The Battle for Freedom and Fiscal Responsibility, Yet Again
This cartoon was originally published in the Chicago Tribune in 1934.
David Horowitz succinctly summed up this seemingly never-ending battle when he explained that our history is one of two “distinct revolutionary traditions,” as opposed to the idea of an old order (conservatism) and a new revolution (progressivism). Our two-hundred year history, that which has shaped our nation, is a history of two disparate revolutionary paths to the modern world, “two different paradigms of the European Enlightenment that took root, respectively, in America and France.”
He goes on to say that, “the radical ethos of the French Revolution became the wellspring of a socialist revolt against bourgeois order that culminated in the creation of the Soviet empire. On the other hand, the libertarian ethos of the American Revolution inspired the conservative opponents of the Soviet tyranny, a counterrevolution based on individual rights, free markets and democratic constitutions.”*
You’d think once the battle had been won by the historic experiences of the past century, the debate would be over; that, unfortunately, would be asking too much. So the same arguments must be won, the same battles must be fought, and the same truths must continuously be told.
*The Politics of Bad Faith, David Horowitz, The Free Press, 1998, p. 142.
August 18th, 2010 at 11:01 pm
It would be nice if Wall Street hadn’t bet the farm on the housing market. Then maybe the government wouldn’t have to intervene to preempt a worldwide economic meltdown of unprecedented proportions.
Make no mistake, behemoth corporations are just as bad as big government. They both require some major pruning.
August 19th, 2010 at 2:40 pm
Good point about corporations, but the essence of the problem isn’t “behemoth corporations,” rather it is any corporations with too much influence in Washington. For instance, if the size of business were necessarily limited by government, one of the main potential consequences would be loss of economies of scale and thus lower efficiency and higher prices for the consumer. Size, in and of itself, is not the problem; artificially imposed power (that which is granted through government rather than the free markets) tends to ultimately hurt the consumer and lead to the problems endemic in “too big to fail.”
Here are some examples related to the housing market:
The banking crisis stemming from the bursting of the housing bubble was concentrated in commercial banks, but the investment banks were less regulated than were the commercial banks. Commercial banks held large numbers of mortgage-backed securities. In 2001, the Federal Reserve, along with the FDIC, Comptroller of the Currency, and the Office of Thrift Supervision instituted the Recourse Rule. This rule was meant to steer the funds of banks into “safe” assets and made it attractive, from a tax perspective, to buy MBS’s as opposed to actually lending out their own money. After these tax incentives were instituted, it turned out that only $2 in capital could provide a bank with $100 in mortgage-backed bonds (as long as they were rated AA or AAA or issued by GSE’s, Fannie and Freddie), v. $5 for actual mortgage loans and $10 for commercial loans.
As the demand for MBS’s increased, so did the supply from Wall Street and the GSE’s. This timing coincided nicely with the fact that major pressure had been put on banks during the 1990s to make loans to individuals who wouldn’t qualify under traditional guidelines. The banks, of course, weren’t willing to hold on to those loans – they simply sold them off to Wall Street and bought back highly rated bonds that offered them a huge tax advantage.
Investment banks, which were caught with huge inventories of MBS’s they hadn’t yet sold off and mortgage loans that hadn’t yet been securitized, were the only other category of investor to suffer such huge losses. Hedge funds, pension funds, bond funds, insurance companies – none of these had been incentivized to make such investments and none were stung the way these banks were. The recourse rule covered only commercial banks, and when the bubble burst and their assets were squeezed, lending froze and the Great Recession began.
Now for the bond-rating agencies. One of the requirements was that the bonds be AAA or AA – another problem. Was this caused by the size of the rating agencies? No, it was caused by the fact that the agencies were protected in basically forming an SEC-sponsored oligopoly, since the implementation of regulation in 1975 which made it nearly impossible for the entry of new rating agencies into the US market. Two firms control 80% of the market, and three firms control 95%. Problem. We all know that the ratings of the MBS’s was horribly flawed and innacurate, but there was really no competition and they’ve been entitled to do as they please for decades. Oops.
Government is capable of handing out favors, while the market generally just acts to reward those that deliver the best service or product at the most attractive price. In 1995, Hank Paulson of Goldman Sachs went to the federal government (boy, it’s great to be connected), complaining of the 12:1 leverage rule. There was at that time an exception made for GS, as well as any larger firm, which included Morgan Stanley, Merrill Lynch, Lehman, and Goldman Sachs. What essentially happened was that leverage ceilings were lifted for those firms and they went on to increase their debt in the 1:40, sometimes even 1:50, range. That actually set them up nicely to be able to afford to buy those mortgages and package them for the commercial banks to buy at a great tax advantage!
The less government is involved, the less influence is able buy power and reward those who would take advantage of our system for their own gain. The more we allow the free market to work, the greater chance we have of not being ripped off by the powerful, in Washington or on Wall Street.
August 19th, 2010 at 2:46 pm
You might also be interested in my comment found here, which addresses the additional issue of honesty and values.