Every Wednesday at 8:00pm Eastern (5:00pm Pacific), Peter Schiff broadcasts Wall Street Unspun, which is his mid-week run-down on the market dealing with any issues making the headlines at the time. This week’s episode is one of the best I’ve heard yet, in fact, I think this episode may actually be one of the best talks on the current economic crisis that I’ve ever heard, period. Highly, highly recommended.

Initially, Peter Schiff talks about Barack Obama’s newly unveiled stimulus package. He highlights some obvious holes in that package and uses that as his launching off point. He compares the stimulus package to an individual home owner: Say you’re deep in debt, you’ve lost your job, and you’re generally in the midst of a severe financial crisis, would the solution be to remodel your house? Of course not. Obviously it would be nice to have an updated infrastructure with new roads and bridges, but this is the worst possible time to undertake that kind of activity, since we don’t have the money to do it. Read on for the rest of the episode split into 6 parts:

Schiff asks a rhetorical question that really highlights the flaw in Obama’s plan: “Why don’t governments in poor countries make their countries rich by building roads and bridges?”, Because it doesn’t work that way, obviously. The money has to come from somewhere, and that somewhere is from an already bankrupt nation. But Schiff isn’t just finding fault, he’s offering a solution. Instead of taking money and filtering it through the inefficiencies of government so we can build infrastructure, why not leave the money in the hands of the private sector so they can use it to build factories or other things that will increase our productive capacity and allow us to pay back the trillions we’ve already borrowed from foreign countries so we can actually get out of this financial mess.

Schiff uses Obama’s plan to point out the flaws of Keynesianism (aka Keynesian economics), and how we’re now moving away from a more market based economy to a centrally planned one, which could have horrifying consequences for not only the economy, but for our social freedoms as well.

In the second half of the episode, Schiff begins moving from general to specific, and starts giving advice and predictions for the next few months and years. First off, he says the bond market is going to tank on a grand scale, as in, worse than the housing bubble. The scary part is that a bond bubble bursting means the government is going bankrupt, and the only way the government has to prevent a catastrophic drop in the bond market is the rev-up production of money to buy back bonds. But here comes the really scary part: if the government turns on the printing press and prints out money, that means inflation, and inflation has the direct result of undermining the bond market and making bonds a worse investment. That cycle will cause an out of control event called hyperinflation.
The takeaway for Common Sense Investors: GET OUT OF THE BOND MARKET!

He also talks about real estate and buying a home in this market. His advice is to rent for now, since there really is no reason to buy a home. One caller near the end of the episode points out that nominal house prices will go up in a hyper-inflationary environment, or even in one with just really high inflation… but Schiff points out that real house prices will not; that means a house may go from costing $500,000 to costing $3 million in a year, but that same $3 million won’t buy as much food or gold or anything else that the $500,000 did just 2 years before.

The main takeaway for Common Sense Investors here: unless you can find a no money down deal, avoid buying a house in this economy, rent for now. If you’re looking for investments, go with commodities, go with gold, go with foreign equities, follow Schiff’s advice and you’ll make it out of this mess a wealthier person.

It’s just Common Sense.

Part 2

Part 3

Part 4

Part 5

Part 6

Michael Shermer is one of my absolute favorite science writers alive today. He’s the founder of The Skeptics Society, the Editor-in-Chief of Skeptic Magazine, writes the monthly Skeptic column in Scientific American magazine, and is adjunct professor in economics at Claremont Graduate University. He’s a phenomenal writer and speaker and a genius mind.

He wrote an op-ed column in January of 2008 called “Why People Don’t Trust Free Markets” which complimented his book, The Mind of the Market, which came out around the same time. The op-ed is fantastic and a required read for all Common Sense Investors, so we’ve reprinted it here in its entirety. Enjoy:

The new science of evolutionary economics offers an explanation for capitalism skepticism

In his magnum opus on the power of free markets, Human Action, the Austrian economist Ludwig von Mises noted: “The truth is that capitalism has not only multiplied population figures but at the same time improved the people’s standard of living in an unprecedented way. Neither economic thinking nor historical experience suggest that any other social system could be as beneficial to the masses as capitalism. The results speak for themselves. The market economy needs no apologists and propagandists. It can apply to itself the words of Sir Christopher Wren’s epitaph in St. Paul’s: Si monumentum requires, circumspice.” If you seek his monument, look around.

Capitalism may not need apologists and propagandists, but it does need a vigorous scientific and rational defense as evidenced by the fact that so many people still distrust free markets. Market solutions to social problems are generally received with skepticism. Businessmen are distrusted, corporations looked at askance, and there is a well-known resentment against those who have most benefited from markets. (As one New Yorker cartoon featuring two people in conversation reads: “I hated Bill Gates before it became so fashionable.”) Why do people distrust free markets?

Part of the answer can be found in our history. Because we lived for so long in small groups of a couple of dozen to a couple of hundred people in hunter-gatherer communities in which everyone was either genetically related or knew one another intimately, most resources were shared, wealth accumulation was almost unheard of, and excessive greed and avarice was punished. Thus, we naturally respond to a free market system in which conspicuous wealth is paraded as a sign of success with envy and anger. Call it evolutionary egalitarianism.

Throughout most of the history of civilization as well, economic inequalities were not the result of natural differences in drive and talent between members of a society equally free to pursue their right to prosperity; instead, a handful of chiefs, kings, nobles, and priests exploited an unfair and rigged social system to achieve gains best described as ill gotten.

People also have a remarkably low tolerance for economic ambiguity. Free markets are chaotic and uncertain, uncontrollable and unpredictable. Most of us have little tolerance for such environments, and we have learned to expect that social institutions such as the government will bring a level of certainty to society. People who cannot afford (or who choose not to purchase) insurance against acts of God typically expect acts of government to save them.

As well, there is well-documented liberal bias in the academy and the media against free markets. A 2005 study by the George Mason University economist Daniel Klein, for example, found that at two of America’s leading institutes of higher learning Democrats outnumbered Republicans among the faculty by a staggering ratio of 10 to 1 at the University of California, Berkeley and by 7.6 to 1 at Stanford University. Measuring political attitudes through voter registrations among faculty in twenty different departments, in the humanities and social sciences the ratio was 16 to 1 at both campuses (30 to 1 among assistant and associate professors), and in some departments, such as anthropology and journalism, there wasn’t a single Republican to be found.

In another 2005 study on “Politics and Professional Advancement Among College Faculty,” Stanley Rothman, S. Robert Lichter, and Neil Nevitte discovered that only 15 percent of those teaching at American colleges and universities describe themselves as conservative while 72 percent said they were liberal, and that figure climbed to 80 percent in such departments as English literature, philosophy, political science, and religious studies, with only five percent labeling themselves as conservative. In a 2005 publication in the Georgetown Law Journal, Northwestern Law Professor John McGinnis reviewed the faculties of the top 21 law schools rated by the 2002 U.S. News & World Report graduate-school rankings and found that politically active professors at these top law schools overwhelmingly tend to be Democrats — 81 percent contributed “wholly or predominantly” to Democratic campaigns while just 15 percent did the same for Republicans.

In a manner and potency matching academia, the bias in the media is against free market economics. A comprehensive 2005 study conducted by UCLA political scientist Tim Groseclose and University of Missouri economist Jeffrey Milyo, published in the Quarterly Journal of Economics, measured media bias by counting the times that a particular media outlet cited various think tanks and policy groups, and then compared this with the number of times that members of Congress cited the same groups. “Our results show a strong liberal bias: all of the news outlets we examine, except Fox News’ Special Report and the Washington Times, received scores to the left of the average member of Congress.” Not surprisingly, the authors discovered that CBS Evening News and the New York Times “received scores far to the left of center” and that “the most centrist media outlets were PBS NewsHour, CNN’s Newsnight, and ABC’s Good Morning America.” Interestingly, USA Today — that ne plus ultra of pop print media — was closest to political center of all newspapers.

The strongest reason for skepticism of capitalism, however, is a myth commonly found in objections to both the theory of evolution and free market economics, and that is that they are based on the presumption that animals and humans are inherently selfish, and that the economy is like Tennyson’s memorable description of nature: “red in tooth and claw.” After Charles Darwin’s The Origin of Species was published in 1859, the British philosopher Herbert Spencer immortalized natural selection in the phrase “survival of the fittest,” one of the most misleading descriptions in the history of science and one that has been embraced by social Darwinists ever since, applying it inappropriately to racial theory, national politics, and economic doctrines. Even Darwin’s bulldog, Thomas Henry Huxley, reinforced what he called this “gladiatorial” view of life in a series of essays, describing nature “whereby the strongest, the swiftest, and the cunningest live to fight another day.”

If biological evolution in nature, and market capitalism in society, were really founded on and sustained by nothing more than a winner-take-all strategy, life on earth would have been snuffed out hundreds of millions of years ago and market capitalism would have collapsed centuries ago. This is, in fact, why WorldCom and Enron type disasters still make headlines. If they didn’t — if such corporate catastrophes caused by egregious ethical lapses were so common that they were not even worth covering on the nightly news — free market capitalism would implode. Instead it thrives, but just as eternal vigilance is the price of freedom, so too must it be for free markets, since both are inextricably bound together.”

