Monetarism, Laissez-Faire Capitalism, Augusto Pinochet, Chile, Hyperinflation, El Ladrillo, Chicago Boys, Milton Friedman and Miracle of Chile

Posted by PITHOCRATES - March 6th, 2012

History 101

During the 19th Century Mercantilism gave way to Laissez-Faire Capitalism and Free Trade

Portugal and Spain were superpowers around the 16th and 17th centuries.  Great monarchies with mercantilist economic policies.  Which was all about trade.  Maximize exports.  Minimize imports.  Settle colonies to mine/harvest raw material.  To ship back to the mother country.  Where they manufactured goods from the raw materials.  And exported them to other countries.  Selling them for gold and silver.  Which was key.  Maximizing the trade surplus in the balance of trade.  Finished goods going out.  Gold and silver coming in.  For the nation that gathered the most gold and silver won in the zero-sum game of mercantilism.  Where the monarchy works with business.  Picking winners and losers.  And rewarding the winners who help enrich the monarchy.

Of course, these policies force a kingdom’s subjects to pay higher prices.  By keeping out lower-priced imports.  And with special deals favoring some domestic industries so they can sell at monopoly prices.  They nationalized their Industries.  Creating an aristocratic class.  Composed of government officials.  And their partners in the nationalized industries.  Living the good life on the backs of the poor.  Who paid high taxes.  And high prices.  To support those mercantilist policies.  And it was these policies that settled South America.  Taking all of their gold and silver (bullion).  Shipping it back to the mother country.  The surge in bullion in Europe made it less scarce.  And less valuable.  Meaning it took more of it to buy the same things it once did before this surge.  Resulting in higher prices.  And inflation.  Hurting the consumer more.  And leading to the development of the quantity theory of money.  And monetarism.  Which held that the amount of money in circulation had a direct impact on prices.  The more money the higher the prices.

With the rise of Parliament in Britain power shifted from the king to the people.  Via their representatives in Parliament.  Instead of rule by dictate there was rule by consent.  Which made the business of choosing winners and losers more difficult.  Parliament had the power.  But Parliament was more than one person.  It was full of special interests.  Which made it more and more difficult to choose any one special interest over another.  Unable to curry favor for one’s own interest one didn’t support another’s interest.  At least not when that support came at the expense of your interests.  So there was another power shift in addition from the king to parliament.  There was also one from the king to the markets.  So during the 19th century mercantilism gave way to laissez-faire capitalism.  And free trade.  An economic system that let the British Empire dominate the world during the 19th century.  Making it rich.  And powerful.  Thanks to that vigorous economic activity that could build the world’s most powerful navy.  And pay for an army to garrison an empire.  Meanwhile the old school mercantilist empires fell from superpower status.  And became shadows of their former selves.  Soon the Spanish and Portuguese colonies would gain their independence from these dying empires.

Milton Friedman’s Monetarism turned the Chilean Economy Around

The South American nations may have hated their European masters but they liked one thing about them.  Their mercantilist policies.  Which survived into the 20th century.  Where government partnered with business.  In the worst of crony capitalism.  Where special interests that favored the ruling powers received government favors in return.  Usually protected markets.  And favorable legislation.  That allowed them monopoly prices.  Giving them great profits.  Generous union wages and benefits.  And generous health care and pensions.  At least, for those politically connected.  So the government rigged the game for them.  And they made it worth the government’s while to rig the game.  All of this paid for on the backs of the poor.  Who paid high taxes.  As well as high prices.  And suffered abject poverty.  Which made for an unhappy people.  And a large amount of government turnover through revolution as dictatorships and military juntas overthrew other dictatorships and military juntas.

