Fred’s Tossin’ and Turnin’

Next month marks the 65th anniversary of the publishing of Friedrich Hayek’s classic The Road to Serfdom. He wrote it as World War II drew to a close to warn Europeans of the dangers of socialism. At the time, the leading intellectuals in England and elsewhere strongly favored pushing their societies toward the warm fuzzy embrace of socialist utopia. Hayek pointed out that for socialism to function, the government must become more and more coercive. (Think of the IRS and the heavy fines meted out by government agencies to bring citizens to heel.)

Eventually, Hayek observed, this power over the individual falls into the hands of a despot with disastrous results. His prime example of this phenomenon was Germany. They had embraced the National Socialist Party, granting it absolute control over German society. When Hitler took over, the NSP morphed into the Nazi Party and Germany became a military dictatorship. (“Nazi” by the way, is Bavarian slang, which roughly translates into “dummy” or “dunce”.)

Hayek rightly made no distinction between the terms “fascist” or “communist” as is so common today in intellectual discourse from the left and right. For the average citizen the realities of living under either one is identical with the loss of individual freedoms such as speech, assembly, property and the likelihood of getting a fair trial when you piss off some bureaucrat.

It would be hard to deny that the current Obama Administration and Democrat controlled Congress is pushing us rapidly into the direction of socialism. Indeed, “Newsweek” magazine on its Feb. 26th cover proudly proclaimed “We’re All Socialists Now”. They accept that the era of bigger government is coming and that we should embrace it. Ol’ Friedrich is turning in his grave.

Hayek was an economist first and often did intellectual warfare with John M. Keynes during the Great Depression. Keynes believed in an activist and expansive government and favored fiscal stimulus (big government spending). Hayek believed in free markets, limited government, stable monetary policy, low taxes and appropriate regulation. (Ebenstein, National Review, 2/23/09). The politicians of the day followed Keynes’ prescriptions and the depression lasted from 1929 until after WWII. In short, it did not work out well.

Hayek was a “monetarist” meaning he favored actions by the Federal Reserve to create stability in the money supply and interest rates to direct the economy independent of political influence. “Fiscal policy” is the responsibility of Congress.

In past blogs I have asserted that the current mess precipitated by the housing bubble was caused by “easy money” for far too long and the interference by Congress in the housing market with the Community Reinvestment Act. To understand how this worked out let’s look at what the Fed under Greenspan (Fed. Chairman ’87-2006) did and see the results on the economy of his ministrations.

Between 1998 and 2000 Greenspan gradually ratcheted up interest rates to 6.5% causing a recession in 2001. (Note: This is the Federal Funds Rate as opposed to the Prime Rate, which is generally 3% higher.) He began lowering rates until they hit 4% just before 9/11. Immediately after 9/11 he dropped them to 1% and kept them there until 2004. Hayek argued that, “…if interest rates are too low they will attract resources to areas of the economy not otherwise attractive to investment.” Like real estate? Housing prices were skyrocketing and the mania was in high gear. Sensing trouble, Greenspan then jacked up rates to 5.25% by 2006. Adjustable rate mortgages started kicking in and that pinprick caused the bubble to burst. Many economists now call this whole mess “The Greenspan Bubble”.

From this it should be clear that the Democrat strategy to blame the economic crisis on Bush, while effective, is totally bogus. The politically independent Fed gets the lion’s share of the blame for this debacle, with honorable mention to House Democrats who pushed to get unqualified buyers into houses and then resisted all efforts to rein in Fanny and Freddie.

The 2006 elections brought in a Democrat controlled Congress and the 2008 Presidential election gave us the thinly qualified Obama. Rewriting history and elevating FDR to sainthood have resurrected Keynesian theory.

Money in incomprehensible numbers is getting tossed out the door in frantic spending to try to stem the tide of recession. At the same time the Fed cut the interest rates to essentially zero. And, yesterday while House Democrats were looking for the addresses of the AIG employees who got bonuses so they could string them up on the nearest light pole, the Fed quietly created $1.5 trillion dollars out of thin air. They’re gonna print it, folks! Did I hear someone say “smoke screen”?

In the most blatant display of hypocrisy I’ve ever witnessed, politicians called for the heads of AIG executives for receiving bonuses that were agreed to in the very “stimulus” legislation they had just passed!! Of course, they had an excuse: none of them had actually read the damn thing. Latest news on this is that Geitner, Obama’s Treasury Secretary, now admits that he insisted the “Dodd Amendment” authorizing the bonuses be added to the stimulus bill. Dodd had only the day before denied he knew anything about the amendment carrying his name. Today they passed a bill to tax these 71 individuals to get the bonuses back. It’s probably unconstitutional. How can anyone have any confidence in these clowns?

But, I digress. Feel better though having gotten that out of my system.

OK, what does all this mean? It seems the latest move by the Fed coupled with the massive spending by the Obama Team will likely jolt the economy into a mild recovery. Most likely we will dip back into recession when the cap and trade taxes, individual tax hikes and card check kick in. In any case, almost everyone expects that the next ice burg in our path will be unprecedented inflation. In a year or two the US dollar might look a lot like the Zimbabwe currency.

Fred, climb out of the grave. We need ya, man.