This is an excellent ReasonTV discussion about the financial bailout and the high level of frustration that the economically literate are feeling in response to it. Tim Cavanaugh has a great line where he points out that the bailout redistributes wealth from “the prudent to the profligate.” And again where he says this bailout was “perfectly designed to punish the just and reward the wicked.”

One of the major issues that frustrates economically minded people is that the media portrays them as ideologically motivated, or worse, unserious when it comes to this bailout. The media has almost wholly supported the bailout from the beginning, and the issue was portrayed by them as the government having no choice but to swoop down and clean up the “market failure” of the private sector; whereas economists and other informed people tried to explain that this bailout was just a poorly designed attempt to stop the free market from naturally adjusting to problem caused mainly by government intervention in the first place.

Despite all the negativity and frustration, Len Gilroy makes an upbeat prediction that I really hope comes true, but I fear probably won’t. He says that because of all this financial trouble, the era of cheap money is over for state and local governments. Combine that with the fact that it’s going to be near impossible politically to raise taxes and we may have the perfect storm for free market based policies. There is already a huge interest in privatization of roads and bridges and such and it’ll only increase as governments start to realize they need much more money then they have available. Hopefully, as that privatization is obviously successful, it’ll open the door for more market-based policies in different areas of government. It may be the silver lining to this, the worst economic disaster in United States history.

After a short break in the Schiff videos, here’s another where he deconstructs Stephen Leeb’s hilariously off-base comments. Only when it comes to political ideologies can a person be wrong so many times and still keep the same opinion. Remember these videos where Peter Schiff got everything right and his laughing opponents got everything wrong? Or these?

Stephen Leeb just won’t learn.

In the December, 1958 issue of economic journal The Freeman, Leonard E. Read first published his essay I, Pencil: My Family Tree as told to Leonard E. Read. It’s been 50 years since that initial publication, and in celebration of that anniversary, we’ve reprinted the entire essay here, including Milton Friedman’s afterword added in 1976.

I, Pencil is one of the most insightful and important works explaining the necessity of free markets and the impossibility of centralized economic planning. Clearly written and easy to understand, it’s perhaps the most elegantly written essay on how market economies work. Long before much work was done on complex adaptive systems, Read explained them perfectly. It’s required reading for all Common Sense Investors.

Read on:

I, Pencil
By Leonard E. Read

I am a lead pencil—the ordinary wooden pencil familiar to all boys and girls and adults who can read and write.

Writing is both my vocation and my avocation; that’s all I do.

You may wonder why I should write a genealogy. Well, to begin with, my story is interesting. And, next, I am a mystery —more so than a tree or a sunset or even a flash of lightning. But, sadly, I am taken for granted by those who use me, as if I were a mere incident and without background. This supercilious attitude relegates me to the level of the commonplace. This is a species of the grievous error in which mankind cannot too long persist without peril. For, the wise G. K. Chesterton observed, “We are perishing for want of wonder, not for want of wonders.”

I, Pencil, simple though I appear to be, merit your wonder and awe, a claim I shall attempt to prove. In fact, if you can understand me—no, that’s too much to ask of anyone—if you can become aware of the miraculousness which I symbolize, you can help save the freedom mankind is so unhappily losing. I have a profound lesson to teach. And I can teach this lesson better than can an automobile or an airplane or a mechanical dishwasher because—well, because I am seemingly so simple.

Simple? Yet, not a single person on the face of this earth knows how to make me. This sounds fantastic, doesn’t it? Especially when it is realized that there are about one and one-half billion of my kind produced in the U.S.A. each year.

Pick me up and look me over. What do you see? Not much meets the eye—there’s some wood, lacquer, the printed labeling, graphite lead, a bit of metal, and an eraser…

Innumerable Antecedents

Just as you cannot trace your family tree back very far, so is it impossible for me to name and explain all my antecedents. But I would like to suggest enough of them to impress upon you the richness and complexity of my background.

My family tree begins with what in fact is a tree, a cedar of straight grain that grows in Northern California and Oregon. Now contemplate all the saws and trucks and rope and the countless other gear used in harvesting and carting the cedar logs to the railroad siding. Think of all the persons and the numberless skills that went into their fabrication: the mining of ore, the making of steel and its refinement into saws, axes, motors; the growing of hemp and bringing it through all the stages to heavy and strong rope; the logging camps with their beds and mess halls, the cookery and the raising of all the foods. Why, untold thousands of persons had a hand in every cup of coffee the loggers drink!

The logs are shipped to a mill in San Leandro, California. Can you imagine the individuals who make flat cars and rails and railroad engines and who construct and install the communication systems incidental thereto? These legions are among my antecedents.

Consider the millwork in San Leandro. The cedar logs are cut into small, pencil-length slats less than one-fourth of an inch in thickness. These are kiln dried and then tinted for the same reason women put rouge on their faces. People prefer that I look pretty, not a pallid white. The slats are waxed and kiln dried again. How many skills went into the making of the tint and the kilns, into supplying the heat, the light and power, the belts, motors, and all the other things a mill requires? Sweepers in the mill among my ancestors? Yes, and included are the men who poured the concrete for the dam of a Pacific Gas & Electric Company hydroplant which supplies the mill’s power!

Don’t overlook the ancestors present and distant who have a hand in transporting sixty carloads of slats across the nation.

Once in the pencil factory—$4,000,000 in machinery and building, all capital accumulated by thrifty and saving parents of mine—each slat is given eight grooves by a complex machine, after which another machine lays leads in every other slat, applies glue, and places another slat atop—a lead sandwich, so to speak. Seven brothers and I are mechanically carved from this “wood-clinched” sandwich.

My “lead” itself—it contains no lead at all—is complex. The graphite is mined in Ceylon [Sri Lanka]. Consider these miners and those who make their many tools and the makers of the paper sacks in which the graphite is shipped and those who make the string that ties the sacks and those who put them aboard ships and those who make the ships. Even the lighthouse keepers along the way assisted in my birth—and the harbor pilots.

The graphite is mixed with clay from Mississippi in which ammonium hydroxide is used in the refining process. Then wetting agents are added such as sulfonated tallow—animal fats chemically reacted with sulfuric acid. After passing through numerous machines, the mixture finally appears as endless extrusions—as from a sausage grinder—cut to size, dried, and baked for several hours at 1,850 degrees Fahrenheit. To increase their strength and smoothness the leads are then treated with a hot mixture which includes candelilla wax from Mexico, paraffin wax, and hydrogenated natural fats.

My cedar receives six coats of lacquer. Do you know all the ingredients of lacquer? Who would think that the growers of castor beans and the refiners of castor oil are a part of it? They are. Why, even the processes by which the lacquer is made a beautiful yellow involve the skills of more persons than one can enumerate!

Observe the labeling. That’s a film formed by applying heat to carbon black mixed with resins. How do you make resins and what, pray, is carbon black?

My bit of metal—the ferrule—is brass. Think of all the persons who mine zinc and copper and those who have the skills to make shiny sheet brass from these products of nature. Those black rings on my ferrule are black nickel. What is black nickel and how is it applied? The complete story of why the center of my ferrule has no black nickel on it would take pages to explain.

Then there’s my crowning glory, inelegantly referred to in the trade as “the plug,” the part man uses to erase the errors he makes with me. An ingredient called “factice” is what does the erasing. It is a rubber-like product made by reacting rapeseed oil from the Dutch East Indies [Indonesia] with sulfur chloride. Rubber, contrary to the common notion, is only for binding purposes. Then, too, there are numerous vulcanizing and accelerating agents. The pumice comes from Italy; and the pigment which gives “the plug” its color is cadmium sulfide.

No One Knows

Does anyone wish to challenge my earlier assertion that no single person on the face of this earth knows how to make me?

Actually, millions of human beings have had a hand in my creation, no one of whom even knows more than a very few of the others. Now, you may say that I go too far in relating the picker of a coffee berry in far-off Brazil and food growers elsewhere to my creation; that this is an extreme position. I shall stand by my claim. There isn’t a single person in all these millions, including the president of the pencil company, who contributes more than a tiny, infinitesimal bit of know-how. From the standpoint of know-how the only difference between the miner of graphite in Ceylon and the logger in Oregon is in the type of know-how. Neither the miner nor the logger can be dispensed with, any more than can the chemist at the factory or the worker in the oil field—paraffin being a by-product of petroleum.

Here is an astounding fact: Neither the worker in the oil field nor the chemist nor the digger of graphite or clay nor any who mans or makes the ships or trains or trucks nor the one who runs the machine that does the knurling on my bit of metal nor the president of the company performs his singular task because he wants me. Each one wants me less, perhaps, than does a child in the first grade. Indeed, there are some among this vast multitude who never saw a pencil nor would they know how to use one. Their motivation is other than me. Perhaps it is something like this: Each of these millions sees that he can thus exchange his tiny know-how for the goods and services he needs or wants. I may or may not be among these items.

No Master Mind

There is a fact still more astounding: The absence of a master mind, of anyone dictating or forcibly directing these countless actions which bring me into being. No trace of such a person can be found. Instead, we find the Invisible Hand at work. This is the mystery to which I earlier referred.

It has been said that “only God can make a tree.” Why do we agree with this? Isn’t it because we realize that we ourselves could not make one? Indeed, can we even describe a tree? We cannot, except in superficial terms. We can say, for instance, that a certain molecular configuration manifests itself as a tree. But what mind is there among men that could even record, let alone direct, the constant changes in molecules that transpire in the life span of a tree? Such a feat is utterly unthinkable!

