The Reichstag is Burning

January 29, 2009

Nationalize them?

 

The past week has brought many calls for the nationalization, or ‘partial-nationalization’, of the banks.  The New York Times has covered this.  CNN has covered this.  One of our primary overlords, Nancy Pelosi (D, Calif), has said, “Whatever you want to call it.  If we are strengthening them [the banks], then the American people should get some of the upside of that strengthening.  Some people call that nationalization.”  Indeed, some do.

 

I have heard two main arguments for nationalization:

 

1. Nationalize the banks because we have already pumped so much money into them that we may as well take them over.  (“We”, here, presumably means the state – with which so many modern Americans identify).  Taking over the banks completely would eliminate all these executive bonuses and wastes of money and force them to lend again.  This way we can ensure the money gets used efficiently.  If we nationalize the banks we’ll at least have direct oversight as to where the money is going.  This is the typical statist argument: that somehow the state knows best how to allocate capital and set the strategic direction of research, production and distribution of goods and services. 

 

2. Look at how wasteful these banks are.  Look at the bonuses and layoffs and refusals to lend!  All that money and what’s changed?  Nothing.  More layoffs and bad news daily.  I’m beginning to think we should just nationalize the banks.  This is a variation of the former, but is more of surrender than an actual statist argument.  Basically, this line of reasoning supposes that government, at least, couldn’t do a worse job than the banks are doing now in managing the capital injections.

 

The Reichstag is Burning

 

While argument 1, above, is the predictable statist line of reasoning, it is argument 2 that should be most concerning – most concerning because it represents a fatalism and resignation that is precisely the desired effect.  I suggest that not even our government could accidently operate with the ineptitude it has shown throughout this crisis thus far.  And it is all too easy for frustrated citizens to favor more action rather than partial actions, ‘all in’ vs. incremental plays.  Such thinking would be a tragic mistake.

 

Our forefathers feared and respected the power of the state and sought to contain it, restrict it and minimize it.  The state merely feigns incompetence.  In fact, the state is highly competent, as I have previously discussed, at what it does best: grow both in scale and in the scope of its intrusive power into the lives of the people.  The incompetence you perceive around you is due to the classic error of looking at the wrong metrics.  We judge the failure of the corporatist state and of statist corporations in their inability to solve our problems and their inability to add positive value to our lives.  So we vote the incumbents out and a new group in.  We change presidents.  We throw our allegiance to this statist party or that.  And, most fundamentally, we make the error of supporting new and more vigorous expansions of the state to cure the seeming ineptitude of previous regimes.  This is precisely what is happening now.

 

The ‘nationalization isn’t starting to look so bad’ fatalism is sentiment manufactured by the state by design.  The failures you perceive around you are nothing less than tantamount to the burning of the Reichstag, but infinitely more subtle and complex: a series of events manipulated by the state for twofold purpose:

1. to increase the power of the state, and

2. to enrich and protect the elite in charge of major corporations, specifically those in finance – those that handle the job of creating money in our fiat-currency economy.

 

More hyperbole from Barbedwiresmile?  Hardly.  Look around and show me where these two ends are not being accelerated, where they are not already happening and in the headlines on a daily basis?  Where is the size and authority of the state not expanding?  Where are the heads of major corporations not being enriched and protected?  Again, this is not by accident.  This is by design.  What better way to expand the tentacles of the state than with the full support and even request of the people?

 

The future – don’t bet against inflation

 

But what does this mean for the future?  In addition to the increased authority of the state, it means the state will do everything in its power to create inflation.  There has been much written about our current deflationary environment and clearly all of the data suggests we are in what will be a prolonged period of deep recession – the word ‘depression’ has been used with increasing regularity.  Many who were early in signaling the inflation alarm have been harangued by the deflationists for making the wrong call and, thus far, losing their clients money.  The authors of some outstanding economics blogs have been among those pointing out, in great detail, the degree of the inflationist’s’ failure in accurately assessing current economic trends.

 

While it is clear that all signs point to a period of prolonged deflationary pressure, we underestimate the power of the state at our own peril. 

 

First, let’s look at a simple definition of inflation: an increase in the total supply of money and credit.  In a fiat-currency economy, it’s the supply of money and credit that matters.  The deflationists are correct in stating that the increase in the total supply of money has been greatly offset by the dramatic decrease in the total supply of credit.  Again, in a fiat-currency economy, money is credit (and credit is money).  Clearly the total supply of money and credit has decreased rapidly over the past two years as has the velocity of money in the form of credit extension (or lack thereof).  Such a decrease in the overall supply of money and credit can only be viewed as deflationary.  On this, the deflationists and I agree.

