Why the libertarian rich & their bankers love price controls – on money.

Larry Kummer, Editor

11 years ago

Summary: Marx believed that the inherent contradictions in capitalism would bring about its downfall. Events since the crash have revealed contradictions between the values and actions of the 1% and their bankers. But they’ve successfully managed these contradictions. That’s the operational genius of the pseudo-philosophy called libertarianism. {1st of 2 posts today.}

The price system works so well, so efficiently, that we are not aware of it most of the time. We never realize how well it functions until it is prevented from functioning, and even then we seldom recognize the source of the trouble.

… Prices perform 3 functions in organizing economic activity: first, they transmit information; second, they provide an incentive to adopt those methods of production that are least costly and thereby use available resources for the most highly valued purposes; third, they determine who gets how much of the product — the distribution of income. These three functions are closely interrelated.

Milton Friedman, from Chapter 1 “The Power of the Market” in “Free to Choose” (1980)

Libertarians Ascendant

{political movements} “are a kind of ghost town into which anyone can move and declare himself sheriff”.
— Saul Bellow, quoted by Allan Bloom in “Closing of the American Mind”

Investors — whether professional or just rich (the top 1% own 42% of non-home financial assets; the top 10% own most of the rest) tend to some form of libertarianism. Typical of libertarians, their opinions vary — but with one firm tenet: markets should be free. After all, that’s the source of their wealth and income. Their allegiance to free markets has limits, however, when it comes to what they love most: money.

Since the crash the Federal Reserve has intervened in the US economy with actions unprecedented in their size and duration. They pegged the short-term interest rates to zero, and bought 20% ($2.5 Trillion) of the public Federal Debt plus $1.7 trillion of home mortgages. They have controlled the most important prices in an economy: the price of money, expressed through the prices of financial assets. (e.g., see this Citi survey of global credit managers).

How we got here

“Every man is a revolutionist concerning the thing he understands.”
— George Bernard Shaw’s “The Revolutionist’s Handbook and Pocket Companion” (1903)

America hasn’t seen such government intervention since the 1970s, when we had wage-price controls (instituted by my favorite President when playing Name that Liberal), controls on oil prices (by Carter), and the money markets (Volcker pushing rates to the moon under the twin team of Carter-Reagan; like Hoover-FDR, what one started the other expanded). All of these had horrific effects on the economy. Perhaps the following quarter-century of prosperity resulted from lessons learned about allowing Washington’s economic generalissimos access to the national controls.

Every Belle Époque ends (e.g., the happy time from 1871-1914), in this case due to bankers’ buying the deregulation (liberation from the New Deal restraints) which of course resulted in them again bringing the economy to the brink of ruin. Harsh times force difficult choices that reveal one’s true values, and the investor classes choose to support the Fed’s interventions — no matter how ideologically unpalatable (their necessary support, without which the Fed could do little).

The Fed’s actions, along with massive bank bailouts and fiscal stimulus (which they also supported), succeeded. The economy stabilized and then resumed growing (albeit slowly). With low inflation (a joy for the credit class and burden to the rest).

We hear much whining about the heresy of the Fed’s actions while the wealth of the 1% and their bankers has skyrocketed, as they siphon off much of the recovery’s benefits — just as they skimmed off most of the gains from American’s increased productivity since the 1970s.

Conclusions

We spend too much time talking about people’s ideologies. We should instead focus on their actions. We don’t care what the 1% and their banker apparatchiks say; we care what they do. Their lovely words distract us while they pick our pockets.

As so many have shown, from economists such as Paul Krugman to polemicists like Charles Pierce, a core Republican policy since 1980 has been shifting the tax burden from the rich to the middle classes (aka, the level tax), justified by pixie dust theories about benefits (which the Reagan and Bush Jr tax cuts disproved) — and deregulate businesses, stripping us of any control over them. Those are their principles, however disguised.

They have been winning for a long time. They’re winning today. Eventually it will be an endgame, where we no longer have the ability to resist. Time is our enemy. Let’s keep our eyes open and act.

Appendix #1: About Libertarians

Political affiliations meant something to citizens of the Republic. To subjects — sheeple — of New America they’re a fashion statement.

Last year’s “hard core Republicans” become members of this year’s “Tea Party movement”. People too avant-garde to be just Dems and GOPs dress themselves up as “Libertarians”. It’s an almost meaningless label, in that self-identified “libertarians” tend to have views quite similar to those of the general public — and don’t agree among themselves what the label means. For details see “In search of libertarians“, Pew Research, 25 August 2014.

Appendix #2: Diocletian and the first known national price controls

In 302 the Roman emperor Diocletian commanded “there should be cheapness,” declaring, “Unprincipled greed appears wherever our armies … march. … Our law shall fix a measure and a limit to this greed.” The predictable result of Diocletian’s food price controls were black markets, hunger and food confiscation by his soldiers. Despite the disastrous history of price controls, politicians never manage to resist tampering with prices. That’s not a flattering observation of their learning abilities.

— Walter Williams (Prof Economics, George Mason U) in “Economics for the Citizen”

We don’t know much about the “Edict on Maximum Prices” (only fragments survive), but we know enough to say that this version of the story is not accurate. See this article for the rest of the story.

For More Information

Posts about libertarians: