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Fundamental world views: individualism vs collectivism

A recent spat in the media about Rand Paul being unfairly cornered on decades-old civil rights legislation and the resulting discussion has highlighted the fundamental divide in politics today.  Indeed, it represents the fundamental divide in human thought across political parties, time, ages, races, and location: individualism vs. collectivism.

While I cannot do it justice here, a proper understanding of what these two terms are is treated at length in Hayek's The Road to Serfdom, a read that is highly recommended.  In brief, individualism is a philosophy that holds individual, natural rights as sacred, condemning violence of any kind against others except for self defense (or defense of those who cannot defend themselves).  It embodies the concept of sovereignty, which is that we are free to choose and act for ourselves, so long as we do not infringe the rights of others.  The natural result of this basic philosophy is some familiar rights we all know about: private property rights, the right to the fruits of one's own labor, freedom of speech and religious expression, the right to self-defense, and so forth.

On the other side of the divide is collectivism, or a philosophy that individual rights are not as important as the group (whatever that may be), and that all members of the group should be equal (sometimes even strictly equal).  Collectivism's goals roughly can be summed up in this: everyone should "make it," no matter what their differences are.  Where individual discrepancies become too large, they are reigned in via redistribution, coercion or other methods so as to restore equality.

Fruits of Collectivism

Just as individualism has natural results and natural frameworks that arise from it, so does collectivism.  A few philosophies of government fall into this category, among them are socialism and communism.  The stated intent to eliminate the poor or the downtrodden (economic equality) is an obvious underpinning for socialism, although degrees and strategies for implementation vary widely.

But for a moment, envision the results of such a philosophy.  If the desire for equality overrides individuality, which individuals decide what equality really means?  There are some objective measures of equality (for example, some aspects of people financial situations can be measured numerically), but the reality is that human beings engage in subjective valuation of what they encounter; recall the saying "one man's trash is another man's treasure."  If someone else decides what you can have in order to be equal to your neighbor, that may actually feel like a terrible injustice due to your own subjective valuation.

What's more, those who decide what should be given or taken are in a position of relative importance compared to those who do not have this power, and that those with that power tend towards abuse of their position, thus destroying the equality meant to belie the whole apparatus.  In addition, if many individuals in the group agree with the current rulers, what happens when a different set of rulers gain control, and what was allowed and provided for equality's sake previously is now changed to something else?  This reliance on experts or benevolent dictators necessarily will mean that, while some will agree with their actions, some will not due to individual differences that cannot be ignored.  Those who do not agree, though, generally will not have the power to counter that which they do not agree with.

History is rife with examples where socialism and communism had those in charge abusing their position to silence dissent (for the supposed betterment of the whole of course!) to gain economic advantage, such as separate housing programs for the regular people than for the party leaders, etc.

What's more, policies and laws that put individualism on the back seat compared to collectivist goals have fundamental effects on overall wealth and standards of living even when there is no abuse of power.  They largely stem from the fact that, if one is going to be taken care of and "made equal" to his peers despite personal differences, then much of the motivation to excel and produce the effort necessary to benefit himself or society is largely lost.  If responsibility for earning and working hard can be pushed on someone else without repercussions, the natural human temptation is to indulge that laziness.

The effect of the removal of motivation is that, on the whole, society becomes poorer and has a lower standard of living.  This occurs because on average people work less and produce less; work and production are the fundamental underpinnings of a standard of living for a society.  Where there is no hope to excel in an area beyond one's peers or to enjoy the fruits of one's labor, most will not bother to try.  Advancement and financial stability will slowly decelerate.  The weight of those who take more than they give (called externalities in philosophy) will eventually gain critical mass and cause a collapse of the system.  This is precisely what happened in the USSR, a sad tale confirming the drag placed on a society under collectivist government.  Underscoring the rot that was occurring in soviet society was the refrain spoken there: "we pretend to work, and they pretend to pay us."

A final note: another form of government that can be classified as collectivist is corporatism, widely regarded as a synonym of fascism.  In this case, there is generally a two-tier system of equality, with the merging of government and corporate interests forming an elite oligarchy at the top which enjoys many extra benefits and power, with those in the lower tier exercising some form of socialism or crony capitalism in an attempt to enter the ruling class or mitigate their losses.  It can be classed in form as socialism for the rich, where the redistribution is not strictly toward equality; instead it tends to move upward to the ruling class and downward to the poorest in order to secure the consent of the masses.  It fleeces the middle and working classes who are given no political power.  It is simply a more visibly corrupt, obfuscated form of socialism, but the results are generally the same in the end.

