If you read my first post you know capitalism and the free market have nothing to do with greed. Greed is a derogatory term used to undermine self interest. Everyone pursues their own self interest, even the bleeding heart liberal who shouts compassion from the roof tops. True compassion comes from the person who earns and then voluntarily gives up part of their earnings to help another. Compassion is not sacrificing your fellow man for your belief in your own, false altruism. Milton doesn’t argue the word greed, but he pretty much shuts Phil Donahue down.

Being a huge UFC fan, this analogy has to be my favorite of all time.

I’ll borrow an analogy from Peter Schiff. Imagine if you will a victim at the unfortunate end of a Brock Lesnar knuckle sandwich. The blow has knocked him out cold and the medics try to revive him. The best suggestion they can come up with is to have Lesnar pound the man’s head even harder with his fists. When the man has seizures from the repeated pounding, a medic (coincidently named Bernanke) screams gleefully “Hurray, he’s moving.”

Sadly, such is the response to our present crisis by the policy makers in Washington, DC. To solve a problem caused by malinvestments resulting from easy credit at 1 percent interest rates, the Fed is supplying even more easy money at 0.25 percent. None of the malinvestments have been allowed to be liquidated.

Housing prices have been propped up, banks and auto companies have been bailed out, regulations have been increased, debt covenants have been violated, unemployment insurance has been extended. In addition, there’s the cap-and-trade bill, the healthcare bill, and a “czar” around every corner.

All of these increase the already-humongous burden on wealth creators. In short, the problems that caused the Great Recession have been compounded. Real output must then necessarily decline. How can anyone logically assert that we are in the beginning of a recovery?

via A Path To Runaway US Inflation – Ganesh Rathnam – Mises Institute.

Just found this video on YouTube. YouTube just rocks. As I like to say, THANK GOD FOR THE FREE MARKET. YouTube would have never been developed by socialists.

Fannie Mae announced a new “deed for lease” program, where they will take your deed and rent your house back to  you if you don’t qualify for a loan modification and can prove you can’t pay your mortgage. They will sign a one year lease with the current owners. They are hoping they can then sell off the houses a year from now, when they assume the housing market will be better and the value of the homes will be higher. This is some pretty optimistic thinking from a now government owned institution.

What would make them think the housing market is going to pick up that much over the next year. So far, unemployment continues to rise. The Fed has been busy at the printing press, and the government is taking debt levels into unknown waters. More than likely if the economy begins to pick backup, we are going to have massive inflation. That will lead to two scenarios. Either we’ll have hyperinflation that makes the 70s look like child’s play, or we’ll have a Fed induced recession to bring inflation under control. Neither scenario paints a pretty picture for a booming housing market.

Fannie Mae and Freddie Mac (Freddie is already doing something similar) are only delaying the inevitable. The market is much smarter than the government is. It will take into account that these government institutions have a ton of inventory being hidden from the market, what analyst call “shadow” inventory. If the housing market begins to pick up, it will be driven back down with this excess inventory. Instead, Fannie should take the short term pain and end it quick.

Because of Fannie’s mistakes it is asking the government (me and you) for another $15 billion after a quarterly loss of $18.9 billion. In total, it’s estimated that we will have wasted $200 billion on both Fannie and Freddie by the time this mess is over. Then again, we know how reliable government estimates are. So far we have handed over $61 billion to Fannie, and estimates are that Fannie is sitting on inventory around 65,000 homes.

Instead of becoming landlords, why doesn’t Fannie and Freddie sell of packages of houses as investment bundles. This would get the houses off their books, and it would bring them back into the free market where they can begin to stabilize the market. Investors will buy theses homes, and guess what they’ll have to do? They have to pay taxes on their profits, which ultimately will help with the government losses that will occur with the sale. With the investors holding properties, they will want to drive prices up. They’ll either rent them out, which investors are better at than the government, or they will fix up the homes and put them back on the market. Investors will not shoot themselves in the foot by flooding the market. They will slowly bring the houses onto the market to maximize sale prices and make the most profit. Whether renting or selling, the investor will be paying taxes on his capital gains.

The government should just take the short term pain of selling them off now? This may hurt the housing market, but it will be over and stabilization can begin. Instead, the government is prolonging this crisis and making it worse, and who’s going to eat this mess? We are.

By way of Mises.org, here is another great examples of the free market delivering a plethora of choices for consumers. Take note of the mention of the government forced recycling programs and why they started them.

Also, image what it would be like if the beverage industry was heavily regulated like health care. Think you’d have all these options. Inversely, if government would get out of health care, you’d see a plethora of options in that industry as well.

In an op-ed in today’s Wall Street Journal, Dr. Pardes, president and CEO of NewYork-Presbyterian Hospital, talks about the coming doctor shortage.

It is important to note that the shortage the country will soon face isn’t just of primary-care physicians. It is true that there aren’t enough primary-care doctors and nurse practitioners. But it is also true that we need more cardiologists, neurologists, general surgeons, pediatric subspecialists, urologists and other highly trained specialists.

Nonetheless, the few ideas to address the coming doctor shortages that were briefly considered in Washington treated the problem merely as a shortfall of primary-care doctors. One idea is to shift unused federal training funds to hospitals that need more positions, but only if those funds are used for primary care. Another is to move primary-care physician training out of hospitals and into federally qualified health centers. A third idea is to take training dollars away from doctors and instead use it to train nurses and other professionals.

None of these ideas would actually increase the number of doctors. At most the first two ideas would increase the number of primary-care doctors at the expense of the number of specialists.

But that’s not likely to happen either. The fundamental reason why medical students are not entering primary care on their own is that they can’t afford it. Medical-school tuition can cost a student as much as $50,000 a year. Some doctors start out owing hundreds of thousands of dollars before they are even able to open a practice. Going to medical school is a little like taking out a mortgage, only without getting a house in return.

Once doctors do start treating patients, they are squeezed between what they earn from government programs and insurance companies on one side and escalating malpractice insurance rates on the other. Meanwhile, specialists can often charge more and pay less in other costs than primary-care doctors. The reality is that many physicians cannot afford to go into primary care.

To address the shortage of doctors and the incentives that compel young doctors to eschew primary care, Congress needs to think about how to increase doctor pay, institute malpractice reform, and provide subsidies to reduce the amount of debt doctors have to take on. Residency caps should also be raised so teaching hospitals can train more doctors. Without these actions new doctors would be foolish to enter primary care, and thankfully our medical schools do not recruit foolish people.

via Herbert Pardes: The Coming Shortage of Doctors – WSJ.com.

Unfortunately, the doctor seems to suffer from what most commentators and policy wonks suffer from. They believe that you can cure an illness by increasing the causes of the illness. It would be like telling an alcoholic to drink a different alcohol to cure his liver disease. The government creates the shortage by manipulating the free market. When the government implements price controls via program reimbursement rates, you end up effecting supply negatively.  The doctor also doesn’t seem to realize that part of the reason education is so expensive is there is a massive amount of government money chasing after education services. The more dollars chasing a good or service, the higher the price rises.

The doctors has many bad assumptions here that undermine his stated goal. He says that the cost of education is extremely high. He compares it to taking out a mortgage without getting a house. This is in my opinion economically silly. Tuition is in investment like any other investment. Actually, if you pick the right major, it can be a very high yielding investment. With the high cost of medical school, one would expect a high return on that investment. In the free market that would be the case. As I’ve already said, tuition has climbed year after year because of all the government money in education. Remove government, and you will lower cost. On top of that, the doctor says government programs squeeze doctors with government reimbursement rates. This alters the return on investment analysis as well. If your investment continues to grow larger because of government, and your return is “squeezed” by government, of course you are going to begin to see shortages. This is what government always does.

Unfortunately, he then argues the government should do more. He says Congress should be looking at ways to raise doctor pay. Are you serious? Government is the reason your pay is decreasing. Get the government out of health care, and you will begin to see salaries increase.  In the free market, if there is a shortage in supply, prices increase. Seeing the increase in price (or pay in this case), competitors enter the market (in this case doctors).

Also, as price is driven up, entrepreneurs will look for alternate solutions to doctors. An real world example of this are the clinics at many local pharmacies.

