I try to bring at least one new idea or perspective to my readers through my articles, commentaries, and Market Updates, every opportunity I have. I know my ideas are not main stream, and I assume that every person that reads my views disagrees with them to one degree or another. But I also know that they keep reading.

The reason, I think, is the articles are easy to understand and the perspective is usually fresh to the reader. People who are open minded and interested in the pursuit of truth appreciate fresh new ideas and perspectives, even if they disagree with them. With that in mind, I give you…"Collapse as Moral".


Many times what is good in theory and right in principle can also be irrational and immoral. For example, it can be argued that the government and the Fed should not have intervened into the market to save the banking system or help merge or save financial institutions; that this was a bailout at taxpayers’ expense, therefore immoral. But if you remember, the government and the Fed did stand aside at first and let Lehman Bros, an institution that existed for over a hundred years, fail.

That policy of non-intervention if continued would have led to financial contagion and the probable collapse of Merrill Lynch, Countywide, AIG, Washington Mutual, and many other major institutions all of which were being “run” and were teetering on the brink of bankruptcy. Instead these institutions were saved. Some were merged and others were lent money so they could continue to operate. This is one of the functions of the Federal Reserve: to be a Lender of Last Resort in order to prevent structural damage to the financial system and economy. They performed that responsibility well, as they were created to do.

Of course if they had not, the contagion would not have stopped there. We would have seen a run on money market funds and most savings accounts, which was already in progress. And the banking system would have likely collapsed along with the international financial system and most stock markets around the world, which were in free fall at the time. Hundreds of millions of individuals around the world would have lost their wealth and their livelihoods and the world economy would have gone into a greater depression than ever before as tens of trillions of dollars would have evaporated. Businesses would have gone bankrupt, and millions of individuals left jobless and penniless.

This is exactly what should have happened according to many present-day free market advocates. And it should have happened in the name of "morality". That’s right! “That’s the free market at work” they say. The Government should have stayed out of it and allowed businesses to fail and the Fed should have stood by and watch the money supply crater as it did during the 30’s, and allow deflation and depression to set in, and the financial system crumble.

Of course capitalism would have gotten the blame. Condemnation for doing nothing and the back-lash because of it would have led to much greater control of economies around the world, including here in the United States. Military law and various forms of dictatorship would have been the most likely outcome of such a collapse. Instead the government supplied bridge loans to troubled industry and the Fed moved to increase the money supply substantially and added capital to the banking system. Free market advocates yelled, “foul”!

Milton Friedman, a champion of free market capitalism, would disagree with today’s free market advocates:

Click here: What GOP Economists Don't Understand About Milton Friedman - Matthew O'Brien - The Atlantic

Friedman said about Japan’s bout with deflation and recession:

"In 1989, the Bank of Japan stepped on the brakes very hard and brought money supply down to negative rates for a while. The stock market broke. The economy went into a recession, and it’s been in a state of quasi recession ever since. Monetary growth has been too low. … the Bank of Japan’s argument is, “Oh well, we’ve got the interest rate down to zero; what more can we do?”

“It’s very simple (said Friedman). They can buy long-term government securities, and they can keep buying them and providing high-powered money until the high powered money starts getting the economy in an expansion. What Japan needs is a more expansive domestic monetary policy.” (Japan has finally decided to take Friedman’s advice after suffering over 25 years of recession and deflation.)

Continuing from the same Atlantic Magazine article:

“Friedman hated deflation. Among his many, many contributions to economics, Friedman revolutionized our understanding of the Great Depression by pointing out that the worst of the slump could have been averted if only the Federal Reserve had stopped the banking panics of the era that caused prices to go tumbling down. Capitalism hadn't failed. Just the Fed.

It's counterintuitive that falling prices can be bad. After all, nobody ever complained about stuff being cheaper. The problems, though, are twofold. First, if prices fall across the board, so too will wages -- but debts won't. Borrowers will have a harder time making their payments. More of them will default. And defaults will push down prices and wages even more. This so-called debt deflation (or liquidity trap) is basically a doomsday machine for mass bankruptcy -- and it's exactly what happened in the 1930s.” End Quote

Instead of allowing a full scale collapse, we had learned the lessons of the Great Depression and helped merge failing companies into sound companies in an orderly manner. We made bridge loans to banks to help keep them afloat which have since been paid back with interest to the taxpayer. And companies like AIG have paid back their loans, while others, the weakest companies have been taken over by stronger companies.

