http://slog.thestranger.com/slog/archives/2008/11/25/re_in_the_free_market_for_lov Comments On: Re: In the Free Market for Love by Paul Constant en-us Copyright 2009 The Stranger. All rights reserved. This RSS file is offered to individuals, The Stranger readers, and non-commercial organizations only. Any commercial websites wishing to use this RSS file, please contact The Stranger. webmaster@thestranger.com (The Stranger Webmaster) Mon, 23 Nov 2009 00:00:01 -0800 Mon, 23 Nov 2009 16:30:00 -0800 Foundation http://blogs.law.harvard.edu/tech/rss
Ayn Rand fucked up her axioms, big time. And if you start from bad axioms, you reach bad conclusions. On occasion, though, Rand or her followers actually stumble onto something that is true by sheer chance. And the Fed causing the financial crisis happens to be one of those things.

Austrian-school economists have been predicting this since 2001, when the Fed cut interest rates to 1% and left them there for years. How does the Fed cut interest rates? Inflation. The Fed works by doing what are called "open market operations": it buys securities from banks and deposits virtual money into the banks' reserve accounts. For every $1 of added reserves, the banks can lend out $10 through the "miracle" of fractional-reserve banking, and the Fed promises to print as many paper dollars as the banks need to fulfill those loans (which mostly happen through checks or direct-deposit anyway). Because the banks have more money to lend out, they lower interest rates to encourage people to borrow the new money (because they earn more from finance charges on loans than they do from sitting on a money pile).

Up to this point, all economists agree. What happens when this extra money is injected into the economy is where the Austrians disagree with everyone else. The money mostly goes to businesses. Businesses see that interest rates are lower, so they start riskier projects that pay off farther into the future but might not pan out. They spend the money on the equipment and people needed to make that risky investment happen.

Now the new employees/contractors and the manufacturers of infrastructure have more money, and no obligation to pay anything back (because they aren't the ones who took out a loan). They're happy with how much money they have saved up (savings being a cushion to protect them from hard times), so they turn around and immediately spend it. Prices rise, because the amount of money being spent has increased but the amount of goods to buy has not. (For instance, there is only enough wheat to bake X loaves of bread. The government has flooded the economy with more money, but the government can't flood the economy with more wheat, because that additional wheat doesn't exist.)

Prices have risen, but only the people who were directly employed by the expanding businesses have received more money. Everyone else is poorer, because their purchasing power has eroded. But interest rates are still low, so they turn to loans and credit cards.

With all the new credit card debt, the banks' money starts to dry up. Interest rates would naturally rise, if left alone. But the Fed has set a target, so more "open market operations" are conducted to force the interest rate back down. This floods the economy with even more money.

This cycle perpetuates itself a few times, and prices continue to rise because the money faucet is still wide open. So the Fed decides to "cool off" the "overheated" economy (i.e. head off the bust half of the price bubble that they just created) and moves its interest rate target above the free market interest rate, which means they keep doing their "open market operations", except this time they do them backwards: they sell their stockpile of securities to banks, then destroy the virtual money that the banks paid with.

As soon as this happens, people begin to notice that finance charges from the loans and credit cards are taking up more and more of their income. They realize that their savings, which haven't increased all this time, are now practically worthless due to inflation. If anything bad happens, they won't have a cushion to fall back on. So they start to unwind their debt by paying off their loans and credit cards, and try to build their safety cushion back up.

This causes the pyramid scheme to collapse. All those risky, long-term investments? Turns out none of them were good ideas. They only looked like good ideas because interest rates were so low. So the companies that first took out those loans start laying off employees and selling equipment to pay off their loans as quickly as possible, before the company goes under from the weight of the debt.

Now unemployment is higher, and unemployed people spend less of their money. Mostly healthy businesses that only took on a little bit of debt, even debt that would've made sense at high interest rates, are suddenly overwhelmed by the loss in sales. So they start layoffs as well, to pay off their debt.

The whole thing snowballs, and soon you have a recession. The only difference in 2008 is that, this time, people didn't notice how deep they were in debt until after it was far too late to unwind it, so they defaulted or declared bankruptcy in unusually high numbers. This put the banks on the line: whereas normally the banks make out like bandits, if loans aren't paid back then the banks can't afford to give good customers the money that's "safe" in their checking accounts (because the bank spent it behind their backs). The bank fails, the FDIC steps in, yadda.
Posted by Chronos]]> Wed, 26 Nov 2008 17:41:59 -0800 The Stranger Back up your assertions or be condemned to live in an ever shrinking fantasy world.

This statement:
"This recession is the product of Fed controlled interest rates and Fannie-Mae manipulation of the mortgage market. "
is not true.

Deregulation and privatization are at the heart of our current fiasco. Fed-controlled interest rates are hardly a new thing. Fannie-Mae was a late-comer to the rising tide of our financial tsunami. Government agencies are much slower to innovate, remember.

Was that so hard?
Posted by dirge]]> Wed, 26 Nov 2008 12:26:10 -0800 The Stranger
1) Ayn Rand's fiction books were conceived as vehicles for her political and philosophical arguments. She is not a regular novelist, in that she was never interested in examining a situation from a number of vantage points and coming to an artful conclusion about the rich and subtle complexities of human experience. She was a propagandist. This is neither good nor bad in and of itself, but it does mean that her contribution to culture is only as positive as her logic and moral reasoning is sound.

