Shell game

All government spending must be paid for by one or more of

• Immediate taxes
• Deferred taxes (including interest)
• Higher interest rates
• Higher inflation
  

In view of this fact, there is no such thing as a tax cut, there is only a tax shift. You can shift the burden of taxes from investors to wage earners, or from domestic source to foreign sources but eventually the piper gets paid. The only way to lower the tax burden is to reduce government spending (and thus government services.)

Now for the last decade the Republicans have been running a scam: They promise to lower your taxes and that gives them permission to wildly spend on everything their hearts desire including golf trips to Scotland. But voters have caught on to this lie, which is one reason that Barak Obama was elected and we came to a hairs breath of veto proof Senate.

Libertarians know that government spending is the real danger, every service that government provides must prove that the value delivered to citizens exceeds its cost, otherwise we are diverting resources from more profitable use by the private sector.

A useful policy option

The next administration should change the tax law so taxpayers are given a 200% deduction for charitable giving during 2009, the deduction should decline to 150% in 2010 and to the normal 100% deduction in following years. The current cap on the deduction should be removed or at least raised for one year.  The idea is to let Americans choose the causes they want to support rather than Congress. A big dose of charitable giving next year would be more likely to get to the people who most need it than any government spending.

Retire Stimulus

Words are an important part of the political battle. Who ever controls the words controls the debate, thus the difference between an "undocumented worker" and an "illegal alien." And in this current economic crisis, the word of the day is "Stimulus." But really we are beyond the point of "Stimulus". When the Fed changes rates from 5.25% to 5.00%, that is stimulus. When the Federal Treasury sends out tax rebate checks, that is stimulus. And to be frank, we've already tried those things and they didn't seem to do a damn bit of difference. We should admit that when Congress voted to allow the Treasury Secretary to spend $700 billion to shore up the financial system, we were way past stimulus. We are now into "mitigation".

As in, we are now in a recession and possibly heading into a Depression, so we need the mitigate the pain the country is already feeling. The economy doesn't need smelling salts, it needs morphine. The truth is the government has a lot less control over the economy than either Democrats or Republicans will admit (you can't exactly run for office on the slogan, "I can't make your life any better, but I look better on TV than my oppenent.)

So in a few months we will have a new president who feels the urgency of the situation (unlike the current clown incumbent. So hope he does some good mitigation, think happy thoughts, and smile through the pain.

Regulation and the Credit Crunch

One of the issues that came up during the campaign is the issue of regulation versus de-regulation. Many Democrats make the claim the deregulation of the financial system was the cause of the credit crunch. It is true that the actions taken after the S&L crisis resulted in a shift of mortgage origination from regulated banks to unregulated mortgage brokers and the Federal Reserve, which was given authority to regulate mortgage lending, never proposed rules for mortgage lending until we were deep in the crisis.

However, that does not explain why Wachovia and Washington Mutual failed, or why Bear Stearns was taken over with government and why Lehman Brothers filed for bankruptcy. The two banks were clearly watched over by Federal regulators and while Wachovia did have investment bank assets, it was the commercial bank activities that resulted in its demise. The two investment brokers were never closely regulated so you can't blame "deregulation" for their demise. They were always assumed to be open for failure.

The sour fact is that no amount of regulation would prevent the kind of credit crisis. Regulators are drawn from the same industry that they regulate and they gain no superhero powers when they start to work for the government. Regulators, when they are doing their job, can prevent an industry from failing in obvious ways but will never be able to stop a company from failing in non-obvious ways. Governments can not legislate away the greed and stupidity that results in market bubbles. They can close certain routes to disaster but fools will always find new ways to lose their money.

Libertarians not opposed regulations. The only way markets will be efficient is if there are enforced rules promoting transparency, equal access and fairness. This is precisely why governments were created in the first place. However, any regulations seeking certain price levels or granting special rights to certain buyers or seller should be opposed. But Libertarians know there are limits to government powers; that buyers and seller must take responsibility for the transactions they engage in.

Technorati Tags: Regulation

Banking Insanity

One of the follies this crisis has brought out is the idea of unlimited backing of bank deposits. The old limit was $100, 000 per person at each bank. The emergency bailout bill increased the limit for 1 year to $250,000 per person. Subsequently, the FDIC announced that it was guaranteeing all bank deposits.

The original rationale for the limit on deposit guarantees was that it allowed big (supposedly sophisticated) depositor to enforce a market discipline on banks. Any bank that was careless in lending would lose large depositors. Banks have gamed this rule by using "brokered deposits", that is getting deposits from brokers who break up big chunks of money into FDIC backed amounts. The bad banks attract the brokered deposits by offering above market rates, which puts pressures on the good banks to compete with higher rates. Regulators should step in and stop the zombie from cannibalizing his fellow banks.

But now that is all gone away. Nothing bad is allowed to happen to anyone any more. The government will make all ouchies go away. The non-socialist of you will realize that government doesn't create wealth it just moves it around. The depositors are protected but the taxpayers are on the hook for bad bank behaviour, with no incentive to lend prudently. We've seen this movie before and it's a bad horror film. In theory, the banks pay for the deposit guarantees with the fees to the FDIC. But when a lot of banks get into trouble, the FDIC goes running to the U.S. Treasury and borrows as much money as it needs. Now, how much money does it take to back an unlimited guarantee?

Call to arms

As Thomas Paine wrote, "These are times that try a man's soul." Since 9/11, we have been assaulted on the rights front by a government that is determined to use the excuse of terrorism to expand its gathering of information about Americans. And now that the Bush administration is on the verge of leaving office, we have a new and greater threat. The sub-prime loan bubble has transformed into a credit crisis and stock market crash. But the government intervention, started by the Bush administration and to be continued by the Obama administration, is a cure that is worse than the disease.

Government can not fix all problems. There are many people to blame for this problems we face. We should look at our own actions and try to adjust our lifestyle to the new reality. The great danger we face is that government, in responding to the many calls for economic security and punishment of someone, will impose rules and guarantees that destroy the incentives and risks for business and financial innovation.

We know where the Democrats stand on regulation and market intervention. The Republicans, having been complicit in the current crisis, may retreat into populism and know-nothing. It is important then, that we of a libertarian bent speak loudly to defend free markets and small government. We can not remain as amateurs, throwing stones outside the debate sites, but must capture the high ground of the debate in order the defend our country from those that would trade economic freedom for supposed government safety.

As the Ron Paul run for the Republican nomination and the Obama win of the Democratic nomination shows, the internet gives new tools to spread ideas and organize politically. We must organize ourselves to oppose the coming onslaught of government intervention in markets. Some few may be worth implementing, but the vast majority will be not well thought out, ineffective, or counter productive.