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| Home Front: Politix |
| Conservative Economics Dead; Barry's Modest Role Favored |
| 2008-07-12 |
| The biggest political story of 2008 is getting little coverage. It involves the collapse of assumptions that have dominated our economic debate for three decades. Since the Reagan years, free-market cliches have passed for sophisticated economic analysis. But in the current crisis, these ideas are falling, one by one, as even conservatives recognize that capitalism is ailing. Not this conservative, E.J. You know the talking points: Regulation is the problem and deregulation is the solution. The distribution of income and wealth doesn't matter. Providing incentives for the investors of capital to "grow the pie" is the only policy that counts. Free trade produces well-distributed economic growth, and any dissent from this orthodoxy is "protectionism." Yup, yup. The old script is in rewrite. "We are in a worldwide crisis now because of excessive deregulation," Rep. Barney Frank (D-Mass.), the chairman of the House Financial Services Committee, said in an interview. A liberal speaks, and conservative principals are in free-fall? He noted that in 1999 when Congress replaced the New Deal-era Glass-Steagall Act with a set of looser banking rules, "we let investment banks get into a much wider range of activities without regulation." This helped create the subprime mortgage mess and the cascading calamity in banking. While Frank is a liberal, the same cannot be said of Ben Bernanke, the chairman of the Federal Reserve. Yet in a speech on Tuesday, Bernanke sounded like a born-again New Dealer in calling for "a more robust framework for the prudential supervision of investment banks and other large securities dealers." Bernanke said the Fed needed more authority to get inside "the structure and workings of financial markets" because "recent experience has clearly illustrated the importance, for the purpose of promoting financial stability, of having detailed information about money markets and the activities of borrowers and lenders in those markets." Sure sounds like Big Government to me. This is the third time in 100 years that support for taken-for-granted economic ideas has crumbled. The Great Depression discredited the radical laissez-faire doctrines of the Coolidge era. Stagflation in the 1970s and early '80s undermined New Deal ideas and called forth a rebirth of radical free-market notions. What's becoming the Panic of 2008 will mean an end to the latest Capital Rules era. What's striking is that conservatives who revere capitalism are offering their own criticisms of the way the system is working. Irwin Stelzer, director of the Center for Economic Policy Studies at the Hudson Institute, says the subprime crisis arose in part because lenders quickly sold their mortgages to others and bore no risk if the loans went bad. "You have to have the person who's writing the risk bearing the risk," he says. "That means a whole host of regulations. There's no way around that." CEOs "benefit substantially if the risks they take pay off" but "pay no penalty" if their risks lead to losses or even catastrophe -- another sign that capitalism, in its current form, isn't living by its own rules. Frank also calls for new thinking on the impact of free trade. He argues it can no longer be denied that globalization "is a contributor to the stagnation of wages and it has produced large pools of highly mobile capital." Mobile capital and the threat of moving a plant abroad give employers a huge advantage in negotiations with employees. "If you're dealing with someone and you can pick up and leave and he can't, you have the advantage." "Free trade has increased wealth, but it's been monopolized by a very small number of people, In the campaign so far, John McCain has been clinging to the old economic orthodoxy while Barack Obama has proposed a modestly more active role for government. But the economic assumptions are changing faster than the rhetoric of the campaign. "Reality has broken in," says Frank. And none too soon. |
| Posted by:Bobby |
| #21 The post WWII paradigms of our economy are collapsing American Industry is no longer..."On Parade." We're buying everything overseas. Bloody EVERYONE cannot work for the government... or sell insurance. Somebody has to actually PRODUCE something. We're not doing much of that here anymore. It frightens me. |
| Posted by: Besoeker 2008-07-12 21:49 |
| #20 Regulation and overblown government brought you the last depression and they're doing their best to bring you another. Things were better before the Fed. |
| Posted by: Nimble Spemble 2008-07-12 21:33 |
