In a truly cringe-inducing performance, French socialist Dominique Strauss-Kahn (and no, we're not trying to insult him – he really is a French socialist), who is currently heading the IMF –  a bureaucracy that is frequently called upon to intervene whenever the system of free-floating fiat currencies  produces yet another crisis – confided that the 'free market' is henceforth no longer fashionable. According to the AFP:

 

„The liberal theories that have guided the global economy for the last 30 years need to be overhauled, according to the head of the IMF – an institution long seen as their chief cheerleader.

The International Monetary Fund's Dominique Strauss-Kahn, in a speech on Monday said the "Washington Consensus" – a set of liberal theories that stress the efficiency of the free market – were antiquated.

"The Washington consensus is now behind us," Strauss-Kahn told students in Washington, reflecting on lessons learned from the 2008-2009 financial crisis.

"In designing a new macroeconomic framework for a new world, the pendulum will swing – at least a little – from the market to the state," he said.“

 

It makes our blood boil when the chief bureaucrat of the ultimate monetary bureaucracy propounds and reinforces the lie that the 'free market' is somehow to blame for the crisis. What free market? The IMF may have been a 'cheerleader for the Washington consensus', but we fail to see how the bubbles and imbalances that have laid the economy low can in any way be blamed on what is largely a mythical free market. Central banks control what is the most important price signal for actors in the marketplace, namely the interest rate. The State meanwhile has inexorably metastasized over the decades, in the process exerting ever more control over the economies of the developed world. These economies are buried in a veritable jungle of red tape, taxes and regulations. Meanwhile the portion of economic activity attributed to wasteful government spending has grown and continues to grow like the proverbial weeds.

The banking sector that blew up in 2008 was and is incidentally the most highly regulated and subsidized sector of the economy – shielded against competition via stiff licensing laws, part of a cartel with a 'lender of last resort' that  possesses unlimited money creation capability at its center, and endowed with the incredible privilege of creating money from thin air. At the height of the bubble, the financial sector was responsible for a full 40% of reported corporate profits.

To say that the 'liberal theories that stress the free market are antiquated' is presumably par for the course for a central planning apparatchik like Strauss-Kahn, but we would stress that there simply was and is no truly free market in operation. As we noted on occasion of Greenspan's faux 'mea culpa' back in 2008, the notion that capitalism is to blame for the ongoing implosion of the fiat money system may appeal to etatistes, but it is nothing but shabby propaganda

We live in an age of Keynesianism, not in a system of free market capitalism. To hear this bureaucrat blame the non-existent free market for the errors of his fellow central economic planners is revolting. That the 'pendulum will swing a little from the market to the state' is an absolutely ridiculous thing to say in light of the fact that the pendulum has been swinging in that direction for at least the past century.

The last time society had the opportunity to partake of the accomplishments enabled by a fairly free market setting and enjoyed the associated soaring real incomes and massive increase in general prosperity was during the 'Gilded Age' that ended roughly with the beginning of WW I. Ever since then, the State has been on the march, claiming an ever bigger share of the pie – which consequently never again experienced comparable growth.

The liberalization of the past three decades concerned mainly the fields of international trade and capital mobility. This is not to say that we ever came close to 'free trade'. Free trade doesn't require compendiums of rules that are several thousand pages thick –  a true free trade agreement could be written down on a napkin. What we did get is rather 'managed trade', but it certainly was a great improvement on the utter sclerosis that pertained previously. The free movement of capital and the increase in world trade were largely responsible for the bulk of the gains in prosperity the world has experienced over the past few decades. Since there are few other areas in which liberalization could possibly be rolled back, we must assume that the head of the IMF has his eye on these areas when he invokes the alleged need for the State to grow even more. 

The article continues:


“The IMF has long championed free-market policies, calling on member countries to privatize state-run industries and to ease rules for businesses.

"Don't get me wrong – the old pattern of globalization delivered a lot – lifting hundreds of millions out of poverty," he said.

 

To the extent that the IMF has called for such measures it may actually have done some good in its otherwise useless existence. So, 'millions have been lifted out of poverty' – fine, so why change anything? Shouldn't we strive to lift millions more out of poverty? Nope, there is something fundamentally wrong according to Strauss-Kahn:


“But this globalization had a dark side – a large and growing chasm between rich and poor. While trade globalization is associated with lower inequality, financial globalization – the big story of recent years – increased it.”

 

We would note to this that the inequality of incomes – even if it is growing – is per se not proof that anything untoward is happening. One only needs to do a little experimental arithmetic to see why. Let's for instance assume that there is a country of 1,000 people, two of which earn $1 million each, while the remaining 998 earn $1,000 each. Say that after 5 years – as a result of globalization –  there are now three big money makers earning $3 million each, while everybody else now earns $5,000 each. Clearly, the 'gap between rich and poor' has grown, but in what way has this been detrimental to the poor whose income is now five times greater than before? It is sloppy thinking to assert that growing gaps in income are inherently bad.

The article continues:


Strauss-Kahn, who is widely expected to leave his post soon to lead France's Socialist Party in 2012 presidential elections, said more focus on social cohesion as well as tighter rules were needed.”