Implementation of Collectivism

We have touched on this to some degree already, but it is important to further expound on the methods through which each worldview is implemented.  It must be noted that human beings are, broadly speaking, self-interested beings.  Self interest is not necessarily selfishness, however; a self-interested being may find great reward in providing volunteer service for other people, rationally seeking a net benefit of everyone around himself or herself.  It can take on many forms and is a manifestation of that same subjective valuation that is inherent to each individual's makeup and experience.

Collectivism's goal of equality also takes on various forms: equality of race, equality of financial situations, equality of actions, equality of feelings, etc.  In order to provide equality, however, individual differences in a given area must be reduced or removed.  Being naturally at odds with subjective valuations in some individuals, this imposition of equality on those who would need to change their valuations provides a choice for collectivists: let them choose, or coerce them into being subject to the collective's rules aimed to create the equality.  It is readily apparent that if a choice is provided then equality can never be generally achieved for an entire nation, as those who do not wish to participate will simply act or speak in such a way to contradict the set terms of equality, thus destroying any perception of having reached the goal.

Of necessity, then, collectivist regimes impose the rules of equality by coercion and by force.  Any arrangement where people join the collective by choice and remain by choice is not collectivism, it is simply individualism where many choose to band together for common benefit, by contract!  This fact that the use of force is necessarily for collectivist governments is evident:  under socialism, for example, what happens when an individual does not pay their taxes to aid in redistribution of wealth (toward the aim of economic equality)?  They are harassed, fined, and ultimately jailed.  In the United States, IRS enforcement agents are even issued a badge and a gun, and if you physically resist their efforts to arrest you for violation of these rules, you could conceivably end up shot and killed in the process.

When everyone is forced to comply with collectivist policies then any complaint about the policies or their implementation are met with disdain, as the individual is often painted as not desirous of equality.  In the case of racial equality (a noble goal), they are painted as racist.  In the case of economic equality, they are painted as greedy, or as one who hates the poor, and so forth.  This perception management is necessary for collectivism, as any admission that the use of force does not justify the ends (equality) would destroy the whole regime.

Fruits of Individualism

On the other hand, individualism stresses as sacred individual natural rights, and that those rights do not come from government, but from God or nature.  And individual's rights cannot require another to do anything, such as provide a service, buy a product, or say (or not say) any particular thing, etc.  An individual's rights allows them to utilize their life, time, resources, and private property how they see fit, so long as they do not infringe the same right for others.  An individual's rights also extend to the opportunity to enter into exchanges and contracts with others freely, so long as all parties to any transaction agree and are not misled or coerced (more on this below).

Note that this broad right to do or say as one pleases does not extend indefinitely; one cannot lie or commit fraud, as knowingly spreading falsehood can easily be classed as an infringement of others' right to their agency (free choice).  Providing misleading information naturally impugns another's ability to make proper choices, and as such is a violation of natural rights.  In addition, along with each right comes responsibility to act appropriately and within the bounds of that right (e.g. don't violate the rights of others), and to uphold and defend others' rights to the same.

By deduction, it can easily be found that if all individuals acted within their rights, with self interest, a set of natural structures arise.  First, is the free market, which is simply describing in aggregate many individuals engaging in exchanges and contracts with each other freely.  Within this system, pursuing one's self interest is generally called capitalism.  Capitalism is a system of freedom for contract and exchange, and nothing more and nothing less.

The next system that arises naturally and desirably is a limited government.  No free society will be comprised of perfect individuals, and thus some lying, fraud, and violation of other individual rights is bound to take place.  Individuals have a right to enforce their own individual rights, and to request help from others in enforcing just consequences for violation of rights (a natural consequence of a violation of rights is a loss of at least some rights for the offender, pursuant to the offense).  Limited government achieves these ends by being delegated the authority to act for individuals in defense of their rights (not exclusively, but nonetheless the authority is given).  This delegation of authority is done by consent, trust, and benefits all of society when appropriately discharged; for specific functions government can increase efficiency, justice, and order in defending natural rights, particularly for those who do not have the capability to defend themselves properly.

