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WHAT'S A FREE MARKETEER TO THINK? Volume 2

Commentaries

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In response to the federal government’s massive new involvement in financial markets, on Monday I invited a number of think tank and other colleagues from around the country and Minnesota to address a purposely free-swinging question:  “What’s a free marketeer to think?” 

We published four pronto columns yesterday and here, in what might be described as Volume Two, are four more by former Minnesota congressman and current Brookings Institution scholar Bill Frenzel; Shannon Goessling, president of the Southeastern Legal Foundation in Atlanta; Larry Reed, president of the Foundation for Economic Education in New York; and Devin Foley, American Experiment’s director of development.  We will continue disseminating incisive pieces likes these as we receive them over the next two weeks.  

Many thanks, and needless to say, I welcome your comments. 

Mitch Pearlstein
Founder & President
Center of the American Experiment


No Democracy will Allow its Economy to Implode

By Bill Frenzel

Our credit markets are in shambles.  Few Americans comprehend the reasons for the system’s failure, but nearly everybody understands that it is “broke.”  Ironically, a country renowned for devotion to free markets now seems to require the government to “save” those markets.  

The Bush Administration, led by the Secretary of the Treasury and the Chairman of the Federal Reserve Board, is asking Congress to enact a $700 billion rescue plan.  There is heavy resistance.  But, after much complaint and criticism, and the addition of its own “improvements,” Congress will probably agree to some version of the proposal. 

Purists and populists alike bewail the plan.  A government solution is usually a wrong solution.  The greedy risk-takers should not be protected.  Every other loser in the country will insist on salvation, too.  Even those who have lost nothing will demand much.  

Whenever the government meddles in the marketplace, whether in crisis or to respond to criminal behavior, it tends to go too far.  There is always an urge to overdo the relief, or to reward an unworthy class, or to lay on too much burdensome regulation. 

The critics, many of them conservatives, are dead right.  A free market system should require that mistakes be corrected, and paid for, in the marketplace.  The problem is, however, that no democracy will allow its government to stand idly by while its economy implodes.  Most people would devoutly hope that the government would not have to intervene.  But when the panic strikes, the people can usually be counted upon to demand government interference. 

A basic question policy-makers need to ask and answer is this: How bad is it?  If the crisis can be weathered without major damage to the economy, the urge to meddle should be restrained.  

Cases for restraint would include the Chrysler and New York City loans of the 1970s, specific industry requests like the current auto industry loans, and the never-ending demands for protectionism.  The economy can withstand the loss of a couple of big companies which made mistakes.                                                                                                                                  

But when the whole financial system begins to crumble, the government is driven to respond.  Failure to act means punishing everybody, probably for a very long time, until the system is rebuilt.  

Another basic question: Whose rescue plan is to be used?  When the government is poised to meddle, the time-tested rule is don’t let Congress lead.  If the Executive Branch does not lead, Congress will.  With Congress in charge, the rescue becomes a bidding match to shower benefits on favored constituencies.  Everybody gets paid off with someone else’s money.   

The good news here is that there are some successful modern precedents.  Two of them are Long-Term Capital Management and Continental Illinois Bank.  Those rescues were swift and successful.  The system was protected and the economy hardly burped. 

More to the point is the case of the Resolution Trust Corporation, a five-year rescue operation of the early 1990s. Savings and loan firms were beginning to fail in significant numbers.  The financial system appeared to be at risk. 

RTC was successful.  Its operations shored up the system.  Many S & Ls failed, but most survived.  Best of all, RTC left the taxpayers about as well off as they were before its creation.  Its success, and reductions from Cold War Defense spending levels, helped put the U.S. budget in the black in the mid-‘90s.  

No two crises are the same.  The S & L meltdown, we are told, was only half as difficult as today’s problem.  Different situations require different solutions.  No one can be sure that the Paulson-Bernanke rescue plan will work like the RTC did, but experts assure us the problem is serious.  

So how does this free marketeer react to the Paulson-Bernanke rescue operation?  He wishes that they had not been obliged to propose it.  He is grateful that they waited long enough to be sure the crisis was real.  Believing that it is, he is equally grateful that they have finally moved toward a solution they believe is adequate.    

He prefers an executive branch plan over a legislative branch plan, and  hopes Congress does not “water up” the administration’s proposal by adding pay-offs for favored constituencies.  Or, more realistically, he hopes congressional add-on costs and regulations can be limited in scope. 