 

But the reality is that we live in a fiat-currency, fractional reserve lending economy centrally planned by a central bank: in this case the Federal Reserve which, as you know, is neither ‘federal’, in that is not an entity of the federal government but rather a private corporation, nor a ‘reserve’, in that it holds no actual ‘reserves’ to back up the currency.  And it is here that we err, despite the current economic indicators, in underestimating the will of the state.  For economists, like generals, are often fighting past wars or, at the least, allowing their assessment of future events to be disproportionately governed by their perceptions of the past, and the present.  To do so brings insufficient imagination to the assessment or, at the very least, fails to consider the lengths the state will go to in order to prevent deflation.  To say that the Fed cannot inflate its way out of a depression is to ignore history.  Look at a graph charting inflation from 1913 through the present.  This time-frame, last I checked, includes the Great Depression.  Google it – there are many floating around out there.  There’s a reason why your grandfather said he could buy that same shirt for a nickel.  He could have.  Inflation has continued unabated since the founding of the Federal Reserve and will continue to escalate into the future.  A fiat currency economy is inherently inflationary.  And out government will go to great ends to ensure that inflation wins out over deflation in the long-term.

 

Inflation vs. Asset Deflation – it has always been thus

 

In our corporatist state, politicians’ primary constituents are not the mass of voters.  Voters are easily manipulated.  The primary constituents of our political overlords are wealthy individuals and corporations who keep the political class in power.  The wealthy are not wealthy because they earn high wages.  Rather, they are wealthy because they own assets.  Therefore, when given a choice, the state will always choose inflation, or even hyperinflation, over widespread asset deflation.  The scenarios we see playing out today have very little to do with the various superficial issues in the news and everything to do with this fundamental dynamic. 

 

The state faces such a choice today.  And as you can see, everything the state is doing is in line with this thesis.  The argument against inflation is that the state simply cannot inflate its way out of this deflationary environment.  But, alas, it can.  It has the power to do so, and has done so before.  Wrong, say the deflationists: the state cannot suspend the fundamental rules of economics.  Yes- this is true.  But in a fiat currency economy, the ‘rules of economics’ are determined by the Fed, in conjunction with the state.  Many students of history and economy will point out the pain and ultimate failure of states that have tried to suspend the fundamental laws of economics and, yes, I too understand this reality.  But it does not change the fact that the state will respond to its constituents and attempt to inflate its way out of widespread asset deflation with no boundaries on the pain inflicted upon the general population.  It’s a choice: inflation affects everyone, but disproportionately affects the worker, the wage earner.  Asset deflation hits the wealthy far more than the poor.  The reason is simple: the wealthy own assets, the poor own money.

 

While the laws of economics cannot be suspended, the people do not live in a world governed by such laws.  The people live in a pseudo-economic bubble, governed by the Fed.  The tools of governance in this bubble world are fiat currency and fractional reserve lending.  Outside this bubble, in the real economy our overlords and elites inhabit, the laws are still in effect.  However, the bubble can be manipulated indefinitely in order to preserve the prosperity and security of the elite.  As it has been since feudal days, as it will be here in corporatist America.  In fact, other than some brief periods between 1776 and 1912, this is the dynamic that has preserved the power of the state, of central bankers and of the associated ruling elite since the earliest of recorded time.  To think we have somehow evolved beyond this dynamic seems foolish at best, dangerous at worst. 

 

It is in this manner that the deflationists are wrong – not for their economics, but for their politics; not for their analysis, but for their imagination.  Throughout human history, the state has proven that, ultimately, it will resort to any tactic, commit any act, suffer the people through acts of barbarity almost unimaginable in 21st century America, to protect its existence and the comfort of its ruling elite.  Again, to think we have evolved beyond this is a psychological comfort we must not allow ourselves if we are to adequately assess the events enfolding around us.  These events manifest daily, in events large and small, internationally and locally, as the continued expansion of the state.  In the past several years the state has extended its authority exponentially.  And the current pace of this state expansion is accelerating, all to the cheers and support of the American people who, year after year, decade after decade, have cast their vote, faction by faction, for one side or the other of the same statist coin.  Today these factions still bicker: on what should be regulated or banned, on how much money should be confiscated or spent, on which corporations should be the recipients of such revenue and on how to continue the relentless expansion of the state.

