Lehman Broters

Think of how powerful and influential this blog is.

 

Several days ago I threatened the Fed (Federal Reserve) and Treasury Department (Paulson et. al.) with dire (unspecified) consequences (from me) if they used taxpayer money to bail out Lehman Brothers, as they did with Bear Stearns.  Obviously intimidated, as they should have been, the Federal Government has supposedly drawn a "line in the sand" about again using taxpayer money to finance "rescues" of private Wall Street companies.  Thus, Lehman Brothers is being "allowed" to go into bankruptcy today, as it should have been. 

 

Now the Federal Government is still throwing public money into the "system" to provide "liquidity".  It probably has no choice, but there is a danger (as usual with central planning--it is ALMOST, if not quite, enough to bring you around to the Ron Paul position that the Federal Reserve is a disastrous, evil thing--the idea that the Federal Government can really "control" what happens is an illusion.  The Fed is opening up its assets (taxpayer assets) to provide loans to financial institutions in a "cash crunch".  The Fed has already "bailed out" Fannie Mae and Freddie Mac by putting billions of taxpayer dollars on the line.  Ture, stockholders were not "bailed out", but BOND holders, and financial institutions holding Fannie Mae and Freddie Mac PAPER were "bailed out".  The Fed had no choice there, because the "central planning", quasi-government entities should never had existed in the first place.

 

Now it once was that brokerage houses were limited in what they could do.  They could not do banking.  And banks could not do brokerage functions.   Maybe it should have stayed that way  But all of these "sophisticated" financial products made it difficult to maintain the "old" standards.  This, by the way, had nothing to do with the Bush Administration and everything to do with "modern" computer models and instant communications--combined with all of these "smart" guys making up ever more "sophisticated" instruments and transactions made possible by computers.  It is not that much of a stretch to blame this whole mess on computers, and the FALSE sense that computers provide WISDOM, instead of a faster way to hang yourself.  And Obama criticizes McCain for not doing EMAIL.   Knowing what you are really doing, and the risks you are really taking, is more important than understanding the computers that are allowing so many people go make BIGGER mistakes.

 

That said, this is NOT the "end of the worlds".  As I have said before, EVERY bank in Texas (except one or two) failed when oil prices collapsed way back when (but not THAT long ago).  In the 1980's savings and loan "crisis", almost EVERY savings and loan went under (before we even had these modern mortgage intruments, and savings and loans were providing most of the mortgages). The world did not end, and it likely won't this time either.  What might make it end is panic that causes us to destroy the free market, in the name of central planning, when central planning (and CONCENSTRATION) got us into this in the first place. That is what happens with central planning, and too much concentration of power.  There may not be MORE mistakes, but the mistakes that are made are DISASTROUS.  The more power and decision making that is concentrated in one place (e.g.  the Federal Government), the more this is true.

 

I have had this argument with the Wall Street Journal for DECADES.  Okay, the Wall Street Journal is probably unaware it was in an argument.  But it was. The Journal has always said that "Bigness is not bad."  Wrong. Or to put it more accurately, Bigness is an EVIL  It may not be the worst evil, but it is still an EVIL.

 

Freddie Mac and Fannie Mae were too big.  Bear Stearns was supposedly "too big" to fail, and too liable to bring others down with it.  Well, there is something WRONG with a system where capitalist enterprises can't be allowed to fail  That system has FAILED--is fundamentally flawed.  As with a power grid, a system has to be flexible enough so parts of it can fail.  That is the main ADVANTAGE of a truly diverse free market system.

 

It is the disadvantage of big mergers.  Big mergers VIOLATE free market theory.  They create entities with too much influence in the overall economy, when then make the WRONG decisions.  They create too few decision makers (the evil of central planning).  There is NO excuse to allow big mergers in a free market economy.  Bigness IS an evil, and we should not allowthe massive creation of corporate empires BY MERGER.

 

That said, we almost had to encourage Bank of America to buy Merrill Lynch, because Merrill Lynch would have been under too much pressure after the failure of Lehman.  Yet, can we now allow BANK OF AMERICA to FAIL  We need to be working toward a decentralization in both government and business cuch that the (inevitable) bad decisions of a few do not bring down us ALL. 

 

Despite the outbreak of sanity in taking my advice on Lehman Brothers, and not using taxpayer money to "bail out" another private company, I am not that hopeful about the trend.  We KNOW the trend toward an ever bigger and more powerful Federal Government, where the inevitable mistakes will have ever worse consequences.  There is that same trend in business--toward ever bigger and more powerful corporate empires.  Neither is acceptable, but we seem to be unable to stop either.