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Velocity is Freedom

George Gilder after signing my copy of Wealth and Poverty

George Gilder after signing my copy of Wealth and Poverty

The big prize at Freedom Fest was George Gilder, most famously noted for his Wealth and Poverty. His new book is The Scandal of Money. Gilder wrote of travelling to China with Milton Friedman and respectfully challenges many of Friedman’s assumptions which have been proven wrong.  Below he shows that his idea that the velocity of money only narrowly fluctuated  has been proven tremendously wrong.

But if velocity is not constant, then consumers and investors and lenders could counteract any given monetary policy merely by changing the rate at which they spend or invest the dollars. In recent decades, this is what we seem to have done, compensating for and neutralizing every change in the money supply with a nearly equal and opposite change in turnover. Indeed, in an interview in 2003, three years before his death, Friedman finally acknowledged, “The use of quantity of money as a target has not been a success. I am not sure that I would as of today push it as hard as I once did.” 10

Velocity is not an effect of psychological forces outside the economy. It is the active means by which economic agents— people— control money. Velocity is freedom. It expresses the public’s appraisal of economic opportunities and opportunity costs. Velocity comes in two forms— pro-growth and anti-growth rises. In anti-growth moves, people flee from financial assets to consumables and collectibles, real estate, and financial shuffles in zero-sum inflationary surges that are not technically measured as velocity but certainly reflect monetary turnover. Positive accelerations of velocity come when investors plunge into actual companies and drive a rapid learning curve of opportunity and progress. In neither case does the central bank control money. We the people control it.

If we control money, then money does not require a sovereign source. Its source can reside outside the political system. It does not need central bank management. Currencies around the world do not have to be separated and allowed to float against one another.

Gilder, George. The Scandal of Money: Why Wall Street Recovers but the Economy Never Does (Kindle Locations 683-696). Regnery Publishing. Kindle Edition.

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Reading 2016 07 20

The Secret History of the Minimum Wage by Diedre McKloskey at Reason

Friedman’s Sampler from the WSJ in 2006

What most people really object to when they object to a free market is that it is so hard for them to shape it to their own will. The market gives people what the people want instead of what other people think they ought to want. At the bottom of many criticisms of the market economy is really lack of belief in freedom itself.

“Fair” is in the eye of the beholder; free is the verdict of the market. (The word “free” is used three times in the Declaration of Independence and once in the First Amendment to the Constitution, along with “freedom.” The word “fair” is not used in either of our founding documents.)

From Don Boudreaux at Cafe Hayek’s Quotation of the Day

American “Progressives” a century ago explicitly rejected the idea that an ordinary person spending his or her own money does so in ways that promote that ordinary-person’s best interest.  “Progressives” believed that knowledge of that ordinary-person’s best interest, and the fortitude to pursue it, was possessed reliably only by “experts” (that is, “Progressive” professors, pundits, politicians, preachers, and mandarins).  Today’s “Progressives” differ only in being more crafty than their predecessors of a century ago when making the case for the state to superintended the lives of ordinary people.  While today’s “Progressives” speak of “nudging” by the state and of government efforts to reduce “phishing for phools,” the contempt that today’s “Progressives” have for the choices and abilities of ordinary people is no less searing than was the contempt felt by “Progressives” of the past.

From Matt Ridley Industrial Policy Can be Regressive

The history of industrial strategies is littered with attempts to pick winners that ended up picking losers. Worse, it is government intervention, not laissez faire, that has done most to increase inequality and to entrench wealth and privilege. For example, the planning system restricts the supply of land for housebuilding, raising property prices to the enormous benefit of the haves (yes, that includes me) at the expense of the have-nots. The government favours private pensions, creates tax loopholes and subsidises farming and the opera.

Why are salaries so high in financial services? Because there are huge barriers to entry erected by government, which hands incumbent firms enormous quasi-monopoly advantages and thereby shelters them from upstart competition. Why are cancer treatments so expensive? Because governments give monopolies called patents to the big firms that invent them. Why are lawyers so rich? Because there is a government-licensed cartel restricting the supply of them. Why do civil servants get so many knighthoods — symbols of inequality? Because they control the supply of them.

