http://www.marketwatch.com/…

Central bankers and regulators are rethinking their faith in the ability of market forces alone to police the increasingly complex global financial system.

In a speech in Jackson Hole, Wyo., Federal Reserve Chairman Ben Bernanke said the Fed’s toughest challenge is not restoring growth, fighting inflation, or providing fragile banks with sufficient liquidity to get through the current financial crisis. Rather, it’s finding a way to prevent the next one.

The bailout of Bear Stearns in particular represents a failure of the supervisors to monitor the system. Bear wasn’t a particularly large institution, but its assets and liabilities were so thoroughly linked with the rest of the financial world that its failure would have been devastating, Bernanke said. Read the speech.
It’s not that Bear Stearns was too big to fail, it was too interconnected.

Bernanke suggested that the Fed and other bank supervisors need to use a holistic approach, rather than look at each institution in isolation. The explosion of securitization and derivatives in the past few decades has shifted risks in ways that aren’t immediately apparent. A risk that would be manageable for one bank would be unbearable if it applied to all, because systemic risks tend to create illiquid markets.

The regulators also have to clearly explain when and under what conditions financial institutions will be allowed to fail and when they will be bailed out, Bernanke said. To limit moral hazard, bailouts should be structured so that shareholders are wiped out, similar to the way failing banks are now treated by the Federal Deposit Insurance Corp.

Imposing systemwide supervision and regulation won’t be easy to design or cheap to implement. Unintended consequences are certain to appear. But the alternative of doing nothing would consign us to periodic costly boom and bust cycles that could leave us all poorer.

Just… wow. The organization that is the biggest nonfree component of the current economy and who is looking daily to increase its power doesn’t have faith in the market’s ability to handle things. What a shock. I love that last sentence too. “But the alternative of doing nothing would consign us to periodic costly boom and bust cycles that could leave us all poorer.” Is this guy serious? Has this guy ever opened an economics book or thought critically on the subject? Making us poorer? The Fed’s massive inflation has helped do that. So has the socialization of so many aspects of our lives. We have periodic costly boom and bust cycles BECAUSE they refuse to do nothing. The bust doesn’t make us poorer. It makes us wealthier in the end. The bust is the liquidation of bad investments. If you continue on with the malinvestment you’re continuing on with an inefficient system and not investing in the things with the highest priority. The boom shouldn’t be happening in the first place. Spurred on by cheap debt and other manipulations. Some debt so cheap, like today, that they in fact are paying people to take money. Price inflation being higher than interest rates. Even if you don’t believe Mises and Rothbard on that one show me where the Fed has stopped the cycle? Please. Once you’re finished show me how well government regulation and interference in healthcare, education, housing, the poor, drugs, etc. has done.

http://mises.org/story/2944

The close followers of the work of Ludwig von Mises (1881–1973), one of the leading thinkers of the Austrian School of Economics, maintain that economics is an a priori science, “a science whose propositions can be given a rigorous logical justification, which distinguishes Austrians, or more precisely Misesians, from all other current economic schools.”[1]

Indeed, such a view stands in very sharp contrast to today’s state-of-the-art mainstream economics, which has fallen victim to the spell of positivism: in an attempt to investigate the truth of hypotheses in the field of social sciences, the positivists declare that measuring peoples’ actions and their continual empirical testing (according to “if-then” statements) would be required, thereby allowing for scientific progress.[2]

However, the positivist-empiricist approach does not, and cannot, deliver on its promise. It promotes false economic doctrines, as it misconceives the logical status of the science of economics. Positivism-empiricism encourages, intellectually speaking, a drift away from the free-market order, paving the way towards collectivism, socialism, and even totalitarianism.

Positivism-empiricism encourages social relativism: it denies any a priori truth of the social reality of human action, adhering to the view that “anything goes.” As such, social relativism plays into the hands of the enemies of the free societal order: there is nothing that could, as a rule, prevent recommendations derived from the positivist-empiricist doctrine from violating individuals’ property rights.