I, Pencil, am a complex combination of miracles: a tree, zinc, copper, graphite, and so on. But to these miracles which manifest themselves in Nature an even more extraordinary miracle has been added: the configuration of creative human energies—millions of tiny know-hows configurating naturally and spontaneously in response to human necessity and desire and in the absence of any human masterminding! Since only God can make a tree, I insist that only God could make me. Man can no more direct these millions of know-hows to bring me into being than he can put molecules together to create a tree.

The above is what I meant when writing, “If you can become aware of the miraculousness which I symbolize, you can help save the freedom mankind is so unhappily losing.” For, if one is aware that these know-hows will naturally, yes, automatically, arrange themselves into creative and productive patterns in response to human necessity and demand— that is, in the absence of governmental or any other coercive master-minding—then one will possess an absolutely essential ingredient for freedom: a faith in free people. Freedom is impossible without this faith.

Once government has had a monopoly of a creative activity such, for instance, as the delivery of the mails, most individuals will believe that the mails could not be efficiently delivered by men acting freely. And here is the reason: Each one acknowledges that he himself doesn’t know how to do all the things incident to mail delivery. He also recognizes that no other individual could do it. These assumptions are correct. No individual possesses enough know-how to perform a nation’s mail delivery any more than any individual possesses enough know-how to make a pencil. Now, in the absence of faith in free people—in the unawareness that millions of tiny know-hows would naturally and miraculously form and cooperate to satisfy this necessity—the individual cannot help but reach the erroneous conclusion that mail can be delivered only by governmental “masterminding.”

Testimony Galore

If I, Pencil, were the only item that could offer testimony on what men and women can accomplish when free to try, then those with little faith would have a fair case. However, there is testimony galore; it’s all about us and on every hand. Mail delivery is exceedingly simple when compared, for instance, to the making of an automobile or a calculating machine or a grain combine or a milling machine or to tens of thousands of other things. Delivery? Why, in this area where men have been left free to try, they deliver the human voice around the world in less than one second; they deliver an event visually and in motion to any person’s home when it is happening; they deliver 150 passengers from Seattle to Baltimore in less than four hours; they deliver gas from Texas to one’s range or furnace in New York at unbelievably low rates and without subsidy; they deliver each four pounds of oil from the Persian Gulf to our Eastern Seaboard—halfway around the world—for less money than the government charges for delivering a one-ounce letter across the street!

The lesson I have to teach is this: Leave all creative energies uninhibited. Merely organize society to act in harmony with this lesson. Let society’s legal apparatus remove all obstacles the best it can. Permit these creative know-hows freely to flow. Have faith that free men and women will respond to the Invisible Hand. This faith will be confirmed. I, Pencil, seemingly simple though I am, offer the miracle of my creation as testimony that this is a practical faith, as practical as the sun, the rain, a cedar tree, the good earth.

Afterword
By Milton Friedman, Nobel Laureate, 1976

Leonard Read’s delightful story, “I, Pencil,” has become a classic, and deservedly so. I know of no other piece of literature that so succinctly, persuasively, and effectively illustrates the meaning of both Adam Smith’s invisible hand—the possibility of cooperation without coercion—and Friedrich Hayek’s emphasis on the importance of dispersed knowledge and the role of the price system in communicating information that “will make the individuals do the desirable things without anyone having to tell them what to do.”

We used Leonard’s story in our television show, “Free to Choose,” and in the accompanying book of the same title to illustrate “the power of the market” (the title of both the first segment of the TV show and of chapter one of the book). We summarized the story and then went on to say:

“None of the thousands of persons involved in producing the pencil performed his task because he wanted a pencil. Some among them never saw a pencil and would not know what it is for. Each saw his work as a way to get the goods and services he wanted—goods and services we produced in order to get the pencil we wanted. Every time we go to the store and buy a pencil, we are exchanging a little bit of our services for the infinitesimal amount of services that each of the thousands contributed toward producing the pencil.

“It is even more astounding that the pencil was ever produced. No one sitting in a central office gave orders to these thousands of people. No military police enforced the orders that were not given. These people live in many lands, speak different languages, practice different religions, may even hate one another—yet none of these differences prevented them from cooperating to produce a pencil. How did it happen? Adam Smith gave us the answer two hundred years ago.”

“I, Pencil” is a typical Leonard Read product: imaginative, simple yet subtle, breathing the love of freedom that imbued everything Leonard wrote or did. As in the rest of his work, he was not trying to tell people what to do or how to conduct themselves. He was simply trying to enhance individuals’ understanding of themselves and of the system they live in.

