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Old 12-16-2008, 07:43 AM
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Default The limits of free markets?

No one I know is a free market purist. Push hard enough and you will find some area where every person opts for limits. No one I know would opt for a world of economic Allosauruses versus hordes of Ornithopod cows.

Especially since we tend to be the cows.

Survival of the fittest is great. If you are the fittest.

Government, however, can become an Allosaurus too. It does tend to distract the little velociraptors most of us work for, though. Velociraptors make yummy snacks. So maybe having the odd Allosaurus can come in handy some days.

So we end up somewhere in the middle ideologically (yes, you too, you you you Libertarian you).

http://www.smartmoney.com/blog/ (quoted because it will change with new blog posts no doubt):
Quote:
Taking Stock

The Limits of Free Markets
By: Igor Greenwald, 4:35 PM ET on 12/15/08
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Joseph Schumpeter is the dead economist most beloved by laissez-faire types for his paradigm of "creative destruction," the notion that progress depends on innovation that sweeps away outdated business models (and businesses, and jobs.)

The idea and the man have enjoyed a revival of late, bandied about with reference to General Motors and more broadly, capitalism's current crisis.
Free-market zealots are less likely to rehash the fact that Schumpeter thought capitalism was doomed, undermined by the growing dominance of the largest corporations and the popular opposition engendered by this concentration of wealth and power. Capitalism would give way to socialism not as a result of a tragic accident or a policy mistake but rather by popular demand. This would happen because capitalism would make most people richer. And richer people don't like surprises.

Our markets have been positively overflowing with surprises, of course: for the recent and soon to be ex-retirees, for the newly unemployed, for borrowers and lenders. And every bone-chilling gust of Schumpeter's destructive gale is making him look that much more prophetic, as voters demand that governments do something.

This popular distrust of change is something most libertarians don't deign to address. They just assume that more progress, more change, more absolute wealth is good, and that's that. The workers are to be promised "more jobs" and threatened with loss of same if they don't stoke capitalist fires. But what if the relatively prosperous worker no longer values maximizing his monetary gain as much as knowing that he won't lose his health care and home at the whim of the employer, or his nest egg to financial follies he can't fathom?

And what if millions of prosperous voters come to see such risks as an intolerable threat to their families and sense of well-being? What if it turns out that people value certainty and hate complexity? That's when the political market starts leaning to the left, irreversibly so according to Schumpeter. In the end, markets work for people and not the other way around. When markets fail, people seek fixes and alternatives.

The Greek chorus of free-marketeers would have us believe that the world as we know it is ending because governments around the world have thrown a few trillion of paper scrip and electrons at a mess of planetary proportions. In fact, this is not the end of the world or even of capitalism as we know it. Rather this is the continuation of the mixed economic system we've had for most of the last century, and the reason it's survived so long and will survive this is governments' rightful preference for expediency over ideology (aka principles) during emergencies.

Enterprise didn't die when children were banned from the factory floor nor when old-age pensions were introduced, though in both cases contemporary alarmists had argued that it might. On many quality of life measures, Japan and France lead the U.S. despite meddlesome public policies that don't seem to inconvenience the natives much.

The biggest political divide in Washington today is not between liberals and conservatives, or Democrats and Republicans. It is between realists who understand that the bailout, no matter how many zeros it ends up carrying, is part of the price of doing business in occasionally chaotic markets, and romantics whose notions of free-market efficiency have been cruelly dashed. But people aren't cogs and maximum efficiency is not their overarching goal. It's about time that free-market defenders started taking this into account.
Interesting how part of what Schumpeter said gets quoted by folks who are appalled at what else he said.

Is this YOUR middle? (I can hear the L screams now...). What is? What say you?
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Old 12-16-2008, 07:51 AM
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I say you may be a cow, but I prefer to think of myself as a Bull. Cows get turned to Steak, Bulls go to Stud Farms
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Old 12-16-2008, 07:57 AM
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Seriously, My opinion is that the current GM Crisis is caused by the arrogance of both the Uniouns and GM Management Their Arrogance clouded their business sense, otherwise,how can you explain they were paying laid off workers.

Kind of like Eastern Airlines years ago when the Unions arrogance put the airline out of businees and cost all the employees their jobs

Is that Free Market or poor managemnt? I guess you could say the free market enabled the poor managers
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Old 12-16-2008, 08:58 AM
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Hmmm, Schumpeter, he did predict that capitalism would eventually kill itself after all. Which it has, by creating a hyper-political class of intellectuals that attack the very basis of a free market. Pointing to mistakes in the command economy as failings of a free market, which they are anything but. This much he wrote in so many words. Liberal economists point to Schumpeter because he was a pure capitalist and predicted why it would necessarily fail due to politics. He was right. We followed that rabbit path just like he described. Others point to Schumpeter because he sounds a lot like a Marxist, which he only shares in the view of where we end up, not in the why (primarily because of government, not despite it). To him it's not inevitable, unlike Marx who thought we are doomed to egalitarianism by our nature. Maybe we are, I dunno, I'm certainly no sociologist.