Government on the other hand will just hold prices against the will of the market. As Austrian economists will tell you, “You can control price or supply, but you can’t control both.” Because government is controlling price, they will drive down supply. This will ultimately lead in the opposite outcome that the doctor claims to want. Even if the government funnels money in to subsidize doctors, they are taking that money from another area of the economy. While they may be able to falsely increase the supply of doctors, they’d end up producing a shortage in another area. This is why we defeated the Soviet Union. Central planning never works. Government always gets it wrong. The free market does this on its own by the decisions of millions of people. While I appreciate the doctors concern, I wish he’d drop his assumption that government can fix this. They have never been able to fix a problem in the economy without creating multiple new and worse problems.

Translation: “We are going to continue to print money in hopes of tricking consumers and businesses into spending money. We know it will create false growth and the possibility for hyperinflation, but we are so smart we can stop it by driving the economy back into recession. Trust us. Look how good we’ve been at this.”

BY JON HILSENRATH

The Federal Reserve affirmed its plan to keep interest rates “exceptionally low” for a long time despite signs of economic recovery. But the Fed began to lay rhetorical groundwork for an eventual shift in its stance, suggesting that when the unemployment rate falls or if expectations of inflation turn up, it could change course.

“Economic activity has continued to pick up,” the Fed said in a statement following a two-day meeting. It noted that consumer spending has improved, housing activity has increased and businesses were retrenching at a slower pace.

Fed officials voted unanimously to maintain their target for the …

via Fed to Keep Rates Low Despite Pickup – WSJ.com.

Finally, I finished Robert P. Murphy’s “The Politically Incorrect Guide to Capitalism“.  It’s a small book, but I read too many books at once. The book was great for those average Joes, like me, who love the free market and want to defend it but don’t have the time to get a Ph.D in economics.

Robert explains why capitalism works best, why the government doesn’t, and why most government regulations have the opposite effect it claims to have.

The last section provides the reader with a 12 step program to help them break their government addiction. They are as follows:

1. Admit that government “solutions” are a problem.
2. Have faith that human beings can interact peacefully, and that economic blessings are available to all.
3. Surrender to the fact that certain social ills cannot be eradicated by force or political “will”.
4. Ask yourself, “Do I want to advocate self-sufficiency and voluntary means, or do I want to look to politicians every time I don’t like something?”
5. Survey the past record of governments when it comes to economic “planning” or other alleged improvements.
6. Learn to look for hidden costs of government intervention, rather than the superficial benefits.
7. Understand the role of market prices (read my root causes of health care crisis blog), and why tampering with them interferes with the job they have to perform.
8. Study history. Examine whether governments that violated private property rights stayed out of their citizens’ other affairs.
9. Before condemning a market outcome as unjust, first understand why it occur (read my blog on mortgage crisis).
10. Study other “spontaneous” social institutions, such as language and science, where no one is “in charge” and yet the outcome is quite orderly.
11. When politicians propose a new program, remember how much they said it would cost at the outset. Compare that number to the actual amount spent.
12. Go through the newspaper and discover how government meddling causes or exacerbates the conflict in virtually every story.

As you can see, if you follow Robert’s 12 step program, you will undoubtedly come to the conclusion that the free market handles our societal ills much better than government. These 12 steps are great, but you should read the book first. That way you’ll no why these 12 steps are right. It’s a quick read. Pick one up, and be prepared to defend free market capitalism.

Also, check out Robert’s blog Free Advice for more good info. This economist can even be funny sometimes.

**** Before the FTC cracks down on me. I just finished reading the book, and I paid for the book myself. Robert was nice enough to answer a couple questions I had. That doesn’t count as paid advertising does it? Guess it depends if Big O likes my blog.

In a very long article in the Wall Street Journal today, they are highlighting a supposed genius economist who is developing a new paradigm of thinking of how the markets work and in particular the use of leverage by banks. Unfortunately, in the entire article, the writer and apparently the economist never mentions monetary policy, negative interest rates, or incentives and their effects on behavior. These supposed geniuses start off with the assumption that the market is irrational and just decides to go haywire out of the blue. They completely ignore incentives and how the change in incentives changes behavior. The new paradigm was reached a while ago. Someone tell this genius to grab some books and read up on Austrian economics.

