In 1983, Arthur P. Bloom of Bell System talked about a poster that hung on walls in offices throughout the company:

Shortly after, the Government, deeming that Bell System had become too powerful, forcefully divested the company into three separate entities.

 

Today, the future of the entire financial system is in jeopardy. Government is placing ever-more regulations and restrictions on businesses. Congress is discussing “Cap and Trade” which amounts to the largest tax increase in US history. Taxes in virtually all other areas are rising. One by one, businesses are failing, banks are going out of business, and nearly half a million people are becoming unemployed every month. Like a scene from Atlas Shrugged, the free market is wilting away in the name of businesses that some people call “too big to fail.”

The Government says massive spending was the best solution and the cost of doing nothing would have been far worse. Some say Ben Bernanke, the Chairman of the Federal Reserve, saved the economy from total collapse. Some claim that the country couldn’t afford to not pass the bailouts and stimulus.

                Economist Peter Schiff claims “We don’t have any money!” Peter predicted the recession back in 2006 and asserts that we cannot afford to spend all this money.

The American People seem to understand that Government involvement in the economy does not help. They are becoming more and more disenfranchised, even fed up with a system that is spending their children’s futures on businesses that have dug their own graves. This is evidenced in “Tea Parties” and town-hall meetings.

Blame for the crisis is being thrown around like confetti. From Government deregulation to greedy Wall Street bankers, illegal immigrants to HGTV, it seems as though anyone who profited from the housing boom is in the crosshairs.

The most innocent of the accused suspects is Free Market Capitalism. The notion that this collapse had its roots in Free Market Capitalism is the most groundless, irresponsible accusation of all.

                Noted economists Adam Smith, Ludwig von Mises, Friedrich Hayek, Murray Rothbard, Milton Freedman, and Carl Menger have advocated free markets for their ability to give the greatest innovations, the most competition, the highest quality products, the lowest prices, and the most freedom. The free market works by promoting liberty, by keeping the means of production in the hands of the people, and by sound monetary policy. Free Market Economics, not to be confused with “trickle-down economics”, empowers everyone, not just the rich, to create wealth.

                Contrary to popular belief, the US does not have a capitalist economy. Much of the system is owned and controlled, not by private individuals, but by the Government. One out of every three dollars in the US is spent by Federal, State, or local Governments.

The US has a central bank that was awarded monopoly status by the congress to create monetary policy. The Government created Fannie Mae and Freddy Mac, the biggest mortgage lenders in the world. The Government created the Federal Deposit Insurance Corporation, which insures deposits in commercial banks. The Government created the Federal Housing Administration, which issues loans to people who can’t afford private mortgage insurance or a conventional down payment. The Government created the Federal Trade Commission which is supposed to protect consumers from “unfair and deceptive acts or practices”. Government created the Security and Exchange Commission, and dozens of other regulatory agencies, which supposedly exist “to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.”

This amount of Government intervention in the economy is defined, not by free market capitalism, but by one very ugly word- Fascism.

Virtually the entire housing market, mortgage lending, and financial system of the United States is controlled and overseen by Government created enterprises that failed miserably in creating stability. They give average, everyday Americans a blatantly false sense of security. The tax money that pays for these agencies may as well have been flushed down the toilet.

                So what caused the recession? The only correct answer is Government.

Hundreds of years ago, money lenders could issue notes that were redeemable for gold. Notes are the foundation of all paper money, or fiat currencies. Some moneylenders found that they could print and issue banknotes for far more gold than they had in their reserves. This dishonesty would ensure that when lenders collected interest, they could make more money. It was the beginning of “Fractional Reserve” banking systems.

In 1913 the Congress decided that a central bank should be created to print money, so that all bank notes came from one source. The central bank was also supposed to help steer the economy away from bubbles and busts by having determination of interest rates.

Our banking system, under the Federal Reserve, is a Fractional Reserve system as well. Banks are legally allowed to lend far more than the amount they contain in their vaults. Where does the other money come from? From banknotes that assure the debt will be repaid. In other words- money comes from a promise.

Money is created, as Congressman Ron Paul states “out of thin air”.

Under the Federal Reserve, the fact that only a fraction of each dollar-note was backed by gold signified the point when US currency stopped having real redeemable value. It was replaced with a promise of value. The mentality of many Americans changed from believing that the currency represented something of value, to believing that the paper currency actually had value. A fiat currency is no more valuable than the paper it is composed of.