Finally, he hopes that our fabulously successful market system will infrequently require future interventions and that the marketplace will be able to exact its own punishment for incompetence and greed. 

He has regrets but no illusions about government intervention into the private marketplace.  It will happen again, and often.  We simply have to do our best to manage it carefully.  

Bill Frenzel is a guest scholar at the Brookings Institution and a former Member of Congress from Minnesota who voted against federal loans to Chrysler and New York City in the 1970s.


Gold.  Solid as a Rock

By Shannon L. Goessling

The underlying strengths of our economy, and the creative power of our people, are testament to the adage, “The business of America is business.”  American commerce and industry – along with the world-sustaining entrepreneurial class – is now held hostage to a Government-Finance cartel dictating the future of our Republic  This week, the world responded with a resounding NO when the $700 billion-plus bailout plan was announced – the dollar sank, commodities flew off the charts, and foreign banks threatened to stop funding the U.S. deficit.  Doing “something” is not necessarily better than doing nothing, at least when the public fisc is at stake.  The evidence is in:  the leveraged fiat money system has run its course, and it cannot be sustained.

A startling and seriously underreported statement came from the world’s largest purchaser of U.S. dollars.  "The U.S. dollar is no longer a stable anchor in the global financial system, nor is it likely to become one," said Fan Gang, a member of the Monetary Policy Committee of the Chinese central bank and director of the National Economic Research Institute. "Thus it is time to look for alternatives."  Who do we think services our national debt?  It’s not American free enterprise.

If the assets of Main Street are on the table, then let’s make “the people’s dollar” – the world’s reserve currency (at least for now!) and the “oil” that runs the global economy – an asset that matters.  The “full faith and credit” of the American people means that this nation’s real assets, not just our ability to be taxed indefinitely and exponentially, should back our currency – precious metals, a commodities basket, or other alternative that demonstrates that the true wealth of this nation is not in its ability to print and loan and borrow leveraged money, but rather in our shared value as an industrious, innovative, and productive nation.  Think it’s just not done anymore?  It’s too old-fashioned?  Ask the more than 40 nations who have moved back to the gold standard, including and especially Switzerland, which never left the gold standard.  Solid as a rock. 

The results would be nearly immediate – a refloated, revalued U.S. dollar backed by tangible assets will stave off inflationary pressures and avoid the boom and bust cycles we’ve experienced, and will once again make our markets attractive to essential foreign investment.  The United States simply cannot be the world’s marketplace if the currency representing our productivity is degraded and debased, as we are currently witnessing.

American freedom, independence, and strength are at risk – this is truly a “once in a lifetime” crisis that begs for theright actions, not reactive maneuvers that fail to address the real danger.  And certainly not actions that result in outright government ownership of a significant percentage of our economy.

Shannon L. Goessling is executive director and chief legal counsel of the Southeastern Legal Foundation headquartered in Atlanta.


Not So Fast!

By Lawrence W. Reed  

“Thank God we had the federal government last week to bail out the private sector!”

That’s what a rather statist friend of mine declared, almost gleeful that the financial crisis seemed to be proving how much we all need a massive federal establishment to both regulate and rescue us.

Never mind the federal government’s own indispensable role as an enabler in the crisis, from its reckless monetary policy to its jawboning banks to make dubious mortgage loans.  Never mind the long-term danger of its assumption of colossal new obligations and the moral hazard in the message its intervention sends.  My response to my friend was of a more narrow focus.  “Thank God we have the private sector to bail out the federal government not just last week, but EVERY week!”

Think about it.  Taxes on the private sector pay a majority of the federal government’s bills.  For most of the rest, the government borrows by selling its debt obligations mostly to private sector entities—including banks, insurance companies, and individuals.

The federal government is the world’s biggest taxer and the world’s biggest debtor.  If those of us in the private sector didn’t pay our taxes or didn’t buy Washington’s paper, the feds would have gone belly-up decades ago.  We’ve rescued Washington to the tune of about $10 trillion and rising.  A big difference between Washington bailing out the private sector and the private sector bailing out Washington is that the private sector has to work, invest, employ people and produce goods to come up with the cash.  It can’t print it like Ben Bernanke can.