Among many other benefits of individualism, the natural result is that individuals will pursue exchanges that will tend to be beneficial to themselves under whatever subjective valuation they espouse.  The other side of any exchange will also do so, and the matching of the two parties results in mutually beneficial transactions.  The information that flows throughout the whole society about these transactions serves to direct the ebb and flow of markets, production, and labor, and if all of these are unencumbered by intervention by third parties (where no rights have been violated), it results in a constant improvement in overall wealth and standard of living.  A metaphor typical of this type of improvement is "a rising tide lifts all boats" as all of society is made richer.

It is true that tolerance is required under these arrangements.  The freedom to do or speak as one pleases dictates that one must tolerate differences of opinion and subjective valuation, and not spuriously equate just any action to a violation of natural rights.  Those differences are precisely what makes the entire system of individualism function: they provide the dynamics and diversity that absorbs shocks and changes over time, and encourages the natural flow towards an equilibrium of the highest wealth possible.

Implementation of Individualism

It becomes somewhat impractical for individuals to enforce consequences for rights violations themselves, and there will obviously be some controversy and chaos resulting from it if someone is claiming they are enforcing their rights appropriately while the alleged offender or others say the alleged victim is not.  Naturally, a neutral third party should be agreed upon by both parties, and by agreement their determination of guilt must be accepted.  The obvious implementation of this in society is government, and a particularly relevant example is the court system.  As a check on the court system, a jury is also provided (again, if you insist on your own rights being enforced, you have an obligation to help others enforce theirs, and thus sit on a jury as needed) for similar goals of ensuring neutrality and proper enforcement of natural rights.

The government is also a natural result of individuals who would rather not have to provide for certain common needs for large-scale events, such as war defense, negotiation with other nations, etc.  Realize, however, that government cannot legitimately exist by itself; rather, it exists by contract with individuals writ large, however implicit that contract may be.  In the United States, agreement to the contract is implicit, but the contract itself is explicit (the US Constitution).  The contract is not intended to limit the freedom of individuals but rather to limit the power of government so that it only performs the duties assigned to it as a proxy for them.  The government should not be able to perform any duty, even in aggregate, that the individuals that are party to the contract cannot do for themselves in their own individual sphere (self defense, rights enforcement, contracts, and so on).

As a result, individualism rejects the notion that the government may use force to abridge any individual right if the individual has not violated another's right: a person may not be punished before they commit a crime.  This circumscribes nearly all regulation and control that government may exercise, and strictly limits its size and power; it is also desirable for the contract with government to strictly limit the delegated power, in order to keep it from abridging the rights of the individuals that authorize its existence.

There are various strategies for keeping other people and government in check so as to not allow a drifting away from its ideal limited functions.  Checks and balances between departments and branches are a prominent method.  Another is federalism, which is breaking up government horizontally instead of vertically (checks and balances between branches are a vertical separation); federalism is the separation of power between, for example, states and the federal government in the United States, or even the separation of power between states and counties.  It emphasizes that keeping power delegated more locally gives individuals more opportunity to check government and keep it from overstepping its bounds, as their voice is maximized in a locality.

Additionally, individualism is based upon core principles, rejecting the notion that other people may rule them; it is the ultimate expression of individual sovereignty, and other levels of sovereignty are built purely upon individual free association.  Thus, individuals are ruled by principles and laws made pursuant to those principles, and not by "men."  This rule of law is a central tenet of individualism, which holds forth that other people cannot make decisions for any individual where he/she has the ability to make that decision, and that individual actions are governed by laws that are applied equally to all.

Polar Opposites

The fundamental difference between collectivism and individualism then is the use of force vs. the use of agency.  Individualism is the supremacy of the individual and their right to choose their own actions, so long as they do not harm another or another's property.  Collectivism is simply a veiled form of totalitarianism, where a desire for equality is used to trump individual rights.

It can also be said that collectivism aims to provide "freedom from worry".  This is clearly an invalid use of the word freedom, where by having choice forcibly taken away in certain matters the subjects are somehow made more free.  If collectivism removes the worry of failure, that certainly cannot be described as freedom.  In addition to the unintended consequences of such a goal, it goes against the very grain of choice, as those who wish to opt out are not allowed to do so.  When agency is destroyed the utopian goal of equality and removal of concern creates not a utopia but a nightmare and a totalitarian's playpen.

