“Black September, the biggest financial shock since the Great Depression, is prompting a Republican Treasury secretary and Federal Reserve chairman to devise the most muscular government intervention in the economy since the Great Depression in an effort to prevent the economic devastation of the Great Depression.”
The question is, with recommended promises of further ‘help’ from legislators looming immediately after the Jewish holidays, how long will the American people be able to stave off their socialist representatives in Congress, the White House, the Fed, and the Treasury?
The media, including the leading fair and balanced media, have been nearly 100 percent pro taxpayer-funded bailout. And do we really believe that the taxpayers who will foot a socialist/bailout bill will individually be recompensed? Perhaps it makes more sense to definitively make the case that we are looking at turning the corner from capitalism to unmistakable nationalization ad socialist policies.
Is this an exaggeration? In the 1930’s, one of the most famous—and certainly the most influential—economists of the time, John Maynard Keynes, argued that catastrophic, systemic crises in financial markets, including plummeting stock values and business failures, were caused by wild fluctuations in investor confidence, and that government must step in to stabilize financial markets. Keynes’ theories were politically appealing. Government would stabilize investment markets through fiat, driving out the influence of ‘animal spirits’ (in the modern day these might be the greedy ghosts of ‘animal spirits’), and save the day. It is Keynes, in his “General Theory” who stated that:
The spectacle of modern investment markets has sometimes moved me towards the conclusion that to make the purchase of an investment permanent and indissoluble, like like marriage, except by reason of death or other grave cause, might be a useful remedy for our contemporary evils. For this would force the investor to direct his mind to the long-term prospects, and to those only.
The only radical cure for the crises of confidence which afflict the economic life of the modern world would be to allow the individual no choice between consuming his income and ordering the production of the specific capital-asset which, even though it be on precarious evidence, impresses him as the most promising investment available to him.
As is often the case when trying to dissect an economic problem, we need to decide where to fix our attention. We are making decisions right now and operating in the short run. The long run, while it isn’t infinitely far off, is our planning horizon—far enough off that we recognize that pretty much anything may change by then. And we bridge that gap between the ‘now’ and ‘eventual’ by trying to make short run plans that are consistent with reaching our long run objectives. The better the match between our short-run actions and their consequences for our long run goals, the better off we are. Ideally, this is what businesses, investors and markets, and we as individuals operating within them, succeed in doing.
It’s precisely the function of markets and market systems to coordinate all these plans across individuals, across space, and across time. In the extremely complex process of producing even the simplest good, spontaneous order processes bring together knowledge, technology, and social and economic coordination in ways that are impossible to fully or adequately anticipate by any planning board or single market actor. It is self-defeating to forsake the short run entirely in the interest of the long run, or vice versa. The real-world need to coordinate changing plans over time is exactly the problem that markets are best suited to address.
At this juncture it is important to understand that the onset of the current credit contraction is no mystery. It isn’t fundamentally a ‘Wall St. vs. Main St.’ disparity in world view or values. Main St. is just as interested in profit as is Wall Street, and for the same reasons—prosperity and wealth creation are good, no matter where you currently stand on the relative economic ladder.
Only the Fed, with its power to create credit systemwide, along with Congressional legislation that virtually mandated junk loans, could make the extended housing bubble possible. The Federal Reserve, responsible for all of the ‘injection effects’ that caused the economic and mortgage boom in the first place (and by the way masked any real gains from productivity and technology in the tidal wave of money they have flooded into the American and international markets), is first and foremost responsible for the mess. The Fed does not create prosperity by creating money and credit. Money and credit, as the author of the above linked Wall Street Journal article correctly notes, stand in the center, as an intermediary good in every exchange, but they are not neutral intermediaries.
New credit goes to particular individuals and enterprises—the injection analogy—and when they are withdrawn or even tapered off, especially when they have been too risky and unwarranted in the first place, are necessarily painful and unpleasant. No addict can withdraw without suffering during withdrawal; the Fed has allowed, and Congress has insisted, that credit markets extend and expand their reach to risky credit consumers (mostly in the form of home mortgage loans), with the certainty that there must be a stopping point. The longer the credit addiction, the larger the number of banks and the bigger the volume of bad debt. One might reasonably ask why, if it’s a certainty that excessive credit creation precipitates the severe contraction needed to clear out the bad debt and unwise investments, we don’t simply outsmart the process and not get suckered in.
Riding the up-wave can be fabulous, as long as you gauge the turning point. What the Fed has done—in full concert with the socialist and economic engineers in Congress—has been to create the tidal wave and urge everyone to get aboard. They’ve ‘done their job’ of promoting employment and home ownership, and can claim plausible deniability for the devastation once that wave crests and starts crashing into reality.
Alexis de Tocqueville, addressing the French Constituent Assembly, then debating public make-work and government bail-outs to allay French economic and unemployment problems, foreshadowed the socialist movements of the modern age when he argued:
Now, the first characteristic of all socialist ideologies is, I believe, an incessant, vigorous and extreme appeal to the material passions of man.
Thus, some have said: “Let us rehabilitate the body”; others, that “work, even of the hardest kind, must be not only useful, but agreeable”; still others, that “man must be paid, not according to his merit, but according to his need”; while, finally, they have told us here that the object of the February Revolution, of socialism, is to procure unlimited wealth for all.
A second trait, always present, is an attack, either direct or indirect, on the principle of private property…I do not pretend to hold that all who do so, assault it in the frank and brutal manner which one of our colleagues has adopted. But I say that all socialists, by more or less roundabout means, if they do not destroy the principle upon which it is based, transform it, diminish it, obstruct it, limit it, and mold it into something completely foreign to what we know and have been familiar with since the beginning of time as private property.
Now, a third and final trait, one which, in my eyes, best describes socialists of all schools and shades, is a profound opposition to personal liberty and scorn for individual reason, a complete contempt for the individual…They hold that the State must not only act as the director of society, but must further be master of each man, and not only master, but keeper and trainer. For fear of allowing him to err, the State must place itself forever by his side, above him, around him, better to guide him, to maintain him, in a word, to confine him. They call, in fact, for the forfeiture, to a greater or less degree, of human liberty, to the point where, were I to attempt to sum up what socialism is, I would say that it was simply a new system of serfdom. [Paris, 1848.]
Thanks to the freedom-loving sense of the American taxpayers, who recently flooded their representatives with a rejection of socialist proposals, we haven’t yet crippled the economy for the future. Markets can still rebound as long as Congress and the Fed don’t get hold of them.
Freedom is on the run–from the very institutions and representatives that claim to be their guardians and champions, unfortunately.
Part of this Free Market Minute has already appeared on the JLF blog site Locker Room.