There has been a lot of discussion in the Australian media recently about the introduction of an Australian Bill of Rights. Such a bill would, presumably, enshrine into the Constitution freedoms such as freedom of speech, freedom of religion, freedom of association, and other freedoms reminiscent of what appears in bills such as the United States’ Bill of Rights. While the aforementioned freedoms are certainly essential in a modern democracy, enshrining them into the Constitution brings with it serious problems.

Under Australian law, the High Court is the sole entity with the right to interpret the Constitution. In other words, whatever is the interpretation of the Constitution by the High Court, is the final word. This represents a significant shift in the balance of power. Take for example the freedom of speech. While this is clearly a fundamental right in any credible democracy, it may have limits. For example, should religious extremists be able to use ‘freedom of speech’ as an excuse for using their influence to incite followers to conduct extremist actions such as hate crimes or terrorist offenses. While it is debatable whether freedom of speech should allow such actions, the point is that it must remain debatable. In other words, the public should be free to debate this issue, form a consensus, and pressure the elected representatives to pass motions based on this consensus. On the other hand, with a constitutionally enshrined freedom of speech, it becomes no longer a debatable issue which can be influenced by elected representatives or the public, but instead becomes an issue which is decided upon by unelected judges, who are accountable to no one, and whose rulings become the uncontested rule of law.

A good example of the pitfalls of constitutional bills of rights is the 2nd amendment in the United States’ Bill of Rights – ‘The right to keep and bear arms’. ‘Arms’ is a rather generic term and can be used to refer to anything from pocket knives to fully automatic assault rifles. Gun laws are a very important political and social issue. However, under the US Bill of Rights the interpretation of this amendment is left solely in the hands of the justices. In other words, debate on this issue in the House or Senate is effectively stifled since neither have the right to influence this – only the Supreme Court does. As a result, it is presently acceptable for individuals to posses fully automatic military assault rifles, and neither the House nor the Senate can do anything about it. In a sensible democracy, issues as important as this need to be debated, and ultimately decided by elected representatives, not by unaccountable justices whose views cannot be overruled by the democratic process.

By far the most striking example of the undeserved shift of power away from elected representatives and into the judiciary, is the Roe vs. Wade decision by the US Supreme Court in 1973. In this ruling the Supreme Court ruled that a woman’s right to abortion is protected via the right to privacy of the Fourteenth Amendment. This has become one of the most cited and debated rulings in US history. Abortion is an extremely important, contentious and dividing issue in Western societies, and it needs to be debated and acted upon accordingly. However, as was evident in this case, justices sometimes feel the need to take an activist position and interpret the constitution in ways it was never intended to be. Whether you are for or against abortion is not the issue. The point is that abortion is an extremely important topic that needs to be publicly debated and ultimately decided upon by the Parliament, not by the activist judiciary.

To illustrate the fact that a Bill of Rights is not absolute and is open to interpretation by the judiciary, consider a very good example – once again the US Bill of Rights. In the hands of the judiciary the US Bill of Rights did nothing to prevent slavery, nor did it prevent segregation, nor did it prevent the circumvention of habeus corpus during the War on Terror, despite the fact that under a literal interpretation of this Bill such acts would be outlawed.

A final objection to a Bill of Rights, is that it is not flexible – it cannot evolve with evolving social views. What is enshrined in the Constitution is essentially permanent, unless a referendum takes place, which is very rare. In other words, while the views of society may change, the views of the Parliament may change, but what is enshrined in the Constitution does not.

In summary, a constitutional Bill of Rights, by definition, shifts legislative power away from the Parliament and into the hands of the judiciary, which is not elected, not accountable, and whose rulings cannot be overturned. If a politician implements a bad policy, they can be voted out at the next election. When a judge makes a bad ruling, they cannot be. A Bill of Rights is not flexible, and therefore cannot change as social views change. This is a dangerous situation and represents a complete attack on our democratic process and principles. Australia has an impeccable history of allowing freedom of speech, freedom of religion, freedom of association and protecting the rights and views of minority groups – historically, is the US better in these regards? As such there is no convincing reason to shift power away from Parliament and into the hands of the judiciary. Shifting around the power balance, in a system that has worked so well for a hundred years, is a precarious and pointless thing to do.

This is a must read.

