In 1936, there was a low-budget movie called Reefer Madness. It has become a cult classic. It is online here.

It was produced during Franklin Roosevelt’s New Deal. A really accurate movie describing the New Deal would have been called “Subsidy Madness.” Few people saw the connection in 1936. Few see it today. About 95% of those few who do see it deny it whenever the withdrawal pains begin. I call them the libertarian cheerleaders.

The addiction to government subsidies is much greater because the results seem more pleasant, the market is far larger, the resistance is minimal, and the result is the same. Just as with hallucinatory substances, you need ever more government regulation and more fiat money to get the same buzz.

In my September 9 report, “It’s a Wonderful Subsidized Life,” I spoke of the weekend devastation inflicted by Hurricane Hank. Secretary of the Treasury Henry Paulson announced the end of the semi-private mortgage market in the United States. You can read my report here (who won, who lost, who will lose).

The investment world cheered on Monday morning. The Dow Jones Industrial Average rose by 290 points.

I said in my report, written on Monday afternoon, that the stock market rises for just one day after each weekend bailout. Sure enough, on Tuesday, the Dow fell by 280 points.

Now comes Lew Rockwell with a terrific essay on why we should stop the bailout.

All of the self-identified libertarians who have rushed to assure us that the bailout was financially necessary, and that the government did the right thing, are once again proving the truth of this slogan:

“There are no atheists in foxholes, and there are no libertarians in meltdowns.”

There are a few holdouts. Rockwell is one of them. So am I. That, plus $2, will get you a ride on the New York City subway.

THE ROAD TO ADDICTION

Government intervention is like a hallucinatory drug. So is fiat money. The more you get, the more you want. The buzz wears off sooner, and the highs are lower. “More! More! I have to get more!”

As I said in my previous essay, each government intervention calls forth the next one. That idea goes back over half a century to an article written by Ludwig von Mises: “Middle of the Road Policy Leads to Socialism.” You can read it here.

Mises made the point that each government intervention distorts the true conditions of supply and demand. So, the result of the intervention is the opposite of the excuse the government used as a justification for the intervention. Things get even worse.

The politicians and their hired servants, the bureaucrats, then announce another intervention into the operation of what little remains of the free market. This time, they assure us, the system really will work better. This time, it will be different. But, of course, it is not different. The reform does not work better. It moves the market even further away from the true conditions of supply and demand. It moves even further away from the free society. Mises said that the results of the intervention are always worse from the point of view of the original justification by the politicians, namely, that the intervention would make things better.

All of the cheerleading from the libertarian camp about how it was a great idea for the government to intervene to stabilize the mortgage market will turn to dust in their mouths. A year from now, or five years from now, the mortgage market is going to be worse. But the dust-eaters will convince themselves that it really is caviar.

There will be more intervention by politicians and bureaucrats. There will be more distortions in the conditions of supply and demand. Political pressures will be brought on the politicians to continue to subsidize people who cannot afford to buy a home, and who could not possibly get a loan to buy a home in a free market. Low down payments are still going to be common. There will be millions more Americans abandoning their homes by walking away or by foreclosure. There will be more people declaring bankruptcy because they had been lured into the investment, so-called, in housing. It was not an investment; it was a high-ticket consumer expense. Now millions of consumers find that they cannot afford the expense. So, they are walking away. There are 1.2 million homes in foreclosure today. In a year there will be 2 million homes in foreclosure.

Over and over, we see the same pattern: government intervention distorts the free market, which then results in unforeseen negative consequences. When I say unforeseen, I mean “unforeseen by the politicians and bureaucrats.” Also, “unforeseen by the libertarian cheerleaders who told the public that it was necessary that the government intervene.” The ex-atheists in foxholes are closer to the truth than the ex-libertarians during meltdowns. There is a God, but there are no successful solutions from government intervention during the meltdown. The government merely kicks the can down the road again. The errors increase. The negative feedback from the market, which would have reduced the errors, is not allowed to function. Whatever the problem was that the government was attempting to solve escalates. The next crisis will be worse. Then, once again, the libertarian cheerleaders will stand behind the government and tell their constituents that it is sad that this was necessary, but there is no question that it was necessary.

