Liberty

“How China Became Capitalist”

Brandon Christensen Current Events, Economics, History, Liberty , ,

That’s the title to this short piece by Nobel laureate Ronald Coase and his co-author Ning Wang published by the Cato Institute. Among the gems:

The presence of two reforms was a defining feature of China’s economic transition. The failure to separate the two is a main source of confusion in understanding China’s reform. The Chinese government has understandably promulgated a state-centered account of reform, projecting itself as an omniscient designer and instigator of reform. The fact that the Chinese Communist Party has survived market reform, still monopolizes political power, and remains active in the economy has helped to sell the statist account of reform. But it was marginal revolutions that brought entrepreneurship and market forces back to China during the first decade of reform when the Chinese government was busy saving the state sector.

Do read the whole thing. The Cato Institute ranks third on my list list of trustworthy think tanks. Hoover and Brookings are two that I think produce university-caliber research. Cato ranks far below Hoover and Brookings in my estimation, but it occupies a lonely third place, as none of the other think tanks out there are even close to Cato’s stature, either.

You can check out Cato’s website here.

Who Owns the Fed?

Warren Gibson Economics, History, Liberty , , ,

Have you heard? The Federal Reserve System raked in profits of $79.3 billion last year, almost triple what runner-up ExxonMobil made. The Fed’s business model is a snap—just print money—and unlike poor beleaguered Exxon, the Fed has no competition to worry about. This means a gigantic windfall for the big banks because, although they don’t like to admit it, they actually own the Fed.

Or not. These are all half-truths and distortions, all too easy to find on the Internet. Bloggers like to begin with the discovery that commercial banks hold shares of Fed stock and those shares pay an annual dividend. A further discovery that the Fed makes big profits is all it takes to send some of them off on a conspiracy tangent. Because shareholders in a profit-seeking corporation are its owners, so it must be with the Fed, they think. Profiteering, world-government schemes, and who knows what else, must surely follow. As I will show, these half-baked ideas are distractions from the serious issues that surround the Federal Reserve System.

Yes, commercial banks hold shares of stock in their local Federal Reserve branch, but these shares do not confer ownership in any meaningful sense. Ownership is defined as the legal and moral right to use and dispose of some asset. Ownership can be conditional or temporary, as when you lease an apartment and acquire the right to occupy it for a limited time, but not to run a business in it or do major renovations. Your purchase of shares of stock in a public corporation gives you rights to vote in shareholder elections, receive any dividends declared, and sell your shares—but that’s about all. You may not walk into the corporate offices and start giving orders; on the other hand, you may not be held liable for any misdeeds of corporate officers or employees. If you acquire shares in a nonpublic company like Facebook, you accept additional restrictions on when and to whom you may sell your shares.

Member banks receive a fixed 6 percent annual dividend on their Fed stock and enjoy limited voting rights. But there the resemblance to ordinary shares ends. The banks are obliged to acquire shares when they become members of the Fed, and they may not sell their shares or pledge them as collateral. An initial issue of stock was seen as a good way to capitalize the Fed when it began, but there has been no need for additional capital and those shares are no longer significant.

Each branch has a board of directors with six members elected by local member banks and three appointed by the central board of governors. However, board members are not all bankers. Moreover, under a rule recently enacted by Congress, only nonbankers may serve on committees that select Fed bank presidents. This new rule is one way in which the ground has been shifting under the Fed recently; more about this below.

In the beginning the Fed was quite decentralized. A dollar bill in my wallet is imprinted “Federal Reserve Bank of San Francisco,” a remnant of the formerly dispersed power. The headquarters operation was initially a modest one, operating out of an office in the Treasury Department, but it now has its own imposing building, greatly expanded powers, and a correspondingly larger staff. With so much power now centralized, the branches engage mainly in monitoring local conditions and passing recommendations up to the board of governors. They have also become known for differing interests and points of view. The St. Louis Fed, for example, has an excellent collection of data available to the public. The Cleveland Fed is known for innovative research.

The Fed is a nonprofit institution, but that designation means only that profits are not its primary mission. The Red Cross is also a nonprofit, and like the Fed, it does earn a profit during any year in which gross income exceeds expenses. From an accounting point of view, such profits are essentially the same as those earned by firms in competitive markets, but not from an economic point of view. Competitive profits serve the vital function of directing scarce capital resources to the most urgent unmet demands of consumers. The Fed’s profits serve no such function.

Its income consists primarily of interest earned on its securities portfolio. Until recently the portfolio was made up almost entirely of Treasury securities. It has expanded greatly since 2008 to include mortgage-backed securities, loans to such pillars of the financial system as Harley-Davidson, and other assets including direct real-estate holdings. It incurs operating expenses of the usual sort: salaries, buildings, supplies, and more.

Remember that $79.3 billion profit? The 2010 figure, far higher than the $47.4 billion recorded for 2009, did not benefit the Fed’s managers or member bank shareholders because the money was remitted to the Treasury. That’s the law. It happens every year. If any private firm earned that much in a year it would be headline news and a boon to stockholders. For the Fed this is just an interesting statistic.

Who Calls the Tune?

The answer to the question “Who owns the Fed?” is that it’s the wrong question. Instead, we should ask: Who calls the Fed’s tune? That’s not such an easy question, yet it’s the only way to reach an understanding of why the Fed acts as it does and why it has done so much economic damage.

First and foremost, the Fed was created by Congress and can be modified or abolished by Congress. Clearly Congress is the Fed’s most important constituent.

The U.S. president also holds substantial sway over the Fed. He appoints the seven-member board of governors subject to Senate confirmation. The powerful Open Market Committee, which makes monetary policy decisions, consists of those seven plus the president of the New York Fed and four seats that are rotated among the 11 regional presidents.

But even though it exercises ultimate control, Congress has given the Fed a degree of independence that no other federal agency enjoys. Although its profits are swept back to the Treasury, the Fed enjoys a sweet deal that is unavailable to ordinary Federal agencies, which must plead with Congress for an annual appropriation. The Fed spends whatever it wants on operations, constrained only by the necessity to keep up appearances—not to look like fat-cat bankers. Its profit is whatever remains after all expenses have been paid, and, in contrast to ordinary corporate accounting, after dividends have been paid.

The Fed’s vaunted independence is a good thing, the thinking goes, because we don’t want the stewards of our money to be caught up in the swirl of day-to-day politics. But independence trades off against accountability. After all, in a democracy the bureaucracies are supposed to be accountable to Congress. The purse strings are the primary means of accountability among the other agencies, but there are no such strings tying Congress to the Fed.

Such control as commercial banks exert is not so much a function of their nominal stockholdings as it is of their connections through the network of good ol’ boys that weaves through government and “private” financial institutions. The Fed surely looks out for the interests of major private institutions, especially big banks, insurance companies, and securities firms. It does not want big-bank failures or a stock-market crash. It must be cognizant of foreigners who hold $3 trillion in U.S. Treasury debt and are keenly aware of the Fed’s actions and pronouncements.

These incentives have little to do with the Fed’s official dual mandate: stable prices and high employment. That mandate was established by the Employment Act of 1946 and the Humphrey-Hawkins act of 1978. These were times when no one questioned the Keynesian idea that inflation and unemployment always trade off against each other (the Phillips curve) and that monetary and fiscal policy must steer a course between two extremes. If the proponents of the mandate could see the relatively stable prices of recent years coupled with high unemployment, they would call for major Fed “easing.” If they then found out how much easing we have already had and the consequent monstrous increases in debt, they would surely be speechless.

Swift Changes

Some congressmen are calling for reassessing the dual mandate. This is just one way in which things are changing fast for the Fed. This once-staid institution is under increasing attack and is finding it necessary to defend itself, as when Chairman Ben Bernanke came out of his cloister to appear on 60 Minutes, a decision he may regret given the reaction to his astonishing claim that further “quantitative easing” will not increase the money supply.

New rooms are being added to the Fed mansion even as the sand shifts under it. Congress has given it extensive new powers unrelated to monetary policy, most notably a new consumer protection agency. The idea is that the Fed’s independence will ward off regulatory capture, something that always seems to happen to ordinary regulatory agencies. We shall see.