| #19 trailing wife: It's not an either-or scenario. Government and business are only constrained by factors beyond their control. In many ways, it is like the Panic of 1893. The post WWII paradigms of our economy are collapsing, and we need a return to the stability of the early 20th Century. This means the whole modern mindset of how to deal with the problem will not work. Government can only spend tax money, and once it is gone, there is no more money to spend. They cannot just raise taxes, or else they will have LESS money. They cannot have a deficit, because no one will underwrite it. If they cannot pay, they are bankrupt. They must resolve their current debt to function, or it will take all of their revenues. Their two choices are to renounce their international debt, or to exchange it at a high rate for food, our most fungible commodity. Initially there will be high inflation, because that is how they got out of this type of mess in the past. But it will not work, so it will likely be followed by high deflation. Instead of the currency being backed by credit, it will have to be backed by paper. Every dollar will have to have a paper equivalent. Imaginary money on computer will no longer work except in very transitory circumstances. If a bank has $10B in deposits, it will have to have at least $10B in paper money. More if it wants to loan cash money. Fortunately, paper checks still exist as a system, but they will function as debit instruments, requiring instant checks to insure they are solvent. They will act like debit cards. The politics will be interesting. The winning political party will realize that it is a whole new ball game, and will do what it must to insure that the public does not starve and has a place to live. Any idea that does not have this as its first axiom will fail, despite best intentions. Top down economics will be dead, as will efforts to restore easy credit. Efforts at inflation will also taint those responsible, but protectionism will be rewarded. A big plus to whoever gets industrial production working again in the US. The throttle for agriculture will be wide open. My guesstimate is that 1/3rd to 1/2 of the government will have to be let go. The same with State and local government. Public education will be limited to in-State students, and tuition will be slashed to cash in hand. Social Security, except for the poor, and Medicare will be over, with direct medical provision without paperwork, aka County hospitals. Insurance will be a shadow of itself, and private doctors will be cash only. Quite possibly there will be the return of the poor farm and the orphanage. Prisons will be limited to violent offenders and white collar criminals, whose number will jump for a while. It will be painful, but the gains of financial stability will soon be evident. The biggest regulation in the future will be in both credit and speculation, which will remain under tight controls, and only slowly allowed to rise to a fraction of their former glory. |
| Posted by: Anonymoose 2008-07-12 21:31 |
| #18 ANdy byt the way, soince when did Barney "gay prostitution ring" become an expert on Economics? He's as credible an authority on this as Cindy Sheehan is on defense policy. |
| Posted by: OldSpook 2008-07-12 21:17 |
| #17 Morons. Hayke's theories still hold. Dionne is a leftist colelctivist shill who quotes lefties instead of a single credible economist. Supply side still works, if we could find the polticial courage to use it - and to cut back on the government spending and taxes. Since Reagan taxes have gone UP, and caused economic distortions and dislocations. |
| Posted by: OldSpook 2008-07-12 21:15 |
| #16 yep, it's been a -$22,000 month for me |
| Posted by: Frank G 2008-07-12 20:46 |
| #15 We could always go with the Wizard of Oz and free silver... Investing is easy for those with a computer and web access, speculating is an adrenalin-high causing game, and lots of people aren't quite as smart as they think. The suckers get skinned as always, and the innocent pay the price when the problem is big enough to affect the economy. My father got caught in the stock market crash in the 1970s; he'd got a new Rolex watch and a stereo out of it before the sudden margin call ate our college money. Brilliant man -- a biochemistry research professor -- but he didn't then understand that people aren't like chemicals, therefore previous performance does not indicate future trends. I'll take regulation and an overblown government over another Great Depression, though. |
| Posted by: trailing wife 2008-07-12 19:44 |
| #14 Everytime I see E.J. Dionne's picture, I think the guy still wears pajamas with feet on them. |
| Posted by: tu3031 2008-07-12 17:15 |
| #13 (I'm talking economics, not social/cultural stuff which has gone down, too, but that's for a different thread). No, it's the same thing. That's why the subject is properly called Political Economy as opposed to domestic economy or industrial economy. And if you want to find the real beginning of the down slope it is the XVI Amendment, passed by the populist states of the west and south eager to tax speculators and evil Wall Street, that started tremendous changes that culminated in the Great Depression which has not yet been fully analyzed. Some people never learn. |
| Posted by: Nimble Spemble 2008-07-12 17:01 |