Between the two worldviews, it can be seen that collectivism is a dangerous system based upon, in effect, slavery and control and theft (redistribution).  Individualism provides true freedom and is most likely to obtain an increasing standard of living and net benefit to all participants.  While there are individual risks and responsibilities that must be shouldered, individualism provides equality of opportunity in that every individual is free to work as hard as they would like, and is free to seize opportunities as they come, but is not free to force those opportunities to come via coercion.

Truly the world views are actually between freedom and slavery.

Note: please see Liberalism by Mises for a wealth in good information on the subject, although he treats it through the term neoliberalism rather than just collectivism.  But he's really talking about the same thing.

Analysis of HR 3200, the national health care bill

A few of the statements in this analysis could be construed as unneeded alarmism, but if even half of their assessment is true, this is very scary material indeed:

http://www.liberty.edu/media/9980/attachments/healthcare_overview_obama_072909.pdf

If you take a look at my last post, you'd realize that a government-sponsored health care system is fundamentally immoral due to the theft factor, and the chilling effect it has on individual liberty. However, the extent of this bill catapults it deep into the territory of medical tyranny. There is nothing positive in this bill, and a cursory reading should be enough to convince any rational human being that the total cost of medical care will not be better under this scheme. In addition, the loss of individual liberty to determine medical care decisions unfettered given the rightful resources the individual has access to will be destroyed to a very large degree.

The solution to our high cost of medical care is not more government. It is less. People think that our current medical insurance system and HMO setup is a free-market construct; it is not. Legislation in the 70's helped create HMOs, and legislation earlier than that created Medicare/Medicaid, which have had a detrimental effect on medical care costs, and have been abject failures by any cost measure.

Our insurance system is broken, because it is not insurance: does your auto insurance policy pay for oil changes, or replacing your brakes? Why not? Because then it wouldn't be insurance! There is a way to reduce the cost of medical care. Bear with me, and I'll put forward a tax-less, efficient, fair, and ultimately low-cost system that has much less bureaucracy to boot.

This goes back to simple economics. How do you get the best price for a service in the marketplace? Honest price discovery. Do we currently know how much medical services should cost (ergo do we have real price discovery)? No, we obviously don't under our current system. Normal economic transactions take place between two individual entities, with no intermediary that has the authority to tell them what they can buy or sell for. Naturally the two parties will try to maximize their end of the deal, and there is nothing immoral about that. Their backdrop is the published prices that others are paying for the same exchange, and that informs the parameters of what is acceptable. In addition, as there is more demand for the service or good, it affects the price as there is more or less competition for the same resources (services, goods). All of this helps to rapidly facilitate the discovery of what the real price for the service or good is, if left unfettered by others (third parties), such as the government (via regulation and/or price fixing) or insurance companies (attempting to do the same thing), or fraud by one of the parties. Hunting down and punishing fraud is one of the only legitimate functions of the government, and it directly helps with proper price discovery.

What we have in our health care today are two external parties inhibiting price discovery: the government, and insurance companies. For the government's part, via Medicare and Medicaid they are engaging in price fixing; and, via regulation of HMOs and insurance plans (always "for our own good, and for the consumer!") the parties' hands are tied to some extent on one side or other of medical service transactions. For the insurance companies part, aside from dealing with government regulation, they form a third party in nearly all medical transactions that inhibit price discovery by patient and doctor.

Think about it: does the average Joe really know how much he pays for medical services? He knows what his co-pays are if he has insurance. If he has no insurance, he either gets no services or goes to the ER, and may not end up paying anyway, so he doesn't know what the costs truly are there either. Because the insurance company is the intermediary, and they have the power to set the price, neither the patient nor the doctor know how much they can get for the transaction. The insurance company has a (possibly regulated) maximum they will pay for any service, and they don't necessarily publish it. The doctor has no idea what that is, but he/she knows that if they charge less than the maximum, the insurance plan will happily pay out the lesser amount. So, they charge really high rates, and the insurance company says "nope!" and gives them their internal maximum payout instead. The patient, meanwhile, has no idea what was paid, and really has no say even if they did know. They only see what their co-pays are, and what the insurance company charges in premiums that come out of their paycheck, which ultimately has nearly nothing to do with what their medical care actually costs.