Rep. Ron Paul is the Fed’s most prominent critic. Last year his bill to require an audit of the Fed garnered a great many cosigners in the House. He reintroduced it at the start of the 2011 session, this time with his son Rand Paul on hand in the Senate to file the same bill there.

But in some ways the Fed is already quite transparent. Its website has extensive reports, updated regularly and more detailed than any releases from commercial banks or private corporations. And while deliberations of the powerful Open Market Committee are secret, detailed minutes are now made available shortly after each meeting.

In other ways it is quite secretive. For example, the Fed refused to disclose the names of banks that got loans during April and May 2008, denying Freedom of Information Act (FOIA) requests filed by Bloomberg and Fox News. Responding to lawsuits, the Fed did not claim it was a private institution and therefore exempt. Instead it cited potential harm to the banks that had borrowed, but the court sensibly ruled against a “test that permits an agency to deny disclosure because the agency thinks it best to do so. . . .” The information was released.

“End the Fed” has become a rallying cry for Ron Paul and his supporters. His little book by that name will not earn any academic awards, but as a mass-market polemic it does a good job of making his case without conspiracy theories or private-ownership sideshows. There is, however, room for honest debate about fractional-reserve banking, which he opposes.

About the Fed, though, Ron Paul is right. Whatever good intentions its managers may have, the Fed, like all central banks, exists ultimately as an enabler of ever bigger government. My colleague Jeffrey Rogers Hummel may be right when he says the Fed is becoming the central planner of the U.S. economy. But when we argue for replacing the Fed with market institutions, we must take the time and effort to get our facts straight and to expose the complex network of special interests that supports the Fed. Wrongheaded and simplistic arguments only hinder the cause.

[Editor’s note: this essay first appeared in the Freeman on April 21 2011] 

The Future of Liberty: Reason or Superstition, Abortion Edition

Brandon Christensen Current Events, Liberty

I have been having an ongoing back-and-forth with co-blogger Hank on abortion. You can find the latest volley here.

Among the gems:

The answer to my question is obviously ‘no.’ It has been the answer for 100,000 years. Not 10,000 years. Not 1,000 years. Not 100 years, but 100,000 years. At least. And, of course, this will continue to be the case in the foreseeable future as well. The last thing we need is to replace a fetish of the past with a fetish of the future when it comes to reproductive rights.

Libertarians use reason and facts to guide their thoughts, not appeals to an unforeseeable future or an omnipotent being (see my original post).

The liberty movement will continue to suffer as long as we have people who appeal to superstition and ignorance to make their points. Underlying this debate is a far bigger one: do libertarians really represent a different kind of politics, or are we, as some on the Left and the Right charge, merely Republicans who think smoking weed is not a crime?

What’s Up with Inflation?

Warren Gibson Current Events, Economics, History, Liberty

Inflation as measured by the Consumer Price Index (CPI) has been almost nonexistent for several years, though it started creeping higher in the first half of 2011. Yet many prices have been rising at double-digit percentage rates. Are official figures trustworthy? And what of expectations? There is a great deal of buzz right now about inflation but also talk of renewed stagnation with the Fed’s QE2 program having ended in June. Could renewed stagnation trigger enough deflation to counter inflation? Or might we get the worst of both worlds—stagflation—as in the 1970s?

We can’t get anywhere with these questions until we agree on the meaning of inflation. At one time the word referred to an increase in the money supply. Over time it came to mean a general increase in prices, an unfortunate turn of events not just because we lost the nice metaphor of an inflating balloon, but also because the shift in meaning tended to obscure the relationship between the two phenomena. Some free-market authors hold out for the old definition, but I suggest this is wasted effort. In my classes I use the phrases “price inflation” and “money inflation” to keep the distinction alive without getting too sidetracked by semantics.

