"Capitalism Without Bankruptcy is Like Christianity Without Hell" (and other financial facts you may not have known)

Most politicians have less understanding about money, finance and economics than the average undergraduate business major. Yet these are the people making laws that affect your financial future.

The prices of oil and gasoline are NOT set by oil companies. They are set by the buying and selling of future contracts by traders in the open commodities market. When gas prices go up it is in reaction to speculators believing that they will continue to go up. When gas prices go down it is in reaction to their believing that they will continue to go down. Speculators cannot manipulate the market--they can simply place bets based on what they think the market will do in the future. Those bets themselves drive the market. However, no speculator can be sure that any bet he or she places will be profitable. The idea that speculators can manipulate the market to make a profit is a myth perpetuated by politicians looking for scapegoats.


Five reasons health care has become more expensive:

1. It’s a lot better than it used to be. Medical technology has made incredible advances in the last thirty years. Those advances cost money. 
2. Prices go up when something is in demand and/or when a lot of money is allocated to be spent on it. The rise of aging baby boomers and the government allocating huge amounts of money to Medicare and Medicaid have increased the demand for health care and thus driven prices up. If less money was allocated for health care, prices would drop. It’s simple economics.
3. Doctors regularly prescribe needless procedures in order to avoid lawsuits and boost profits, because...
4. The health care system is being crushed by required government procedures, paperwork and other inefficiencies. 
5. Somewhere along the line we got the idea that others are obligated to try to keep us alive for as long as possible. Apparently we think it’s okay to bankrupt the nation in order to make this happen.

Ever since governments have coined or printed money, they have found ways to debase (decrease the value of) that money. The word “debase” itself comes from the practice of ancient governments adding base metals to gold and silver coins in order to make more coins—thus lowering their value and creating inflation. Why do governments do this? One reason is because inflation is an invisible tax. It’s a way governments transfer money from people that have it (savers) to people that don’t (debtors). With the development of central banks and fiat (non-backed) currency, governments have perfected the efficiency of creating inflation.


Inflation is not a fact of nature. It is a deliberate practice by governments which control the money supply. In the one hundred years before the creation of the Federal Reserve Bank, the U.S. dollar actually increased in buying power. What cost $100 in 1812 only cost $56 in 1912! But since the creation of the Federal Reserve Bank in 1913, what cost $100 in 1912 would cost $2342 in 2012, a 95% loss of buying power.


Despite what hysterical politicians and central bankers tell you, sometimes deflation is the best thing for an economy. Politicians don’t like deflation because it makes it hard for them to get re-elected.


Fat cat executives should be held accountable when they drive their businesses into the ground. They should not be allowed to escape with golden parachutes. Aside from the rank injustice of it, it’s a matter of applying the proper incentives. Executives convicted of fraud or malfeasance should be allowed to keep a modest retirement, while the bulk of their wealth should be used to reimburse defrauded investors. Those who caused the failure should have to start over like everyone else.


The housing bubble and the ensuing credit crisis was created by banks, financial companies, but mostly the US government. Banks and mortgage companies gave home loans to people who had no business qualifying for them. These lenders did this because they could package these loans into investments and pass the risk onto to clueless investors. However, although the financial community bear some responsibility, the government and the Federal Reserve Bank bear the most responsibility because (1) they encouraged lending to unqualified borrowers (“everyone deserves a piece of the American dream”) and (2), most importantly, they held interest rates artificially low, allowing buyers to buy more house than they could really afford, spurring demand for home loans, driving up prices, and inflating the bubble. When unqualified buyers began defaulting on loans, the bubble collapsed.


As I said, the Federal Reserve’s holding interest rates too low for too long produced the housing bubble and credit crisis. The Fed's proposed solution is to... keep interest rates even lower indefinitely! Got that? This is what Japan has done for over twenty years and it has produced a zombie economy there, a twilight realm where little fails but little grows too.  Japan’s suicide rate is one of the highest in the world.


So what should the US do? Simply put we should allow capitalism to take its course—we should allow failing businesses to fail.  When businesses fail, the losers are cleared out, someone else steps in, acquires the assets and has a fighting chance of doing something better the next time. But by propping up failed businesses, the government is ensuring that the same mistakes will continue to be made and that resources will continue to be misallocated. As former astronaut Frank Borman said, “Capitalism without bankruptcy is like Christianity without hell.” As I noted, it's a matter of incentives.


Motivated people will always find a way to profit from circumstances. This includes the unlikely circumstance of capitalism being dead--and just about any other you can think of. That is the genius of human nature, and an expression of people's right to act in their own interest.