economic crashes and other great things
|Reviewed by T. Nelson|
In the mortgage crash of 2008, only those who viewed their houses as a place to live in (that is to say, ordinary people) lost money on their homes. Those who saw a house as a mere investment did what I jokingly told my friends to do: sell your house at the peak, rent for a while, then buy it back cheap.
That's what you have to do these days. Thanks to the government, we are all Wall Street bankers now. David Stockman, who was the director of the Office of Management and Budget under Ronald Reagan, says that if the government had adhered to its own principles of sound economics the 2008 financial panic would never have happened. The crash was triggered by the impending bankruptcy of Goldman Sachs and Morgan Stanley, which had been playing too many games with money. Bankruptcy was a natural and healthy development—just desserts for their speculative financial practices. But instead of letting them fail and purge the system of junk investments, Hank Paulson and Ben Bernanke panicked and demanded a 700 billion dollar blank check of taxpayer money to bail out their pals, claiming that the economy was about to be consumed in a fiery Armageddon. Stockman calls this the culmination of decades of crony capitalism: the corruption of capitalism by bad government.
Stockman says that Paulson's claim of Great Depression 2.0 being at hand was essentially a big, fat lie (although he doesn't use that word), as were Bush's and Obama's claims to have forestalled an economic crash. True enough. But politics played a major role for both presidents. The 2008 elections were a month away. Bush knew an Obama presidency would be a disaster, so he let the Paulson trope trip him into the TARP trap. And Obama never cared much for capitalism to start with.
Stockman writes passionately about this stuff. He comes across as one of those people who gets excited while paying their taxes. We get the impression that things like risk-intolerant prime fund investors and corporate divestiture deals keep him awake at night.
Sleep deprivation may explain the impression that some parts of this book give of having been banged out over a couple of months at three in the morning. Stockman says the 2008 crash was fake, then he says it was a disaster caused by deficit spending under Reagan—even though spending as a percentage of GDP was virtually the same under Reagan as under Carter and Johnson. Then he gives Obama, the biggest spender of all time, almost a free pass. He repeats his theme about GD 2.0 not being imminent at least twenty times in the first 50 pages. All in all it takes him 718 exhausting pages, not counting the index, to say what could have been written in 300. But his goal is to pound his points in with repetition, historical detail, and personal experience.
Stockman excoriates the Republicans for abandoning their conservatism, starting with Nixon for taking the dollar off gold at Bretton Woods. That was necessary by Washington's unwillingness to do what was needed to maintain a budget surplus. But unhitching from gold started this whole shebang about fiat currency and the myth that deficits don't matter. Because the government used phony statistics dreamed up in the '30s by Keynesians which count government spending and borrowed money toward the GDP, these big spenders of fake fiat money could claim to have boosted GDP. Yet as our economy rotted away, most kept saying the fundamentals were “strong.”
But the biggest villain in this story is the Fed. Stockman calls it a rogue central bank, whose free money policies amount to little more than blowing bubbles. The Fed's job was to curtail domestic demand to kill the trade deficit. Instead it threw a “debt party.” Under Greenspan, debt grew 6.5 times faster than GDP, and the deflationary pressure from Chinese imports, which kept inflation low, accelerated.
Stockman provides a masterful description of the GD 1.0. He calls FDR's New Deal a political gong show. The GD was not caused by a collapse of domestic demand, says Stockman, but by the collapse of debt-financed foreign consumption of American exports, which set off a frenzy of protectionism. Smoot-Hawley was proof of this. But in 1933 FDR turned what should have been a brief contraction into a catastrophe. Stockman says it was wartime savings, not wartime deficit spending, not FDR, and certainly not Keynesianism, that pulled us out of the Depression.
However, Stockman overestimates the power of the presidency. For example, he says the Republican government under G.W. Bush essentially nationalized the entire commercial paper market by taking control of Freddie Mac.
Yet we all know in those days Congress was firmly in the hands of the Democrats, and it was they, not Bush, who had pressured banks to issue subprime mortgages as a way of increasing home ownership among minorities. Bush tried several times to rein in Fannie Mae, but was unable to get past Congress. By 2007 HUD had decreed that 55% of Freddie and Fannie's mortgages be given to borrowers below the median income in their communities. The only way this could happen is with subprimes. Thus, the Democratic congress, not Wall Street greed, and not Bush, caused the 2008 crash. On this point Stockman is silent.