In 1970 Milton Friedman said, “[Price] inflation is always and everywhere a monetary phenomenon.” This is not entirely true but understandable because he was writing at a time when the causal relationship had nearly been forgotten. We can have price inflation without money inflation when there is a supply shock. An overthrow of the Saudi government, for example, might well disrupt the flow of oil from that country. A surging oil price, because it is so important to our economy, would likely pull up the price level with it. In this situation the monetary authorities can help things by doing exactly nothing—letting higher energy prices do the work of encouraging marginal users to cut back. Supply shocks, as such one-time events are called, do not of themselves generate sustained price increases and are therefore not classified as inflation by some economists. Continue reading →

Open Season on White Males

Warren Gibson Liberty , ,

California has a statute (I hesitate to say “law” but that’s another story) called the Child Abuse and Neglect Reporting Act. Will all those in favor of child abuse or neglect please raise their hands? Nobody? So how could anyone object?

Some background: the statute designates certain people as “mandated reporters” of child abuse or neglect. These “reporters” include people whose duties involve regular contact with children, or supervisors of such people. Some higher-ups at the California State University System, which includes San Jose State where I teach a single class, hit the panic button recently and decided every employee in the whole system, tens of thousands of people, would be designated a “mandated reporter.” This would include not just teachers but also janitors, clerks, administrators, etc.

This decision sets up some really nasty incentives.

First, designated reporters are subject to fines and/or jail time if they fail to report an incident. Nothing is said about penalties for filing false reports. Therefore, sure as God made green apples, reports will surge. Anyone who even remotely suspects something that smacks of child abuse will file a report because they have nothing to lose by doing so and a lot to lose by not doing so.

Second, those who file reports are not civilly or criminally liable for their reports. Their identities are kept secret. Here we have a door wide open for anonymous attacks on anybody for just about any reason. Anybody can concoct a story and then hide out, knowing their target could well spend ungodly amounts of time and money digging himself out from under the accusation.

Notice I said “himself.” White males are prime targets, especially those who are “politically incorrect,” including this humble writer.

It’s true that I and many of my colleagues have almost no contact with children. An under-eighteen student might on rare occasions find her way into one of our upper division classes. So it would seem we are at minimal risk. But in fact we are at great risk from charges of something similar to child abuse: sexual harassment. As far as I know there isn’t a mandated reporter law about sexual harassment but that hardly matters – I’m sure we can get in just as much hot water if charged with sexual harassment as with child abuse. All it would take is some female student, unhappy with her grade, to concoct some story about goings-on in my office, or merely some remark or look I supposedly gave her in class. Again, I’d be toast.

We have been ordered to sign a form acknowledging our status as child-abuse reporters. We’ll see. And that’s not all: an online indoctrination course is coming our way. I endured a similar course at Santa Clara University and I cringe at the prospect. Note to students with an entrepreneurial bent: start a business taking these “courses” on behalf of recalcitrant faculty.

Incidentally, where is the union when I need them? Yes, there’s a faculty union which has been helping itself to part of my paycheck for many years now without my permission and with no discernable benefit to me. As yet I have heard nothing from the union on this matter, and I don’t expect to.

Is the Free Market Ethical?

Fred Foldvary Liberty

Free-market economists have amply demonstrated and documented the fact that free enterprise is the most efficient and productive way to provide for people’s economic needs and desires. The simple but powerful logic of supply and demand is irrefutable, and even the critics of the free market acknowledge that the “invisible hand” of self-interest can produce and distribute goods and services without any need for central planning and control.

Yet, the pervasive critics and opponents have succeeded in convincing much of the world that there is something sinister or immoral about the free market and private enterprise. Even when they acknowledge its efficiency, they claim that free enterprise is somehow unfair or inherently exploitive. Even when they agree that the free market is productive, they argue that it produces the “wrong” goods, too much advertising, for instance, or too many luxury goods, and not enough “public goods” such as education.

The opposition to free markets, then, is often not so much an economic claim as a moral one. Marxists, for example, claim that profit is the taking away from the workers part of the value which they put into their products, a value that, in their view, rightfully belongs to the workers. Less radical advocates of government planning claim that though the free market may be efficient, it does not produce the goods that people “really need,” such as health care, or that the inequalities of wealth resulting from free market forces are for some reason wrong.