Summary:

• Chinese hackers, presumably government operatives, hack into Google.
• Hackers target dissidents and human rights activists.
• Google threatens to withdraw its operations from China.

Following the recent credit crisis and collapse of several major financial institutions, many commentators have jumped to the conclusion that this proves that the case for free market capitalism is invalid and that libertarian ideals are dead. This includes comments to this effect by prominent people like Nicolas Sarkozy who said “Le laisser-faire, c’est fini” (“Free market capitalism is dead”). The view taken by Sarkozy and many other commentators is fundamentally misguided and suggests a misunderstaning of the real reason for our recent financial troubles. The real reason was not free market capitalism, but quite to the contrary, government interventionism.

Our troubles started with the sub-prime mortgage crisis, which, I think it is fair to say, was the event that triggered the remainder of the problems we have seen. The sub-prime crisis was not caused by free marketeers, but rather by two forms of interventionism. First, the US government offered backing to the two major mortgage backers, Freddie and Fannie. Second, having given them the guarantee of government backing, pressured them to expand their sub-prime lending – lending to people who in a normal (free market) situation would be ineligible for loans on the basis of their credit rating or ability to pay off their debts. Naturally, Freddie and Fannie were more than happy to comply. After all, if the government is guaranteeing your financial position, you can afford to take risks you ordinarily wouldn’t take. So sub-prime lending flourished and as a result many people who were unable to pay off their loans were given loans anyway. A few years down the line, and, surprise surprise, Freddie and Fannie found themselves in a situation where they had vast amounts of bad investments on their hands.

There can be no argument that this sequence of events came about as a result of free market capitalism. Rather, it came about as a result of a misguided, interventionist policy to artificially expand home ownerships rates. This problem was compounded by an ultra-expansionary monetary policy championed by Greenspan et al., which further artificially expanded the amount of bad debt in the market.

Following the government bailout of Freddie/Fannie, their financial woes sent shockwaves of loss of confidence through the rest of the market, which triggered the remainder of the troubles we are seeing today – the collapse of banks and other financial institutions, the decline in world stock markets.

Nonetheless, despite the overwhelming evidence for the real cause of our problems, I haven’t seen many politicians or media commentators call for measures that really address the problems, such as eliminating government involvement in the mortgage market, allowing for insolvent companies to go down, and a more restrained monetary policy. Instead, they’re all too busy calling for the death of capitalism, while advocating bailouts and the injection of more credit.

Capitalism was never the root of today’s problems. Interventionism was. And the only solution is to scale back interventionism and return to free-market principles.

I conclude with this picture…

Several European nations, most notably Germany, have introduced government guarantees on personal savings accounts at their banks. This approach to bailing out, bailing out the consumer, is completely different to the until-now ‘conventional’ approach of bailing out the institutions. There are very valid arguments both ways on this issue, so here’s how I see things.

The downside

The government guarantee approach adopted by Germany et al. might skew the allocation of capital in the market in favour of more risky investment decisions. Without government backing, every person with a savings account must first make an assessment of which bank or savings institution to deposit their money with. This decision will be based on numerous factors, with the security and stability of the bank being a major consideration. This in turn creates a market mechanism whereby savings tend to be deposited in institutions which are perceived to be safer. With full government backing this mechanism is completely destroyed. We are left with a system in which savers couldn’t care less about the security or stability of the bank in which they are depositing their funds because they know their savings are government backed. Presumably, this will in turn will lead to more money being deposited at dubious institutions which engage in more risky allocation of capital – malinvestment. So although the government backing approach is probably better for the consumer, which is good, it by no means bypasses the problem of moral hazard, which was my biggest criticism of the US bailout package.

The upside

The upside of this type of government intervention is that it virtually eliminates the possibility of bank runs. Ironically, a government backing of savings at banks reduces the possibility that the backing will actually be needed. When people know their money is guaranteed they have no reason to rush to the bank to withdraw their funds as soon as there is any loss of confidence. In other words, the positive feedback loop of loss of confidence is contained and not allowed to spread and engulf the entire banking sector and broader economy. So from this point of view the government backing can be seen as an investment into creating a positive market psychology that will rarely (if at all) actually require the investment of taxpayer dollars.