In 1973 it was Augusto Pinochet’s turn in Chile.  Who came to power in a military coup.  At the time the country wasn’t doing so well.  And in full mercantilism.  The economy was in the toilet.  There was abject poverty.  And hyperinflation (peaking at 1000% or so) as the government printed money to pay for its out of control spending.  To try and bribe the angry mob and keep them from overthrowing the latest dictatorship.  Pinochet was the guy to fix that.  Like everybody that came before him.  And after his military junta failed as the previous military juntas failed, he tried something new.  Thanks to something called El Ladrillo.  And economic plan so thick and heavy they called it ‘the brick’.  A plan prepared by the Chicago Boys.  Chilean economists schooled in the Chicago school of economics.  Pinochet even met with Milton Friedman.  Prominent economist of the Chicago school.  And monetarist.  Who came down to give a speech.  (Interestingly, for the American left roundly criticized Friedman for giving a speech in a right-wing dictatorship.  Though he received no such criticism for giving the same speech in a left-wing dictatorship – communist China.  Showing that the political left was okay with human rights violations as long as they were committed in the left-wing dictatorships they so admired). 

Pinochet asked for some economic advice.  Friedman gave it.  And Pinochet followed it.  He ditched the mercantilist policies.  Embraced laissez-faire capitalism.  Privatized the state industries.  Established free trade.  Cut government spending.  And stopped printing money.  Ending the hyperinflation.  Replacing it with a strict monetary policy.  This didn’t please the politically connected as they lost their privilege.  But Friedman’s monetarism turned the Chilean economy around.  Creating a prosperous market economy.  With a growing middle class.  The strong economic growth led to some healthy tax revenue.  Which in later years funded antipoverty programs.  The Miracle of Chile even replaced the military junta with a democratic government.  Chile now has one of the healthiest and freest economies in the world.  An economy better and stronger than their former colonial master.  Spain.  Who maintained enough of their mercantilist policies to pull them into the Eurozone debt crisis.  And probably could learn a thing or two from their one-time colony.  Who is doing very well these days.  Thanks to the Miracle of Chile.  Milton Friedman.  And the Chicago Boys.  Those great Chilean economists given a chance by of all people a military dictator.

Everyone does Better under Free Market Capitalism, not just the Politically Connected

In 2010 a 7.0 earthquake hit Haiti.  A country rife with political corruption.  With little, if any, free market capitalism.  And even less rule of law.  Where most people live in abject poverty.  In ramshackle housing.  This earthquake claimed 230,000 lives.  A heart-wrenching loss of life.  Especially sad because the impoverished masses suffered the most.  As is often the case in countries with poor economic and political institutions. 

Later that same year, an 8.8 earthquake hit Chile.  Thanks to the economic reforms that rebuilt Chile into a healthy and prosperous democracy, Chileans did not live in ramshackle housing.  The higher standard of living created by the Chicago Boys’ economic reforms created better housing.  And safer cities.  Because of this the far stronger earthquake in Chile killed far fewer people than the lesser earthquake in Haiti.  The death toll in Chile was less than 1,000.  Which is impressive considering that was one of the most powerful earthquakes in recorded history.

Economics matter.  Say what you want about free market capitalism.  Malign it all you will.  But you can’t change some facts.  In particular, everyone does better under free market capitalism.  Including the poor.  For if this wasn’t the case Chile would have seen the loss of life Haiti saw.  But they didn’t.  Because there were no impoverished masses living in ramshackle housing in Chile.  Because those economic reforms improved the standard of living for all Chileans.  Not just the politically connected. 

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The Anatomy of a Subprime Mortgage Crisis

Posted by PITHOCRATES - October 17th, 2010

Old Time Politics – Buying Votes

There’s a lot of lying going on about the subprime mortgage crisis.  How it happened.  Who was responsible for it.  Was it the banks and their predatory lending?  That’s who Barney Frank blames.  Well, them and Republicans.  Or was it some more of that irrational exuberance that led to a real estate bubble?  It created a dot-com bubble in the 1990s.  Which in turn caused a recession.  Was it just a little history repeating itself?  Perhaps they both played a part.  But if they did, they were minor supporting roles.  They weren’t the star of the crisis.  For neither could have done anything had it not been for their enabler.

The Boston Globe’s Donovan Slack writes about one of the enablers backpedaling on his previous rosy statements about the two companies at ground zero of the crisis (see Stance on Fannie and Freddie dogs Frank on boston.com).  Fannie Mae.  And Freddie Mac.  Frank is running for reelection.  And his words are coming back to haunt him.

