Econ Saturday
Madoff and Stanford, says The Economist, “suggest this will be a fraud-infested downturn.” I’d suggest that this is going to be a monster-infested downturn. Check out this excerpt:
Depositors also besieged Stanford’s smaller, onshore Bank of Antigua, as well as operations in Venezuela and Panama. A big chunk of the client base is Latin American—reportedly, America’s Federal Bureau of Investigation is investigating whether he had money-laundering links to a Mexican drugs cartel. Americans are said to have ploughed in as much as $1.5 billion. In total, the group claims to have more than $50 billion “under advisement”.
Caribbean, Latin America, Mexican drug cartel, billions. This for a group out of Texas. [Later addendum: The version of The Economist article that is currently online deletes the reference to the "money-laundering links to Mexican drugs cartel," but it was there Friday when I wrote this post; it's interesting that The Economist surreptitiously redacts material after it's been published. I wonder how many other big-name magazines/newspapers do that?]
The Economist says regulators are again shuffling their feet uncomfortably, but I’m asking a different question: Why do we need regulators? And the only answer I can come up with is, “Because the financial universe has gotten so large and complex.”
Do you need regulators to determine whether the piece of land down the road is really there? Do you need a bureaucrat to tell you whether that gold coin is true gold? Does it take a G-man to discern whether the corner bakery might make a good investment opportunity for your growing family? Of course note. But when investments start getting layered and complex, people begin to flounder. There is a direct correlation between size and the need for regulation: The bigger the size, the more need for regulation.
Chesterton wrote years ago about Hudge and Gudge: Big business and big government. They work together, he said, to hurt the average man. 
They both claim to help the average man, but in the process, they help each other more and end up spitting on the average man. The bailouts of the Wall Street banks and the long-term cost they will impose on average taxpayers for the next 100 years make no sense, unless you understand this queer affair between big government and big business. The whole concept of the federal reserve is very odd, but you begin to get an uncomfortable sense of understanding when you realize there’s a long-standing clandestine relationship between NYC and DC.
I’m not alleging conspiracy, incidentally. I am alleging mutuality of self-interest and insider dealings, but that’s not my main point here (at some point, I am going to come up with a list of merchant-government collusion incidents that have occurred since The Glorious Revolution, but not now). My main point here is, those two bastards always seem to grow together but we always think of them as enemies.
It’s in government’s self-interest to let businesses get big. When they get big, the government can claim it needs to get bigger to protect the nation from big businesses. This is exactly what happened during the Teddy Roosevelt administration, and his cousin Franklin played a similar card during The Great Depression. We know Obama is going to play that card, too: In the wake of the scandals, we need more government oversight, maybe even a nationalization of the country’s banks.
And if that occurs, big businesses will get even bigger . . . because only big businesses will be able to afford the lobby costs and wine-filled dinners to sway favorable loans out government-controlled banks.
Corruption occurs at all levels. The only way to keep corruption from getting huge is to keep the levels from getting huge. It’s bothersome to know the country club golf buddies are swinging deals between themselves without regard to how their deals might hurt others, but at least they’re dealing on a local level. When those country club deals get to the point where national economics are at stake, it’s no longer bothersome: it’s alarming and has the potential to cripple the nation permanently. In the wake of ongoing globalization, the cry for more international oversight and regulation is going to increase.
Of course, the whole globalization track has hit a rough spot, so much so that some are saying we are “deglobalizing.” I don’t think it’s true, but if there’s a way to reverse the ever-expanding growth of business–which brings with it the ever-expanding reach of government–I’m for it.
Would I support the growth of business if it didn’t bring growth in government? Yes, I think the economies of scale help everyone. But as I read more and more about the history of commerce, I’m becoming increasingly skeptical that such a thing is even possible. The two–bigger business and bigger government–have been married too long. Even if it’s not theoretically necessary for the two to be wed (and I’m becoming convinced that it’s not even theoretically possible for business to grow without bringing with it an increase in government), as a practical/empirical matter, the two have consistently grown with each other, so much so that a theory that says they don’t have to grow together in our historical political milieu is simply utopian, quixotic, pollyannaish, and every other idealist adjective in the dictionary.
As this economy unravels, watch for the fraud. Every time it occurs, you’ll see bigness, and every time you see it, you’ll see calls for more government. Fraud occurs at small levels, too, but individual vendettas and lawsuits can take care of those. For the big frauds, you need a Big Brother.
As the Church Lady would say, “How convenient.”
[Related link]
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You might say he’s bullish on gold: Gold at $5,865 per ounce. He doesn’t really think that, but he throws out some interesting stats that indicate no one really knows where the top is (of course, no one knows where the bottom might be, either, but I’m the optimistic sort). Sample:
Bookmark it: del.icio.us | Reddit | Slashdot | Digg | Facebook | Technorati | Google | StumbleUpon | Window Live | Tailrank | Furl | Netscape | Yahoo | BlinkList[E]stimates of the total amount of above-ground gold range from about 108,000 to 140,000 tonnes. About 30,000 tonnes are held by central banks; about 70,000 to 80,000 tonnes are in the form of jewelry; and about 20,000 tons are held as coin and bullion. These amounts are not at all large. The amount of gold per person in the world is a tiny number, less than 1 ounce per person.
7 Responses to “Econ Saturday”
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February 21st, 2009 at 11:46 am
“Deglobalizing?”
Sounds like a good first step toward Distributism.
February 22nd, 2009 at 4:49 pm
This one’s for you, Eric (via Hot Air):
http://www.usnews.com/blogs/capital-commerce/2009/2/21/peter-schiff-how-he-would-fix-america.html
http://www.schiff2010.com/peters-solutions
February 22nd, 2009 at 5:47 pm
Thanks!
Taki had a feature piece about Schiff last week. I didn’t see it until today, though.
February 24th, 2009 at 6:30 am
[...] I listened to a fascinating podcast at Lew Rockwell yesterday: Russ Baker on The Looting Bush Family. Baker has written a polemic against the Bush family. The book’s basic premise: the Bush family has been exercising undue influence behind the scenes of government since the early 1960s. What I found particularly fascinating: arguments that Prescott Bush was a part of a Wall Street establishment that controlled Richard Nixon and exercised (still exercises) immense control over Washington, DC. It’s an argument that resonates with my observations last Saturday. [...]
March 28th, 2009 at 6:41 am
[...] think the writer is correct, but he misses the larger historical picture: This kind of Hudge-and- Gudgery has always gone on. It’s a carry over from merry old England in the late seventeenth century. [...]
June 15th, 2009 at 1:34 am
[...] harped on this point before: the marriage of big government and big business. The nuptials have been going on since the 17th [...]
June 15th, 2009 at 1:43 am
[...] about the Drug Cartels as of June 15, 2009 Monday, June 15, 2009 Econ Saturday – ericscheske.com 06/15/2009 Madoff and Stanford, says The Economist, “suggest this will be [...]