September 15, 2018 brings the post-industrial financial world to a ten-year milestone. Lehman Brothers Holdings Inc. was officially shuttered on this day in 2008, rocking the entire planet. The event occurred just 110 days before a revolution its collapse helped to spawn: Bitcoin. A little-known economic philosopher, Ludwig von Mises, tried to warn many years ahead about the perils of allowing politicians to issue and steer money.
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Mises Warns Fifty Years Prior
Investment banks successfully captured levers of government regulation, both sectors preying upon the need for housing, and together they created a moral hazard, leading to what is known as malinvestment, as predicted by a cranky, marginalized mid 20th century economist, Ludwig von Mises.
This is what happens when governments control money.
The phenomenon may have also helped hasten Satoshi Nakamoto’s white paper to be made flesh, as in early January of the following year, the Bitcoin network mined its first block. While the cryptocurrency phenomenon was founded in direct opposition to Wall Street and its finance system, what a difference ten years has made. Almost all happy talk the community engages in at present can be categorized as Wall Street worship: crypto enthusiasts now work to be absorbed into the very system predecessors once despised.
The genesis block’s not so subtle encoded shot at legacy finance.
Known as the Dean of the Austrian School of Economics, Ludwig von Mises (1881-1973) wrote in his magnum opus Human Action, “A lowering of the gross market rate of interest as brought about by credit expansion always has the effect of making some projects appear profitable which did not appear so before…It necessarily brings about a structure of investment and production activities which is at variance with the real supply of capital goods and must finally collapse.”
And by September 15th, 2008, ten years ago to the day, Misesean analysis worked its unforgiving way through Lehman Brothers investment bank, giving to dreary picturesque scenes of employees carting their belongings out of a shuttered building. The pre-Civil War American institution, fourth largest of its kind in the US, was under Chapter 11 liquidation bankruptcy orders. Not even the federal government could help it. When the dust finally settled, the bank was broken up between financial ghouls, vultures such as Barclays (itself over three centuries old) of the UK and Japan’s Nomura Holdings Inc. (the baby of the group at slightly less than 100 years), for pennies on the dollar.
Indexes during a six-month period on Lehman’s bankruptcy. Within two weeks both set new all-time highs. Trust that binds financial institutions collapsed, and critical funding markets came to a virtual standstill. The amount of fear paralyzing markets was unprecedented.
The Romance of Easy Credit, Loose Money
To pound home the point further still, and it’s worth quoting at length, Mises argues a half century before history reveals him as an economic sage, “However conditions may be, it is certain that no manipulations of the banks can provide the economic system with capital goods. What is needed for a sound expansion of production is additional capital goods, not money or fiduciary media. The boom is built on the sands of banknotes and deposits. It must collapse.”
Lehman, to be fair, was more a broader symptom than true cause. Lehman Weekend, as it became known, was then the largest bankruptcy in its country’s history, testimony to the institution’s influence politically and in the financial world. The 2000s were a culmination of decades-long agitation by American progressives to fit everyone with a house, a home, ownership, and what would amount to a mortgage.
A romantic idea insured and backed by the imprimatur of the US government, it helps explain just why, why indeed, banks would ultimately loan to folks who could not repay. As a matter of basic logic, one must grant the business of modern fractional reserve banking is to make loans, selling money, and to then profit on the difference in interest rates, a classic model.
That any of those loans, never mind a sizable chunk or even a majority, would be bad or “subprime,” below standard, must have some kind of backdoor guarantee. Someone must signal a willingness to cover markers should they be called. That someone was the US federal government through a variety of exotic insurance and incentive policy programs.
Footing the bill with unemployment.
Lessons the Current Bitcoin World Would Do Well to Heed
As Mises divined so many years ago, it all starts out really great, helping first…