That was his basic credo and one that he stuck to consistently during his long period of service to the public—not public service in the sense of government service. Whatever the pressure, he stuck to his guns, refusing to compromise his principles. That was why he was so effective in keeping alive, in the early days, and then spreading the basic idea that human freedom required private property, free competition, and severely limited government.

you can listen to an audio version of the essay here: The author’s reading of I, Pencil

In the wake of the largest swindle Wall Street has even known, everyone is questioning how this could have happened. How could anyone run a 50 billion dollar Ponzi scheme right under the SEC’s nose? The SEC, with virtually limitless resources, has the power to do essentially whatever it wants when investigating fraud. So how could they miss this? Is this just a failure of the free market, an example that those hedge funds just have too much freedom, and government regulators need more power and resources? Not at all – in fact, quite the opposite.

This is a wake up call for investors and the public. Where the SEC failed to spot a problem, the free market saw it. Eighteen months ago, a firm named Aksia run by Jim Vos and Jake Waltour, warned clients not to do business with Bernard Madoff’s investment fund. Aksia is what’s called a due-diligence firm, and they’re an example of what regulation would look like in a true free market.

Because of the lack of government regulation in hedge funds, these due-diligence firms emerged. Investors wanted to be assured that their money was going to a reputable fund, so these companies thoroughly investigate hedge funds for a fee.

Since these firms are operating in the free market and competing with one another (as opposed to the SEC, which has a monopoly on the business of regulation), they have incentives to do the best job so that they gain the best reputation in the business, thus increasing their customers and their wealth.

And Aksia was thorough; they found a number of red flags in Madoff’s fund during it’s investigation, including:

1. The Madoff investment strategy, called “split-strike conversion,” is known to be very volatile; it involves trading huge positions around options expirations. Despite that volatility, its returns over the past decade were an amazingly stable 8-10 percent.

2. Aksia discovered a 2005 letter to the Securities and Exchange Commission from a financial advisor who supposedly studied Madoff’s operations. That letter asserted Madoff was running a Ponzi scheme. There was also a Wall Street Journal story at the time about one of the Madoff’s associated “feeder funds” getting shut down in 1992.

3. Madoff’s strategy was bizarre: He said he would move $13 billion in various trades at once, yet Aksia couldn’t find traders who saw his trades. There were also no regulatory filings. And family members were running the firm.

4. The comptroller of the firm was based in Bermuda. Most mainstream hedge fund investment advisers have their comptroller in-house. Madoff’s so-called feeder funds, meanwhile, were audited by respectable auditors. That gave the impression that Madoff had a professional operation. But the central investment action wasn’t with the feeder funds, but in Madoff’s New York City headquarters. And those activities were audited by a smaller, lesser known firm.

5. Madoff sent out accounting statements by mail. Most hedge funds email statements and allowed them to be downloaded via computer for easier analysis by investors.

6. Aksia wasn’t the first firm to check out Madoff’s activities. A two-man shop (not counting the secretary) which operated out of a small office in Muncie, N.Y., was also looking into Madoff’s activities.

So whats the moral of this story? The SEC simply cannot protect investors as well as free market systems can. The SEC failed to protect investors from mortgage-backed securities and credit default swaps and collateralized debt obligations – and now it failed to notice a $50 billion dollar Ponzi scheme masquerading as a hedge fund. Unfortunately, some people will see those facts and come to the conclusion that we just need more regulation and the SEC needs more resources.

The SEC failed because it’s a centralized monopoly, it’s that simple. And Bernie Madoff’s scheme succeeded because investors had a false sense of security in that bad system and it’s regulations. Take away that monopolistic regulatory giant, and a system of due-diligence firms would spring up to take it’s place. That type of decentralized system of competing firms is many orders of magnitude better at finding fraud and protecting investors; and it’s been proven so. It would be less expensive and more efficient than the SEC, and it would lower taxes and place the financial burden on the actual investors instead of the entire US population, including non-investors.

It’s just common sense.

There are some solutions that will probably never become a reality, but you just have to push them, get them out there, make sure other people at least hear them. That’s how I feel about the Buffalo Commons. Imagine the world’s largest nature reserve, where massive herds of wild buffalo could migrate across the plains the way they used to, uninterrupted. And imagine that same land had a environmentally safe, completely non-polluting energy source collecting power 24 hours a day 7 days week. That’d be pretty rad, and it seems like most people would be for it. Well it can happen, check it out:

The Federal Government owns huge amounts of land in the west – they own more than half of Oregon, Utah, Nevada, Idaho and Alaska; and almost half of California, Arizona, New Mexico and Wyoming. These aren’t park lands either, they’re just public domain lands offering no value to anyone. Selling off some of those lands could generate hundreds of billions of dollars, maybe trillions, for the government. What if the government sold some of those lands and used that money to buy up a huge parcel of land in the great plains?