When one speaks of what people should consume, or what a worker should earn, these “shoulds” are moral considerations. These are moral attacks on the free market, which must be answered by moral arguments, since they are based on goals and values rather than facts about how an economy works. So let us examine the question, is the free market ethical? In order to answer that question, we must first ask, what exactly is a free market? Continue reading →

National-Socialist Management Practices; No Obama Derangement Syndrome

Jacques Delacroix Current Events, Law, Liberty, Politics , , , ,

[Editor’s note: this essay first appeared on Dr. Delacroix’s blog, Facts Matter, on July 18 2009]

Quick update on health care on 7/20/09:

I have said before on this blog that there is something wrong with the way we deliver health care in America. It costs us twice more per capita than it costs Europeans and we die younger. That is true in spite of the fact that liberals lie a lot on the subject of health, especially, regarding the number of “uninsured.” The Republican Party missed that boat entirely and we are paying the price for it now.

The President’s insistence that bills must be passed before the August recess has only one explanation: He wants to avoid debate like the plague. Think it through. If our health care system is as bad as he says, it has been so for a long time and we can probably stand it for an additional three months, or six months , or a year. Decisiveness is not everything. (See below.)

After all, the President wants to dispose for the long run of 1/6th of our economy. Given the considerable slowdown in economic growth his other policies guarantee, given the aging of the population, it will soon be 1/5, or 20 % of the economy. There is nothing else like it. For comparison, national defense never took more than 5% since the Korean War.

Aside from anything I may believe about the influence of government on  effectiveness in health delivery, I am interested in the political consequences of the President’s plans, of all his plans. With health, he will make sure the government controls the economy to an unprecedented level. He is turning the US into a corporatist state. That’s another word for “fascist,” without the violent overtones. Continue reading →

Hating Energy Dependence, Not Loving Energy Independence

henrymoore Liberty , , , , , , , , ,

I have been working on this piece since November 30th. I wrote the bulk of it on the first day, and most editing since has been cosmetic. It is related to a project I am helping a friend with, although that is not the reason I wrote it. I don’t often blog about things that recently happened, and when I do bring up current events it is usually in a very general way. The same is true about this post as well. Still, gas prices have been falling, where I’m located at least, ever since before Thanksgiving. A gallon of regular has been stuck at $2.94 for a week or more now and I begin to wonder if they’re not ready to go back up again. Mentioning that is the best I can do to tie to any recent goings-on to the material below, which I hope you, the reader, enjoy, as it is my very first official Notes on Liberty contribution. Thanks again, Brandon, et al.

What’s so bad about Energy Dependence?

Contrary to what one might be led to think, energy independence need not be the opposite of energy (inter)dependence. Likewise, contrary to what many advocates of free markets and free trade will say, energy dependence (perhaps not their choice of words), is not a good thing. Energy interdependence certainly can be a good thing, but in today’s world I can’t agree that every instance of it always is.

The argument in support of energy interdependence runs, energy is cost-effective so long as it is abundant, therefore, the more suppliers of energy we have, the better. But the statement can also lead to another conclusion: therefore, the larger the size of the supply, the better. What this should mean is a very large domestic supply is as good or better than simply a large foreign supply. This does not mean they aren’t both good. And of course, the more suppliers there are the greater the potential for competition to lower prices, but I suspect that it is much easier to get competition amongst a few suppliers in a free (well, sort of) country than it is to get competition amongst several suppliers in an unfree world. Continue reading →

(The Myth of) Gun Control as a Panacea

Amar Ali Current Events, Liberty

Just because this is my first post on this consortium, don’t feel shy to comment or rip in!

In light of the horrific tragedy in Connecticut, liberals (not to be confused with leftists[i] ) have decided to take this opportunity to push a political agenda. Inevitably, this leads to dubious arguments rushed to by emotionally moved people trying to justify drastic and sometimes extreme policy positions.

What better time and opportunity to deconstruct this myth and inject a broader perspective?

The most common and tired false rationalization is that guns kills, therefore, gun control, or banning guns would lead to less deaths. Coincidentally, on the same day as the Sandy Hook tragedy, 22 children in China were attacked by a man wielding a knife[ii]. Does this mean we must ban knives or have “Knife Control”? Most would respond no. In fact, it has been shown that more people have been killed with Hammers and Clubs[iii].

