Deregulation did not Cause Financial Crisis, Welfare Did

“The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.”

Henry Hazlitt – Economist/Journalist (1894 – 1993)

If only Alan Greenspan, George Bush, and the rest of the economic imbeciles in Washington that gave us the Great Recession would have heeded the words of the great Henry Hazlitt, as a nation we would not have produced so much phony wealth which in turn has caused so much pain.  Leftist wholeheartedly support this view.  As a matter of fact, the current occupier of the Oval Office is fond of constantly reminding Americans that it was George Bush and his Republican Congress from 2001 to 2006 that implemented the policies that caused the worst financial and economic crisis since the Great Depression.  But, while Obama and the left are correct about who caused the crisis they are way off the mark about what the guilty parties actually did to bring it about.

Obama and his ilk claim the cause of our current troubles was the deregulation of the financial services industry in the late 1990s and early 2000s.  Now, they have to be careful because the major deregulation legislation of this time frame was signed by one their own – President Bill Clinton.  I am of course referring to the law which repealed the Glass/ Steagall Act.  Enacted during the Great Depression, Glass/Steagall prohibited commercial banks from owning investment banks, and vice versa.  It was meant to safeguard commercial banks against failure by making it illegal for them to participate in investment bank practices like securities trading and stock and bond underwriting.

It does seem more than coincidental that the most severe economic crisis since the Great Depression has taken place shortly after the repeal of Glass/Steagall.  And to the shallow statist mindset that is all that matters.  But Obama and the left are wrong; repeal of Glass/Steagall did not cause the current financial crisis.  In the first place, as Conn Carroll of the Heritage Foundation has pointed out, Glass/Steagall was “steadily weakened” from the 1970s on by the “complex new financial reality” of the times and by waivers from regulators that made mergers routine – the 1998 merger between Travelers and Citigroup essentially repealed the law once and for all.  Thus, the erosion of the law over 30 some years without any major financial crisis is an indication that the ultimate repeal of what was left of the law in 1999 did not cause the troubles of today.

Next, by looking at which institutions brought on the financial carnage one can conclude that Glass/Steagall’s repeal was inconsequential.  Bear Stearns, Lehman Brothers, and Merrill Lynch all went belly up as investment banks without commercial bank divisions.  The granddaddy of them all, AIG is an insurance company with no commercial banking division.  Washington Mutual was a savings bank that went bankrupt because of the many sub-prime mortgage loans it made that went bad.  Lastly, Fannie Mae and Freddie Mac did not fall under the jurisdiction of Glass/Steagall and their bailouts are on target to hit $1 trillion at the rate home prices continue to fall.  So in reality Glass/Steagall would not have prevented any of these firms from causing so much trouble for the economy.  Further, it has been argued with a lot of validity that the repeal of Glass/Steagall has actually benefitted taxpayers in this crisis.  It has reduced their losses that would have been incurred by direct government bailout by allowing Bear Stearns to be purchased by JPMorgan Chase and Merrill Lynch to be scooped up by Bank of America.  All things considered equal, the repeal of Glass/Steagall has been a blessing in disguise for our economy.

Lastly, it is ridiculous to believe that the repeal of Glass/Steagall would cause bankers and investors to become so reckless and irresponsible with their resources that they would risk their economic viability.  It just wouldn’t happen.  Knowing that they could lose everything, their robust salaries and benefits, personal wealth, good name of their companies, and their own professional reputations most CEOs take great care to honor the fiduciary responsibilities they are given.

But, some obviously do not.  As we have seen it was not on account of the repeal of Glass/Steagall.  Those that gambled with others’ money to get rich quick did it because of statist government policy not libertarian deregulation.

The simple fact is that the Great Recession was caused solely by irresponsible welfare policies of Washington.  These welfare policies specifically targeted homeowners and banks.  Undeterred by the dot.com bubble and ultimate crash he caused in the 1990s, Alan Greenspan kept interest rates too low for too long again in the early 2000s after 911.  At the same time, President Bush stated that he was about to “use the mighty muscle of the federal government” to make homeownership more available for more Americans.  He got Congress to spend up to $200 million a year to assist first-time homebuyers with down payments.  He pressured mortgage lenders to make sub-prime loans because “Corporate America has a responsibility to work to make America a compassionate place.”  Lastly, he caused immense moral hazard by getting Fannie and Freddie to guarantee all the junk loans being made, again to the tune of potentially $1trillion.

The banksters that closed the deals all along the financial food chain knew that if their get-rich quick scheme ever failed, Alan Greenspan and his Fed and the full financial resources of Uncle Sam would be there to catch their fall.  This precedent was set in the 1930s with the Reconstruction Finance Corporation, the savings and loan bailout of the 1980s, and as recently as 1998 when Greenspan’s Fed bailed out hedge fund Long-Term Capital management.  Sure enough, the banksters were correct as Greenspan’s protégé Ben Bernanke and treasury secretary Hank Paulson frightened Congress into appropriating over $800 billion toward the Troubled Asset Relief Program.

