In the International Business Times’ article on the coming inflation, they talk about government debt being at record levels. This is true, and I’ve already talked about how we are enslaving our children with with ever increasing debt. The paragraphs below also mentions how much we are already robbing ourselves. In 2008, the government paid $451 billion in interest on the debt. How much production was eaten up by that $451 billion? How much would that have stimulated our economy? This was before the massive almost $2 trillion deficit Obama is running in 2009. Instead of benefiting from our production, we will be paying for yesterday’s waste. We’ll be robbing ourselves to pay for the bailouts of yesteryear. The bailouts that benefited none of us. They only benefited Geithner and Paulson’s buddies at Goldman Sachs. Couldn’t this classify as modern day enslavement by the rich and politically connected?

2: GOVERNMENT DEBT IS AT RECORD LEVELS

Canada’s budget surplus has turned into a multi-billion dollar deficit as a result of the credit crisis. But Canada’s problems pale in comparison to those of its neighbour to the south. The richest country in the world is drowning in debt.

Let’s examine for a moment the sorry state of US indebtedness. Due to ongoing bailouts and stimulus packages, the US will experience a record $1.75 trillion deficit in 2009. US debt (accumulated deficits), as tracked by the famous US National Debt Clock in Manhattan, stands at a staggering $11.8 trillion and counting. In 2008 alone, the government paid a staggering $451 billion in interest, according to the government’s own website, TreasuryDirect.gov. And that number is expected to rise substantially in 2009.

That figure – $11.8 trillion – is a mindboggling amount of money. But it represents only a part of America’s total liabilities. If Social Security and Medicare obligations are included (which they should be), obligations rise to over $106 trillion dollars, according to the US Treasury.

None of this money has been set aside, but has instead been borrowed by the government for its own use. When combined with the debt of nearly $11.8 trillion, total debt soars to an astonishing $118.6 trillion, or nearly ten times total GDP, or $300,000 per person.

via The Next Crisis: Spiralling Inflation – Part 1 – International Business Times -.

Just to be clear to populist liberals, government will not solve this. The government is the means of the enslavement, so they cannot be expected to set us free.

Last night, Ron Paul was on Larry King after Michael Moore. Ron Paul, who seems to be the only congressman who understands economics, rightfully explains that Michael Moore doesn’t seem to know what the free market is. He’s mixing corporatism with capitalism. As I’ve always said, if you listen to liberals talk about capitalism, they are never talking about capitalism. They are talking about whatever they put before capitalism. How many times have you heard crony capitalism, corporate capitalism, greedy capitalism, etc? Their complaint is not about capitalism. Their complaint is with cronyism, corporatism, and greed. None of them are synonymous with capitalism. They are more closely synonymous with government, the very solution that they then propose. Anyway, here’s Ron Paul.

http://www.dailypaul.com/node/112628

Rather than letting the free market deliver credit to consumers, Chris Dodd needs to grandstand for his constituents. He wants the government to limit interest rates on credit cards.

Senate Banking Chairman Chris Dodd has been hearing from constituents upset because banks have been raising the interest rates on their credit cards. This week Mr. Dodd decided to do something about it. He proposed a bill imposing an immediate freeze on those rates.

“At a time when families are struggling to make ends meet, jacked up rates can quickly create crushing debt,” Mr. Dodd said in a statement. “People need to be responsible with their money, but they shouldn’t be taken to the cleaners by outrageous rates.”

If customers are being taken to the cleaners, it is because lawmakers like Mr. Dodd sent them there. In May, Congress passed the Credit Card Accountability, Responsibility and Disclosure Act, which bars rate increases without a 45-day notification. To reduce their risk under this law, banks are rushing to raise rates before it takes effect in February. Thus the Senator’s latest political grandstand.

via Dodd Tries to Freeze Credit Card Rates – WSJ.com.

This is no different than price caps. What do price caps do? In order for price to be driven down, you need demand to decline while supply remains steady, supply to increase while demand remains steady, or demand to decrease while supply increases. If you artificially limit price, while not lowering demand, you automatically lower supply. It will happen no other way, so while Dodd does some showing off, he is decreasing credit in the market, which we are told is one of our biggest problems right now. I have an idea. How about Dodd tells his constituents to quit borrowing money. The credit card companies can’t charge you if you don’t ask for their services.