These people never learn. They are not believers in the free market. They are believers in the mixed economy. They are Keynesians in drag.

Their cheerleading confuses sensible people whose instincts are correct. These people believe that taxpayers’ money should not be used to bail out investors who bought the common stock and preferred stock and the bonds issued by these two gigantic government boondoggles. They understand that this bailout is one more subsidy to the rich. In this case, it is a subsidy to the richest of the rich: the central bank of China and the central bank of Japan. This bailout is a gigantic payoff by the United States Treasury to the idiot bureaucrats who run the central bank of China and the central bank of Japan. These bureaucrats are mercantilists. They subsidize exports — a limited sector of their national markets — to foreigners. They create fiat money and buy U.S. dollar-denominated bonds. Why? To keep their currencies from rising in value and thereby reduce exports.

These two central banks invested in a pair of boondoggles during a period in which the greatest idiot of all, Alan Greenspan, a “the government must intervene one last time to save the economy” libertarian, was pumping fiat money into the economy and forcing down interest rates. Rates on Treasury debt fell. The idiot Chinese central bankers and the idiot Japanese central bankers bought the bonds of Fannie Mae and Freddie Mac because these bonds paid a slightly higher rate of interest than Treasury debt. They did this, knowing full well that both organizations were not supported by the US government and did not say that they were supported by the US government. But the idiot bankers bought the bonds nonetheless. This summer, they were facing default. But, lo and behold, it was Hurricane Hank to the rescue! On his own authority, he announced that the United States Treasury will intervene to fund the bankrupt boondoggles to the tune (initially) of $100 billion per boondoggle. He correctly assumed that the Democrats in Congress would rush to support his decision, and thereby validate another high bureaucrat who acts on behalf of George W. Bush. He was correct. The Democrats in Congress have all said, just as the cheerleading libertarians said, that this intervention is necessary to save the economy. The Democrats are to Republicans what libertarians are to Keynesians. They are government intervention cheerleaders in a crisis.

Any voter whose instincts tell him that the Federal government should not bail out rich investors who have made bad investments on the assumption that the government would bail them out becomes the fall guy. Like all the other taxpayers, he is going to pay the freight to bail out the bad investments of the idiots.

So, as it turns out, the idiots were the smart guys. It’s still the same old story. The idiot buyers of Fannie Mae and Freddie Mac bonds knew who they were dealing with. They were dealing with a corrupt Administration and a corrupt Congress. A bond of political unity joins together Republicans and Democrats. This bond is based on moral corruption: the politics of plunder.

Did any Democrat in Congress rush to criticize hurricane Hank? Of course not. The only Senator who openly criticized the whole corrupt deal was a Republican, Jim Bunning. It took a retired baseball pitcher to recognize a spitball when he saw one.

A SPITBALL FROM PAULSON

The housing market is going to continue to decline. Prices from the peak in 2005 to the bottom in 2011 will fall by at least 40% nationally. In some regions, such as California, Florida, and Nevada, the fall will be even greater.

I think Professor Nuriel Roubini of New York University is probably close to the truth: by the end of 2009, 40% of all Americans who live in a home for which there is a mortgage will be underwater. That is, they will owe more money on their homes than they could sell the homes for after discounts and real estate commissions. The bailout of Fannie Mae and Freddie Mac was justified officially because the government says that there has to be continuity in the mortgage market. This continuity refers to future sales of homes. It is an attempt to maintain the high price of homes. This is supposedly a good idea. This is a standard government good idea: “Keep prices higher than they would have been if there had been no government intervention.” In other words, it is an attack on consumers. Virtually all government intervention is an attack on consumers. It may be an attack on consumers in the majority on behalf of consumers in the minority, but it is nonetheless an attack on consumers.

The government almost always intervenes on behalf of the suppliers, not on behalf of the consumers. So it is in this case. The justification has been that there must be orderly markets for homes. This means keeping sale prices higher than the free market would produce.