When Bush, Greenspan, and their legislative accomplices on the Hill launched this massive welfare program for banks and homebuyers after 911, they did not take into account the words of Henry Hazlitt.  They only considered the immediate effects for two groups in society.  Even years later, when Bernanke and Paulson informed the president of the enormous economic catastrophe that our country was about to face and they pressured him to sign off on government bailouts for their banking buddies, Bush was said to have remarked “How did we get here?”

We got here because of government intervention into the economy not deregulation.  Unfortunately we are going to stay here because Obama is doing exactly what Bush did before him – provide cheap money and encourage borrowing through government funding (tax credits for first time homebuyers) and guarantees.  Maybe that is why Obama and the left are so keen to blame deregulation for the crisis.  They use it as a smokescreen to hide the failures of the welfare state in the past and the failures we will experience in the future.

Article first published as Deregulation did not Cause the Financial Crisis, Welfare Did on Blogcritics.

Why the Constitution Matters in Military Affairs

Week after week it’s easy for me to blog with compelling arguments that most things Congress does is unconstitutional.  But, up until about two years ago with the advent of Ron Paul’s Freedom Revolution and last year’s birth of the Tea Partiers, most Americans would have said, so what if something is unconstitutional?  That document is outdated and irrelevant.  These are modern times with issues unimaginable to the Founders.  Nonsense, the eternal truths contained in the U.S. Constitution are as relevant today as they were in the 1700s.

Take making war for instance.  Article 1 Section 8 gives Congress, not the president, the power to declare war.  In that same section, Congress has the power to finance the endeavor.  Since the end of World War II, the clause pertaining to declaring war in the Constitution, like many others, has been almost totally ignored by both the Congress and president.  Additionally, Congress has rarely if ever invoked its power to restrain presidential power by controlling the purse strings of the military during times of war.  The consequences have been horrendous. 

In the 1960s and 1970s it led to an 11 year war in Southeast Asia.  Instead of a declaration of war the military action was justified on the basis of the Gulf of Tonkin Resolution passed in 1964.  The resolution gave President Johnson the authorization to do whatever was necessary in order to assist “any member or protocol state of the Southeast Asia Collective Defense Treaty.”   This vague and open ended wording led to much criticism of the president and his Secretary of Defense over how they conducted the war.  Specifically, President Nixon’s expanding of it to include the bombing of Cambodia made an already unpopular war almost an event that tore the country in two.  It also led to over 50,000 American and countless Southeast Asian lives being lost.  The conflict ended in defeat for the U.S. and spending for the war caused high inflation which hurt American households, facilitated our manufacturing base to move overseas, and eventually brought on problems like the Savings and Loan crisis.

In current times we find ourselves mired in two conflicts in Afghanistan and Iraq.  To be sure, Congress did not declare war in either circumstance.  For Afghanistan, it passed a resolution authorizing the president to use all “necessary and appropriate force” against those whom he determined “planned, authorized, committed or aided” the September 11th attacks, or who harbored said persons or groups.  For Iraq, the resolution authorized the president to use the Armed Forces of the United States “as he determines to be necessary and appropriate” in order to “defend the national security of the United States against the continuing threat posed by Iraq; and enforce all relevant United Nations Security Council Resolutions regarding Iraq.”

It seems like Washington never learns from its mistakes.  Again, loosely worded resolutions instead of firm declarations with a narrow objective allowed President Bush to abuse his powers by spying on Americans, holding prisoners at Guantanamo Bay indefinitely, and expand the bombing to include other countries other than Afghanistan and Iraq, namely Pakistan.  In addition to over 1 million Iraqi and Afghani deaths from the main theaters of war, 1 in 3 people killed in the expanded bombings of Pakistan have been civilians. 

Because Washington has not followed the eternal truth that war should be entered into and conducted carefully, our government is primarily responsible for the destabilization of the Middle East.   It doesn’t take a rocket scientist to understand that because of the threats of invasion that came from the previous administration and with American military might all around it Iran is attempting to acquire nuclear weapons.  Even though Saddam was a vile and ruthless tyrant his Iraq acted as a counterweight to Iran.  Today, Iraq is in chaos and if U.S. forces do ever leave it will be ripe for a takeover by Islamic extremists.

A Republican Congress unfortunately did not deny George W. Bush the ability to launch an unjust war on Iraq based on lies, misinformation and his desire to avenge Saddam Hussein for allegedly sending a hit squad to assassinate his father.  One man made the decision to start the war in which Americans would die and hundreds of billions of dollars would be spent.  This was not the intent of the Founders who were wise enough to give the powers of declaring wars and financing them to the Congress.  The Founders gave them to Congress because it is a deliberative body that represents the many viewpoints of Americans.  These viewpoints, like in the enactment of laws, place a check and balance on the solitary power of the president.  Congress has abdicated this constitutional power and consequently has propped up an imperial presidency – something the Founders, other than Hamilton and Adams, would have vehemently rebelled against.

