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Tuesday, November 25, 2008

This Time Will Be Different. No Really, I Mean It.

I am going to keep this short. If it runs on too long, conditions are likely to change and the opening sentences of this blog may be outpaced by conditions on the ground.

A summary of the steps taken thus far to address our economic situation would likely be incomplete since it is highly likely that right now our policymakers are concocting another financial trick play. Imagine a schoolyard football game taking place in a marble hall rather than a sand lot. A game in which the players all wear Brooks Brothers suits and the plans are drawn up by the point and click of a mouse rather than in the dirt with a stick.

Paulson and Bernanke are loath to let a week (or sometimes even a few days) go by without unveiling and trying to implement some new tactic. They appear to be doing so in response to the incessant drumbeat from most corners of the populace to do something, anything. Even the previously unflappable President-Elect Obama has entered the fray this week (most likely to his detriment, and ours).

With every new policy prescription, press release, and public comment crafted to reassure a frightened public, it has become increasingly clear to me that government most likely will never be the answer to slumping economic growth nor will it be the mechanism to prevent these same circumstances from recurring in the future.

I realize that it is beyond fashionable and nearly mandatory for all members of the political-celebrity class to denigrate deregulation and frown upon free markets, but with a little reflection it would seem this anger is really misplaced. The fact of the matter is that since the Great Depression government intervention into the economic sector has increased, not decreased.

This increased presence has taken many forms. Taxation as a percentage of income, for instance, was about 12% in 1930. In 2008, it was about 31%. These numbers come from the Tax Foundation, click here for a link to the data.

The last 80 years have also seen a proliferation of law making. It is hard to quantify since it depends on what you count as a law, but I don't think anyone believes we are actually reducing and simplifying the rules that govern the US.

Also, look at how FDR's cabinet was about half the size of George W. Bush's cabinet. With much of the increase coming from the promotion to cabinet-level of the heads of various regulatory agencies which didn't even exist under FDR.

Then there are Fannie Mae & Freddie Mac. They were chartered then regulated by the federal government. That wasn't enough to keep them out of trouble so the government stepped in to bail them out. The fact that they haven't flourished under their latest incarnation should be a surprise to no one.

We've had Hoover trying to put chickens in our pots, a New Deal, a Fair Deal, crossed into a New Frontier, and created a Great Society. We even had President Ford try to whip inflation, as if it were some sort of playground bully. (I heard he waited by the White House flagpole until 3:30, but inflation never showed.)

One can try to tar the policies of Reagan, either Bush, or even some of Clinton's as being lax regulatorily. But a case for ours being a highly unregulated economy is simply not supported by the facts. It is almost indisputable that the last 80 years have constituted an increasingly complex interventionist regime and yet we still find ourselves in a state of financial crisis.

I'm reminded that at least once, insanity has been defined as doing the same thing over and over again but expecting different results. If that definition is correct, it is clear we have gone completely insane as a nation. At this point, I'm not sure what it will take to snap us out of it.

4 comments:

Mark Harvey aka Snooper said...

bloody good piece

Anonymous said...

Jerry, we went through Amazon to get to your blog (the second to last one)
bit neither me nor you mom could figure out how to respond to it through that channel, so I am going
to say a few things about both of your latest blogs.
First, I agree entirely with your statement that electronic media changes the nature of dialogue,and, hence,the intent and outcome of communication (as I suggested in my last response that modern technological
market techniques have changed the nature of how our "free market" works). It is as if we now need another appendage to our to our way of thinking and doing things in our economy. I sympathize with "Pete" of NBC that the crises (and future crises) can't wait as long as they used to do, but I also agree that to change the founding father's ideas means changing to a different type of government, something that may also call for a "second revolution".

But secondly, I fail to see how "government intervention" since FDR
(taxation and laws") can be equated with regulatory restrictions on the market. It seems to me that the current problem has been an absence of strong, strictly enforced regulations (I read somewhere that when Bear Stearns was told they could not do something, they simply got a new regulator); I don't know how true this is specifically but I have an idea that in the general it was the traders, not the "regulators" that were calling the shots concerning credit and Credit Default Insurance. A lot of fellows were making a lot of money as the credit market went down the drain.

Finally, and most extreme, I'm afraid that this current crisis is the litmus test for Capitalism. It seems to me that there has to be some sort of general moral fiber in the concept of Capitalism, not moral in the sense of right or wrong, but in the sense that there was a "higher" operational reason operating in its operation. this reasoning seems to have been lost somewhere along the way.

P.S. We are going to call and get more directions on how we can respond to your blogs through Amazon. Again, your insights and entertaining style of writing are a joy to read (something that is rare among writers, especially me. I tend to be stodgy and prosaic, as most columnists are). Style is a matter character more than technique and if one does not have a quickening and delightful character, one cannot have style.

Joe Barz said...

Correct me if I'm wrong, but I think the point is that we've had increased "government mandated regulation" in the economy/markets since WWI. It is this uncontrolled government intervention that is causing the crisis.

Why do you think these financial companies made these bad loans? Because they were backed by government insurance. There is no incentive to qualify a borrower if you can get the government to guarantee the loan (i.e. Fanny/Freddie).

In regards to the "litmus test for Capitalism", we do not operate under Capitalism. Under Capitalism, companies that make poor business decisions fail and go out of business. There is no concept of federal bailouts in a Capitlistic system.

Jeremy R. Shown said...

Steve -thanks for the comment on the writing. I am having more fun with this than I thought I would. (Is it appropriate to have fun with a global economic slowdown?)

Joe - Good to hear from you.

Now to the point - I think it is fair to say we have a regulated economy. Yet we still find ourselves in this state of distress. If that is the case, I just can't see how doubling down on regulation will lead us out of the woods. Of course, I could be completely wrong.

I do think we may be seeing the litmus test for something, but as Joe says I don't think it is capitalism. I think one can argue that what we have had over the last several decades could be described more as corporatism. Where enormous business organizations, truly global in scope, are allied with political interests for their mutual benefit and continuance.

Additionally, corporatism could provide an explanation regarding Joe's point about the bailouts. While they are something you wouldn't expect to find under capitalism, they would be utterly unexceptional if our political system has a vested interest seeing specific corporations remain in business.

Reading what I just wrote I can't help but wonder if I'm so far to the right, that I'm left.