Some say that supply/demand and price discovery don't apply to medical care. They argue that there will always be infinite demand for medical services. This is complete hogwash, and anyone who says it either has ulterior motives or doesn't understand economics or psychology. If the patient does not have access to the prices for their medical treatment beforehand, how can they decide whether to seek the treatment or not? The patient will always default to the maximum care, because their insurance plan costs will stay largely fixed if they do. If the doctor has no access to prices beforehand, and the patient appears to just say yes to everything, they're going to perform the maximum number of services they can justify, and charge the maximum amount for each. There is nothing immoral about this; it is just the natural result of the signals everyone is sending each other, but obviously it is horribly inefficient. The infinite demand that people argue exists only appears to exist as a distortion in the market due to a lack of price discovery. The result of inhibited price discovery is that costs automatically and naturally go to the highest amount that is affordable. That means literally that the costs would go to infinity if there was an infinite supply of money. Since there is not, it caps out when people are tapped out financially and reach their economic pain threshold.

In understanding the problem properly, the solution immediately jumps out of the page at you. The problem is not greedy doctors, or even greedy businessmen, or even illegal immigrants going into ERs and getting expensive (for us down the line) free (for them) medical care. The problem is threefold:

• Patients do not pay directly for their medical care, so they never see what they paid.
• Prices for medical care are not published beforehand; you can't know what it will cost you until after you get the service. (By the way, isn't this fraudulent?)
• There is an intermediary with nearly sole authority to set prices; the patient literally has almost no say in the matter.

The solution is simple, and we'll hit the obvious benefits afterward:

• Patients must pay directly for their medical care. They may contract with an insurance company to cover unanticipated and rare care (such as emergencies or unexpected problems like cancer), but that must be all that such a policy can cover. If they cannot afford the care, the provider has no obligation to provide the care to them, even if they will die as a result. That sounds harsh, but that is the price of freedom.
  
• Every service must have a pre-published price by the care provider (so that even emergency work is still performed in a market-controlled environment that can be contested in court), or the patient must be notified fully of costs individually before a service is rendered. As much as doctors might hate dealing with the business aspect of their practice, they must.
• Regulation must be removed that is inhibiting the use of more generics, or drugs produced in other countries, or holistic healing strategies (I'm not much for them, but people should be free to use them if they want). E.g. real competition in the drug space needs to be opened up.
  

That's it. A true free market in medical care, and catastrophic insurance only for the rare occurrences. The benefits are, again, many:

• People will begin to take care of themselves better and act like hypochondriacs less when they have to foot the bill. The demand for services will naturally be reduced to a sustainable level (and that pesky infinite demand goes out the window).
• Doctors will be forced to compete with each other, and will be forced to establish reasonable prices for their services. Doctors who are worth the money, or cost less, will be favored, bring up quality and bringing down cost overall.
• People will have the freedom to get their medication from other countries or sources, if they so choose. More competition, less fat cats on pharma street.
• If a person goes to the ER unnecessarily, and suddenly they get told what it's going to cost or are forced to foot the bill or go bankrupt, they won't come back for trivial things. Voila, fewer economic externalities.
• Doctors and patients will generate better relationships, and will tend to observe medical care from a more objective, cost-effective viewpoint. They will make better decisions, and there will be no need for government-mandated end-of-life decision management, which is incredibly scary. Instead, we will have informed decisions and people taking responsibility for their own choices. Less blame, fewer lawsuits, more efficiency, more personal health care.
• Vastly reduced bureaucracy: fewer in-network/out-of-network problems, more choices, less paperwork (other than price agreements), and less government, which means fewer taxes as well.
• More charity. When somebody really needs help, and they can't pay for it, and there is no government backstop, it is amazing how much the american people step up to the plate and help take care of it. When there is government intervention, people tend to say, "I pay my taxes, so I've already done my part." Or doctors say, "I deal with medicare and medicaid, I don't need to do anything pro-bono, the government is covering it." If they knew those things weren't there, they would, where it is at all economically viable, perform services pro-bono, or charity groups would spring up to raise money where doctors cannot afford it.

It's so simple, yet I am continually amazed at how many people do not realize that a true non-government, free-market solution will solve all of the same problems as nationalized health care, but with vastly less cost and overhead, and it retains individual liberty perfectly at the same time.

HR 3200 is and will be a complete disaster. It is not the way to fix our medical care; simple, proper economics is the way.

Bailouts: Recursive Loop Spending

This post is inspired by a challenge from Stewart Feil, who gave me simply the title and wanted to see what I would write when I looked at it.