Are we really going to hand over health care to a government who enslaves our future generations to bail out their buddies on Wall Street? TARP was sold as a bailout of banks in respect to freeing up credit. It turned out to be a slush fund to spread the wealth around to the wealthy.

The Troubled Asset Relief Program will expire on December 31, unless Treasury Secretary Timothy Geithner exercises his authority to extend it to next October. We hope he doesn’t. Historians will debate TARP’s role in ending the financial panic of 2008, but today there is little evidence that the government needs or can prudently manage what has evolved into a $700 billion all-purpose political bailout fund.

We supported TARP to deal with toxic bank assets and resolve failing banks as a resolution agency of the kind that worked with savings and loans in the 1980s. Some taxpayer money was needed beyond what the FDIC’s shrinking insurance fund had available. But TARP quickly became a Treasury tool to save failing institutions without imposing discipline (Citigroup) and even to force public capital onto banks that didn’t need it. This stigmatized all banks as taxpayer supplicants and is now evolving into an excuse for the Federal Reserve to micromanage compensation.

TARP was then redirected well beyond the financial system into $80 billion in “investments” for auto companies. These may never be repaid but served as a lever to abuse creditors and favor auto unions. TARP also bought preferred stock in struggling insurers Lincoln and Hartford, though insurance companies are not subject to bank runs and pose no “systemic risk.” They erode slowly as customers stop renewing policies.

TARP also became another fund for Congress to pay off the already heavily subsidized housing industry by financing home mortgage modifications. Not one cent of the $50 billion in TARP funds earmarked to modify home mortgages will be returned to the Treasury, says the Congressional Budget Office.

via TARP Should Not Be Extended – WSJ.com.

Those who love the government and think they will serve justice up on a platter of compassion, need look no further than the scam of TARP that was pulled on the American public. I’m sure the Wall Street Journal was all for the bailouts, and now they say the government didn’t enforce discipline. How do you force discipline on companies by bailing them out. The free market delivers discipline by the prospect of failure. When that failure option is removed by the government, discipline goes with it. This is a great lesson in A) don’t trust the government when it tells you something has to be done right away or society will suffer and B) government would sell your children in to slavery quicker than you can say TARP if that is what it takes to bailout their buddies. Don’t believe me, that is exactly what they did.

Since the mortgage crisis began, the left has used the repeal of the Glass-Steagall act as a battering ram to break down the pro-free market argument. The left, the media and even some conservative politicians claim it was not having enough regulation that caused the mortgage crisis and ultimately the economic melt down that we are currently experiencing.

This really is a silly argument on its face. How does removing an act, which separates commercial and investment banking, cause risky behavior? Causation is what the statists are claiming. This would be like saying removing a guard rail is what caused me to drive off the road and into a tree. I’m sure we can all agree, it wasn’t the guard rail. It was my reckless driving. Similarly, it wasn’t the removal of the Glass-Steagall act that caused the current mess, it was the risky behavior. But, why was there risky behavior? Why would I drive off the road and hit a tree? Something must influence these actions.

In the case of driving off the road and hitting the tree, maybe I was drinking, or maybe the speed limit sign said 100mph. Both of these influences would be considered the the causes, would they not? Also, by the standard of the left, removal of the guard rail would cause every driver to drive recklessly and hit the tree. If all drivers fly off the road and hit the tree, surely there must be something that causes them to do so. It would have to be a 100mph sign heading into a blind bend, or maybe a mandatory rest stop where all must fill up on liqueur before heading back down the road. Either way, both would cause the reckless behavior.

Similarly, in the mortgage crisis, something influenced the behavior of the entire market. Bankers didn’t wake up one day and say, “Hey, let’s be really risky.” Bankers were enticed into being risky by the government. The government encouraged the risky behavior with artificially low interest rates by the Fed and legislation (ie. regulation) by congress that was trying to promote so called affordable housing. “Everyone should own a home” was the mantra of the past decade.

First, the government and community organizing groups through their power of controlling and influencing how banks operate forced the banks to lend to borrowers that would otherwise be deemed risky. This was not just the left. The Bush administration jumped on board with similar pushes. Fannie Mae and Freddie Mac’s purpose was to push affordable housing, and they are the ones who basically establish the market in which bankers operate. Who do you think created the mortgage backed security instrument of which this monster was created?