2) As Paul Constant and @8 have pointed out, Ayn Rand's writing style is so ham-fisted and corny that she inadvertently becomes an automatic endorsement AGAINST whatever she is trying to convince us of.

I'm not even going to get into point #1, though I will say that I am with the majority here in questioning the soundness of Rand's reasoning. Nevertheless, my core complaint with Rand is not that she is "wrong." It is that she is such a clumsily crappy writer.
Posted by Emily]]> Wed, 26 Nov 2008 11:48:54 -0800 The Stranger

Posted by Original Monique]]> Wed, 26 Nov 2008 11:39:37 -0800 The Stranger Posted by Alan Greenspan]]> Wed, 26 Nov 2008 09:45:12 -0800 The Stranger
Greg's brother is an economist (or at least still studying to become one) and while we were having drinks with Aislinn, he brought up the fact that his brother had to get a PhD, since no one in economics will take you seriously with only a master's degree. Then we started wondering if Alan Greenspan had a PhD, and if he didn't, maybe that was the whole reason he has fucked up this economy so badly.

Aislinn did a quick search on her phone, and sure enough, motherfucker only has a Masters. And people wonder why he failed so miserably.
Posted by Original Monique]]> Wed, 26 Nov 2008 09:12:57 -0800 The Stranger Posted by Vince]]> Wed, 26 Nov 2008 06:44:26 -0800 The Stranger Posted by octaviastkid]]> Wed, 26 Nov 2008 00:03:03 -0800 The Stranger Posted by Luke Baggins]]> Tue, 25 Nov 2008 23:27:53 -0800 The Stranger i hope it's made as a black comedy.
shit's gonna be funny no matter what.
that book cracks me up!
Posted by BrianMyFatAss]]> Tue, 25 Nov 2008 22:18:28 -0800 The Stranger Posted by jimmy]]> Tue, 25 Nov 2008 21:34:51 -0800 The Stranger Posted by Urgutha Forka]]> Tue, 25 Nov 2008 18:57:18 -0800 The Stranger Posted by Greg]]> Tue, 25 Nov 2008 18:04:48 -0800 The Stranger Posted by Sirkowski]]> Tue, 25 Nov 2008 17:16:06 -0800 The Stranger http://www.aynrand.org/site/News2?page=N…
Posted by The Avenger]]> Tue, 25 Nov 2008 16:58:39 -0800 The Stranger Posted by flamingbanjo]]> Tue, 25 Nov 2008 16:58:12 -0800 The Stranger Posted by paulus]]> Tue, 25 Nov 2008 16:50:31 -0800 The Stranger Posted by Matthew]]> Tue, 25 Nov 2008 16:40:39 -0800 The Stranger Posted by Luke Baggins]]> Tue, 25 Nov 2008 16:39:54 -0800 The Stranger
While you're looking for that quote, you should find the article where she advocates creating federal agencies to manipulate the mortgage market. You'll find both in the fantasy library where works by the caricature of Ayn Rand are kept. Her actual works are against things like the Federal Reserve, farm subsidies, and handouts in general.

When you try to tie her to George Bush, you reveal that you're afraid to hold up your ideas against the ones she actually published. Doing this in the slog is a great service to our side for which you have my thanks.
Posted by Luke Baggins]]> Tue, 25 Nov 2008 16:37:46 -0800 The Stranger Posted by Dawgson]]> Tue, 25 Nov 2008 16:35:54 -0800 The Stranger
So I tried my damnedest to read Atlas Shrugs and after about 30 pages I didn't even give a damn about the ham-fisted ideology in every sentence - just reading the writing style was like having a really hairy, overweight person rub their balls on your face after running for, like, 5 miles in lycra stretch pants while they breathe on you with sour milk breath; just awkward and sad and irritating.

People who are really into Ayn Rand and Objectivism are the right wing version of people who are really into Leon Trotsky and Marxist-Leninism and both are only even mildly acceptable if the person in question is still in college.



Posted by Billy Nilly]]> Tue, 25 Nov 2008 16:29:41 -0800 The Stranger
Manipulating interest rates as chairman of the fed to induce more people to buy houses they couldn't afford was Alan Greenspan's choice, blaming it on Ayn Rand was his cover story.

Blaming Ayn Rand for George Bush's cross-fondling religious handout bonanza may seem like a good way to discredit the idea of the free market, and you have George Bush as an ally in that endeavor, but young people who actually read her will see how far her actual ideas are from this strawman. So keep it up.

This recession is the product of Fed controlled interest rates and Fannie-Mae manipulation of the mortgage market. Neither of these things are consistent with laissez-faire.

Posted by Luke Baggins]]> Tue, 25 Nov 2008 16:28:53 -0800 The Stranger Posted by Bellevue Ave]]> Tue, 25 Nov 2008 16:26:49 -0800 The Stranger Posted by Fnarf]]> Tue, 25 Nov 2008 16:24:19 -0800 The Stranger