Bailouts are more like the inadvertent governmental way of cornering markets, making the government the 'only' market for something. This happens because once the government starts buying something (shares in a company above price, long end of the treasury curve, etc.), everyone will essentially hold out to sell to the government, so as to get the "screw the taxpayer" price. Bailouts also have the effect on the receivers of holding risky behavior in esteem, and the effect on the rest of the market of increasing mistrust.

One bailout begets another; or, at least it does if you don't realize your philosophy completely sucks, and that you can't out-maneuver mathematics. It softens, widens and deepens the collapse of debt default into a down-trending, see-saw shape. The default has to happen to relieve the exponential growth in debt, but bailouts distort and prolong the process. They introduce mistrust in the market environment, destroying the meaning of prices. Many groups (from the porn industry, to autos, to homebuilders, to banks) demand a bailout, and everyone else waits to buy because they don't know who is going to get favored next. Bailouts ultimately drag out the eventual re-establishment of a solid bottom, which is necessary for true, proper linear economic growth from real production.

The other problem with bailouts is that, to be blunt, it's like trying to treat a burn victim with a blowtorch. We have a huge debt problem. Debt is defaulting, causing total money/credit to contract (read: deflation) back to sustainable levels. This *must* happen, because banks and the Fed serially blew bubbles in the market to just kick the can down the road, and the can was getting bigger, and bigger. Bailouts of necessity require an increase in debt or a decrease in savings, which is precisely the problem that got us here in the first place. And, once you have a few patrons addicted to debt, they don't get broken of the habit without some really bad hangovers, and have to fall on their face a few times before they realize you are serious about cutting them loose. This is as true of corporations as it is of individual people. The longer you go giving out bailouts, the harder it will be to cut off the freeloaders later, and so it goes until your hand is forced. In the meantime, you will have done yourself likely serious harm in terms of solvency. There is no "right amount" of capital to give out that will turn a recession around; companies, and people, are black holes when it comes to money. Those who manage it well don't need bailouts, even when they are bankrupt, and those who don't will never manage it well even if they get bailed out. What's even worse, is the government is bailing firms out with *our* money, not theirs. See the following for a funny, but accurate depiction of what is going on:

http://patrick.net/housing/contrib/Fannie.jpg

Recursive bailouts are predicated on the people who have the power to give the money out either ignoring, or not understanding these simple truths. The average person, and thus the average company, is not so unlike a homeless guy that you give $4 million. Generally speaking, he'll blow it in no time and not be better off in the long run. If you think that means you just didn't give him enough, then you are throwing good money after bad and are a complete fool.

The parallels to what our government is doing are quite obvious.

It's the Economy, it's Stupid!

This post is partly a response and analysis to Matthew and Bradley Haupt's Allied Tax Planners Special Report. I see in a number of analyses of the economic situation, what caused it, and what might cure it that contain contradictory statements and misfired deductions. I definitely enjoyed this report, and I encourage you to read it; however, while in spirit it has a lot of really well-founded conclusions, it misses the mark in a number of important ways. It does contain some good overview information of what has happened in the last year or so financially, and it provides a great bird's eye view of the economic turmoil.

For the record, the best way to describe my own educational filter on what is happening in the economy is that I follow Mike Shedlock's views. He has consistently correctly predicted the stages of the economic fallout, and his analysis is quite understandable and educational.

I'll address the report in a non-linear fashion, so this will not be point-by-point. For best reading, I suggest reading their report, and then come back for my comments. I'll refer to the Haupt's article as the ATP from here on out, for brevity.

Are we going into a depression?

This question almost essentially relies on one additional question: will we hit at least 10% unemployment officially? If so, then we most certainly will look back on this time as a depression. If not, then we'll probably have just considered it a bad global recession. Where are we currently? The latest governmental figure for October 2008 pins us at about 6.5% unemployment. That doesn't seem high, except for the fact that we haven't seen those numbers in a while, and the announced-but-not-implemented-yet layoffs are quite high. It is not inconceivable that we'll hit 7% by the end of the year. At the current pace, we're looking at somewhere around 8-9% by the end of next year. If it doesn't slow down by late 2009, we might just cross that ill-fated depression finish line. One interesting note is that while official unemployment is 6.5%, if you count all disaffected workers such as part-timers who want full-time work, those who gave up looking, and those whose unemployment benefits ran out, we're actually at a whopping 11.8% unemployment! This figure came out of the same goverment report that had the 6.5% number. If we hit 10% official unemployment, we're probably looking at 20% real unemployment. That is very, very bad.