In 1945, Friedrich August von Hayek (1899–1992) formulated the consequences of a social philosophy that ignores principles:

[T]he aversion to general principles, and the preference for proceeding from particular instance to particular instance, is the product of the movement which with the “inevitability of gradualness” leads us back from a social order resting on the general recognition of certain principles to a system in which order is created by direct command.[3]

In virtually all developed countries, government activity — as measured, for instance, in terms of state spending as a percentage of total income and the scope of authoritative regulation — has been expanding at the expense of individual freedom and the free-market order, acquiesced to — or even publicly advocated — by mainstream economists.

This is why Mises’s work on the logical status of the science of economics needs to be brought back to public attention: his work actually forms the intellectual bulwark against the degeneration of the free societal order. So in what follows, the methodological foundations of Austrian economics will be reviewed briefly.[4] Our starting point is, and necessarily so, the field of epistemology.

Read the rest here.

http://www.baltimoresun.com/…

A is waiting in line at a movie theater. When she gets to the ticket window, she is told that as she is the 100,000th customer of the theater, she has just won $100.

B is waiting in line at a different theater. The man in front of him wins $1,000 for being the millionth customer of the theater. Mr. B wins $150.

Amazingly, most people said that they would prefer to be A. In other words, they would rather forgo $50 in order to alleviate the feeling of regret that comes with not winning the thousand bucks. Essentially, they were willing to pay $50 for regret therapy.

Regret falls under a psychological effect known as loss aversion. Research shows that before we risk an investment, we need to feel assured that the potential gain is twice what the possible loss might be because a loss feels twice as bad as a gain feels good. That’s weird and irrational, but it’s the way it is.

This article has been making it’s rounds both online and in print and I’ve found it incredibly frustrating. Just like people have been force fed a redefinition of “free market” and “freedom” we are also given a completely distorted theory of economics. Many still believe in the labor theory of value instead of say the subjective theory or marginal utility theory. In Keynesian economic theory and homo economicus. As Ludwig von Mises said in Human Action:

It was a fundamental mistake of the Historical School of Wirt-schaftliche Staatswissenshaften in Germany and of Institutionalism in America to interpret economics as the characterization of the behavior of an ideal type, the homo oeconomicus. According to this doctrine traditional or orthodox economics does not deal with the behavior of man as he really is and acts, but with a fictitious or hypothetical image. It pictures a being driven exclusively by “economic” motives, i.e., solely by the intention of making the greatest possible material or monetary profit. Such a being, say these critics, does not have and never did have a counterpart in reality; it is a phantom of a spurious armchair philosophy. No man is exclusively motivated by the desire to become as rich as possible; many are not at all influenced by this mean craving. It is vain to refer to such an illusory homunculus in dealing with life and history.

Even if this really were the meaning of classical economics, the homo oeconomicus would certainly not be an ideal type. The ideal type is not an embodiment of one side or aspect of man’s various aims and desires. It is always the representation of complex phenomena of reality, either of men, of institutions, or of ideologies.

This idea that it’s not “rational” to choose the $100 first place over the $150 second place is absolutely ridiculous. Does anyone truly believe these things? Who would possibly deny that people have nontangible desires which can be monetized. My guess is that people have been told that this is how things are and assume that while they don’t fit the mold others must. It’s like the idea of altruism. By definition altruism is: Unselfish concern for the welfare of others; selflessness. However, there can not be such a thing. Every human action is selfish. What people truly mean when labeling someone “altruistic” is that they don’t comprehend or don’t hold those same selfish desires which are not perceivable or tangible. It is easy to see the “selfish” man hording his wealth but it requires far more abstract thought to see the selfishness in spending time in a soup kitchen. When labeling someone who takes the 1st place $100 as “irrational” people really mean that they can’t understand the reasons why someone would give up $50 for prize status. Given the chemical, genetic, emotional makeup of man… I say the response is perfectly “rational.” What is irrational is acting as if humans are not in fact human.