The Freedom Factory

U.S. Treasury Dept. considers converting loans to equity ownership in major U.S. banks…is this a backdoor to nationalization? Congressional push-back to Obama’s revenue raising plans is leaving $1 trillion gap in budget, Obama set to take on credit card companies for charging interest rates that he considers too high, the U.S. Energy Secretary warns that some Caribbean islands will disappear because of Global Warming, and China issues another condemnation of U.S. economic policies…threatens to diversify currency reserves out of USD… Continue Reading

There are two colossal events occurring in the world right now: Private credit and wealth is being destroyed, and in its place a good deal of money is being created. Much is taking place behind the scenes, driving this epic showdown between natural forces pushing for a return to sustainable equilibrium pitted against the full arsenal of man’s capability to resist.  Just as the fog of war can obscure a battlefield until the end, the outcome of this struggle is far from clear. Nonetheless, there are some telling events to note, signs for which to watch, and consequences to mull. Continue Reading

We are moving closer towards a political economy every day. Every dollar borrowed, taxed, printed, and spent by government really comes from the private sector.  Trillions of dollars of national resources are being allocated by politicians and bureaucrats towards things they claim will benefit our economy. Congress just passed a $3.6 trillion budget ($1.2 trillion in deficit), and combined the Federal Reserve and Treasury have dumped $13 trillion into the economy in the last 16 months. What we must all ask ourselves right now is whether or not we trust government with our money? Continue Reading

New Zealand Prime Minister John Key speaks a strange language. It’s English, all right, even with an accent, but he is one of the only world leaders who is speaking of relaxing regulations, cutting taxes, spending within budget, and focusing on making his country more productive.

Rather than jumping on the tax, borrow, spend, print, populist bandwagon with nearly every other world leader, John Key’s solution to the tough times is to “use this time to transform the economy to make us stronger so that when the world starts growing again we can be running faster than other countries we compete with.”

Key’s idea is to grow the country out of recession by improving productivity, not simply catering to populist calls for wealth redistribution, stifling regulation, and growth-inhibiting class warfare taxes. He calls attempts to use debt and money printing to “prop up growth” risky, saying that saddling future generations with debt could be counterproductive. He is one of the only politicians who states “There is actually a limit to what governments can do.”

At a time when governments are growing by leaps and bounds, and everyone seems convinced that Big Brother holds the keys to economic prosperity, it is refreshing to see a world leader (actually an ex-currency trader) embrace sound economic principals.

Key admits that New Zealand will not pull the world out of recession; it’s too bad other leaders lack such humility!

Here’s a link to the Wall Street Journal interview with Key.

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Congress wants to impose 90% tax on Wall St. bonus recipients, Fed will no longer raid legal marijuana dispensaries, auto parts suppliers to receive $5 billion in aid, Mexican drug cartels thriving in U.S., and the Federal Reserve creates $1.2 trillion in new money…just the latest in your Freedom Under Fire Report! Continue Reading

Former Federal Reserve Chairman, Alan Greenspan, published an editorial in the Wall Street Journal today that absolves himself of any wrong-doing in the housing bubble and its subsequent destructive aftermath. Latching onto a weak argument that circa 2002 long-term mortgage and short-term federal funds rates had statistically diverged in correlation, he suggests that the overcapitalization of housing resulting from cheap credit was not his fault. Many critics have pointed the finger at Greenspan for setting short-term rates too low for too long. Access to cheap credit, according to critics, sparked “irrational exuberance” in the housing market, flooding the sector with unprecedented capital and driving prices to ridiculous levels.

Rather, Greenspan blames global trade in boosting foreign savings rates and leaving the U.S. with large current account imbalances that were subsidized by our trading partners. The current account cash flows went almost exclusively into housing, driving long-term mortgage rates to unprecedented lows and encouraging speculation.

Hilariously, in his editorial Greenspan cites famous economist Milton Friedman as saying that during Greenspan’s tenure from 1985-2005, “There is no other period of comparable length in which the Federal Reserve System has performed so well. It is more than a difference of degree; it approaches a difference of kind.”

Friedman did not live to see the aftermath of Greenspan’s policies. Short-term federal funds and long-term mortgage rates did diverge in correlation, but they did so precisely because of Fed and other governmental policies. The structural distortions in our economy leading to sustained trade imbalances were caused by irresponsible monetary and fiscal policies. Congress legislated the creation of the secondary mortgage market, mandated that it funnel capital to subprime borrowers, and taxed away America’s industrial base. Couple this with a sustained period of negative real interest rates orchistrated by Greenspan, and the U.S. economy grew ridiculously distorted over time, channeling the world’s savings towards our consumption, leaving the country bereft of productive capacity. Housing is not productive, but consumptive.