Our friends in Washington have blessed us with future burdens almost too astronomical to comprehend.  In the name of taking care of us in our old age, we are saddled with no less than $6 trillion in Social Security payouts over the next 75 years for which there are no presently earmarked funding streams.  The unfunded obligations for the new federal prescription drug program, enacted under President Bush, according to Brian Riedl of the Heritage Foundation, total another $8 trillion.  On and on it goes.  The private sector has an awful lot of bailing out to do in coming decades.

If you have any doubts about the role played in the present crisis by the very federal government now posturing as our rescuer, take a look at this article from the September 30, 1999 edition of The New York Times:http://tinyurl.com/3jdn9e.  And then contemplate how deeply we taxpayers will have to dig in the not-too-distant future to pay the bills of our benevolent, compassionate and forward-thinking government.

Lawrence W. Reed is president of the Foundation for Economic Education in Irvington-on-Hudson, New York (www.fee.org) and president emeritus of the Mackinac Center for Public Policy in Midland, Michigan.


Distorting the Very Idea of Free Markets

By Devin Foley

We may or we may not be at the brink of Great Depression 2.0.  Whether we are or not, the crisis will likely worsen in coming weeks and through it all, the death knell for markets, particularly of the free variety, will be sounded.

We’re already hearing how markets have failed, how greed overtook the country, and how deregulation and free market ideology are to blame.  The solution?  Almost always more government control.

Unfortunately, over the past few decades many policy wonks, public leaders, and politicians have claimed the ideas of free markets as their own, all the while increasing the size, scope, and budget of government.  They paid lip service to the ideas, but in few ways did they actually work toward implementing the ideas.  In doing so, the very definition of free markets has been distorted making public debate about whether or not markets are failing, especially free markets, terribly difficult in this present crisis.

Let’s clear things up a bit.

Are “free markets” to blame for this mess? Simply put, no.  A market is basically an individual or corporation trading something of value for something else of value with another individual or corporation.  A free market would be one in which the exchange is free of government regulation or manipulation.  Try and think of something that isn’t somehow regulated by the government.  It’s hard to do because free markets do not exist in America and have not for a very long time, if ever.

So what about markets in general?  Did they fail?  Are they to blame for all of this mess?  Again, the answers are no. What you are seeing is the failure of government and the power of the market.  Try as the government might, it simply cannot suppress the invisible hand of the market.  One way or another, the invisible hand will sort things out to determine the real value of stocks, goods, houses, labor, and anything else of value.

If you walk into a grocery store to buy some apples and find that apples are $10 a pound, are you going to buy? Probably not.  Is that a failure of the market?  No.  It simply means that the grocery store overpriced apples.  So if the grocery store crashes the price of apples to something more reasonable like $3 a pound, are you going to buy? Probably.  Did the market fail because the price came down?  Absolutely not.

It’s the same thing for stocks and houses. 

Last week Treasury Secretary Henry Paulson said, “Let me step back a bit and provide a little perspective.  As I've long said, the housing correction is at the root of the challenges facing our markets and our financial institutions.”

I disagree.  The root of the challenges facing our markets and our financial institutions is the government-sponsored credit binge.

Under Alan Greenspan’s leadership, the Federal Reserve opened the spigot to easy money and the country drank deeply.  Money was printed and credit was made available to the banks.  The banks naturally took their cut and then passed the credit on to their customers in the form of easy-to-get loans of all sorts.  The customers then went out and bought houses, cars, TVs, vacations, and all manner of consumption goods.  We were drunk on credit.

All of this easy credit inflated asset prices, kept the economy growing, and thoroughly indebted the country.  Home prices climbed to unsustainable levels in every housing market around the country.  And how do we know house prices climbed too high?  We know, because the markets worked and the housing bubble popped.  Just like the overpriced bag of apples at $10 a pound, the overpriced houses are coming down in price.

Sadly, now that our country and many of its people are up to their eyeballs in debt there isn’t a lot of cushion for an economic slowdown and so there isn’t a lot of tolerance for pain.  Instead of taking the pain and working through the debt hangover, in a panic the government is now proposing we drink a new, credit-induced bailout to forget about our problems.

The cure for too much debt is not more debt.  The cure for this problem is to free the markets, set a responsible monetary policy, and let the chips fall where they may.  If we do not confront the problem now and deal with it like adults, the government’s actions will push us into a great depression, just like in 1929.

Devin Foley is director of development for Center of the American Experiment.

 

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