But Democrats aren't really getting a free pass here. Stockman mostly ignores them because he assumes they just want to tax and spend. He criticizes the Republicans because he had higher expectations of them. To Stockman, Democrats might as well be from Neptune. Republicans believed in fiscal rectitude, and they should have known better. Of all the presidents, Stockman has the highest praise for Eisenhower.
So, what about the future, then? Stockman has no solution, other than to say the “wrecking ball of the Keynesian state” can only get worse. He's not thrilled with Milton Friedman's theories, either—in fact, he seems skeptical of all academics. Stockman's worst insult is to call someone a “learned professor.” Greenspan followed the learned Professor Krugman's advice, he says, which left the middle class in ruins and kept speculators in business and debt zombies solvent.
If the so-called Occupiers cared to understand the truth, they would have called for Krugman's head and burned Alan Greenspan in effigy. ‘Being greedy’ may be the first line of any Wall Street banker's CV, but Wall Street is only a river flowing along the contours laid out for it by the Fed.
We still need academics and their theories because the alternative is to rely
on guesswork and experience. Wisdom in government is what Stockman is arguing for,
but it's unattainable, because for every Stockman there are a hundred Greenspans
who have to make a hundred catastrophic mistakes before they reach Stockman's
plane of enlightenment. Theories are a way of
encapsulating wisdom, so those painful lessons can be avoided. Even
fools politicians can get good results from a good theory, if they apply it
That has been the pattern: government intervenes in the economy, creates a disaster by rewarding bad behavior, then blames it on “free markets” to justify even more intervention. We saw this before in Japan. If this were a science fiction movie, we'd get up and leave: this is where we came in. But unfortunately for us, it's not a movie. Godzilla is real, and he is Washington, D.C.
jan 26, 2014; updated feb 02, 2014
|Reviewed by T. Nelson|
We sometimes forget that the Great Economic Crash of 2008 affected Britain, too. We may not remember whether it was Gordon Brown or Gordon Ramsay who was in charge over there, but whoever it was, he must have done a lot of swearing indeed.
Economic historian Niall Ferguson, a former Brit, says the West has become sclerotic. The Great Degeneration is his term for the substitution of government, with all its inflexible rules and restrictions, for the small organizations that once filled our lives. We have stopped moving forward, and become a “stationary state.” The rule of law, he says, is in danger of falling to the rule of lawyers, who have morphed from revolutionaries to the bloodsucking parasites we see today.
The only ones enjoying themselves are the mandarins, like those in feudalistic China. They're having a blast making up new ways to run our lives—so much so that we now waste $1.75 trillion per year, or 11.1 percent of our GDP, complying with all their rules and regulations.
Ferguson blasts to pieces the 'facile' argument that Reagan-era deregulation caused today's economic problems. Some newspaper columnists claim to believe that the 1970s, which Reagan inherited, were a wonderful period of economic growth and progress. In fact, the 70s were synonymous with Nixon, Jimmy Carter, stagflation, malaise, terrorism, Vietnam, the Cold War, SS-20s, Backfire bombers, H-bombs, the SDS, the IRA, riots, the Iran Hostage Crisis, bad government, and military incompetence. The 1970s were so uniformly awful that even old people never reminisce about them. As hard as it may be for Democrats to accept, Reagan turned much of that around.
Ferguson calls over-complex regulation “the disease of which it purports to be the cure.” Dodd-Frank is a prime example: it's stuffed with dreamy-eyed irrelevancies like a call for increased participation of woman-owned businesses and establishing “carbon markets.” But the biggest threat is our debt. When debt exceeds 90% of GDP, he says, it crushes growth. Unfortunately, our economists are Keynesians, and they see it only as a reduction of aggregate demand that can be solved by even more debt.
Ferguson thinks that, like China, the West can revitalize itself. But as an economist he surely must know that China is a mercantilist state. China suffered through decades of chaos, mass murder, poverty, near slavery, tyranny, and war before achieving its current state of optimism and growth. But even our economists know it can't last. Prosperity for China means debt for us. Already the Chinese are having to buy real estate, like the Japanese 25 years earlier. Their economy is following a similar trajectory.
I would add that it jolly well didn't hurt that the Chinese executed, by some accounts, some 10,000 of their own officials for corruption. Being accused of corruption is a big deal there, unlike in America, where its seriousness depends on which party you belong to. While we're importing stuff from China, we might consider importing a few of their cool customs as well.
It's no great mystery how to fix the American economy. The problem is: too many people, voters included, don't want it fixed. They'd rather have cradle-to-grave security. To paraphrase Churchill, they had to choose between prosperity and security. They chose security, and they will have poverty.
feb 08 2014