America is a center-right nation.  To counter that, the Left courts a coalition of special interests and single-issue voters.  Federal workers, teachers, unions, gays & lesbians, pro-choice feminists, environmentalists, socialists, minorities, etc.  Each taken by themselves is a very small percentage of the voting population.  But taken together it’s a sizeable percentage.  Then add in one more very important Democrat constituency.  The poor.  Now with all of these firmly in the Democrat’s camp, it’s just a matter of getting enough of the moderate and independent vote to win an election.  Of course, this is a moot point if they DON’T lock in the Democrat base.  And they do this by giving away as much free stuff and favorable legislation as possible. 

Give Me Your Tired, Your Poor, Your Huddled Masses Yearning for a House They Can’t Afford

The key to locking in the base is, of course, the poor.  There are a lot of them.  So the Left courts them.  Engages in class warfare.  They paint the Republicans as rich fat-cats who want to take their welfare, social security, food stamps, etc., away from them.  That they want to keep them in slums or throw them onto the street.  In contrast, they, the Democrats, want to provide for them.  To help them.  And they give them a lot of things.  To earn their gratitude.  And their votes at the election booth.  And the grandest of all the things given to them?  Affordable housing.

Poor people don’t have a lot of money.  That’s pretty straight forward but it needs to be said.  Because people who don’t have a lot of money can’t afford to buy a house.  Again, that’s pretty straight forward.  But it needs to be said.  Now, when these people apply for a mortgage and get denied, why do you think they got denied?  Here’s a hint.  Re-read this paragraph.  They get denied because they don’t have a lot of money.  You see, if you don’t have a lot of money, you can’t buy expensive things.  Again, straight forward.  But it needs to be said.  Again.  And often.

Now, what do you think a politician thinks the reason was for these poor people getting their mortgage applications denied?  Red-lining.  Racism.  Classism.  Unfairism.  (Yeah, that isn’t a word.  But it works.)  A large percentage of those denied mortgages are from the inner city poor.  And because of previous white-flight, that inner-city poor also happens to be primarily minority.  Hence the charges of racism.  And that’s just gold to a political party who needs poor minorities to vote for them.

The Siren Song of Affordable Housing

Now Barney Frank is running for reelection.  His Republican challenger is using Frank’s own words in his campaign.   And they’re causing some damage.  For Frank sat on the House’s Financial Services Committee (the oversight committee for Fannie Mae and Freddie Mac) throughout the time the crisis built.  And now he’s answering some very uncomfortable questions (this and all quotes are from Stance on Fannie and Freddie dogs Frank).

Frank, in his most detailed explanation to date about his actions, said in an interview he missed the warning signs because he was wearing ideological blinders. He said he had worried that Republican lawmakers and the Bush administration were going after Fannie and Freddie for their own ideological reasons and would curtail the lenders’ mission of providing affordable housing.

Ideology trumped responsibility.  The Left cries foul when the Right doesn’t reach across the aisle, but the Left never reaches out when they have power.  It’s us against them.  Pure partisanship.  Even when there’s great danger brewing.  It’s their interests first.  Then the country’s.  So he protected Freddie and Fannie.  And enabled them to cause greater harm.

Freddie and Fannie are in the secondary mortgage market.  They don’t write mortgages.  They guarantee them (so banks are more willing to take risks with less credit-worthy people).  And they buy these risky mortgages from the banks.  This further reduces a bank’s risk in approving very risky loans to people who are not credit-worthy.  Which is what the Democrats want.  More affordable housing for people who can’t afford to buy houses.  Frank’s committee sets the rules Freddie and Fannie must follow to keep them from approving mortgages that are crazy-stupid.  But that’s exactly what they encouraged.  Subprime loans.  Adjustable Rate Mortgages (ARMs).  Interest only mortgages.  No documentation approvals.  Any bank that didn’t have enough of these mortgages on their books (i.e., risky loans to poor people who couldn’t afford to buy houses) was in trouble.  The federal government would investigate them for red-lining, racism, classism, etc.

