Economic Crises Are 'The Health of the State'
Early 20th century writer Randolph Bourne was probably most famous for proclaiming that war is “the health of the state.” Whatever the good or bad of wars, they very certainly accrue to the health of governments conducting them.
Bourne’s words certainly ring true to this day, though we can simply add that economic crises too, are the “health of the state.” Ignoring the wisdom offered by Calvin Coolidge, who said that 9 out of 10 troubles coming our way would eventually slide into a ditch, our elected representatives in Washington feel the need to act on everything; their actions solidifying the state’s role in an economy that has historically done best while free of government involvement.
So while the House's failure yesterday to pass the financial rescue package perhaps lends short-term firepower to the arguments of those who support passage, it should be calmly remembered that for nearly a year the markets have been buckling; stocks having fallen more and more with each governmental attempt to arrest the natural workings of markets. As scary as the here and now might be, there's something to be said for more debate.
And when we consider the nature of laws passed amid past crises (think Sarbanes-Oxley), probably the best long-term tonic for markets would be the passage of a law mandating that no major economic decisions be voted on until after a three-month "cooling off" period. This would be hard for many to countenance now, but then the alternative is the acceptance of even greater state involvement in the economy passed by legislators eager to be seen doing something, as opposed to doing that which will be best for our economy over the long haul.
Even though Goldman Sachs and Morgan Stanley both conducted costly, but oversubscribed $10B financings last week, many in Washington believe that without help from the very government that has caused every economic calamity going back to the nation’s founding, recession is a near certainty. Republican Rep. John Boehner tells us the Paulson plan is necessary to “avert the crisis”, while Democrat Barney Frank argues that “If we don’t pass this bill, serious harm will occur.”
The comments of Boehner and Frank follow those of President George W. Bush last Wednesday night. Apparently the Reagan Era is over as so many on the left have made plain because while Reagan frequently said that the ten scariest words in the English language are “I’m from the government, and I’m here to help you”, the alleged heir to Reagan conservatism further distanced himself from anything Reagan given his proclamation that the markets aren’t “functioning properly” such that the federal government is “responding decisively.” Reagan Era, R.I.P.
So rather than allow non-governmental solutions to fix that which ails us, our leaders in Washington would like to take money from the private sector only to put it back in the private sector. We’re told of course that the investments made by Leviathan will probably make money, but if we ignore the kind of investment certainty not exhibited by even the best of money managers, there’s a bit of a problem here.
Indeed, during the 2005 debates about private Social Security accounts when markets were presumably functioning “properly,” many politicians told Americans who might want to opt out of the federal government’s pension plan that the markets were too risky for such activity. Now it seems markets that are “frozen” and function-free aren’t too risky for taxpayer dollars. Put simply, many in the political class are telling us that markets only work when Washington is at the controls.
Worse, our leaders on the Potomac ignore market solutions that wouldn’t require the very “rescue” that continues to roil markets. Last Friday Fox Business’s David Asman referenced the desire of private equity funds to buy the toxic securities that currently trouble banks but for the fear of bidding against Treasury and its presumably unlimited balance sheet. Whereas many market-oriented thinkers used to decry Japan’s unwillingness to let that which isn’t working fail, some of those same thinkers accept a government role when it comes to us.
What’s not being asked enough is if government is presently the problem when it comes to the health of the banking system. Indeed, with some sort of government rescue a near certainty regardless of what happened yesterday, isn’t it logical that this would drive the bidding of private interests to the sidelines? And with so many politicians seeking to bolster homeowners as part of the rescue (lenders are predatory, while borrowers are sacred victims), hasn’t the presumption of aid made mortgage-delinquents even more delinquent given the belief that Main Street’s role will be whitewashed? Some say the presumption of a rescue is what keeps markets afloat, but those same people are the ones who’ve suggested that markets are frozen despite expectations of same.
It’s probably naive to ask this considering the basic governmental incentive to grow, but if Washington won’t countenance the market-clearing and cleansing process that would be a path to recovery, why not at least minimize the government’s role through basic industrial policy? We always hear about how tax cuts “cost” the Treasury versus “stimulus” and $700B in spending that will allegedly aid the economy at a profit, but if bank balance sheets really are a mess, why not zero out capital gains treatment on the purchase of toxic securities to foster a private rescue?
Additionally, are there any small-government Republicans in our midst willing to use the rescue as a chance to shrink the role of government? Another free solution would involve the suspension of anti-trust and other bank-holding company rules so that private-equity interests presently flush might buy the struggling banks whose poor health has the economy on the brink.
It is said that politicians don’t “do the dollar”, but with the federal government the greenback’s monopoly issuer, has the positive impact of a stronger and more stable dollar even been considered? When we consider that mortgage-backed securities pay out dollars, a stronger unit of account would quickly make that which supposedly isn’t saleable more marketable, not to mention that those struggling to pay off mortgages would receive a raise that would keep on giving. The raise would result from commodities such as oil and gas falling in nominal terms, plus a stable greenback would propel capital back into the entrepreneurial economy such that wages for all Americans would get a needed boost.
Unfortunately, the nature of government means that any rescue will entail a truly remarkable process whereby money will be taken from the private sector, make a roundtrip through Washington, after which it will be used to supposedly prevent Armageddon. The wariness of voters about such a plan is well founded, and yesterday's House vote revealed voter concerns.
But such a plan is what we'll most likely get, and it will haunt us for some time. In the end, economic growth is always the result of productive work effort. Sadly, the federal government’s solution insures future regulations that will hamper work effort, not to mention a delaying of the necessary market-cleansing process whose very delay will push true recovery back even further.
So as painful as yesterday was for all investors, it's important to think longer term. While no bill will satisfy everyone, it can be hoped that further debate will at least lead to a plan that is less statist, and as such, less harmful over the long-term.