This was the beginning of all the problems that our economy is having today. Thomas Jefferson warned that “banking institutions are more dangerous to our liberties than standing armies…”

In 1887 the US Constitution declared, “No States shall… make any Thing but gold and silver Coin a Tender in Payment of Debts.” But, there were no restrictions placed on private banks who wished to issue banknotes.

Given the last 100 years on a Fractional Reserve Banking system, most people accept that inflation is a natural occurrence. This is totally false. From 1800 to 1900, when banknotes had to be backed 100% by gold and silver, the cost of living actually went down by over 25%. Coins were made of precious metals which, unlike today, ensured they were always worth something. Quarters used to be composed of silver, though now they are composed mostly of copper- the same metal that used to make pennies.

The supply and demand of money is no different than the supply and demand of any other good. So if the money supply increases, then the demand for it goes down, the money buys less and prices rise. This is called inflation. If the money supply decreases, as it does when people save or hoard their money, the demand for it rises, and it buys more for less. This is called deflation.

When the Federal Reserve lowers interest rates, commercial banks are more inclined to lend money and charge interest rates higher than those offered. If the Fed raises interest rates, commercial banks are more inclined to keep their money in the Federal Reserve, where it collects more interest. That is how the Federal Reserve steers the economy, by discouraging and encouraging banks, and in turn, people from saving and borrowing.

In June of 2003, at the beginning of the housing boom, the Fed had interest rates set at their all time low- 1%.

That might not have been catastrophic, but that was paired with a law passed 3 years earlier stating Government sponsored mortgage-giant Fannie Mae shall fill fifty percent of its entire inventory with “sub-prime” loans. Sub-prime loans were designed for low income borrowers whose rates start out low and then adjust after three to five years. When those two problems combined, the result was the largest single rush to borrow money for houses that the globe had ever seen.

Congressman Paul and many economists claim a free market would never have allowed interest rates to go to 1%, or have allowed for Fannie Mae and Freddy Mac to buy up so many risky mortgages. Free markets would never have allowed for such easy capital formation that stock prices became inflated, leading to the crash.

But over the last year, starting with George W Bush and continuing under Barack Obama, the Government interference in the free market has exploded into a barrage of spending for bank, insurance and auto bailouts and programs like “Cash for Clunkers”. The Congressional Budget Office reports that the estimated trade deficit will reach over nine trillion dollars within ten years. For a President who wants to “spread the wealth around”, the best thing that he could have done would be to let these companies fail, so that private individuals could buy up their assets at auction prices. Mom and Pop insurance companies and banks, who were solvent, would have become the next wave of new business leaders. But the bailouts prevented this from happening.

Harold L. Cole and Lee E. Ohanian, economists at UCLA, published a report five years ago that declared the Great Depression was prolonged by seven years due to Franklin D. Roosevelt’s “New Deal”. Ohanian claimed in 2004, "We found that a relapse isn't likely unless lawmakers gum up a recovery with ill-conceived stimulus policies."

Cole said, "President Roosevelt believed that excessive competition was responsible for the Depression by reducing prices and wages, and by extension reducing employment and demand for goods and services." He added, "So he came up with a recovery package that would be unimaginable today [2004], allowing businesses in every industry to collude without the threat of antitrust prosecution and workers to demand salaries about 25 percent above where they ought to have been, given market forces. The economy was poised for a beautiful recovery, but that recovery was stalled by these misguided policies."

The bailout money has come mainly in the form of loans from China, Japan and Saudi Arabia totaling over two trillion dollars. The Treasury reports that the grand total of the US public debt is about $11.4 trillion. It is painfully obvious that a problem caused by too much borrowing, spending, and government can’t be solved with more borrowing, more spending, and more government.

The US is not the first country to accumulate debt like this. It happened in Weimar Republic of Germany in the 1920s, in Argentina, in Zimbabwe, and several other countries and the result was a phenomenon called hyperinflation. Hyperinflation is defined by inflation of a minimum of 100% over three years. In places like Zimbabwe inflation is over 10,000% per year.

Is this going to happen in the US? It doesn’t have to, but as long as the government continues to interfere instead of letting market forces work, the likelihood is increasing.

                Some people claim that free markets are worthless without government intervention. They say that water, sewer, garbage collection, education, police, firemen, libraries, parks, electricity and gas absolutely have to be supplied by government even though every one of these things exists in the free market. To say that these things could not exist without government is false. Besides, all of these things are still paid for with tax dollars that come from citizens- not from government.