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The True Costs of Compliance

from Daniel Yergin at the WSJ, Markets Run Into Skepticism—and Regulators

There had been a shift in the balance of confidence—the respective weighting in people’s minds between the role of markets and government, between the invisible hand and the visible one. I once asked the great statesman Lee Kuan Yew, the founder of modern Singapore: What caused the shift? He answered with his customary simplicity, “Communism collapsed, and the mixed economy failed. What else is there?”

In other words, it became clear that over-reliance on governments tended to run economies into a wall—whether it was stagflation in the U.S., or paralysis in the mixed economies of Britain and Western Europe, or devastating hyperinflation and budget deficits in Latin America.

After the 2008 crisis, financial regulation needed to be fixed. But what about the results? The Dodd-Frank bill was 2,300 pages. Should it have been 2,500 pages, or would 1,800 have been enough? On top of that are an estimated 26,000 pages of complex rules to implement the bill.

If it is not instituted wisely, with restraint and foresight, regulation becomes a drag on the economy, a tax on job creation, a barrier to innovation. It also boosts “compliance,” America’s great new growth industry. Indeed, in these days of the gig economy, it is said that if you want lifetime employment, go into compliance.

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The Racist Minimum Wage

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The excellent and telling graph above is from Mark Perry’s Carpe Diem.  The incredible jump correlates very strongly  with higher minimum wages that took place in several large urban areas.

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Capitalization vs Regulation

While the left claims the greedy 1% led us to financial ruin, years of reflection indicate that wrongheaded regulation and policy had much to do with magnifying the depth of the recession. Deregulation was not the problem, wrong regulation was the problem and Dodd Frank has not fixed it.

Regulations are not better if they are longer. Most likely the opposite is true. Simple regulations strongly enforced will serve us better.

Letting banks opt out of regulations by holding higher capital ratios is a great way to bring competition to the bloated salaries on Wall Street while protecting the taxpayer.

From the editors of The Wall Street Journal, Fixing American Finance

Don’t believe the shrieks that this is about “rolling back” financial reform to let the banks run wild. The financial system was heavily regulated before the 2008 panic; regulators failed to do their job (see Citigroup) and missed signals from the housing market, among other mistakes. The Dodd-Frank Act of 2010 doubled down on the same approach: Give even more power to regulators with the promise they’ll be smarter the next time.

History tells us that is a fantasy. Regulators will focus on solving the previous problem, while they miss where the excesses are really building. As Charles Kindleberger taught, the essence of a credit mania is that everyone follows everyone else and thinks it will never end. Regulators are no better than bankers. As late as March 2008, then New York Fed President Tim Geithner was telling his colleagues on the Open Market Committee that banks were in good shape.

Mr. Hensarling has a better idea, which is to let banks build much higher equity-capital cushions to protect against the next mania and panic. Now, as before the crisis, regulators pretend that giant banks have abundant resources to absorb losses by allowing them to report a bogus “Tier 1 risk-based capital ratio.”

With a complicated process subject to intense lobbying, regulators undercount exposures they deem to be safe—the way they designated mortgage-backed securities rock-solid before the last panic. This allows well-connected bankers to convince Washington that their favorite assets should have low “risk weights.” Regulators can politically allocate credit by favoring some types of lending over others.

The Texas Congressman wants a simpler system in which private investors with money at risk decide which assets are safe. Under the Hensarling plan, banks can opt out of today’s complicated rules if they have capital equal to 10% of their assets. Their tally of assets has to include off-balance-sheet exposures. No more hiding toxic paper in conduits or structured-investment vehicles as Mr. Geithner allowed Citi to do before the financial crisis. And no more pretending that a financial instrument has no risk because a regulator says so.

Capital at the largest banks today often runs below 7% of assets. The Wall Street giants would have to raise a lot more equity—and therefore pose less danger to the public—to get regulatory relief. They thus may not like the Hensarling plan, which is fine. Smaller competitors willing to operate without a taxpayer safety net deserve the advantage of lower regulatory costs.

The promise of the Hensarling plan is more safety for taxpayers and a banking system that supports a growing economy. One reason Dodd-Frank has never delivered the economic boost that PresidentObama promised in 2010 is that Washington’s distorting role in the flow of credit was dramatically increased.

In this era of hyper-regulation, David Malpass of Encima Global notes that banks have been making relatively few loans to small and mid-size companies while extending huge credit to large corporations and government. A slow-growth economy that doesn’t efficiently allocate credit isn’t safe for anyone.