The Assault On
Free Markets
Peter Schiff
Those
blindsided by the recent financial meltdown are now loudly blaming the free
market for its failure to police its own excesses, and are calling for greater
regulation to prevent future disasters. But
for those who clearly observed the problems developing (in high definition slow
motion) the blame can be directed squarely at the policies of the
Greenspan/Bernanke Federal Reserve. As has been the case countless times
in history, the free market will now pay the price for government incompetence.
In
Senate hearings this week, all parties involved completely ignored the Fed’s
own culpability in igniting the speculative fever. It’s as if a senior prom had turned into a
wild bacchanalia, and angry parents now question why the chaperones failed to
notice the disrobing or why the DJ played provocative music, all the while
ignoring the bearded gentleman pouring grain alcohol into the punch bowl.
A
perfect illustration of the Fed’s failure to take responsibility can be found
in Bernanke’s explanations regarding inflation, which he solely attributes to
the effects of the rapid increase in global commodity prices. He failed
to mention that commodity prices are rising as a direct consequence of his
monetary policy, which is debasing not just the U.S. dollar, but currencies
around the world. Rather than accepting the blame for creating inflation,
Bernanke is shifting the blame to the free market. The Senators are happy
to let him get away with it as it provides more evidence to support the “need “
for more government to save the economy from the disastrous effects of
unbridled capitalism.
When
asked how we got into this mess, Bernanke replied that our problems resulted
from an excessive credit bubble characterized by aggressive leverage, reckless
lending, and extreme risk taking. Absent from his explanation was the
Fed’s role in irresponsibly setting interest rates below market levels, which
mispriced risk, got the party started and kept it raging into the wee hours of
the morning. The expressed goal of the Fed for much of this decade was,
and is, to encourage and facilitate borrowing and lending.
During
his testimony, Bernanke continued to claim that Bear Steams was not bailed out
as shareholders only received about $10 per share. Of course, $10 is
better than zero, which is what they surely would have received if the Fed
hadn’t thrown taxpayer money around. What
about Bear’s creditors though? Although the collapse of Bear Stearns
would have cost bond holders dearly, the bailout essentially makes them
whole. Here again, the Fed creates even greater moral hazards by encouraging
excessive risk taking. By bailing out lenders who extend excessive
credit, the Fed simply invites more of that behavior. The free market
must be allowed to properly price risk. Lenders need to know that when
they lend money, whether to highly leveraged investment banks and hedge funds,
or to over-stretched homebuyers or credit card users, they risk not getting
paid back. By interfering with this process the Fed simply guarantees
more losses and even bigger bailouts in the future.
Also,
leveraged speculators need to know that it is not “heads they win, tails the
taxpayers lose”. Wall Street executives amassed fortunes by making
extremely risky bets. Now that those bets have soured, why is it
taxpayers that have to swallow the losses? Wall Street billionaires earn
their bucks on the backs of the middle class, who made little on the way up,
but foot the entire bill on the way down.
While
Bernanke talked about the underlying strength of our economy, he claimed
necessity in saving Bear Stearns from bankruptcy as it would have brought down
our entire financial system. How sound can our economy be if the failure
of one investment bank could topple it? Does this now mean that no more
major banks or brokerage firms will be allowed to fail? Since we
routinely accused Japan
of practicing “crony capitalism” what do you suppose we should call our
version?
Not
to be outdone in rewarding reckless behavior, earlier in the week Congress
passed $15 billion in tax breaks for homebuilders, who had made their fortunes
overbuilding during the bubble and unloading their shares to a gullible public.
By threatening to hold back on their
political contributions, these same homebuilders are awarded still more
billions. The last ones we should be subsidizing are
homebuilders. After all, the last thing we need right now is more homes.
The
legislation also contained a provision that offers generous tax credits to
individuals who buy homes out of foreclosure. While this is billed as a benefit to
homebuyers, it is just another hand out to lenders, as those qualifying for the
tax breaks will simply pay more at auctions as the tax breaks subsidize higher
bids. The real winners are the creditors who get more in foreclosure than
would have been the case had buyers not had their bids subsidized by the
government.
Of
course, for all the talk about taxpayer bailouts, none of the senators bothered
to mention that, for the moment, no tax increases are actually on the
table. Instead, the bailouts are being financed by savers, pensioners,
wage earners, investors and the elderly on fixed incomes, who all suffer
staggering increases in their costs of living, as the Fed uses inflation to rob
Main Street
to pay off Wall Street.
April
4, 2008
For a more in
depth analysis of our financial problems and the inherent dangers they pose for
the U.S. economy and U.S. dollar denominated investments, read my new book
“Crash Proof: How to Profit from the Coming Economic Collapse.” Click here to order
a copy today.
More importantly, don’t wait for reality to set in.
Protect your wealth and preserve your purchasing power before it’s too
late. Download my free research report on the powerful case for
investing in foreign equities available at www.researchreportone.com
.
Email this Article to a Friend 
Printer Friendly Version