Of course the common retort is that guns are different, that they can be controlled and would lead to a decrease in crime. Problem with that theory is that criminals rarely follow the law. Does a person willing to commit an illegal homicide care whether their gun is legal? And in reality, it shows as crime has increased after bans in UK[iv], [v]  and Chicago[vi],[vii] and the after strict bans. Reports show that homicides in Chicago outpace that of Afghanistan[viii] and it is the only major US city to see increases in homicides.[ix]

Here gun opponents will eagerly jump up to point to Europe to demonstrate cases of “successful” gun control. Unfortunately Continue reading →

Abortion, the Conception of Life, and Liberty

Brandon Christensen Current Events, Law, Liberty , , ,

Ridicule is the only weapon which can be used against unintelligible propositions. Ideas must be distinct before reason can act upon them; and no man ever had a distinct idea of the trinity. It is the mere Abracadabra of the mountebanks calling themselves the priests of Jesus. – Thomas Jefferson, 1816

My blog post on freedom and feminism prompted a number of short but informative dialogues in the comments section, and I thought it would be a good idea to draw some of these arguments out a little more and really delve into the implications of what it means to be free.

My original post was meant to serve as a general outline of the major rift within libertarianism (and, by implication, the American Right) today: the cultural one. I think that the rift between libertarians on cultural issues is actually much less serious than the one between libertarians and conservatives, and the comments section highlighted this important disagreement. Instead of a mutual mistrust based upon suspicion of authoritarian tendencies hiding in plain sight, libertarians actively fight conservatives when it comes to the struggle between liberty and power.

Two key arguments will be exploited on this blog for the sake of showing Ron Paul Republicans and other, newer members of the libertarian movement just how nakedly aggressive and barbaric anti-abortion laws really are. Continue reading →

Inside Insider Trading

Warren Gibson Economics, History, Liberty

Insider trading is something we hear a lot about these days. To most people, the practice smells of foul play, and federal law restricts it. But the inside story of insider trading is something very different, as we shall see. The alleged ill effects on shareholders in particular and on the economy in general are mostly illusory, and in fact insider trading produces benefits that are little understood.

If I may first indulge in a little personal history: I was once a corporate insider. Two friends and I started an engineering services firm in 1982, and we set it up as a corporation. The paperwork required to register the corporation was minimal, but the law allowed us to offer shares only to specially qualified individuals, in addition to ourselves and our employees. Actually this rule wasn’t binding on us. We didn’t want to be answerable to strangers so the only “outsiders” we sold to were a couple of relatives, whom we later bought out.

Most Silicon Valley firms like ours aim to “go public” at some point—that is, sell shares to the general public to raise additional capital and reward early investors. We had no such ambition. We did not want to jump through all the hoops required in an initial public offering, nor did we want the continuing hassle of running a public corporation. (Since that time hassles have been multiplied by Sarbanes-Oxley.) However, we might have benefited from something short of a full public offering, where we would have offered shares to a wider but still limited set of shareholders.

Yet SEC rules allow only a very restricted offering or a full public offering, and nothing in between.

What if we had gone public? The law would have restricted our ability to trade our own shares for reasons roughly as follows: Insider trading would violate our fiduciary responsibility to our shareholders. As managers of a public corporation we would have placed ourselves under a board of directors answerable to shareholders. Our job would be to watch out for shareholder interests, not subordinate them to our own private gain.

There is some truth in these arguments. Shareholders can never be totally sure that management is looking out for their interests. Corporate regulations and employment contracts can do a lot to minimize these “agency problems,” as they are called, but perfection is not possible. Purchasers of shares should be aware of the risks they take and act accordingly. But none of this justifies insider-trading restrictions. Continue reading →

Libertarianism and Feminism

Brandon Christensen Current Events, Liberty , , , ,

I thought I’d throw in my two cents on the recent brouhaha between the two largest camps within the libertarian movement (the “paleos” and the “bleeding hearts”). Really quickly, the differences between the two camps are few and far between on matters of economics, but on matters of culture there is a wide chasm separating the two. The paleos are cultural conservatives and the bleeding hearts are not.

For the record, I consider myself in the “bleeding heart” camp, even though I spent more than enough time in Santa Cruz doing the co-op thing and hanging out out with lazy, dishonest, stinking hippies.