See? We told you he's really a socialist.


“Over the longer term, sustainable growth is associated with a more equal income distribution," he said. "The new global governance must also pay more heed to social cohesion."

"We need a tax on financial activities to force this sector to bear some of the social costs of its risk-taking behavior."

 

Ah, now the cat is out of the bag. We need 'more equal income distribution', which of course can only be achieved by the coercive powers of the State, and – ta da! – we need of course more taxes!

If Mr. Strauss-Kahn were really interested in reducing the 'social cost of the financial sector's risk taking behavior', he would plead for more, not for less, free market capitalism. In a system of free market capitalism the shareholders and bondholders of the offending risk takers would have eaten the losses that were rightfully theirs, as insolvent institutions would simply have gone bankrupt. The fact that there are 'social costs' – i.e. the fact that these losses have ultimately been socialized by means of monetary inflation and by transferring the burden to tax payers –  is a result of the very interventionism people like Mr. Strauss-Kahn and his fellow statist planners are the champions of.

A new tax will only lead to more wasteful government spending – as if we didn't have enough of that yet! The notion that such a tax would result in 'burden sharing' is so naïve it seems hardly deserving of comment. We would also note that Strauss-Kahn keeps referring to the 'financial sector', which is casting a very wide net. For instance, we don't recall that even a single hedge fund has asked for or received one red cent of tax payer assistance. What was bailed out was the very banking cartel whose operations were and are overseen by the central banks. In short, the very sector that is most intimately connected to what is the biggest and most influential central economic planning agency in the modern State.

We would submit that an excellent first step would be to consider how to get rid of this failed system of central planning before it ruins what is left of our prosperity. Increasing the power of the State while rolling back what little there is left of the free market after decades of unchecked growth of statism is surely precisely the wrong thing to do.

In a related development, it was reported today that the 'IMF endorses some capital controls for the first time'. Perhaps not surprisingly, this idea is based on the truly Orwellian-sounding demands of the economically illiterate French president Nicolas Sarkozy (Sarkozy has demonstrated his non-existent grasp of economics on many previous occasions):


“The framework comes in response to a call by France, which holds the presidency of the Group of 20 major economies this year, for capital flow guidelines.

Nicolas Sarkozy, the French president, proposed in January that the G20 develop "a code of conduct" for managing capital flows and said the IMF's role should be "broadened" and include "surveillance" of international capital transactions.”


Now, we will say this: it is clear that the crazy inflationary policies of the central banks in the developed nations, especially those of the Bernanke Fed, have put many emerging economies in a very difficult position. Soaring food and energy prices may not bother The Beard or the i-pad eating chief of the NY Fed, but they do bother people who must spend a large proportion of their income on these necessities. It is no wonder that the flood of money sweeping across the globe is making the authorities in emerging markets uneasy, as their currencies are rising sharply and their economies are threatening to overheat. The massive influx of money is a result of investors desperately trying to protect the purchasing power of their savings by investing in whatever they think will inflate the most. It would however be a mistake to blame free flows of capital for the malaise and to expect that restricting them will achieve any lasting positive results. The problem must be attacked at its root, which means that the twin evils of deficit spending and monetary inflation need to be tackled. 

As an aside and as we have noted previously, the anti-capitalistic mentality is curiously extremely popular in France. It is a bit mysterious where this mindset comes from –  as a matter of fact one of the greatest economists of the 19th century, Frederic Bastiat, was a Frenchman and was compelled to rail against it all his life (perhaps someone should mail Sarkozy one of his books).

We want to close with a quote from George Reisman's excellent essay 'The Myth that Laissez Faire Is Responsible for Our Present Crisis' (we strongly recommend reading it in its entirety):


“Today, they continue to play the same game. Always it is laissez faire that they denounce, and whose alleged failures they claim need to be overcome with yet more government regulations and controls. Today, the massive interventions not only of the New Deal, but also of the Fair Deal, the New Frontier, the Great Society, and of all the administrations since, have been added to the very major interventions that existed even in the 1920s and to which Hoover very substantially added. And yet we still allegedly have laissez faire. It seems that so long as anyone manages to move or even breathe without being under the control of the government, laissez faire allegedly continues to exist, which serves to make necessary yet still more government controls.

The logical stopping point of this process is that one day everyone will end up being shackled to a wall, or at the very least being compelled to do something comparable to living in a zip code that matches his social security number. Then the government will know who everyone is, where he is, and that he can do nothing whatever without its approval and permission. And then the world will be safe from anyone attempting to do anything that benefits him and thereby allegedly harms others. At that point, the world will enjoy all the prosperity that comes from total paralysis.”

 

Amen.

 


 

Head of the IMF, French Socialist Party member Dominique Strauss-Kahn: 'The State needs to grow, free market capitalism needs to be rolled back'.

(Photo credit: EPA)

 


 

French President Nicolas Sarkozy – in spite of being nominally a 'conservative' he is a typical proponent of the anti-capitalistic mentality that is so popular in France.

(Photo credit: EPA)

 



 

 

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