Still, I fundamentally disagree with Igor Greenwald (who seems to shares that notion that we inherently want communism). I believe people when given true economic freedom chose not to be commanded and prodded into masses, told what to do (even if they don't know it's happening). I see economic freedom as true structural freedom, you can't separate economies and everything else, your daily life is the economy. But people are not allowed to make unfettered decisions anymore, the system is designed to protect the status quo. The evening news never presents the side that maybe the Fed tinkering with interest rates and Treasury propping up undeserving industries works against rationality of human nature. They can't say that, it doesn't fit in 10 second spots and requires more than passing thought.

We are told that inflation is just a thing to fix and control. We can deal with it later, after the government and Fed have pumped the money system full of paper. We are not told that inflation is only necessary to propagate the transfer of wealth from productive segments to middlemen who do nothing but change money. By buying into the idea that there are companies (mainly financial, but all inefficiency needs to be allowed to correct) too big to fail we are just cutting ourselves off that the knees ultimately. Deflation is necessary in a free market, but central banks never allow that to happen. They can't allow that to happen. We are taught this system from day 1 in grade school, how great Lincoln and Hamilton were. How taxes are necessary and patriotic. How you must be a good citizen and never question the great men behind the curtain. It's all designed to quell dissension, to keep people from thinking for themselves. Learning about Austro-libertarian economics and politics is hard. Reading von Mises, Franz Oppenheimer, Rothbard, Ballve, Eustace Mullins, Bastiat and Schumpeter is hard. It's not main stream and it's not popular. The system has done a fantastic job at concealing it's mistakes (like when's the last time the Federal Reserve released the M3 numbers?) and keeping us in the dark.

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Old 12-16-2008, 10:20 AM
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I'm thinking it is a bit slow in the mechanical engineer trade today...

Ask the Japanese what a deflationary cycle is like - and that was not runaway. I don't accept that it is kept from happening only in order to enrich 'the men behind the curtain'. While it may be arguable that liberal economic policy lengthened the Great Depression (and the GD was not the first of a series of Ds, so I don't buy that the GD was itself contrived by the aforementioned curtain men) the onset of it was also arguably lack of accountability - so the free market provided accountability. Ask your grandparents what that was like for them.
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Old 12-16-2008, 03:31 PM
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Well, one thing we know is that there are no limits of suckers.

Exhibit A - A fifty billion (yes billion) dollar ponzi scheme ripping off the likes of Stephen Spielberg

Free is a bad word in a liberal democracy. Are you more free or less free with your welfare being constantly subjected to the ravages of "free markets"? One might argue that having to work longer hours with a longer commute just to keep up economically while bearing the risk of downturns on a personal socioeconomic level is not an advancement of personal freedom, but rather a particularly devastating reduction of that very thing.
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Old 12-16-2008, 06:26 PM
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Greenwald's premise seems to indicate that we have recently had a free market. We have not had a free market in a very long time; certainly no in the last 80 years.
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Old 12-17-2008, 01:33 PM
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Quote:
Originally Posted by DaveInDenver View Post
Yup. But how exactly is Madoff's fractional reserve hedge fund scheme any different than the Federal Reserve system itself? If anything, it should serve as a wake up to the danger of non-100% reserve banking. The whole system only has a 10% reserve requirement.
You are equating 10% reserve with Madoff's scheme? You cannot be serious.

I would not invest in any financial firm that kept more than 10% of working capital idle.
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Old 12-17-2008, 02:04 PM
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Quote:
Originally Posted by Red_Chili View Post
You are equating 10% reserve with Madoff's scheme? You cannot be serious.
I'll admit that I'm not the smartest man, but no need to be condescending.

But yes, I'm exactly saying that Madoff's hedge fund is substantially the same as fractional reserve banking, the way he was showing returns without basis. Banks only have to show 10% of their total deposited account balance in readily available cash. So they are playing a pay-it-forward shell game that through extension of credit can turn 1 dollar of deposits into 9 new dollars in loans of money that does not really exist. Eventually someone loses their money at the end of the line (which incidentally is why the FDIC was created in the first place, to protect the unreserved cash in the event of a bank failure or run). Same it would seem with Madoff's clients. There wasn't as much cash and equity as he claimed there was (and why he wasn't filing SEC returns obviously). How it is different than non-100% reserve banking? It's all based on the premise that normally some percentage less than 100% of investors, depositors, etc. will ask for their money at the same time.

I didn't say his scheme was anything like a business sitting on a mountain of cash, how a firm decides to distribute their equity and cash is important, but ultimately it's all accounted to net the same equivalent value.
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Old 12-17-2008, 02:47 PM
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Sorry if it sounded condescending, it was more like incredulous.

Madoff made up returns and funded them with others' deposits, and kept it up until there was no more money (and he took his share off the top). That is a true Ponzi scheme.

10% reserve means 90% of real money - REAL money - is out there getting real returns as working capital. It means that no, the bank cannot cash everyone's check at once for 100% of the funds they deposited. But they can cash 10% of funds needed, and borrow the remainder at the cost of intrabank lending.

In the pre-Fed 1880s runs on banks caused catastrophes, and one of my heroes, David Moffatt, acted as somewhat of a local Fed Reserve by guaranteeing to cover his competitor's withdrawals - which was also in his own interests, since it effectively stopped a panic. Such was not the case, usually.

I do not see the similarity. Madoff *pretended* to be the latter and was not.
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