Conclusion

It’s important to remember that a government backing of bank deposits most of the time requires no input of taxpayer dollars whatsoever. It is only when there is a serious collapse of a bank that the intervention is actually called upon. I think the real questions are ‘what is the probability of a significant crash occurring that would require taxpayer dollars being spent?’, ‘to what extent will this kind of backing reduce the chance of a bank collapse occurring?’ and ‘to what extent will this kind of intervention distort the allocation of capital in the markets, leading to malinvestment?’. I don’t know the answer to any of these questions, but I’d welcome comments. On the whole though I tend to be inclined against deposit guarantees – they seem to be more of a populist measure than anything else. Having said that, like many issues in economics, I don’t think there is substantial data supporting either case, so it’s impossible to draw a conclusion based on empirical evidence.

Why, go on a $440,000 junket of course. What else?

Bear Stearns. Freddie Mac. Fannie Mae. AIG. What next? I’ve already had my rant on the federal bailouts of these financial giants. But there’s one thing that bugs me even more than the bailouts, and it’s the crazy monetary policy surrounding them. Following the collapse of these institutions, Wall Street entered a state of despondency. The solution by the Federal Reserve, and other central banks around the world, was to pump hundreds of billions of dollars more cash into the system. Unfortunately this is not something that is without precedent. Indeed, it seems that whenever the markets take a dive the immediate response of the Fed is to inject more cash. I have two objections to this. First, easy money was surely a contributing factor to the financial problems we are seeing today. Consumers, and homeowners in particular, are living beyond their means because money is easy to come by. This in turn has led to excessive debt to income ratios, which fueled the impact of the sub-prime problems. So, how is pumping more money into the system helping this problem? It’s not. It’s just prolonging the pain. It’s akin to taking out a new loan to pay off an old one – you’re not actually any better off, you’ve just delayed the inevitable, and allowed it to grow in the meantime. Second, when the Fed pumps more money into the financial markets, this is money that is coming from nowhere – it’s just printed. This in turn devalues the dollar. Let there be no mistake, this is a direct form of taxation – an inflation tax. It is a tax paid by every person who holds dollars in order to subsidize Wall Street. This is wealth redistribution in its most perverse form – money is being taken from every citizen, including every member of the middle and lower classes, and redistributed to a large extent to the upper end of town to cover them for mistakes made during the course of their own greed.

Not only does the US government have a lot to answer for by engaging in the socialistic policy of repeatedly bailing out some of the biggest institutions in the country, but the Federal Reserve has a lot to answer for with its solution to the problem of simply printing more money. This approach in unsustainable. You simply cannot go on forever printing money to cover your losses. Eventually you devalue the currency. Indeed this is exactly what has happened. The US dollar is today worth almost half as much as a few years ago compared to many other major currencies.

If you don’t believe me, ask Ron Paul… (I apologize for citing a Fox News story. It won’t happen again)

As a bonus, here’s a personal message from Ron Paul about the current situation

The whole debacle with the US housing market, and, in particular, the bailout of Freddie and Fannie, raises some very important questions as to what the role of government should be in supporting the economy. Proponents of the bailout argue that Freddie and Fannie are so central to the operation of the US mortgage market that their collapse would spell an economic catastrophe. However, my fear is that the alternative – a bailout – while attractive in the short term, could be far more catastrophic in the long term. Specifically, a bailout skews the risk analysis by companies, since they come to assume that if they run into trouble the government will bail them out. This in turn encourages irresponsible risk taking behaviour, which, in the long term, will lead to the same problem of over exposure to risk arising again and again. So as a rule of thumb I tend to oppose bailouts, no matter how dire the situation may appear in the short term. One of the most pivotal aspects of a market system is that market participants need to take responsibility for the risks they take. This in turn encourages responsible risk taking. Bailouts (or any other form of government backing) completely destroy this important feedback mechanism.