Let’s not kid ourselves. This bailout is a subsidy to the suppliers of homes. It is a subsidy to the few surviving homebuilders, to people who own homes, and to people who may want to sell their home to buy an even bigger home later on.

This is an assault on home buyers. It is an assault on anyone who has saved 20% down payment and who wants to buy a reasonably priced home, so that his monthly payments will total a little more than what he has to pay in rent. He wants to move up from renting to home ownership. But, because about two-thirds of Americans are already home owners, and about half of these are in debt to lenders, and something like 40% of these indebted people in a year will find that they are underwater, the government intervenes in order to bail them out. Homeowners vote as a bloc. Renters tend not to vote as a bloc. Homeowners understand that they need a subsidy to make their investment pay off. Thrifty, future-oriented renters do not understand that this subsidy is what keeps them renting.

The government tells voters that this is a pro-ownership intervention. It is pro-ownership in the sense that it is a bailout of millions of people who were lured into making a hoped-for investment that the free market would have priced out of their price range. The free market would have required a larger down payment. It would have established a shorter payoff period. It would have allowed renters who could afford to buy a home to buy one. But, instead, the government intervention lowered the terms of entry, and thereby raised the retail price of housing.

We have seen all this before. This is exactly what is happening with Medicare. The justification for Medicare today is that a retired person cannot afford medical treatment. But the main reason why the retired person cannot afford medical treatment is because Medicare for the past 40 years has subsidized physicians and has pushed up the price of medical care. It has been a gigantic boondoggle for physicians, and it has been done in the name of retired people. Now the physicians are trapped. Medicare is going to squeeze them unmercifully. They were lured into the trap by the promise of government support. I warned about this in 1977, and I went on the road to speak to physicians in a dozen different cities. You can read my essay here.

That speaking trip was organized by Lew Rockwell. Rockwell knew exactly what was going to happen, and it has happened. Rockwell knows exactly what is going to happen to the housing market, because it is already happened to the housing market.

ADDICTION

This is addiction. The government is the junkie. The government promises to make things easier for the guy who wants to get addicted. So, tens of millions of Americans got addicted to government handouts. Only they are not called handouts. They are called “the ownership society.” The program is a gigantic subsidy to landowners, homebuilders, and Asian central bankers. It lured the naïve into the debt trap.

The housing market is going to get worse, the taxpayer is going to get billed, and Asian central bankers will eventually be wiped out by Federal Reserve inflation. That is where all addiction ends.

In the nineteenth century, British and American shippers, such as Warren Delano, Franklin Roosevelt’s maternal grandfather, addicted millions of Chinese to opium.

Mentally picture an opium den in 1850. It is filled with Chinese men puffing on pipes. Today, the substance is not opium; it is IOUs. In 1850, the local retailer was Chinese, and the supplier was a westerner. Today, the local retailer is the People’s Bank of China. The supplier used to be Fannie Mae and Freddie Mac, but Paulson intervened and established the Treasury’s open monopoly over the supply of the hallucinatory substance.

Someday, China is going to go through withdrawal. It will be like Frank Sinatra’s portrayal of withdrawal in The Man with the Golden Arm. The difference is, this time it will be the nation with the fiat money arm.

Americans are also hooked on IOUs. Withdrawal symptoms are now evident in the credit markets. We are going to go through a preliminary version over the next three years: mortgage agreements that go belly-up. Home owners will mail back the keys to the lenders. “Jingle mail, jingle mail, jingle all the way.”

The bailouts have only just begun. More deficits loom.

CONCLUSION

Addicts find it painful to go cold turkey, once and for all. That was Mises’ point back in 1951. He was correct. Meanwhile, the libertarian junkies who peddle the hard stuff in libertarian communities tell us that one more fix will do it. One more fix is necessary. Just one more time. “Please! Please! Just one more time!”

Gary North [send him mail] is the author of Mises on Money. Visit http://www.garynorth.com. He is also the author of a free 20-volume series, An Economic Commentary on the Bible.

Copyright © 2008 LewRockwell.com