The more mortgages Freddie and Fannie bought, the more cash banks had to make more risky loans.  They then dumped these risky loans onto Wall Street.  You see, before the day of subprime loans, ARMs, interest only mortgages and no documentation approvals, mortgages were very safe loans.  But these subprime loans weren’t.  But they looked safe when Wall Street sold them.  I mean, buyers didn’t see the mortgage applications.  They had no idea what a credit risk these people were.  They just knew mortgages were traditionally safe investments.  So they just bought them.  And Freddie and Fannie made it all possible.

Known as government-sponsored enterprises, they didn’t provide mortgages themselves, but rather bought loans from banks and mortgage brokers, freeing up cash so the lenders could make more loans. Fannie and Freddie held or bundled the loans and sold them to investors as mortgage-backed securities.

Investors bought these very ‘profitable’ securities.  This demand just fueled the crisis in waiting.  Because Freddie and Fannie could dump these on Wall Street, they wrote more and more risky loans.  This made everyone happy.  Everyone was making money.  And more people who couldn’t afford to buy houses were buying houses.  And this was, after all, Freddie and Fannie’s mission.  Affordable housing.

In an effort to increase homeownership, the Clinton administration in the late 1990s and the Bush administration in the 2000s pushed Fannie and Freddie to meet growing quotas for buying affordable home loans. Those pushes, combined with a drive for more profits at the enterprises, drove Fannie and Freddie to take on more risk and more debt. They backed subprime and other risky loans, including mortgages for borrowers without proof of steady income.

Even the Republicans got on the band wagon.  New homes sales drive the economy (because of the stuff people have to buy to put into those houses that they can’t afford).  And you make points with the poor and the minorities.  There was just no down side in affordable housing.  Or was there?

But the director of the federal office responsible for overseeing Fannie and Freddie, Armando Falcon, began noticing their expanding portfolios and increasing reliance on risky investments. In early 2003, Falcon warned Congress in a 118-page report of the companies’ potential for a catastrophic failure that could jeopardize the economy.

Okay.  Five years before the crash someone was taking notice.  And he warned Congress.  Thank god someone was looking out for America’s best interests.

But Frank and other Democrats still opposed tighter regulation, Frank most notably in his public statements saying there was nothing wrong with Fannie and Freddie. He and other House Democrats also sent a letter to President George W. Bush in June 2004, saying the proposed crackdown could “weaken affordable housing performance . . . by emphasizing only safety and soundness.’’

Frank and the Democrats were saying that it was more important to put people who couldn’t afford houses into houses than it was to provide oversight.

So he initially supported a Republican measure in 2005 that would have imposed stricter standards on the lenders. But he voted against it in the full chamber because it did not include funding for affordable housing, he said. The bill passed the House.

Frank came around.  He supported a Republican measure to provide stricter oversight.  But he changed his mind.  Once again, affordable housing was more important than the oversight he was supposed to provide.  Then, in the summer of 2008, Treasury Secretary Henry Paulson warned Frank again.  Now Frank chaired the House’s Financial Services Committee.  Now, more than ever, it was his responsibility to reign in Freddie and Fannie.  To provide the oversight that was his committee’s responsibility.  But he still didn’t.  Like Nero, he fiddled as the crisis burned out of control.

In July 2008, then-Treasury Secretary Henry Paulson called Frank and told him the government would need to spend “billions of taxpayer dollars to backstop the institutions from catastrophic failure,’’ according to Paulson’s recent book. Frank, despite that conversation, appeared on national television two days later and said the companies were “fundamentally sound, not in danger of going under.’’

A few months later, Freddie and Fannie would cause the worst recession since the Great Depression.  On Frank’s watch.  And he kept denying that there was any problem until the very end.

Lots of Blame to Go Around – On the Left Side of the Aisle

Barney Frank is not the sole cause of the subprime mortgage crisis.  He was just one of the leading players.  Ultimately, it was an ideology.  Affordable housing.  Putting people into houses who couldn’t afford to buy houses.  This is what caused the worst recession since the Great Depression.  And, yes, the Bush administration did partake in the affordable housing mania.  But if you want to assign real responsibility, ask yourself this question.  Which party do you think of when it comes to affordable housing for the poor and minorities?

