding down their pay and denying them medical insurance. The destruction of the American economy being complete, these capitalist despoilers then managed to divert all of the new wealth to themselves and their Wall Street friends, a scheme that worked, but only for a little while until it, too, collapsed under its own weight, leaving wreckage behind. Krugman writes,

Meanwhile, how much has our nation's future been damaged by the magnetic pull of quick personal wealth, which for years has drawn many of our best and brightest young people into investment banking, at the expense of science, public service and just about everything else?

(I love the stab at too few bright minds devoted to science and public service. Even with massive government subsidy? How could that possibly be the case? Trust me, it isn't. There are far, far, far and away too many folks, brilliant and not-so-brilliant, devoted to these pursuits.) Then...

Now, Krugman never explains just how free markets lead to the kind of speculation we saw on Wall Street; we are supposed to accept his explanation on faith (Krugman's version of "faith-based political economy").

Then he runs off on what I thought was a tangent on regulation and outsourcing. I almost didn't follow him. "What the heck is this doing on Mises.org?" I thought. "He's supposed to be talking about the monetary expansion which was used to fund the bubble." Thankfully, I read on anyway. He makes the case that America has effectively made it unprofitable to produce goods here through over-regulation. This puts us at a severe competitive disadvantage.

Start multiplying this regulatory nightmare across an economy and one starts to understand how government manages to force costs without appreciable economic benefits (except to the politically connected firms that produce the goods required by regulators). Over time, this means that an economy produces fewer and fewer goods that people want.

This creates an ever increasing incentive for monetary expansion:

Such a regulatory and legal regime also reduces opportunities for investment, which means even more economic stagnation. To offset stagnation, the Federal Reserve has attempted to pump new money to "stimulate" the economy. In the 1990s, new money went into the short-lived "high-tech" boom in which the computer-savvy kids of Seattle were made temporary millionaires. In this decade, it went to the infamous "housing boom."

Which Austrians know has predictable economic consequences:

Thus, the only game in town in which the government could give an illusion of prosperity was through aggressive action by the Fed to pump up bank reserves, stimulate lending, and then watch Americans send dollars overseas for consumption goods (as Peter Schiff is fond of saying). In other words, as long as people overseas would accept American IOUs, they would send their goods to this country, but the dollar's recent slide tells us that Uncle Seller is running out of suckers.

Which, in turn, leads to the the overt consequences, finally visible to the mainstream economic commentariat, which are only now raising hackles but have been in the process of sending the world into financial tailspin for some time:

It should not be surprising that when the Fed engineered these financial bubbles, those on the front lines in financial services would be the main beneficiaries. However, here again, Krugman misses the boat on causality. His statement that high salaries and bonuses to financial executives caused pay "inequality" in the economy is a non sequitur. The high pay and bonuses was the result of government monetary policies, which funneled new money directly to Wall Street and the banks.

Wall Street executives did not suddenly decide to enrich themselves and then change the direction of investing in order to do so. Instead, they were able to direct large sums of money for their own compensation precisely because the government was channeling gargantuan amounts of new cash into their firms. For that matter, much of the money was channeled into the purchase of now-worthless "mortgage securities," which were created by the quasi-government entities of Fannie Mae and Freddie Mac.

He also makes what I consider a pretty astute observation to support this hypothesis, especially about the business strategies of companies like GM and GE:

Given the fact that government piles on the business costs and destroys economic opportunity, perhaps we should not be surprised that the one profitable area was financial services. General Motors might not have sold enough vehicles to turn a profit, but its financing division made money. The same goes for General Electric and other companies that have turned profits from credit cards. For the time being, people could make money in the money markets, but as the US dollar now plunges in value, even those last profitable ventures have dried up.

As government has destroyed one business opportunity after another, perhaps we should not be surprised that investment money has left domestic production and was diverted to financial markets. Investors want a return, and government agents and the political classes seem determined to destroy free markets — and the opportunities they present for economic growth.

By far the best sentence in the entire piece is the following:

If ever a financial crisis had "Made in Washington" stamped on it, this was it.

That one says it all. I've sliced and diced this one up to its detriment. It is better in full. I would encourage anybody interested in the present fiasco to read it. I would have liked to see it a bit more direct and concise; a newbie might get a bit lost in the twists and turns. But it is a wonderful piece and a very good rebuttal of the arguments currently circulating in the mainstream press.

We need more financial columnists like Mr. Anderson.