The bleeding heart camp initiated the brouhaha with the following:

This morning Julie Borowski, who makes videos as “Token Libertarian Girl,” shared her answer to the question “Why aren’t there more female libertarians?” […]

Every single one of these things that she criticizes women for doing should be seen not as causes for shame, but as complex choices that smart, thoughtful women can and do make, without destroying their lives in the process.  In addition, Borowski is making arguments that conservatives hurl at women all the time. If we want to pull young women away from liberalism and toward libertarianism, repeating the very same intellectually patronizing conservative arguments that pushed women to liberalism in the first place doesn’t seem to be the way to go.

And a follow-up post had this tidbit to add: Continue reading →

The Long and Short of Short Selling

Warren Gibson Economics, Law, Liberty

Short selling is a little-understood, much-maligned tactic by which traders can profit from their belief that a company’s stock is overvalued.

Following the financial problems of the last two years, short selling has come under fire, with new or revived regulations proposed to curb the practice. It is unpatriotic, destructive, and destabilizing, say the critics. Such complaints are nothing new. President Hoover blamed short sellers for the continuing market declines of 1931 and 1932, threatening regulation or even outright prohibition. “Individuals who use the facilities of the [stock] Exchange for such purposes are not contributing to the recovery of the United States,” he grumbled.

Defenders say short sellers add liquidity to markets. When short sellers are present, buyers encounter a more liquid market because they face a larger pool of sellers than they would otherwise. More sellers—more liquidity—means more predictable prices and smoother price changes. Shorts can put a damper on runaway enthusiasm, and when they are right, they can hasten the demise of failed businesses.

The mechanics of short selling are simple. You borrow stock and sell it, hoping its market price will decline so you can repay your loan with stock that you buy cheaply. In the meantime, you are said to be “short” that stock, the opposite of the situation of someone who owns the shares and is “long.” For widely traded stocks, brokers can easily find shares to borrow, either from their own inventory or from customers who have agreed to make their shares available. For thinly traded stocks it may be difficult or impossible to find shares to borrow. The short seller must pay the lender the amount of any dividends that the stock pays while he is short. And most brokers require cash on deposit to cover the obligation to buy the stock later on. Continue reading →

The Logic of Logic

Fred Foldvary Liberty

Logic means inference, consistency, and inevitability. By inference, one proposition implies another. For example, if California is within the United States, then being located in California implies being located in the United States. By consistency, if A = B and B = C, then A = C. By inevitable determinism, the constants of the universe must be what they are, and cannot be otherwise.

The word “logic” derives from the Greek “logos,” meaning “reason.” In dictionaries “logic” is often defined as “reason,” but then “reason” is defined as “logic,” which makes that definition circular and meaningless. Dictionaries also say that logic is about validity, but that too is circular. The meaning of logic cannot logically come from the implications of logic. Continue reading →

I Bid $100,000,000,000,000,000

Warren Gibson Liberty

The debt ceiling was technically reached on Dec. 31 and the Treasury is now engaged in shell games that will keep the lights on until about March 1.  After that, the consequences could be pretty messy, as explained here.  The Treasury will not have the cash needed to pay current bills and will have to stiff somebody — Social Security recipients, federal employees, suppliers or who knows.  I wouldn’t be surprised if some smart people are trying to think of ways to get money from the Fed, which has a monopoly on money creation, to the Treasury while sidestepping the Debt Ceiling.

If the Republicans try to use the debt ceiling as leverage to get the spending cuts they say they want (not defense cuts of course), they will lose.  Obama will cross his arms, there will be chaos for a few days, and then the Republicans will cave and the president will win.  Another tactic is needed.  Here’s my modest suggestion to the Republicans: raise the debt limit to $100 quadrillion ($100,000,000,000,000,000).  For one thing, it’s time we learned a new “illion.”  I know, it wasn’t long ago that we learned to say “trillion” but we might as well get quadrillions teed up and ready to go.  More seriously, this move would focus on the Obama spending orgy and the explosion of debt that could follow.  Default on the debt or hyperinflation would not just be financial upheavals but could rend the very fabric of society.  This is where the Republicans should focus, not on the debt ceiling.