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FUNDAMENTAL TRUTH #30: “Liberal talk radio is not successful because liberals are not deep thinkers.” -Old Pithy

Posted by PITHOCRATES - September 7th, 2010

LESS THAN MEETS THE EYE

The Left has long searched for an answer to talk radio.  It is one of the few mediums they do not control.   And it’s a powerful medium.  Lots of people listen to talk radio.  Few of them liberal.

When you hear ‘talk radio’, what do you think of?  Rush Limbaugh?  Probably.  Most people do.  When you hear ‘conservative talk radio’, what do you think of?  Rush Limbaugh again?  Probably so.  Now think of Liberal talk radio and what do you think of?  Silence?  Silence that is so silent that you can hear crickets chirping?  Probably.  Successful talk radio and conservative talk radio are synonymous.  Why?  America is a center-right country.  Limbaugh’s success isn’t due to any genius on his part.  He just says what a vast majority of Americans think.  And the Left hates that.  Because they’re not in the majority.

They sound big.  But that’s because they’ve got big mouths.  Sort of a mouse that roared kind of thing.  They’ve got the vast majority of the network news and print media.  The college professors.  The Hollywood elite.  And a bunch of rich people who assuage their guilt over their unearned wealth by proclaiming their liberal tendencies.  This is not a lot of people.  In fact, it’s quite few.  However, if we read or watch the news, watch a movie or a program about entertainers, go to college or hear the obscenely rich talk about helping the ‘little people’ they can’t stand and want nothing to do with, they’re there.  They’re in our face.  Some in positions of credibility.  So people see them as…credible.  However incredible they are.  Which makes it seem like there are a lot more of them than there actually are.  So, then, who are they?  Really?  These liberals?

THE GUILTY RICH

Some people have amassed vast fortunes for doing nothing. Some inherited it.  Some married into it.  Others have made vast fortunes by pretending to be other people (actors).  Some wrote books.  Others made it big in pop ‘music’.  Others rode a wave of celebrity for silly behavior for which they have no shame.  These people don’t live in the real world.  The kind of world where you get up with an alarm clock and go to work 5 days a week (or more) for a paycheck that barely pays your bills.  No.  These people don’t need alarm clocks.  And they never want for anything.  Except to be loved.

Because there are some in politics (i.e., Liberals/Democrats) that like to make everything into a class struggle, these rich people feel guilty.  For in class warfare, the rich are always the bad guys.  And they don’t want to be the bad guys.  Because people don’t love the bad guys.  So they show how much they care for those less fortunate.  They call themselves liberals.  And we forgive them for all that wealth.  The kind of wealth we say CEOs shouldn’t have.  But it’s okay for rich liberals.  Even though they don’t create jobs.  Or make things that make our lives better.

THE YOUNG AND THE STUPID

Kids are stupid.  Don’t believe me?  Ask a parent.  You tell them not to drink, do drugs, have sex, drive recklessly, skip class, lie, cheat, etc., and they still do.  Not all of them.  But many do.  They engage in reckless, stupid, irresponsible behavior all of the time.  And parents find drugs in their rooms.  Deal with a teen pregnancy.  Or an abortion.  Comfort a child with an STD.  Or help her deal with the trauma she suffers when her ‘private’ nude photos aren’t so private anymore (and seeing her arrested for distributing child pornography).  Or hearing from a child’s teachers (or your priest) that they were forwarded a sexting from your child.  Seeing a daughter in a Girls Gone Wild commercial (and seeing her lose a job because of it).  Go to the emergency room because of a car accident or drug overdose.  Enroll a child into rehab.  Or go to the morgue to identify a dead child.  Or something less traumatic, like babysitting a grandchild while your daughter dances at a topless bar.  Or is out turning tricks. 

Kids live in the now.  And they want to have a good time.  All of the time.  Sex, drugs, abortion and STDs.  That’s what they’re thinking about.  And the ‘skankification’ of women.  Of girls.  Boys want only one thing.  Sex.  And girls want to be loved.  So they’re liberals.  They’re all for the liberation and empowerment of women.  Of girls.  Anything that makes girls ‘easier’.  And helps a girl’s self-esteem by making them more ‘popular’.  So legalize drugs.  And lower the drinking age.  Makes it easier to get girls into bed.  And keep abortion legal.  So a girl doesn’t have to worry about getting pregnant.  Makes her less hesitant in putting out.  And cure those incurable diseases, damn it.  Sometimes you’d like to hook up with a girl without having to get her drunk first.  And she’d be a whole lot more cooperative if she didn’t have to worry about an STD or two.