In 2006 the Democrats took back control of Congress with a pledge to end the wars in Afghanistan and Iraq.  For a time there was hope that they would restore the constitutional balance of power in war making. They simply could have done this by cutting funding for the wars.  But instead, Congress continues to finance the wars and in fact has gone along with President Obama’s wishes to continue funding bombings in Pakistan and to escalate the war in Afghanistan – so much for the hope that Congress would exert control over the powers granted to it and rein in the powers usurped by the president.

Wars are costly both in terms of human life and monetary expense.  Unless an attack on U.S. soil is imminent, Congress must retain its constitutional power to declare war and use its authority over funding it to limit the president’s actions.  By not following these constitutional mandates we have become a militaristic society almost constantly at war in adventures far beyond what the Founders envisioned.  This has caused a drain on our families, our finances, and our country’s reputation in the world.  Fortunately, many Americans are finally waking up to this reality.

Rothbard as Prophet – Part 2

As documented in Rothbard’s classic piece America’s Great Depression, the similarities of the 1920s and 2000s did not end with the beginnings of each crisis in 1929 and 2008 respectively.  It gets much scarier than that.  Washington responded in very similar ways to both crises.  As we know, Hoover/Roosevelt policies made the recession of 1929 into a depression and prolonged recover for at least a decade.  Time will only tell how bad Bush/Obama policies will make our current economic depression.

So, just what were the policies of the Hoover/Roosevelt administrations that exacerbated the U.S. economy into the 1930s and resemble the policies of the Bush/Obama administrations today?  For one, a blatant misinformation scheme to make Americans believe that the excesses of laissez-faire capitalism were to blame for the economic downturns was launched.  In both cases, this was used to deflect any culpability of the U.S. government for the crisis.  But, also and more importantly, it was used as the rationale for heavier government intervention in the economy.  It is ridiculous that then and now the American public has fallen for this deception.  We did not in the 1920s and we did not earlier in this decade have a laissez-faire economy in the United States.  As Rothbard points out, just prior to the 1920s America went through the so called Progressive Era.  This era introduced enormous regulations on our economy.  There was price fixing, a full blown agricultural policy and interstate commerce regulation through the Interstate Commerce Commission and other government agencies.  Let’s not forget that the Federal Reserve Bank began operations in 1913 with the expressed mission to prevent economic downturns through currency regulation.

Of course, many regulations and regulatory agencies founded during the Great Depression are still with us today.  Because we are no longer on the gold standard, the Federal Reserve has even more power today than in the 1920s to regulate our money supply.  The bottom line is that laissez-faire means no government interference in the economy, but Washington has had its grubby big hands on our financial system for a long time.  Therefore, Washington’s attempt to blame laissez-faire for economic troubles in this country, ever, is highly disingenuous.

But, the politicians have used this pretense since the Great Depression to step in and “rescue” our economy from the “greedy capitalists.”  After the stock market crash of October 1929, the Federal Reserve pumped $300 million into the reserves of the nation’s banks.  It expanded its balance sheet by purchasing $1 billion of government securities and provided $200 million more to banks at discounted rates.  Sound familiar?  These numbers are nothing compared to what the Fed and treasury have spent on the current crisis ($12 trillion), but they were a lot given the nation’s GDP at the time was $100 billion.  The scary thought is that by the time Hoover left office his attempt to re-inflate the bubble produced a 25 percent unemployment rate.  What will $12 trillion produce?

Additionally, government works projects were used by Hoover/Roosevelt and are about to be used by Obama.  Hoover raised taxes on the rich and Obama has threatened to do the same by allowing Bush’s tax cuts to expire. Fortunately, a major policy difference between then and now is that Washington has not passed (came close with “buy America” clauses in the stimulus bill) protectionist measures in the current crisis.  Nonetheless, the comparisons in policy are startling given they didn’t work the first time.

Beyond the policy similarities, there are at least two chilling coincidences between then and now.  In 1931, almost two years after the crash, the unemployment rate was only 9 percent.  One and a half years after the current crisis began unemployment is 8.9 percent.  But, more ominously, given Hoover’s inflating of the money supply banks didn’t lend and consumers were not spending in 1932.  Naturally, the short term deflation that resulted improved the economy for a while since it began to deflate the credit bubble which the economy needed to recover.  However, it was only a matter of time before all the new money hit the economy and caused havoc.  One year later, the unemployment rate soared to 25 percent.

Again, today, in spite of the Fed’s pumping of new money into the economy, banks have been slow to lend and consumers slow to spend.  Prices have declined over the past 12 months – for the first time since 1955.  You might say the economy is showing signs of improvement – the stock market is up 25 percent in the last two months.  However, since government intervention caused the Great Depression don’t be too hopeful that Washington’s current intervention will have any different outcome this time.

It is amazing that in both crises the same folks who caused the problem were called upon to solve it.  The easy money policies of the Fed have been responsible for both the Great Depression and our current economic crisis.  After the 1929 stock market crash, the Fed’s re-inflating policies did not allow the economy to rid itself of the malinvestments caused by its previous inflating.  The economy sank into a deep depression.  According to Rothbard’s writing, we are headed for a similar if not worst fate.  If only Ben Bernanke had read Rothbard as a part of his study of the Great Depression.