I Wish OWS Stood for “Occupy Washington, Stupid!”

Occupy Wall Street still seems to be bringing the turmoil to cities across the country.  I would like to start off by saying that I think it’s great that folks are exercising their freedom of speech – when they aren’t being maced by John Law – and their right to make a peaceful stink in public.  That said, I still think OWS has missed the boat on the fundamental reasons why this whole financial catastrophe has come about in the first place.  I know that I might as well wish for the moon, but I really wish some “End the Fed” protestors would make the rounds at these things and get some more people educated.  That might bring a bit more direction and sense to OWS, which unfortunately seems to lack a clear focus about what it wants.  The movement, as a whole, knows it’s pissed off, but doesn’t really know what to do to go about getting anything done.  There is no clear platform here.  And yes, this is another post about monetary policy.

There is a great illustration that was created by a guy named James Sinclair, and it looks like this:

OWS vs. Tea Party

In a lot of respects, they’re upset about the same things.  The main differences are that OWS protestors tend to be young adults or students with a socialist tendency while Tea Party members tend to be middle-aged and kinda like Sarah Palin.  Well, I don’t like socialism or “Sexy Sarah,” but I do think it would be nice if some of the “End the Fed” elements popped up more often.

The truth is that the current financial crisis was not created by Wall Street, as such; it was created by the Federal Reserve.  Both current Fed chair Ben Bernanke and his predecessor, Alan Greenspan, are both known for targeting inflation.  That is, they take a look at one measure of the economy – the consumer price index (CPI), for example – and then move to keep that index on a target rate of inflation.  They become fixated on that index and that number.  Without Fed intervention, the market would extend credit based on savings, and investors would take risks based on the rate of returns on capital investment.  The central bank’s manipulation of the money supply, however, throws these things off.

The Austrian business cycle essentially states that the whole thing begins when a central bank buys up assets, which directly leads to the banks expanding credit.  The result here is that prices and inflation concurrently go up.  Businesses will tend to borrow more and, when this money comes onto the market, it will artificially lower interest rates.  The problem here is that when interest rates are artificially low, investments that might have otherwise looked like a losing proposition to business owners will suddenly look far more palatable, and these businesses will start buying up capital goods.  To quote Murray Rothbard: “In short, businessmen react as they would have if savings had genuinely increased: they move to invest those supposed savings.”  I bet you can see where all this is going.

Rothbard continues to explain that, because of an excess of work in the capital goods industries, worker wages are bid higher and higher.  The workers will, in turn, begin to spend this money.  Unfortunately, the lower interest rates reflect saving that is not really happening, and saving is necessary for capital investment to occur successfully.  In effect, businesspeople have a false perception of the real amount of capital available to them.  They have been tricked into believing that people are saving more than they really are.

So what happens when consumers start to get back into their old savings/consumption routine?  Bad news bears, that’s what happens.  Businesses realize that they have invested too much in production goods and not enough in consumer goods.  At this point, an economic depression occurs.  It should be noted, however, that depressions are a necessary evil in the business cycle, for that is the time when bad investments are liquidated and the market rights itself.  As unsavory as it may be, liquidation in the market is vital.

The question now might be this: how is it that booms are allowed to go on for years and years without any retribution, so-to-speak?  This is where you might want to start penning a “thank you” note to the Fed.  By continually increasing the money supply over and over again, the system never has a chance to right itself.  Consumer spending habits never find their norm, and the cost of the capital goods industry never catches the rise in prices.  Only when the banks finally start to become unstable must the money supply be contracted.

Still with me?  Hang in there.  We’re almost at Ground Zero of the current financial crisis.

The problem now is that the Fed is keeping interest rates artificially low.  In effect, they are continuing to expand credit at a time when it oughtn’t to be extended at all.  The Fed continues to print money every day by holding interest rates so low.  They accomplish this, in part, by buying up long-term Treasury bonds (quantitative easing).  They used to only purchase short-term bonds – ones that matured within days to months – but because the interest rates on them are so low, the Fed has turned to buying longer-term bonds.  This has the result of ticking off our foreign debt holders (like China), weakening the dollar, and it’s also going to directly lead to undervaluing risk and misplacing scarce capital – things we can hardly afford at this stage of the game.

I know that I’ve said this time and time again, but I’m going to repeat myself.  (Those of you who know me will be used to that!)  I say again that there will come a time to pay the piper.  We cannot continue to monetize an ever-growing debt.  There must be a correction, and we are only prolonging the time until that eventual day arrives.  And when it does arrive, it is going to speak with authority.

At this point, I’ll bring us back to my original comparison of OWS and the Tea drinkers.  They’re mad about a lot of the same things, quite rightly.  There aren’t enough parties, however, in either camp who truly understand why the US is in its current situation.  It is vital that both camps understand what is really driving this crisis, and then maybe we will begin to see some real results, instead of the usual left-right paradigm repeating itself ad nauseum.

Note: I used the following articles and books to help me write this post.  Hop on over to Cato and Mises.  They will give you a thorough and academic run-down on Austrian economics and the business cycle that is far superior to anything I could ever hope to print.  Have a look!

 Malfeasant Central Bankers, Again
Business Cycle Primer
Tea Party, Meet Occupy Wall Street
For a New Liberty – Murray Rothbard


About The Lady Libertarian
I am American, currently expatriated but hopeful about getting back home one of these days. Besides reading and writing about politics, I enjoy camping, sailing, canoeing, making pie, and traveling. I hope you'll enjoy this blog and find it informative and accessible.

3 Responses to I Wish OWS Stood for “Occupy Washington, Stupid!”

  1. Beth says:

    I feel like I got a mini economics refresher course! 🙂 I have been trying to do more reading when I get the chance. I don’t want to fall in the “angry and don’t know why” category! 😉

  2. Glad it met your personal expectations! I would never claim that economics is my strong suit, and I took me a little while to write this article. I wanted to make sure that everything was clear in my head and on paper.

    I try and read as much about it as possible. Although I certainly find Austrian economics to be the most interesting of all the econ schools of thought, reading about any of it at length can get a bit tedious. I wish I was a genius mathematician and economic thinker, but alas, it was not to be for this one.

    Still, I think when it’s watered down sufficiently, the Austrian business cycle is really fairly basic and can be understood by most people. I certainly think that most people have the ability to grasp what’s going on with the Fed and all that, even if they don’t necessarily take the time to sit down and work it out.

    I’m glad you’re taking the time to brush up on all of it! The more informed people, the better!

  3. Beth says:

    Yeah, I do okay with econ, but it was definitely one of those subjects that the reading and studying was tough to get through! I swear the one MBA class I had on it, the textbook had to be the most boring and awful textbook ever- I had more luck googling the topics than trying to figure anything out from that book. It definitely made a huge difference depending on who was teaching it too- I think my one teacher made it seem more complicated than it really is.

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