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Posts Tagged ‘Depression’

The economic journalist and consultant behind Shadow Stats has an absolutely off the wall interview in a mainstream business publication that begins reasonably enough, but ends sounding like a cross between Ludwig von Mises and the Road Warrior.

It’s worrisome when guys in pinstripes who went to Ivy League schools begin to make the kooks talking about the Illuminati at gun shows sound like the moderate wing of the movement.  These are very tough times for so many Americans. I hope our country somehow pulls through.  But I fear that it will get much worse before it gets better.  There is so much that is unsustainable right now; it can’t go on like this indefinitely. 

I try to count my many blessings in times like these–a job, a great family, freedom, my education, my faith–but it’s so downright depressing to see so many good, hardworking people caught up in a storm beyond their control, while the worst of the worst, the least productive and most parasitical in DC and Wall Street, are living the high life on a combination of government bailouts and central bank sponsered hustles.

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Banking by corporations and limited liability companies is not essential to free markets. Like bankruptcy, all of these arrangements involve shifting some of the harm caused by risk-takers onto those who did not take the risks. There may be good reasons to socialize (i.e,. disperse) risk. People may be improvident or need some paternalistic guidance. A certain amount of risk-taking perhaps should be subsidized, i.e., venture capital, homesteading. But there are other means to amass capital and spread risk–not least debt obligations and insurance respectively–without shielding decisionmakers from personal liability to creditors and others in the case of civil offenses and breached contracts. The possible value of tying corporate decisionmakers and stockholders to the downside of corporate risk-taking should be obvious, considering the heads-I-win-tales-you-lose mess we’ve gotten into under the influences of many factors that have spread risk: limited liability, financial engineering, leverage, and the ethos that on the downside these firms (and investors in the same) are simply too big to fail. I wrote something about this many years ago along these lines here and Hillaire Belloc, to his credit, long ago distinguished between the character of real property and the “paper wealth” with which it shares so little in common as far as social benefits goes. Conservatives who are found of free markets should be rethinking their attitudes towards banking, corporations, and the combination of loose money and weak regulation we’ve recently experienced.

An interesting symposium at the liberal-leaning American Prospect discussed the problems of risk, particularly risk with public consequences. It offered an interesting defense of the welfare state along the same lines as the bailouts; namely, that it frees people up to take certain risks. Of course, like FDIC insurance, bailouts, and bankruptcy, that’s part of the problem when it becomes too generous.

The polymath Richard Posner weighs in, concluding that sensible bank regulation failed, and combined with easy money this brought about the recent crisis:

Finally, let’s place the blame where it belongs. Not on the bankers, who are not responsible for assuring economic stability, but on the government officials who had that responsibility and failed to discharge it. They failed even to develop contingency plans to deal with what everyone knew could happen in a context of escalating housing prices (it had happened in Japan in the late 1980s and the 1990s). Lacking such plans, the government responded to the crisis with spasmodic improvisations, amplifying uncertainty and mistrust and thus retarding recovery.

And let’s not forget to apportion some of the blame to the influential economists who assured us that there could never be another depression. They argued that in the face of a recession the Federal Reserve had only to reduce interest rates and flood the banks with money and all would be well. If only.

Finally, in a tour de force, Allan Meltzer eviscerates the continuing inflationary practices of the unholy triumverate of Obama, Geithner, and Bernanke, viz.:

IN the 1970s, with inflation rising, I often described the Federal Reserve as knowing only two speeds: too fast and too slow. At the time, the Fed’s idea was to combat recession by promoting expansion, printing money and making it easier for businesses and households to borrow — and worry only later about the inflation that resulted. That strategy produced a sorry decade of slow productivity growth, rising unemployment and, yes, rising inflation. If President Obama and the Fed continue down their current path, we could see a repeat of those dreadful inflationary years.

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The absolute craziest convention on Wall Street, at the Federal Reserve, and among academic economists is simply to ignore economic history before the Great Depression. It’s particularly wacky to do so as the Federal Reserve, which was billed as a means of avoiding economic dislocation after the Panic of 1907, was established in 1913. In other words, the Great Depression happened on the Fed’s watch.

What’s happening now to the economy: the bankruptcy of overly leveraged institutions, falling prices, a general sense of uncertainty, and calls for high levels of government spending and control are hardly unprecedented. We heard such rhetoric throughout the 70s. And this shift took place once before, in Europe, in the late 19th Century in response to the “Long Depression” of the 1870s and the associated anemic recovery.

For Christmas, I received among other books Norman Rich’s The Age of Nationalism and Reform, 1850-1890. This book might seem obscure and irrelevant to all but the most die-hard history buffs. But consider the following passage, and ask yourself if you think anyone at Lehman Brothers or on Bernanke’s staff like has had much familiarity with this episode and whether it might have been useful:

The 1873 crash set off an economic depression which was to continue for another two decades in the form of a slower rate of growth, rising unemployment, and a general feeling of economic insecurity. This depression appears to have been caused primarily by overspeculation and overproduction. There was a decline in the rate of railway building, and a consequent drying up of this immense market for goods and materials. At the same time European agriculture was depressed by the competition of cheap agricultural products from the interior regions of Russia, America, and Australia, to which the railroad had given access.

During the depression years there was an actually an increase in the real wages and a rise in the standard of living of many Europeans as a result of a steady fall in the prices of agricultural and manufactured products. The fall in prices, however, which brought hardship or outright ruin to many economic enterprises, together with the increase in unemployment and the overall sense of economic insecurity, aroused a widespread feeling of dissatisfaction with existing government economic policies and anger at the threat of foreign competition. The liberal doctrine of laissez faire was discredited as industry, agriculture, and labor alike clamored for protective tariffs and state aid. And everywhere in Europe, with the notable exception of England, the state responded to these pressures. The 1873 depression thus inaugurated a new period of state intervention in economic affairs which was to increase steadily to he present day. It also contributed to the growth of an economic nationalism which was to strengthen the burgeoning forces of political and ideological nationalism.

I used to feel somewhat sorry for Obama for the crises he must now manage, a good many of which were not of his making. But then I realized: he likes this situation and this is good for his personal goals, even though obviously quite bad for the country. Crises, real and imagined, allow someone like Obama to aggrandize power, push through the most radical and spendy proposals, and–like FDR–will make a great many people worship him even more without regard to results, so long as he manages his own image carefully. Far from feeling sorry for Obama, I feel sorry for my future children and grandchildren. It’s a scary time, and we have an immature and untested demagogue at the helm, whose historical loyalties are tribal, whose background is in the cesspool of Chicago politics, and whose outlook is replete with various artifacts of 1970s cracker-barrel liberalism.

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