ATP writes, "This is, in Alan Greenspan's own words, '...a once-in-a-century credit tsunami,' which could have been prevented, but, like all other crises before it, will pass." This is totally true, it will pass. However, the speed at which is passes by us is what is interesting.

The Causes

The first problem: ATP states that,

"The lesson here is that when government appears to be operating in the best interest of “the people,” they often are not. Free markets work only when they are free from tampering, whether or not the tampering is well-intentioned."

This is 100% correct. Government intervention, except for policing criminal activity, tends to have negative unintended consequences (as well as a few negative intended consequences). It doesn't work, and we agree on that. However, they then go on to say,

"We feel that the Bailout Bill (or “Rescue Plan” as it is now being called) was a good move, IF IT WORKED THE WAY IT WAS SUPPOSED TO and here’s why: as these companies are going bankrupt, the companies and institutions that hold their stock or bonds or other securities are not sure what they are worth anymore, if they are worth anything at all. So these companies suddenly are not sure how much cash they can raise for expenses, to meet obligations, or especially, if they are a bank, how much cash they can lend. The Bailout Bill allows the government to step in as a buyer of last resort of those securities. So for the companies that hold these securities, they can suddenly sell them to the government (yes, for pennies on the dollar, but something is better than nothing) and have cash to invest in other securities, or lend to make interest on their money. Liquidity would have been restored."

But herein lies the problem. You can't advocate that tampering by the government is bad, even if well-intentioned, and then state that a taxpayer-funded bailout would work, even if the intended functioning took place. The bailout was a stupid idea on a great many fronts, but here are a few reasons why:

• This isn't a liquidity problem. This is a solvency (capital) problem. Liquidity means there isn't enough money to go around, or that money isn't moving around. Money isn't moving around because the banks and businesses don't have enough capital anymore. The Fed has been flooding the markets with liquidity lately, and guess what? It hasn't done a dang thing. The banks are hoarding the money, because if they had to reveal their cards, they would be bankrupt immediately.
• The bailout's intended functioning is to fleece taxpayers and consolidate power among the largest banks in order to keep the US financial hegemony over the rest of the world. In other words, this is US Secretary of the Treasury Hank Paulson doing his friends a giant favor, at taxpayer expense.
• Taking money from taxpayers, either by taxes or by the potential whiplash inflation that could result, just devalues assets of the average people of the US whose savings are providing what precious capital the banks have. In other words, if you water down taxpayer's monetary power, you starve the banks of the very capital that would actually put them on firmer footing.

ATP then also states the following about what was done during the Great Depression and then more on the bailout:

"But a lot has changed since the Great Depression, and policies have been put in place so that a lot of things that happened then can never happen again. For example, the stock market crashed massively in 1929, the Dow Jones losing about 42% of its value, in large part due to margin trading (trading stocks with borrowed money). Margin trading has been amended and changed so that it doesn’t push the market down like this anymore. Short selling rules have been changed. At the time of the Great Depression, the government did not do enough to restore confidence, but this time, in order to conserve confidence in the economy, the Legislative Branch passed the Rescue Plan to buy up the assets of bankrupt institutions (such as auction-rate securities, subprime lending issues, collateralized mortgage obligations, structured investment vehicles, etc.). Later, when the market has stabilized, the government will sell these assets on the open, potentially making billions of dollars of profit; so this bailout will not end up costing the taxpayers $700 billion in the end."

Unfortunately, the basic functioning of free markets has not changed since the Great Depression. The assertion that "the government did not do enough to restore confidence" in the Great Depression is erroneous. They're blinded by Fed Chairman Ben Bernanke's academics (but I don't blame them, that's an easy trap to fall into), because he says the same thing. He claims he was a student of the Depression, yet he is making precisely the same mistakes the government did back then.

Here is the mistake: the Great Depression was caused by excessive debt, not a lack of liquidity. The loss of confidence, and the ensuing difficulty in restoring it was because, in a very real sense, the whole stinking world was in a giant debt hole. As long as prices kept climbing (inflationary pressures), the big ponzi-scheme party kept up and the music kept playing. It was fueled by easy money (low interest rates and large amounts of liquidity from the Fed), and as soon as one even marginally important bubble popped, the whole scheme came crashing down.