 

All of which brings me to your bank.

 

Good Bank / Bad Bank

 

The latest idea being thrown around, and the one that seems most likely to be acted upon, is a form of nationalization known as the ‘bad bank’ strategy. A trial run can be observed in the Fed-engineered Citi break-up.  Here’s how this one works. All of the performing assets are split off into a ‘good’ bank. The good bank is owned by the ‘private’ sector: executives who are retained or severanced, bond holders and other creditors, and shareholders who lose money on paper but are not wiped out and in fact retain their shares, waiting for them to rise again over time.

 

The ‘bad’ bank contains of all the nonperforming assets, structured investment vehicles, credit default swaps, collateralized debt obligations, money losing operations, uncompetitive businesses and off-balance sheet malfeasance. The ‘bad’ bank, of course, is owned by the tax payer.

 

Naturally, the voters will support this strategy. In fact, voting patterns for the last several decades have virtually assured this outcome. The people will be told there is a ‘crisis’, this one even worse than the last. The only remedy, of course, will be the further empowerment of the state. The people will have to make ‘sacrifices’, of course, but the state will guide us out of this mess and ensure a brighter future. Which begs the question: A brighter future for whom?

 

The Reichstag is in fact burning- right before our eyes.

 

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8 Responses to “The Reichstag is Burning”


  1. The big picture is that many, if not most, of the larger banks are insolvent.

    The question then is not how to preserve private ownership of any specific bank, but how to preserve the banking system.

    If you look at the S&L crisis as a basis, the federal government takes over the banks, strips out the bad assets, and sells off the remaining banking infrastructure over a relatively short period (typically 3-18 months).

    The government then holds the bad assets, which either become good at some point and are also sold (like the RTC did in the 1980s), or don’t but don’t require any more taxpayer money.

    The alternative is to give banks money for nothing, by Roubini’s estimate something like 3 trillion dollars, so that they can afford to write down these debts.

    As a taxpayer, I prefer the bank takeover.

    The idea that this is somehow Bolshevism, when this is what the government has done with insolvent banks for 70 years, is ludicrous.

  2. housam Says:

    While I do agree with allot of what you say.I have to differ with you on your point regarding the reasons for nationalization.I believe the bad bank/good bank approach could have worked if it was implemented in october when it should have.However the range of bad assets in my view has spread to almost all other assets and therefore identifying bad assets from good assets is almost impossible.If the goverment creates a 1 trillion dollar bad bank for instance and starts buying assets at model pricing(the true rip off),then we risk losing all that money(or whats left of it) if it turns out that the money wasnt enough or the banks where not forthcoming about handing over all their bad assets(I’ll be shocked if that would be true,just ask dick fuld) then we would be back to where we started.The only solution is taking over the banks and disecting their balance sheets and off-balance sheets,break up the institutions into smaller entities to avoid future systemic risk and then sell all the assets to whomever wants it.I think if a pain free approach is taken with this problem we may all suffer for decades to come.


  3. Matthew- thank you for the comment, and I hope you are enjoying the blog.

    The term Bolshevism was not used in my post. I have never suggested that this is Bolshevism or any other form of collective socialism.

    I have simply asserted that this is another form of statism (that makes some degree of sense, seeing as that this is an anti-statist blog).

    In this context, you have made my point: Yes, “this is what the government has done with insolvent banks for 70 years.”

    Exactly. And the results have been exactly what I describe throughout my blog:

    1. Inflation- a tax on the wage earner, and a control mechanism of the central bank as well as the state

    2. Expansion- an expansion of the powers of the state

    I would say this dynamic is actually 96 years old, dating back to 1913 and the establishment of the Federal Reserve. But in reality, this dynamic is far older…


  4. […] Without getting too far into the inflationist vs. deflationist debate, readers are aware that I have long argued that government will always choose inflationary policies in an attempt to inflate their way out of asset deflation.  While an argument rages as to whether government can succeed, I have long suggested their intent is clear.  See here. […]

  5. joker2600 Says:

    Another great article BWS.

    “Asset deflation hits the wealthy far more than the poor. The reason is simple: the wealthy own assets, the poor own money.”

    My favorite line from this article.

    So what do you propose be done about the banks?

    I for one, think that the Federal Reserve be abolished. The power to create money should reside within the state alone. If it were a minarchist state it would be even better I think.

    Still I would like to see the creation of a resource based economy as proposed by The Venus Project.

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  8. Excellent site yours faithfully Francis Nurre


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