The great plains are slowly reverting back to wilderness. People are moving out in droves, it’s the area with the biggest population drain in the country. Land there is cheap – so buy it up. Then comes the interesting part. Offer it for sale or lease to energy companies, on the condition that the new owners or tenants build wind turbines on that land, and leave it otherwise undisturbed, fence-less, etc. In the end, after all the transactions are complete, the government has recouped it’s costs from the energy companies, all it did was facilitate the whole enterprise since no one single energy company could have done it on it’s own.

It’s the perfect solution, wind is one of the major resources of the great plains. That land isn’t being used efficiently right now anyway, and the buffalo need a home. The world’s largest nature reserve, literally millions of acres of wind generating land, plus tourist revenue. It’s win-win-win-win.

Any comments, Common Sense Investors?

I haven’t said much about the whole Detroit automotive financial fiasco here, instead I posted most of my opinions about it over at Ridelust.com. Just the other day, I wrote a post called The 9 Detroit Auto Brands We’d Miss The Least that basically outlines which brands GM and Ford should sell to lighten up their load and get back on track financially.

Remember the story of Aron Ralston? He was the climber who was out in the wilderness when a boulder fell on his arm and pinned him there. He was stuck, unable to get free, so he did what needed to be done, he cut off his own arm. That kind of action takes massive testicular fortitude, but it saved his life in a case where, otherwise, he would have surely died. What does this have to do with Detroit? Well, right now, GM owns 12 different brands: Buick, Cadillac, Chevrolet, Daewoo, GMC, Holden, Hummer, Opel, Pontiac, Saab, Saturn, and Vauxhall; Ford owns 5: Ford, Lincoln, Mercury, Mazda, and Volvo; and Chrysler owns 3: Chrysler, Dodge, and Jeep. All three companies are on the verge of certain death, and something needs to be done. The question is, do they have the testicular fortitude that Aron Ralston had? Here’s a quick run down of which brands I think should go the way of Aron Ralston’s arm:

First of all, GM should unload it’s Opel and Vauxhall brands. It’s a big move considering how important they are to GM, but selling the two brands off will give the company the huge influx of cash they need, that’s the main point. Secondly, Buick needs to go. It’s the perfect time to do it too, since they offer no real value to GM here in America, and they’re loved over in China. GM could unload Buick to Shanghai Automotive Industry Corp (SAIC) and everyone will be better for it. Suddenly, with those 3 brands gone, GM’s troubles aren’t nearly as bad.

Next up on the chopping block, Pontiac. It’s a shame, but Pontiac isn’t the exciting brand it used to be, and it hasn’t been for decades. They really don’t offer any value to GM, so let them go. The fifth brand to go is Hummer. Hummer sales are bleak, and the reputation probably isn’t coming back any time soon after the beating it took from the trend toward eco-mania. Sell them off to a company that can devote more energy to making the brand work again. Same goes for Saab; it’s a good brand that just doesn’t sell well. They have expensive parts, low margins, poor sales, and they aren’t on the good end of the competition with quality Japanese cars.

GMC is a bit of a weird case. Maybe they should sell it off, maybe they shouldn’t, but they definately need to rethink their brand strategy. Chevy and GMC both makes trucks, and the market for personal trucks just isn’t as big as it used to be. So either sell GMC off, or turn the brand’s energies toward making commercial trucks only, and selling to the business market.

That would take care of GM, after selling off those brands, they’d have the money they need and be an ultra-lean profit machine. They’d be able to focus a ton of energy on Chevy and the remaining brands. As for Ford, they need to drop Mercury post-haste. Mercury is completely pointless, they do nothing but mirror Ford models and add simple options to up the price. Ford needs to cut them off now. That might be sufficient to help Ford survive this crisis, but to be safe, they should also sell off Volvo. Recent reports say that Ford wants $6 billion dollars for Volvo, and I think they can get that. Do it to it, Ford, you can make it out alive.

And that’s it, that’s all nine brands. Chrysler can’t drop Dodge or Jeep, so they remain intact in my plan; maybe after GM is done lopping off it’s dead limbs, they could buy Chrysler, although I’m not so sure it’d be a good idea. So pass it along, maybe the head execs at the Big Three will read this and be inspired to summon up some testicular fortitude and do what needs to be done.

This past November 3rd, early on that Monday morning, literally hundreds of parents were lined up outside of the Brandywine School District’s offices to sign their children up for the school choice program. More than 30 parents actually camped out overnight for a spot at the front of the line. The first people started forming the line at 2 pm on Sunday. All this for the opportunity to snatch up some of the district’s limited number of spaces.

“They closed so many schools this year, everybody’s panicking,” said Carla Woods of Claymont. She was one of the parents who camped out outside the office. “I’m freezing,” she said.