Every single time the government collects taxes, they take it away from the free market. The government cannot provide anything to the average person that the average person does not pay for in taxes. But the government must also take a cut from those taxes for operating costs. If the money were kept in the hands of the average citizen, he or she could buy, on the free market, whatever the government was going to provide WITHOUT the government taking a cut.

                Another example of regulation causing problems, in 1936 F.D.R. signed a bill that stated the government would set up the infrastructure to provide electricity to rural areas, because it would not be profitable for electric companies to do so. This might seem like a noble idea, but if this had not occurred, all sorts of individuals would have worked to find a way for rural areas to get power. It is impossible to know where the study of solar or wind power would be by now, but it is all but certain that wind and solar energy would have been the free market’s solution. Also, the coal fired factory plants would not be releasing the majority of manmade CO2.

                Some claim that government must provide water. If the government did not provide water, then the free market would work to provide every home with water, and it is likely that it wouldn’t have required billion dollar public projects. Water literally falls from the sky. The free market already has products that collect rainwater and store it. There is no need for monthly bills, which are further taxed by the government.

                If the government did not provide roads, then the free market would have worked to find a solution to get people from point A to B in the fastest manner possible. Instead though, the free market was only asked to provide cars that run on government highways, cars that release 1/3 of all manmade CO2. The likelihood of the free market producing flying cars by today would be dramatically increased had the government not provided roads.

                The point to be made is that every time the government passes a regulation, they take away the ability for one person to create an innovation that negates the cause of the regulation in the first place. It is no wonder that the income gap in the US, which was far less in the 1800s, has yielded people who succeed greatly, and those who can’t succeed at all. If the government did not intervene in free markets, the number of inventors in the country would skyrocket. US innovations would lead the world, as they did in the Industrial Revolution. The number of business owners would explode, and freedom would truly ring.

Some people think that minimum wage laws help the average worker. They fail to realize that minimum wage laws increased the cost of running a business and, in turn, the cost of the products that businesses provide. If minimum wage laws were a good idea, then why has the income gap skyrocketed since minimum wage laws were put in place? –Because they don’t do anything except cause prices to rise. Besides, people are not required to take any job. If an employer does not offer enough, then they can find an employer who will. If they are worth more than any employer will offer, then they should start their own business to prove it.

The US public education system is a another perfect example of the horrors of government intervention. It is the most expensive in the world, yet it fails in providing high quality education. The US Postal service has not turned a profit in ten years. Government-run Amtrak has not turned a profit since 1971. Sources report that GM, which is now owned by the government, has not turned a profit since 2004. Government-run Social Security is nearly broke. Medicare and Medicaid are nearly broke. Fannie Mae and Freddy Mac are broke. There are hardly any examples of good government enterprises.

                Government has proven that the only thing that it is capable of is destroying things, which is probably the only reason why it should control the military. The military is supposed to destroy things so government-run is a perfect fit.

                Every time that the government creates a new regulatory agency, they have to fund it with taxpayer dollars. Any reasonable person can understand that when the government forces people to pay taxes, with the threat of a prison sentence, it really is just democratically legislated robbery. A tyranny of the majority is no different than a tyrant. Individuals should control their own property, and that includes their earnings. Income Tax did not even exist during the Industrial Revolution.

                In the Constitution, the press was given the freedom so they had the ability to expose every shady business practice. So if a company is doing something immoral, the press should run a story about the company so consumers will not purchase their goods, and they would be driven from the market.

To prove that Free Market economists understand what is going on, and claim that Government involvement only creates problems, here are some predictions for the next four years: price freezes on food, empty shelves in grocery stores, caps on energy usage, evaporation of people’s savings, rising prices of everything, the value of gold and silver skyrocket, and widening of the income gap. People aren’t going to understand what hit them.

There is only one solution to the economic crisis: free markets and sound monetary policy. Government cannot fix this problem, and like Roosevelt during the Great Depression, President Obama is implementing policy changes that are only adding fuel to the fire.

"The fact that the Depression dragged on for years convinced generations of economists and policy-makers that capitalism could not be trusted to recover from depressions and that significant government intervention was required to achieve good outcomes," economist Harold Cole noted. "Ironically, our work shows that the recovery would have been very rapid had the government not intervened."