Second, another part of the Glass-Steagall act that everyone forgets, but which everyone loves is the establishment of the FDIC. While it may seem like an excellent idea, how does saying, “Don’t worry. If you fail, the government will bail out your depositors.” effect behavior. Would that not increase risky behavior, knowing that you cannot harm the customers? Doesn’t that make customers less critical of who they deal with for their banking knowing that they have nothing to lose?

Third, the Federal Reserve artificially lowered interest rates to a historic low, reaching a negative real interest rate. In order to lower the interest rate, the Fed increase the money supply and encourages the banks to push out that money via loans. The whole point of this is to cause an expansion in the economy. Well, we got an expansion alright. As, Thomas Sowell says, “You can open the flood gates, but you can’t control where the water goes.” In this case, the water went into real estate. One could argue that the government did control the water somewhat with their push for affordable housing and their everyone should own a home legislation.

Another problem for the statists argument is if the guard rail of the Glass-Steagall act was still there, would we have still had a meltdown? While I cannot prove something that didn’t occur, one only need to look at the last meltdown with the dot com bubble. That was also Fed induced with money flooding the market. With the Glass-Steagall act in place, the money was forced into another sector, and we still had a meltdown. One can say it was not as big of a meltdown as our current one. The problem there though is the argument is just a matter of proportion. We didn’t have the historic low interest rates in the last meltdown and we didn’t have government passing legislation saying, “Everyone should own dot com stocks”.

Now we could get into the consequences of our entire banking structure and the problems with fractional reserve banking, but that would require too long of a post, and it would probably take me into deeper waters than I’m prepared to swim. The point of this post is to demonstrate that the anti-free market crowd doesn’t seem to understand causation. You can’t hold the free market accountable for something it did not create. Removal of the Glass-Steagall act was not the cause, just like removal of a guard rail doesn’t cause the driver to hit the tree. It both cases, it is outside influences, and in our current meltdown causation lies with the government.

If only we had a President who actually participated in private enterprise before being elected as President of the world’s largest economy.

By MAYA JACKSON RANDALL

WASHINGTON — President Barack Obama, in his weekly radio address, took time out to highlight the importance of small businesses, saying too many small companies are still finding it difficult to obtain the loans they need to keep their businesses running.

“While credit may be more available for large businesses, too many small-business owners are still struggling to get the credit they need,” the president said in his prepared remarks. “These are the very taxpayers who stood by America’s banks in a crisis–and now it’s time for our banks to stand by creditworthy small businesses, and make the loans they need to open their doors, grow their operations, and create new jobs.”

Mr. Obama said it is time that large banks, who have already received substantial aid from the government, take the necessary steps to enable the recovery to take hold.

“Our economy as a whole can’t move ahead if small businesses and the middle class continue to fall behind,” he said, noting that small businesses have been hit hard by the recession. Many entrepreneurs can’t get the financing they need to start up their own companies and small firms have lost hundreds of thousands of jobs, he noted.

via Obama Seeks Support For Small Business – WSJ.com.

No amount of prodding by our socialist-in-chief is going to help small business as long as he continues his anti-free market policies. You cannot ask businesses to borrow money and banks to lend money when the environment for entrepreneurship is under attack. Costs will skyrocket on small businesses with Obama’s so called taxes on the rich, socialized medicine, cap and trade, card check, and…… We are only nine months in. If you are a small business or a bank, do you feel comfortable that you can accurately assess what the future economy will look like. Banks and companies make investment decisions based on risk and reward. If they cannot accurately assess risk, they will not invest.

In my last post, I mentioned that I would address the mortgage crisis separately,  because it was a little more difficult to explain. As shown in my previous blog, Capitalism has nothing to do with greed, but that doesn’t answer why the mortgage crisis happened. Most people have heard that it was caused by Wall Street’s greed.

I’m not going to argue that Wall Street took advantage of the situation, but one has to ask was the home owners being “greedy” when they bought homes that were way out of their price range? Everyone involved in the mortgage crisis, including Wall Street, mortgage brokers, real estate agents, and home buyers would have to be considered greedy. That would include a large chunk of our society. So are we to believe that we are all greedy individuals, and that Socialism would have prevented this? Why would we not still be greedy under Socialism and look to take advantage of that system in anyway we can?