This is not the way things are supposed to be. But what’s the problem?

The Cato Institute’s blog, Cato-at-liberty.org, makes a great analogy: Imagine if the story’s headline was “Bread Lines Form at Whole Foods” and the lead read “hundreds of shoppers lined up early this morning hoping to be among the lucky few to get their groceries at the Brandywine Whole Foods store, taking their place behind about 35 others who had camped out overnight for a spot at the front of the line.”

That would be unthinkable; because in a free market, if a business has increasing demand, they just expand their supply. The idea that there would only be a limited amount of bread in any given area is absurd. But the education system operates outside the free market. Schools don’t open or close or grow and shrink based on market pressures. Competition doesn’t affect the quality of schooling. So, as Cato puts it “when parents are offered even some paltry degree of choice within their public school district, it must be rationed like bread at a centrally planned Soviet bakery.”

So what’s the common sense thing to do? It’s a tough question, vouchers are a step in the right direction, but we should think about a drastic measure. What would happen if public schools were abolished? Would it be that terrible? What do you think, Common Sense Investors? Check out Lew Rockwell’s essay on the subject and let me know your opinion here in the comments.

The internet is a beautiful thing, it creates opportunities to streamline so many things in our lives. It creates a marketplace where people can reach each other so easily. It has the power to decentralize authority and break down barriers. We have information sharing at an insane rate that people just 20 years ago couldn’t imagine, but I think we have yet to see the real power of the internet.

As the financial crisis rages on, a fairly new form of decentralized lending and borrowing is emerging through online sharing of money. According to a study by Grail Research, person-to-person lending (P2P) is a fast emerging trend that could seriously reduce dependence on banks. P2P lending is a form of micro-lending where an individual or a group lends money to a person in need without any intermediary or central authority like a bank.

Many people in third world counties could have their lives changed with less than $100 dollars. They can use that money to buy goods that could allow them to build a business and make more money. For example, someone in Africa could buy a small generator and use it to power a small refrigerator and sell cold drinks. A man in India could buy new carpentry tools to build houses. And those small loans make those things possible.

Borrowers put up a profile online, usually on the site that facilitates this whole process, sites like Kiva.org, dhanaX, or Lending Club, and lenders can browse through the site looking for someone they think is worthy of their loan. The market for these loans is huge. In India, for instance, the size of informal lending market is estimated to be $90-100 billion, with rural areas accounting for bulk of the market. Of this, just 30-35 percent is supposed to be managed through friends and family networks including the emerging new platform of person-to-person lending.

“P2P lending is one of Web 2.0′s less-appreciated applications. By eliminating intermediaries such as banks, it creates better outcomes for both borrowers and lenders. We expect it to be a key threat for traditional lenders such as banks in the long term,” Grail Research Country Head Amit Kumar said.

Groups of the poorest in any given society are the ones that traditional banks won’t help, which is why P2P works so well, it has access to the long tail

Call me an econ-geek, but I’m incredibly excited about the concept of P2P lending. Decentralized solutions to social problems are generally much more elegant and workable. With P2P lending, for example, each individual lender negotiates the interest rate with the borrower, this creates a system where competition increases greatly. Instead of a few banks capable of lending money, the number of lenders is only limited with the number of individuals willing to lend. More competition, of course, means lowered costs and raised quality of the service. It’s a perfect example of how the free market solutions are superior to centrally planned solutions.

Imagine if a government or some other central authority were to take over Kiva.org, or get involved in the micro-lending business. If government were the central authority controlling the microloans, the money would first come from taxes levied on the citizens, whether they want to participate in the program or not. Then, since some members of society may not agree with where the money is going, politicians would propose new legislation requiring borrowers to meet certain qualifications, and setting limits on the amount of money able to be borrowed. Each loan would be controlled by a government employee instead of by the prospective lender, and those government employees need to be paid out of the pool of tax money, lessening the amount that can go to borrowers.

Since everyone is paying, everyone wants a say in how the money is spent. Government officials and special interests, who have more power than individuals, start diverting this pool of money to their own ends. Large corporations start building projects in third world countries under the guise of helping needy so that they can gain access to the pool of micro-loan money, and politicians push that legislation through because they’re getting endorsements and donations from those corporations. All this happens when you move from a decentralized system to a centralized one.

In the decentralized system, since the loans are spread out among thousands of lenders making decisions about their own individual loans, the system is insulated from corruption. There is no need to pay loan counselors or financial consultants because each lender negotiates the rate of interest with the borrower, so less money is used overall and everything is more efficient.

Taking all these things into account, P2P lending is one of the most powerful real world examples of how the free market works better than a regulated system with a central authority. It’s just Common Sense.