When you have a nation built on extreme debt, the only way out eventually is for the debt bubble to pop and for there to be large defaults. People think that the stock market crash of 1929 was the beginning of the Great Depression (Black Tuesday). But it wasn't. It was housing, and it started in 1928 or so when house prices started to plummet. The stock market was a symptom. During the depths of the Depression the stock market had rebounded and appeared healthy, yet the economy hobbled along for years after that. Ask Japan how that feels in a modern world. But if you hold on for very long, you'll get to see it for yourself.

But why did it hobble along? Was it that the government didn't do enough to restore confidence? Did they not provide enough liquidity? The answer is simple: they did too much. President Hoover made a number of strategic mistakes, but he was smart enough to know that he needed to not meddle too much and let it take its course. People blame him for causing it, but I think that if his policies had continued the Depression would have ended sooner (and wouldn't have taken a war to re-energize the economy). The fatal mistake that made it drag out forever was made by our beloved FDR. The government under his watch began doing exactly what our government is now doing: meddling, and trying to inflate its way out of a deflationary collapse. Another way to look at this is that debt created the Depression, and they threw more debt at it to make it go away. I believe it was Einstein that told us that insanity is applying the same wrong solution to a problem expecting a different outcome each time. Our government is obviously insane.

All these interventions did during the Depression was lengthen it out, as the much-needed correction was hobbled in its ability to take its course quickly enough. Then, the interventions didn't produce the hoped-for 'recovery,' and confidence dipped ever lower, hobbling recovery even more. Does this sound familiar? The government has had unprecedented interventions in the last 18 months in the economy, as have foreign governments. What has it bought us? Nothing, except a giant bill that our future selves and children will have to pay for. We now have a crashed stock market (43% down from peak), a crashing housing market (around 25% down from peak, and falling), crashing manufacturing, rising exports (which is deflationary), crashing commodity prices, crashing retail sector, crashing auto sector, etc. Government intervention does not work.

ATP also points out that we have successfully bailed out institutions before. I don't buy it; this does nothing but create the oft-mentioned moral hazard that will plague free markets. If the government bails anybody out, then they have less incentive to do the right thing, because they get rewarded for bad and stupid behavior. One group he mentions are the S&L institutions (the Savings and Loan crisis of the early '80s). Let it be known that the S&L bailout was hardly 'successful' as far as the taxpayer is concerned. They properly shut down the failing S&Ls, and liquidated their assets. That was good. The problem is that the very same investors who drove the S&Ls into the ground turned around and bought the fire-sale priced assets, and then made a killing off of them starting up a new set of S&Ls. The real problem? The markdown hit was taken by taxpayers. In other words, they ran things into the ground making incredible profits with risky investments, cried to the government, who had the taxpayer take his lumps, and then bought the really cheap assets back and began fleecing savers all over again. They fleeced savers on the way up, and taxpayers on the way down. Good work, if you can get it.

What do we do now?

ATP gives some advice, much of it very sage. Don't panic -- yes, panic only tightens the downward spiral. But be careful...if everyone else panics, and you don't, well, they end up with their money out and you don't. Which means you lose. So, keep your ear to the ground, and be deliberate, and watchful, but yes, don't actually panic.

The next bit of advice -- "Now is the time to buy." Hogwash. This is a form of bottom-calling. The bottom in the housing market over the last two years has been called about once per month, each time the housing data comes out. Guess what? There's no bottom in sight. Same goes for the stock market: it's very volatile, but according to many theories, there is a real chance it'll break it's supports around 8000 points in the DOW. If it does, who knows where it'll bottom out at. Buying now is like catching a falling knife. If you're not a professional and aren't properly equipped, then trying it is really not smart. Of course, the same goes for not selling: hang on to your assets long enough, and you might just finally panic and lock in your losses. You can get some gains back later, but it's hard, so be careful.

ATP notes that Warren Buffet has been buying lately, and to follow his pattern to diversify. This is good advice. However, Warren Buffet was recently heard on the media telling people to "buy now, even I'm buying!" If he says that, then don't walk, run to the exits. He is a master at this, and if he tells you to buy, he'll buy a little, and everyone will jump in the spree, and once everyone is buying, he is selling and screwing all the buyers. He isn't worth the billions he is for nothing.

ATP's subsequent 5 important lessons are spot on. Take them to heart.