The reason is we are not greedy. Under normal circumstances in the Capitalistic system, all parties to an economic transaction act rationally in their self interest. There are only two circumstances that could change this. One, fraud, which was mentioned in my previous post and would have to be committed by one of the parties. Again, this isn’t a Capitalism issue. This is criminality committed by one of the parties actions. That would not be different under another system. The other is outside intervention.

So who could intervene in these transactions and have an effect on millions and millions of individual transactions. There is only two sources that can cause massive irrationality on a massive scale. One is the Government, and the other is the Federal Reserve, which is a private institution that holds the power over our monetary system. In this instance, the vast majority of the blame lays at the Federal Reserve.

In most of the play by plays of why this crisis happened, the media has been focusing on Wall Street, mortgage backed securities, CDOs, etc. The question is if this was Wall Street’s doing, why did they just start doing this now? Why wouldn’t they have done this in the past?

To find out how the Federal Reserve instigated this crisis, we have to go back to before the crisis began. The problem is you get into this crisis begot this crisis and that crisis begot that crisis, so I could end up taking us back to the founding of the Federal Reserve. To make it more simple, let’s start in 1998.

In 1998, the Asian markets had a crisis, and there was concern that it would cause a world wide crisis. As usual the Federal Reserve stepped in and flooded the market with money to head off the crisis. So, where did this money go? In the late 90s, I’m sure we all recall the tech bubble. The money found it’s way into the stock market propping up then completely worthless stocks. Eventually, this came to a head with the bursting of the DotCom bubble and the recession of 2001.

In order to ease the recession of 2001, which really had a lot of the same traits as The Great Depression, the Federal Reserve again stepped in and began a massive growth of the money supply. Interest rates were dropped to 40 year lows. Interest rates are the means the Federal Reserve uses to manipulate the market, and to manipulate interest rates, they increase or decrease the money supply (This is simplified explanation for my monetary theorist friends out there).

So again, we are back to the same type of circumstance we had in the late 90s. This time though, we learned our lesson not to invest in the stock market on worthless stocks. What can we invest in that has real value. Oh, I know. How about real estate? So money has to flow somewhere. In this case, it flowed into real estate.

“OK”, you say, “that explains where all the money came from, but that doesn’t explain why Wall Street and the home buyers were greedy. Why did the home owner buy something they couldn’t afford and why did Wall Street take advantage?”

In every business transaction, risk is weighed against return. Returns are adjusted for inflation. So, for example if I’m going to look at in investment, let’s say lending money, I’m going to look at the interest rate. So, I’m going to charge 6% interest. Now, what is the cost of the money I’m going to lend. The Federal Reserve took the Funds rate, which is what is used by banks, from 6.5% in May of 2000 to 1% in June of 2003. That is a huge difference, and that is a lot of new money. So now, if you are a bank, you can borrow at 1% and lend out at 6%. That is a 5% spread. That is a very nice return for banks. But, the calculation isn’t complete. The calculation doesn’t take into account inflation. If inflation is 3%, you are really borrowing money at 3% from the bank, and the bank is borrowing it at -2%. How many times have you heard the term free money in the past decade? As you can see, the home owner is getting almost 0% financing and the banks are borrowing at blow 0%. The banks are paying back the money at lower cost than they got it for. Doesn’t this seem like it would change your rationality a bit?

As you can see, Wall Street did not just willy nilly come up with this mortgage crisis. They were coaxed on by the Federal Reserve. Wall Street is in the business of investments. If you look at your risk and return based on the cost of money that the Federal Reserve put in place, you cannot fault Wall Street. You also cannot fault the home owner. Lastly, you cannot fault Capitalism. Under the circumstances, created by the Federal Reserve, both parties were acting rationally.  The fault of the mortgage crisis lays squarely at the feet of the Federal Reserve.

Now you won’t hear this type of analysis on the news channels. This is too complicated for them to explain. Instead it’s easier just to say Capitalism, greed, or Wall Street is to blame. As with most cases, the media blames the cancer for the patient’s death, when the root cause was the patient’s years of smoking.

Meanwhile, with the uproar created by these allegations, the Federal Government takes more of our freedoms away, and the Federal Reserve is back to printing money again to stave off this crisis. What sector will the next greedy Capitalist be in?