A Colossal Failure of Common Sense

I have been preparing a new course called Government and Business, and I wanted to include a few examples of the consequences of monetary expansion and ongoing Fed policy.  A good candidate is the case of Lehman Brothers.  I ordered Lawrence G. McDonald and Patrick Robinson's A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers from Amazon and read it over the past two days. It is a colorful, enjoyable book that I recommend.  It is mostly well written, but there are occasional sophomoric grammatical errors.  I wondered whether Three Rivers Press bothered to copy edit the work; at the same time,  McDonald's self-deprecating humor reminded me of Ragged Dick's from Horatio Alger's novel; moreover, the early part of the book is a  rags-to-riches tale.  McDonald pulls no punches in describing Richard Fuld and Joe Gregory's (the top management's) incompetence.

McDonald lacks a paradigm to accurately grasp the sources of Lehman's failure.  He sees Fuld's dominance of the firm as the cause--if only his friend Michael Gelband had gained control of the institution, things would not have gone wrong.  His philosophy is the result of his education at the University of Massachusetts Dartmouth and, more generally, of the one-dimensional coverage in the media and in universities, which serve as cheerleaders for America's value-destroying financial-and-banking system.  Things may have gone better if competent people were at the helm, but there are few competent people; they weren't at the helm at Goldman, AIG, Bear Stearns, GE Capital, or any of the other foolishly run outfits that were trading derivatives that they did not understand.

The cause was not bad leadership, but a bad system that permits the Fed to print money and hand it to people who lack the ability to use it wisely.  Investment in Wall Street's waste and the income tax crowd out innovative investment such as occurred in the late 19th century, when there was was no Fed, no central bank, no income tax, and Wall Street was in extremis. Historically, Wall Street's strength and growth rate are inversely related to the nation's innovation and the average American's financial well being.  Yet, Americans continue to vote into office politicians whose first priority is to subsidize Wall Street. 

Lehman had borrowed two thirds of a trillion dollars in printed money. The Federal Reserve Bank had stolen its value from the American people and handed it to half-witted crooks like Fuld and Gregory.  Lehman does not represent a deviant problem like bad leadership. It represents the core of the problem: malinvestment because of a financial system that has no incentive to invest optimally and that lives off the theft of wealth from the public; the stock market will not rise without such theft.

The entire money supply during the millennial years was close to $800 billion.  An amount equal to almost the entire US money supply was handed to half wits who proceeded to buy hundreds of billions of dollars in over-valued real estate and take financial gambles that they did not understand.

McDonald's message, which he does not grasp, is that the American systems of government and finance are  broken and cannot be fixed. An American people that continues to be satisfied with the stealing that underlies the profligacy McDonald describes (via the Federal Reserve Bank, which had printed the money Lehman badly invested ) is the underlying problem.  On this score, McDonald stands accused of apathy along with the rest of a nation that has allowed itself to be financially molested for the past century.

Perhaps a tragedy greater than the fall of Lehman is that smart guys like McDonald and his friends can think of no more imaginative career than living off printed money and playing financial markets. When America was a worthwhile place to live, people like McDonald, Gelband,  and McCarthy were inventors rather than stock jobbers. 

McDonald is a true insider, and he gives an insider's picture of the distressed asset trading desk at Lehman.  He is starry eyed, referring to his various colleagues as "the best in history" at various points, but the sophomoric grammar and starry-eyed reverence amount to a small price to pay for McDonald's wit, charm, idealism, and apparent workmanlike competence with respect to his craft.  At Enron there were two or three people, chiefly Vince Kaminski of Enron's risk management group, who saw that the firm was headed for disaster.  McDonald asserts that several of his trading colleagues, such as Michael Gelband and Larry McCarthy, had warned Fuld and Gregory of an impending crash in the real estate market nearly two years before Lehman's ultimate demise;  they and several others in McDonald's group had resigned months and weeks before the collapse. The remaining members of his group took over the firm when it was already too late; as will occur with the United States, things had to get close to the edge before Fuld and Gregory could be ousted; it seems to me that America may face a fate similar to Lehman's.  Hopefully, by then I will be resident elsewhere.

I think I will fit part of this book into my course, which also includes some material on Long Term Capital Management and Enron--all products of the American Whigs' and financial establishment's stealing from the Americn people via the value-destroying Federal Reserve Bank.  If you want to know why the average American's real hourly raise hasn't gone up since 1970, read this book.  The high salaries in exchange for the destruction of real wealth by Wall Street's bums is malinvestment on a scale that Ludwig von Mises could not have imagined.

Janet Hasson

Tea Parties Cannot Overturn 153 Years of American Immorality

Dear Tom:

Please take me off your mailing list (of the Kingston-Rhinebeck, NY Tea Party).   I have concluded that there is no hope of reform of American tyranny.  In 1776 Jefferson wrote in the Declaration of Independence that just government derives its consent from the governed.  In 1860 the southern states concluded that they could no longer consent to the US government.  In response to their withdrawal of consent, Lincoln murdered hundreds of thousands, with a total death toll of between 500,000 and 800,000 Americans, a million casualties, and massive property damage—all to ensure government without consent.  Previously , the US government under Washington and Hamilton had violently suppressed Pennsylvania farmers who objected to a whiskey tax and had threatened violent suppression of South Carolina when it nullified a tariff in 1828.  Since those events, and especially since 1860, America, by Jefferson’s own definition, has not been governed justly. America is a tyranny, and there is no hope of reform, for the American people are immoral.  They have been satisfied with tyranny for 153 years.

Again, please remove me from your mailing list.