Whenever a stock market crash, or conversely a rally, occurs in world financial markets, the newspapers are immediately filled with analyses by ‘experts’ on why the crash occurred and what should be done in future to prevent such crashes. People point to bad business decisions on the part of companies, bad monetary policy, bad regulations, or any number of other reasons. I’m of the view that most of the time these analyses are fundamentally misguided and ignore the real reason for market crashes. The real reason for market crashes can manifest itself at any time, even when all the fundamentals of the economy are in good shape. What is the real reason? Markets are complex systems, and most complex systems are characterized by chaos and instabilities. This is an inherent trait of complex systems and has nothing to do with whether businesses are making good or bad decisions, or whether monetary policy is enlightened or misguided. Additionally, global financial markets have many inherent positive feedback loops. That is, when a trend emerges it has the ability to reinforce itself. Consider for example when the stock market begins to take a dive. People see the dive, assume that it will continue, and try to protect themselves against losses by taking a short position (e.g. by selling stock or buying appropriate derivatives). This behaviour reinforces the trend by driving prices further down. Conversely, an up-trend could equally well reinforce itself when people try to take advantage of the trend by taking a long position (e.g. by buying the stock). Importantly, the ability for these patterns to materialize is inherent, and has little to do with the underlying strength or structure of the economy.

As an example, to this day there is little consensus on what caused the Asian financial meltdown of 1997. It was completely unexpected and occurred without any obvious reason. Various commentators will attempt to retrospectively explain it away by pointing to various economic indicators or the behaviour of various financial institutions. But I don’t believe there will ever be consensus, because the reasons for the crash probably cannot be attributed to any specific action or policy. Rather, the dive was most likely a collective phenomenon, associated with the fundamental instability of a complex system.

So the question is, what can be done to avoid crashes? The answer is, short of massive regulation of the financial system (which is both unviable and probably counterproductive), probably not much, since large markets are inherently comprised of a large number of individual market participants, which will inevitably lead to a complex system with chaotic and sometimes highly unstable dynamics.

I recently heard about Islamic banking, a form of banking that is consistent with Islamic Sharia law, and started learning a bit about it. Unlike conventional western banking, Sharia law explicitly forbids usury, the collection of interest on loans. Obviously Islamic banks need some kind of profit model, so when a business takes out a loan with an Islamic bank, rather than paying interest on the loan, the entrepreneur engages in a profit-sharing partnership with the bank. That is, the bank becomes a partner in the business and takes an agreed upon percentage of the profits. This type of agreement is consistent with the no-usury requirement in Islamic law.

Apparently Islamic banking is one of the fastest growing sectors of the international economy, catering for the world’s enormous Muslim population who wish to bank in accordance with Islamic law. Interestingly, during the Asian financial meltdown, Malaysia’s prime-minister Mahathir Mohamad refused IMF assistance, a move which shocked world markets, and instead invited the Islamic Development Bank to provide the necessary investment to revive Malaysia’s economy. As it turns out Malaysia’s economy recovered very quickly, unlike some of the other Asian economies which faltered despite IMF assistance.

In my mind, this model of banking offers some key advantages compared to conventional Western banking. Namely, risk is spread between the investor and the debtor – Islamic banks assume a share of the risk in the businesses in which they invest. This is unlike conventional banking where bankers have a cut-and-run approach – the banker’s income is fixed and they are effectively insured against risk via collateral offered by the entrepreneur. This difference clearly changes the dynamics of business loans since the bank has a strong vested interest in ensuring the success of the business and is therefore likely to offer advisory support and other assistance to businesses along the way.

I’m interested to see how Islamic banking develops and whether it becomes more widespread. I’m particularly interested to see whether, influenced by this banking model, conventional banks might start to offer business loans under a profit-sharing model rather than an interest based model (perhaps some banks already do this, unbeknown to me). Islam aside, I’m sure there would be significant demand for this kind of banking model as it spreads risk rather than concentrating it all onto the entrepreneur.

I recently watched a chilling documentary called ‘Jesus Camp’, about a Christian youth camp run in the States, where young children are effectively brainwashed into becoming little GOP crusaders. The extent of the indoctrination was absolutely astonishing. There were scenes of masses of children crying their hearts out while being ‘touched by the Lord’ during mass prayers, scenes of children lying on the floor in convulsions after being taken over by the Holy Spirit, children being told of the evils of homosexuality and abortion, and, most chilling of all, large groups of children praying to a life-size model of George Bush. When interviewed, the leader of the camp cited the fact that the Muslim world was out-fanatisizing the US, so the US needs to catch up. You can watch the documentary here (part 1 ,part 2, part 3, part 4
part 5, part 6, part 7, part 8, part 9).