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11.01.2008 0

F.A. Hayek’s Road Now Taken

  • On: 11/19/2008 10:04:32
  • In: Economy
  • By Robert Romano

    “Subsequent events, notably former Fed Chairman Alan Greenspan’s admission of his failures in congressional testimony, prove that if he and other Reaganomic ideologues weren’t so myopic and intransigent about proving their free-market deregulation theories, they could have acted earlier and prevented today’s colossal mess. Instead, their ideology kept the bubble blowing, delayed the pop, making matters worse.”—Paul Farrell, “30 reasons for Great Depression 2 by 2011,” November 18th, 2008.

    Understandably, but mistakenly, the debate over the causes of the financial crisis has generated a false dichotomy between two camps: those who argue that the problem was deregulation, and those who argue that it was overregulation.

    The reality is that it was central planning that caused the current economic crisis—and it is central planning that is taking us ever further down that dead end road to serfdom.

    So unfortunately for both camps, the answers are not so easy as a tidy debate between socialists and free market advocates. Suffice to say, there were clearly mistakes made by government to create an easy credit environment through loose monetary policies. There were also mistakes made by individuals who rushed in to exploit that environment.

    The bottom line is that all of the causes of the current financial crisis were a direct result of conscious government policy. To break those causes into a debate of deregulation vs. overregulation actually misses the point, because the policy that primarily failed was monetary policy.

    You can’t blame free markets for the Federal Reserve keeping interest rates too low for too long and creating an easy credit environment.

    You can’t blame free markets for central banks the world over lending out too much money out.

    You can’t blame free markets for devaluing the dollar, the inevitable result of the weak dollar policy.

    You can’t blame free markets for Congress spending far beyond its means and burying the American taxpayer in over $10 trillion of debt.

    You can’t blame free markets for Congress creating mortgage giants Fannie Mae and Freddie Mac to promote the laudable, and yet tragically flawed, goal of rapidly and dramatically expanding home ownership in America.

    You can’t blame free markets for the Clinton administration enforcing regulations under the Community Reinvestment Act to force banks to give loans out to lower-income individuals.

    You can’t blame free markets for the Bush administration never repealing the same regulations, never defending the dollar, and for not reining in Congressional spending.

    And you can’t blame free markets for engaging in price discovery when the ailing, thoroughly regulated financial system came crumbling to its knees and the inevitable deleveraging began occurring. In fact, if it weren’t for free markets bringing a halt to this monstrosity, the lending spree might still be under way.

    For, it was only the dramatic economic consequences of such misguided government policies being reported by the free markets that produced any hope of salvaging the capitalist system. And there is no question that the markets are now pricing in the consequences of those policies. The markets are tanking for good reason: The credit system has failed.

    And to date, Big Government still appears to have no interest in slowing the lending down. All interventions this year have had the express intention of unclogging credit markets so that the lending can continue. Recapitalizing banks so that they will lend money. Coordinating interest rates reductions globally so as to add liquidity to the global system. Boosting the money supply from $894 billion to $2.2 trillion since Labor Day alone to aid in the lending “enterprise.”

    This addiction to credit has spoiled markets nearly rotten. And government actions this year to rescue the credit system that is sinking the economy by printing and borrowing yet more money is about as foolhardy an approach as its past nefarious actions.

    Paul Farrell, in his Marketwatch piece from yesterday, correctly notes several causes for concern on the horizon that ALG News shares and has previously reported on. For example, that the U.S. may have its bond rating downgraded from AAA, the Fed refusing to disclose the details of $2 trillion worth of loans, the Treasury’s shifting strategies on the bailout plan, the accelerating growth of the national debt, etc.

    We do agree that these are problems to watch out for, and they are valid observations that point to a deep recession on the horizon. But we can with no confidence whatsoever pin the blame for these problems on free markets.

    So, the dichotomy of “overregulation” vs. “deregulation” as it relates to this financial crisis is a false dichotomy because monetary policy is most certainly government-generated. One can either have a good monetary policy or a bad one. The U.S. had a bad one. A very bad one. And it’s only getting worse since the ruling class has now apparently doubled down on what could be the greatest bet ever wagered.

    In many ways, Mr. Farrell’s is a significant challenge to free market advocates. He attributes every failure to government officials blindly following an ideology he terms Reaganism.

    However, one could easily insert “conscious government policy” for every time he cites free-market “ideology” as the cause for the problems he cites.

    For example, what was most problematic about default credit swaps? That they were unregulated, or that all of the loose credit that was being traded was adopted as a result of the government’s easy credit and loose monetary policies? Clearly, the latter as being more problematic, because if sound credit had been traded on a global basis, instead of the junk that was being swapped in reality, Americans wouldn’t be in the current mess they are in.

    So, now the all-wise, all-knowing central planners attempt to convince the American people that this junky debt—created through the perils of central-planning—just needs to be “managed” better, and it won’t be so junky. So now the regulators swoop in to save the day and regulate the credit swaps. Wonderful.

    A better alternative would be the government not creating junky debt to begin with.

    It is just as mistaken to label the loose dollar and easy credit policies that actually caused the crisis “deregulation” as it would be to label them “overregulation.”

    In fact, it was neither. It was the Fed having too much power to debase currency and destroy the purchasing power of the American people in the first place. It was Congress having too much power to tax and spend the American taxpayer into financial ruin. It was too much government interventionism to perpetuate economic growth—probably to win re-election by politicians—by extending debt.

    All roads lead to the government as creating all of these problems. But nonetheless, the Left is waging an aggressive campaign to argue that it was free market “ideology” that created the mess. Meanwhile, they pretend mightily that yet more regulation will solve a problem as old as civilization itself: Who oversees the overseers?

    Everyone knows that monetary policy is most certainly a government responsibility. Indeed, it is constitutionally a government responsibility. Free markets do not print too much money and decide to lend it to whoever wants it.

    The financial crisis of 2008 was not caused by deregulation or overregulation, it was caused by central planning. And as predicted by F.A. Hayek, that clearly has paved a road to serfdom, one that will find the American taxpayer shackled to a mountain of debt.

    Robert Romano is the Editor of ALG News Bureau.

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