Mr. Geanakoplos is among a small band of academics offering new thinking about those cycles. A varied group ranging from finance specialists to abstract theorists, they are moving to economic center stage after years on the margins. The goal: Fix the models that encapsulate economists’ understanding of the world and serve as policy-making tools at the world’s biggest central banks. It is a task that could require a thorough overhaul of the way those models work.

via Crisis Compels Economists To Reach for New Paradigm – WSJ.com.

In the Federalist Paper No. 12, Hamilton is arguing for the Constitution and the Union by discussing the benefits of the Union to raising revenue for the government. Quickly, Hamilton highlights something modern day socialists somehow forget, that through self interest, what they call greed, all members of society benefit.

Hamilton writes, “The prosperity of commerce is now perceived and acknowledged by all enlightened statesmen,” except for modern day socialists, “to be the most useful as well as the most productive source of national wealth, and has accordingly become a primary object of their political cares.” What Hamilton is saying is all enlightened (educated) men of this time period recognize that commerce (free trade) is the best way to build national wealth. Because this is known to be true, enabling free trade has become the object of their policy.

He continues, “By multiplying the means of gratification, by promoting the introduction and circulation of the precious metals, those darling objects of human avarice and enterprise, it serves to vivify and invigorate all channels of industry and to make them flow with greater activity and copiousness.” Here Hamilton is stating the government should encourage trade by “multiplying the means of gratification”. He talks about precious metals as “those darlings objects of human avarice and enterprise”. Basically, he is saying money and the want of more money (avarice or as socialist like to say, greed) drives people to work more and to produce more for society (enterprise).

“The assiduous merchant, the laborious husbandman, the active mechanic, and the industrious manufacturer – all orders of men look forward with eager expectation and growing alacrity to this pleasing reward of their toils.” What? You mean all these men look forward to earning profits? Those bastards! Hamilton recognizes that it is the reward of profits that causes the merchant, the farmer (husbandman), the mechanic, and the manufacturer to be productive, and the more reward the more productive they will be. He uses words such as assiduous (unrelenting) merchant, laborious (extreme effort) husbandman, active (involving physical effort)  mechanic, and industrious (working energetically) manufacturer.  He uses these words to emphasize it’s the profit motive that creates these behaviors. With no profit motive, you do not have the productiveness of these men.

Next Hamilton discusses how everyone benefits from the free market, even those who think they don’t. “The often-agitated question between agriculture and commerce (basically labor and businessmen) has from indubitable experience received a decision which has silenced the rivalship that once subsisted between them, and has proved, to the entire satisfaction of their friends, that their interests are intimately blended and interwoven.” Notice that Hamilton basically says that the interest of both labor and businessmen are interwoven. Government cannot benefit the laborers by punishing the businessman. In doing so, he also punishes labor.  He continues, “It has been found in various countries that in proportion as commerce has flourished land has risen in value. And how could it have happened otherwise? Could that which procures a freer vent of products of the earth, which furnishes new incitements to the cultivators of land, which is most powerful instruments in increasing the quantity of money in a state – could that, in fine, which is faithful handmaid of labor and industry in every shape fail to augment the value of that article, which is the prolific parent of far the greatest part of the objects upon which they are exerted? It is astonishing that so simple a truth should ever have had an adversary;” Apparently, it still has it’s adversary in modern day politicians, socialists, and labor unions, who believe that free markets don’t help everyone. But Hamilton explains, how could you increase the value of one without increasing the value of the other? You can’t increase the value of what labor produces without increasing the value of labor. Both parties benefit.

Lastly, “and it is one among a multitude of proofs how apt a spirit of ill-informed jealousy, or of too great abstractions and refinement, is to lead men astray from the plainest paths of reason and conviction.” Wow, Hamilton points out that jealousy leads men astray from reason and conviction. How true is this in modern society? While everyone truly knows that government produces nothing, many today still want the government to intervene in the free market because of jealousy. They are jealous of the rich. Because of their jealousy, they are blinded to reason which would highlight the errors of their ways. Does this remind you of the tax the rich argument? They need to pay their fair share! Who cares if they have benefited society more by creating jobs, services, products, etc. They don’t deserve that much more than the poor. Low and behold though, when government takes more of their money, they don’t create as many jobs, services, products, etc, and we are all worse off because of it. These are simple truths, but jealousy, as Hamilton points out, leads us astray from reason.