LOOK AT ME

I drive a Prius.  Because I care.  And I’m better than you.  That’s the message.  But when a rich celebrity drives a Prius and then flies away in their private plane for some fun in the sun, they give a different message.  They’re saying, “I’m a hypocrite.”  And, of course, that they’re better than us.

There comes a time in a rich celebrity’s life when they realize they haven’t done anything worthwhile.  I mean, sure, they’ve become rich and famous.  But they did that by pretending to be someone they’re not.  Or by writing some songs that Big Music marketed well.  Or simply for being good looking.  At some point in that ’empty’ life they need validation.  That their life has meaning.  So they champion a cause.  Warn us about the oceans.  Global warming.  The hungry.  They become politically active.  And provide expertise in things they know little about.  They’ll testify before Congress not because they have scientific credentials.  But because they played someone in a movie who did.  And to show their cerebral prowess they’ll call themselves liberals.  And warn us not to vote for George W. Bush.  For if we do, he’ll legalize rape or send all the gay people to one state.  (And, no, I won’t say who said these things.  I’m sure they’re embarrassed enough.)

And we love our celebrities.  Want to be like them.  So we, too, drive a Prius.  Because we, too, care.  And, of course, because we’re better than you.

THE SELFISHLY NARROW MINDED

The single-issue people care only for single issues.  Gays and lesbians who vote based on only gay and lesbian issues are single-issue people.  People who vote based only on a person’s abortion stand are single-issue people.  People who vote based only on environmental issues are single-issue people.  Etc.  Social Security.  Welfare.  Anti-war.  Anti-nuclear power.  Race.  Redistribution of wealth.  Animal rights.  People can be passionate about any one issue.  And if they are only passionate about any one issue, they’ll vote to advance that one, narrow issue.  And damn the unintended consequences that result from advancing that one narrow issue.  And they’ll call themselves liberals.  Because they’re about the enlightened ideal.  Not profits.  National security.  The rest of us.  Or common sense.

IT’S JUST A JUMP TO THE LEFT, AND THEN A STEP TO THE RIGHT

Liberals are indeed a minority of the population.  And yet our government governs very liberally.  How does this happen?  Simple.  Politicians lie.

During the primary election, they have to appeal to their base.  And their base includes all the small little groups of people noted above.  And more.  To get that liberal vote, they have to show how liberal they are.  Once they get the nomination, they have to move to the center and lie to the independents and moderates in the general election.  Convince them that they are centrists.  If elected, they move back to the left to pay off the far Left that financed their election.  When their poll numbers fall, they then move back to the right.  It’s a dance.  Like the Time Warp.  From the Rocky Horror Picture Show

It’s just a jump to the left
And then a step to the right
Put your hands on your hips
You bring your knees in tight
But it’s the pelvic thrust
That really drives you insane,

Let’s do the Time Warp again!

And there is some pelvic thrusting going on.  But it’s not the good kind.  If you know what I mean.

IS THERE ANYBODY OUT THERE?

So why isn’t there a ‘Rush Limbaugh’ in liberal talk radio?  Because liberals are a small demographic.  And it’s a demographic created from small, narrow, special interests.  And a lot of them have things on their minds other than monetary and fiscal policy.  Foreign policy.  Affordable housing.  They’re thinking about sex and drugs.  Where to jet off to next.  Or checking into rehab.  They’ll rock the vote at election time.  But after that, they have better things to do.  You add it up and there is simply no market for liberal talk radio.  At least, not like there is for conservative talk radio.

When Liberal talk radio succeeds, it’s often by shocking the audience.  Belittling conservatives.  Name calling.  Like on SNL.  Or John Stewart’s The Daily Show.  It’s heavy on the comedy.  Light on the issues.  Because their audience is there for the entertainment.  Not for deep, intellectual thought.

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