Global trade is not the problem. Current account and trade deficits, of themselves, are not the problem. Artificial interest rate manipulation, social engineering legislation that drives consumption over production, and inflationary monetary policy that drives perpetual inflation and currency debasement are the issues.

Mr. Greenspan accuses his detractors of rewriting history, but that is precisely what he is attempting to do.

White House budget found to have “fuzzy math” on war estimates, new role for federal government to provide broadband Internet, U.S. gives Palestinians $900 million, Harvard economist says bailing out homeowners is a mistake, 4th Obama appointee found evading taxes, bank Nationalists look to Sweden, temporary nationalization of mortgage industry now permanent, 1 in 31 adults behind bars in U.S., Australia leaves benchmark rate unchanged, and Bush memos claim unfettered rendition powers…just the latest in your Freedom Under Fire Report! Continue Reading

With all the speculation on a government takeover of the banking industry, including Alan Greenspan’s statement that “the U.S. may have to temporarily nationalize some banks until the industry is restructured,” we should do some serious soul searching. America has a long tradition of respecting property rights and restricting government power from the private domain. Overt nationalization would be unconstitutional, but change is in the air… Continue Reading

 Through a combination of incompetence and greed, the federal government has placed itself in a position of checkmate. There is no way to finance its budget deficits without devaluing the dollar or causing interest rates to rise.  With $10.6 trillion in debt, $8.5 trillion in new money created or given away in 2008, and multiple years of trillion dollar deficits planned by Obama, government has no way to fund its extravagances without either printing a lot more money or borrowing unprecedented sums.

This means that either Treasury bonds will crash, or the dollar will suffer significant devaluation relative to foreign exchange or precious metals, especially gold. Continue Reading

It seems like everyone is looking for someone to blame for the economic crisis. Congress blames the banks for risky lending practices and corporate greed. Banks blame lawmakers for relaxing regulatory standards, keeping interest rates artificially low, and using Fannie and Freddie Mac to increase homeownership. Both groups also blame hedge funds for manipulating markets and distorting asset prices.  So, who’s to blame?

In isolation, one group might be responsible for our current difficulties. However, it does not work like that. The U.S. economy is a complex system that involves hundreds of millions of participants that interact in trillions of symbiotic transactions. Consumers lend to banks, who in turn lend to businesses and other consumers. Government provides oversight and takes a cut of every transaction. As you can see, there is no single entity to lock in the stockade for all to tar-and-feather.

The more meaningful question everyone should be asking is: how did I contribute to this crisis? Since the problems are rooted in the housing market, let’s start there. If you bought, sold, or refinanced a home in the past 7 years, like it or not, you contributed to the housing bubble. Granted, Mr. Greenspan facilitated your transaction by keeping interest rates too low too long in an effort to spur the economy following the dot-com bubble and 9/11 attacks. But nonetheless, your transaction had a direct impact on the ‘market’ and drove up home prices.

If you consumed beyond your means and carried a balance on your credit card, you contributed to the credit bubble. With access to cheap, short-term funding, the banks profited from your excessive spending habits and made a nice profit charging a 15% APR. Additionally, the banks probably increased your credit balance, adding more credit and leverage to the system. Plus, all the goods you purchased were probably manufactured in China, increasing the U.S.’s foreign trade deficit, which in turn fueled more lending to the banks.

Finally, if you invested in any type of managed investment that had exposure to sub-prime mortgages or leveraged financial instruments, you contributed to Wall Street’s greed. Although you are not directly responsible for the decisions of others, your capital enabled institutional investors to gamble with your money. This is one of Robert Kiyosaki’s primary complaints about managed mutual funds. They always collect management fees, pay themselves ‘performance’ bonuses in good times, but the investor bears all the downside risk. In short, always perform due diligence and understand what you are investing in. Just because it appears safe, does not mean it is.

All of these transactions were made possible by debt, cheap capital, and leverage. Before looking to blame someone else for the economy, first consider how you contributed to the problem. As the saying goes: every time you point a finger at someone, remember there are three fingers pointing back at you.

In summary, the economy will only begin to recover after each American accepts responsibility for and rectifies their individual actions. The force of the market it much greater than any program the government can create. Even the $700 billion bailout, impressive as it is, only represents about 5% of the United States’ annual GDP.  The economy created this problem and should be allowed to resolve it. Placing blame and looking to government to solve our problems will most likely only prolong the pain.