Assets have been sold; capital has been raised since the crisis, and all of this without a total collapse of our economy. For this, the Fed and Treasury are roundly condemned by modern day free market advocates.  Consider the alternative. Is it moral for millions of innocent bystanders to lose their jobs and their savings in an economic and monetary collapse through no fault of their own, but immoral to prevent that from happening if the cost is reasonable?

Sometimes we have to choose between the least of bad choices. The choice to take no action during the financial crisis would have been to choose to allow tens of millions of innocent citizens to endure the maximum penalty possible. As it is, most have endured a pretty harsh penalty anyway, through the loss of jobs, wages, and equity in their homes. Most businesses are struggling, and still there's no end in sight to that struggle. So there still has been a penalty levied and paid.

I am for Laissez Faire capitalism. I'm for Freedom. I'm for free markets. And I am for a gold standard. But none of these would be more possible if we would have allowed a total collapse of the monetary system and another Great Depression. They would be less possible. To achieve those goals requires a process of construction -- not destruction. This was achieved and today we have better economic and monetary conditions than we would have had we done nothing. Instead of living in a world of collapse and chaos, we are living in a world of relative stability. Like I said, it has been bought at a price, but has also bought us time to rebuild.

I am not praising the economy we live in, on the contrary; we are living within a fragile fiat monetary system, running huge deficits, and we have moved a long way from free markets and minimum government intervention. We have more regulation and more government control than we did prior to the financial crisis. Only if and when we return to a free market economy and a commodity standard will we have the ability as a nation, (and the luxury), to take no action in times of crisis, since by that time the degree of adjustment required will be much less than what would be required today. The difference is like falling from a one story window versus falling from a skyscraper.

During the 19th century, the heyday of capitalism and the Industrial Revolution, we had many crises and what were then called depressions. But they were over quickly and the damage was contained. Not true today. A fiat standard and the degree of government intrusion into the private economy have made it impossible not to suffer severe dislocations.

We need to, and we can, back out of our problems the same way we came into them, but it needs to be done gradually and carefully – each step leading to less deficits, less regulations, less government intervention, and more economic freedom. It is the return to freedom that should be the goal, not the chaos of collapse. To this end we need the assistance of government and the central bank to eventually engineer a careful transition back to free markets, greater freedom, and hard money. The Fed is not the enemy of capitalism, it did what it could to prevent a total collapse of the economic and monetary system. It's up to us now to fight for reforms that will make that system better.

We need to deal with reality as it is, not as we want it to be. And sometimes that means taking actions we don't like, but must. Morality is at times a contextual matter. One always needs to ask "is this action immoral?" and "compared to what?" Such were the decisions confronting the Fed at the point of crisis. Practical solutions are not based on theory in a vacuum, even if it is correct economic and monetary theory. Sometimes taking extraordinary actions are necessary temporarily, to achieve stability. Then and only then can a nation return to properly rebuilding itself. It serves no purpose to predict doom and gloom and then to suggest the very actions (or absence of actions) that would ensure that outcome. That would be truly immoral.

The Fed has learned the lessons that Milton Friedman so patiently taught them. They have not only succeeded in doing the most practical thing; they have also done the most moral thing they could do under the circumstances: they refused to make the same mistakes of the past.

In an imperfect world one end’s up with imperfect solutions. But we have at least avoided the disastrous policies of the 1920’s and 1930’s. That’s progress.

Unfortunately most Republicans, hard money advocates, and libertarians are in the unenviable position of having to explain why allowing economic and monetary chaos is the “good”, while preventing policies that try to prevent such pain and chaos, is the “bad”.

It’s time for all such advocates of the inevitability of collapse to rethink their tactics and consider the alternative: advocating a rational plan that would return this nation to freedom and fiscal responsibility.

Paul Nathan