| #12 Mostly excellent analysis, Anonymoose. Before the 1930's most people, even most who were reasonably well off, lived in rented housing. The mortgage structure we have now simply didn't exist. Yes, I understand that there are positive intangibles regarding ownership vs renting. I am not sure that having as many people owning as we have the past twenty or so years is ultimately a good thing, though. I guess there will always be a certain percentage of folks who just can't manage their lives that way, for a host of reasons. It is in fact a government intrusion into real estate (subsidization via mortgage interest deduction) that is ultimately to blame for the level of speculation we see now, not deregulation. If housing were treated simply as a sort of "durable good" and not an investment, there would be a lot less speculation. I've always suspected that the changes in finance that led to the Depression were never really addressed by the New Deal, that the New Deal approaches were mere bandaids until the industrial runup in WWII. The 50's were good in spite of those programs and attitudes persisting, due to the fact that we had an intact industrial base and trained workers, and nobody else on the planet had that combination. Things started going south by the late 60's, and have continued to deteriorate since then (I'm talking economics, not social/cultural stuff which has gone down, too, but that's for a different thread). It is a physcial impossibility to tax and regulate an economy into wealth, and yet there are always those who try. Why? All of the data sets we have say it cannot work. Some regulation may be necessary, but always at a cost of economic growth. I'm not sure about the tariff thing, that actually made the Depression far worse. Trade isolationism contributed to collapse before, and it could again. As you've correctly pointed out, we have lots of food, and that is ALWAYS valuable. I like your plan to eliminate our debt. If everyone stays peaceful, that is. |
| Posted by: no mo uro 2008-07-12 16:36 |
| #11 The problem began with Frank Roosevelt. His solution to too much easy credit, which caused stock purchase on margin, resulting in the collapse of the stock market, was itself vast amounts of easy credit. It mortgaged the future to pay for the present. And though it benefited the present very much, we are now living in the future, and the bill is due. What is happening is a worldwide credit collapse. The eventual result is a foregone conclusion: you can no longer buy what you cannot afford. This applies from the individual level all the way up to the national and international level. It is hard to imagine how different the US will be when it has to have a balanced budget, because no one will loan it money. The last time the US government ran out of money, J.P. Morgan, the man, stepped in to keep it from default. The Laffer curve still applies, which even the US government has learned must be obeyed, because there will always be tax avoidance available to the wealthy. This means they cannot "tax America into prosperity", as Rush Limbaugh points out. In practical terms, those parts of the economy that have real value based products and services will continue. But those parts that are based in economic leverage are doomed. The old saying will again apply, that "You can only have credit if you don't need it", with 100% or *more* collateral, carefully assessed for value and even put in escrow, prior to your receiving credit based on all or some part of its value. For most people this means they will only have debit, not credit. And those that have credit will have a limit based on cash they have on deposit with the credit issuer. So why have credit at all? I suspect that with the international credit crisis, the US will fractionally redeem its international debt in exchange for food. That is, $10 bushels of produce for $10 cash, or $100, if they pay in relieved debt. And purchasers will have no choice, if they want to eat, yet have no cash, which most of them won't. This will also mean stiff trade tariffs. If some manufacturer wants to sell it here, they will have no choice but to make it here. Imports will be raw materials for food, exports for cash only or relieved debt. The salad days of speculation will be over for decades, and speculative corporations will fold. |
| Posted by: Anonymoose 2008-07-12 15:12 |
| #10 If this is progress.. Well, growing up in lower middle class from the early 1950's, even with those 'bubbles', I certainly see things better per capita for people in similar strata today than we 'enjoyed' back then. People bitch and moan, but by large extent we are certainly better off. For example, back in the early 60s, 30 percent of all Americans enjoyed air conditioning. Today, its 30 percent of all classified as POOR who have air conditioning. Multiply that by all measure of living [to include life expectancy] and the doom and gloom doesn't match up. That is progress. |
| Posted by: Procopius2k 2008-07-12 14:11 |
| #9 Reduce federal government size and power and you will see a LOT problems go away, Bad. Let's start with Health and Education. Nothing in the Constitution gives the federal gummint the right to meddle in either of these areas. >:-( |
| Posted by: Barbara Skolaut 2008-07-12 12:50 |
| #8 multiple economic crisis of nineteenth century [the Panic of 1857, Panic of 1873, Panic of 1893, Panic of 1896, and Panic of 1907] The Great Depression, the recessions of 1946, 1958, 1960, 1970, 1975, 1982, 1987, 1993, 2001. The bubbles of 1987, 1998, 2001, 2003 and 2007 and the current commodities bubble. Guess what? Even more bubbles and recessions than ever before. If this is progress, then that explains why liberalism is which a contradictory and dishonest political economic philosophy. |