No Consent of the Governed

In early January we're about six months from July 4th, but recall Jefferson's and the Continental Congress's words written 236 years ago in the Declaration of Independence:


We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.--That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, --That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it...

 The Declaration of Independence claims that to be just government must derive its powers from the consent of the governed. Is this the case in the United States?  In 1860 the southern states said that they did not consent to the US government; the US government proved that its power is not derived from any sort of consent.  It invaded the South, and the death toll amounted to 600,000 to 800,000.  There were  a million injuries and massive property destruction.  Far from being a government that derives its powers from the governed, the US government is as authoritarian as Hitler's or Stalin's. It is based on the power of a ruling cabal, nothing more.  The cabal is more benign than Hitler's or Stalin's was, but it is not qualitatively different.  There is no more moral grounding to the US government than there is to the Mafia.  There is little reason to feel secure here, and there is no reason to assume that out-and-out tyranny is not around the corner. 

Progressives are not troubled by the Civil War death toll, and I have never heard a suggestion that the victims' descendents are entitled to reparations.   However, I have heard repeated complaints about Pinochet's killing 3,000 leftists in Chile.  That is wrong, and it is a significant crime, but it is tiny compared to what the US government did.


I decided to assign part of Thomas J. DiLorenzo's book Lincoln Unmasked as well as part of his Hamilton's Curse in a new course I have developed called Government and Business.  Usually Government and Business courses are textbook-based, cliche-ridden Progressive propaganda.  CUNY's new free institutions program gave me released time last year, and I have developed the Business and Government course from a libertarian, free market, and anti-statist persepective.

Most historical accounts of the Civil War are told from the northern point of view; they emphasize the role of slavery, which is fair to a point.  It is also true that there had been a southern secessionist movement in the late 1820s that had zero to do with slavery.  It had to do with a tariff, the so-called Tariff of Abominations.  There was much tariff talk in 1859 and 1860, and to say that secession had nothing to do with tariffs smacks of the kind of propanda that makes Pinochet the world's greatest criminal and Stalin an omelet maker.  The low quality of historical research in general becomes embarrassing whenever economic issues are relevant, as DiLorenzo points out.  An historian who claims that tariffs made the US wealthy, for instance, is a fool, not a formidable intellect as Americans often believe.

In 1828 John Calhoun published a tract entitled "The South Carolina Exposition and Protest" in which he argued for South Carolina's nullification of the 1828 tariff.  Jefferson, who had died two years earlier, would have approved.  Tariffs helped northern manufacturers but directly harmed southern agricultural interests. This is what Wikipedia says about Lincoln's position on the tariff:
 
The Republican party included a strong pro-tariff plank in its 1860 platform. They also sent prominent tariff advocates such as Morrill and Sherman to campaign in Pennsylvania and New Jersey, where the tariff was popular, by touting the Morrill bill. Both Democratic candidates, John C. Breckenridge and Stephen Douglas, opposed all high tariffs and protectionism in general.^[4]
Historian Reinhard H. Luthin documents the importance of the Morrill Tariff to the Republicans in the 1860 presidential election.^[5] Abraham Lincoln's record as a protectionist and support for the Morrill Tariff bill, he notes, helped him to secure support in the important electoral college state of Pennsylvania, as well as neighboring New Jersey. Lincoln carried Pennsylvania handily in November, as part of his sweep of the North...On February 14, 1861, President-elect Lincoln told an audience in Pittsburgh that he would make a new tariff his priority in the next session if the bill did not pass by inauguration day on March 4.

Seven of eleven secessionist states had seceded by March 1861, and the Republicans took control of the Senate. The Morrill Tariff then passed.  It was signed by Democratic President James Buchanan. Buchanan was from Pennsylvania, and he voted for the tariff despite his Democratic affiliation.  He had bankrupted the US government, and a tariff was needed in part to cover the financial mess.  It cannot be said that the South seceded because of the Morrill Tariff because seven of the eleven states that seceded had seceded before the Morrill Tariff was passed, and the tariff likely would not have passed without the southerners' seceding.  At the same time, Lincoln's strong support for protectionism contributed to southerners' concerns about his election.

DiLorenzo is a clear writer, but he needs to tone it down;  in rhetoric less is typically more. Otherwise, his books are great.  His point that Lincoln was a racist who preferred to keep the territories all white to avoiding the Civil War is intriguing (see David Gordon's review on the von Mises site).  He follows through on an idea I have thought of for some time: there is an arc of statism that stretches from Hamilton, through Lincoln, through the Progressives, through the New Deal on to Bush, the bailout, and Obama.

One of the interesting points DiLorenzo makes in his two excellent books is that Hitler was an admirer of Lincoln. DiLorenzo quotes Hitler in Mein Kampf (p. 566, 579 Houghton Mifflin 1999 edition) as supporting the Lincoln position on secession:

 [T]he individual states of the American Union . . . could not have possessed any state sovereignty of their own. For it was not these states that formed the Union, on the contrary it was the Union which formed a great part of such so-called states...Certainly all the states in the world are moving toward a certain unification in their inner organization. And in this Germany will be no exception. Today it is an absurdity to speak of a ‘state sovereignty' of individual provinces.

Hitler would have been a supporter of today's European Union as well.  DiLorenzo makes the point that pro-Lincoln propagandists, who are quick to brand anyone who questions Lincoln's cult of centralization a racist, are in full agreement with Hitler.  If you have a bad argument like centralization, violent suppression of the governed, and totalitarianism, as do Lincoln's supporters, then it is necessary to divert the argument by calling those who disagree with you racists or advocates of slavery.