| Posted by: badanov 2008-07-12 12:49 |
| #7 The credit bubble caused a huge amount of inflation (destroying house price affordability and crushing rental yields), but that was masked by the deflationary effect of chinese imports. Inflation by definition is excess credit. We don't have that. Banks ain't lending and interest rates irrespective of the rate at any discount window is about to skyrocket. We have deflation. How to prevent this in the future? A LAND VALUE TAX to keep the ratio between earnings and land prices stable. The federal reserve to raise the reserve requirements in response to rising credit cration. Keep interest rates targeting as is (i.e. slight financial expansion to stop people sitting on their currency instead of investing it). Taxes are very poor policy, and increasing them is even worse policy. The folly here is that anything the government can do in its tool bag ( fiscal and tax policy) can prevent anything except prosperity, the one thing government and its policies can damn sure do in the shortest amount of time. Cut government spending to the bone and lower taxes even more. The whole problem with China making our goods is that companies which invest in China are backed by the knowledge the government will always overspend and thus will go borrow money to make it through the next crisis. Treasury bills will always be there to back any export/import policy including jobs. the ONLY solution is to reduce the absolute size of government at all levels and make it illegal for congress to mandate anything except only those matter which actually affect the federal government. Because it its oversize appetites, the federal government and state government have become monsters in the way of genuine prosperity domestically. Reduce federal government size and power and you will see these problems go away. |
| Posted by: badanov 2008-07-12 12:44 |
| #6 Before everyone gets the idea that laissez faire and non-federal regulation is the answer, you better go back and read up on the multiple economic crisis of nineteenth century [the Panic of 1857, Panic of 1873, Panic of 1893, Panic of 1896, and Panic of 1907] and their impact on the economy and the society. Thinking you don't need some of this is like parents who think their kids can do without inoculations cause they haven't lived through the real alternative. Can it be better. yes. Can it be perfect. no. More often than not, the problem is the same one as at Three Mile Island, humans ignoring the warnings and doing things [or not doing things] they're suppose to do. The tools are often already in place to address the pending crisis. Its stupid human tricks that create the folly. |
| Posted by: Procopius2k 2008-07-12 10:23 |
| #5 The rates were right. The bank reserves regulation was not. |
| Posted by: Bright Pebbles 2008-07-12 09:52 |
| #4 I am afraid that USA is heading in this stupidity since this idiot like many others doesnt grasp that it was THE STATE(FED) REGULATION OF RATES that made the subprime. He also doesnt grasp that the increase in income all over the world due to increased trade. But i am not afraid, all Eastern Europe is much more capitalist than USA and even parts of Asia is getting deregulated. What happens in US doesnt have the impact it had in the past. |
| Posted by: Omoque Smith5611 2008-07-12 09:47 |
| #3 I would say overregulation is a huge part of the problem. Maybe that's not the right word but preventing drilling and building of nuke plants for the past few decades has not helped the current energy problem and the cost of oil is effecting prices accross the board. We'd ride the mortgage problem without a hitch if hte energy crisis wasn't happening at the same time. |
| Posted by: rjschwarz 2008-07-12 09:45 |
| #2 ARRRGGGHHHH It's not capitalism that caused this it's the fucking govenemnt regualtor of money!!!!!!! The engineered a credit explosion, that seperated the financial economy from the real economy and caused vast amounts of mal-investment. These investments are now negative yeilding and thus worthless. The credit bubble caused a huge amount of inflation (destroying house price affordability and crushing rental yields), but that was masked by the deflationary effect of chinese imports. With the weight of these negative investments killing the dollar, and now chinas internal growth stopping the deflation effect we are seeing inflation on imports and deflation in houses. How to prevent this in the future? A LAND VALUE TAX to keep the ratio between earnings and land prices stable. The federal reserve to raise the reserve requirements in response to rising credit cration. Keep interest rates targeting as is (i.e. slight financial expansion to stop people sitting on their currency instead of investing it). |
| Posted by: Bright Pebbles 2008-07-12 09:23 |
| #1 EJ Dionne is frequently a good barometer for the truth. Read his column, and the truth is usually the opposite. I hope Barney gave him a reacharound |
| Posted by: Frank G 2008-07-12 09:02 |