By Anthony Gregory View all 19 articles by Anthony Gregory Published 03/27/09  
Printer-friendly version
Treasury Secretary Tim Geithner and Federal Reserve Chairman Ben Bernanke believe the federal government needs far more regulatory power. Geithner has proposed a new agency with the power to seize and control non-bank financial institutions. This, he says, would have made the AIG bailout cheaper. So would have not having a bailout at all, but surely he would not take that option seriously. Geithner is capitalizing on the public outrage over the AIG bonuses. The Washington Post quotes Geithner as saying, "The issue of excessive compensation extends beyond AIG and requires reform of the system of incentives and compensation in the financial sector." The Post reports: "In making his case for regulatory reform, Geithner told the committee, 'AIG highlights broad failures of our financial system. Our regulatory system was not equipped to prevent the buildup of dangerous levels of risk.' He said the federal government lacks the legal means at present 'to manage the orderly restructuring of a large, complex non-bank financial institution that poses a threat to the stability of our financial system.'" Bernanke echoes this concern. "AIG highlights the urgent need for new resolution procedures for systemically important nonbank financial firms," the Chairman says. "If a federal agency had had such tools on September 16, they could have been used to put AIG into conservatorship or receivership, unwind it slowly, protect policyholders, and impose haircuts on creditors and counterparties as appropriate." We know that for generations, the federal government has been regulating finance to the hilt, setting interest rates, monopolizing money and claiming it was managing the business cycle so another depression would never come. Most people in charge thought nothing was amiss with the unstable financial bubble over the last several years. The central planners did not foresee this recession, and yet now say had they had more power, they would have steered the economy away from the problems now visible. Geithner, who was intimately involved with the bailouts late last year, even claims that had he and the other finance bureaucrats and regulators had more powers, they could have prevented the high bonuses. This is quite reminiscent of the Bush administration's assurances that 9/11 could have been more easily averted had the federal surveillance state and intelligence institutions had more power and resources. With the tens of billions at their disposal, with all the spying powers under FISA and other federal law, they had failed to stop the terrorist attack; but this was all because their hands were tied, we were told. On Thursday, Geithner unveiled his plan to the House Financial Services Committee. He said, "The system proved too unstable and fragile, subject to significant crises every few years, periodic booms in real-estate markets and in credit, followed by busts. These failures have caused a great loss of confidence in. . . a system that over time has been a tremendous asset for the American economy." Of course, these booms in credit are a result of the Federal Reserve's easy monetary policy. But instead of proposing reform or abolition of the Fed, Geithner wants more regulations, more powers and responsibilities for the Securities and Exchange Commission, more consumer and investor "protection," more global regulatory harmonization, and a new federal agency to track systemic risk and the power to prop up or shut down nonbank institutions. Ron Paul, serving on the House Committee, questioned Geithner, leading the Treasury Secretary to reply, curiously enough, that "we have to be very skeptical" that regulation can fix everything, that the system has been "overwhelmed with regulation" and "it wasn't absence of regulation that was the problem." Although Geithner has been saying more government power is needed, and he has been attacking the supposedly greedy private sector, he has also recently announced a proposed "public-private investment program" to price illiquid "toxic" assets and get them off the books of banks. The Treasury Secretary seeks a "market-based" but government-supported pricing mechanism where both business and government share the burden and, supposedly, both get the payoff when the assets are liquidated. In reality, the government will be providing half the equity and six times leverage. As Gary North points out, the entire Geithner plan to further nationalize the financial industry is in practice a huge bailout of the largest banking houses. So we have a seeming paradox of the top finance officials calling for more government power to keep the greedy, overextended, over-leveraged financial institutions in line, all while these same institutions are massively subsidized and encouraged in their overextended enormity with more artificially generated liquidity. What we are seeing now is a mixed economy in crisis. The American system has for a century been a combination of free markets and government planning. The last several decades have seen an explosion in the regulatory and welfare states. At the same time, the economy has been just free enough to keep growing, and to keep sustaining a government much bigger than any other in history. But now the system is not running as smoothly as it has in the past. The impulse of interventionists is to say the problem is the remaining capitalism being insufficiently regulated, and we must move even further from the market economy. Our answer is that too much government is the problem, and we need to move toward the free market. 
Interventions into the free market invariably cause unintended distortions and destroy wealth. These translate into economic and social problems that interventionists tend to blame not on themselves but on the market economy, concluding what is needed is yet more intervention. The great economist Ludwig von Mises identified this tendency in Critique of Interventionism eighty years ago. 
On the one hand, the mixed economy is not stable, because there are always problems that tend to be addressed counterproductively by moving more toward socialism. F.A. Hayek wrote about the problem of the unstable mixed economy and why it gravitates toward totalitarianism in his great book The Road to Serfdom. On the other hand, pure socialism is impossible, since it completely destroys the price system, the very basis of economic calculation. This is bad for the government too. It is the main reason why the Soviet Union was always doomed. Perversely, more economic freedom means more wealth, including wealth to be taxed for bureaucracy. We have often heard conservative economists argue that lower taxes means more revenue for the government. One downside of a mixed economy is that it is the best system for financing a huge warfare/welfare state. We see that most socialist regimes abroad end up currying favor with big economic interests and abandoning the impossible dream of 100% central planning. They must do so to survive. Lenin's New Economic Policy was even a move toward market liberalization. In America, the starting point is not socialism, but the government's increasing regulation of business is still accompanied with government support for those very same private interests. Whether we are talking about social democratic regimes like Obama's, compassionate conservative administrations like Bush's, or New Deal governments like FDR's, the basic formula is similar: A highly interventionist state, with corporations and politicians working together to allow just enough of a free economy to keep financing a growing government. 
Economist Robert Higgs has convincingly argued that the real tendency is not toward pure socialism, but toward a mixed economy and corporate liberalism. This means a corporate state where big business, special interests and the governing elite together rule over an economy of heavily regulated and politically connected crony capitalism. The public also tends to be included in a semi-democratic fashion -- unlike in outright totalitarian regimes of the past, there is wide enfranchisement and encouragement that the people engage in the system. There is just enough of an opening for business and just enough of an illusion of public involvement that neither economic law nor public opinion will cause the government to fold over, despite its many tyrannical vagaries and encroachments on the liberties of the people. Higgs calls this system "participatory fascism" -- the economics of corporatist central planning coupled with a democratic form of government -- and says it is the dominating tendency in the modern developed world.
Discussion of fascism, like socialism, is often dismissed as hyperbolic, but the fundamental features of fascist central planning can be seen in our economic system. Politically protected big business, cartels, nominal private property rights, a welfare state and socialized risk -- crony capitalism and social interventionism -- mark both systems. FDR's Brain Trust included admirers of Mussolini's fascist regime, on which elements of the New Deal (namely the National Industrial Recovery Act) were based. Roosevelt effectively demonized while courting big business, profiting off a negative popular perception of business and banks while propping them up, forcing corporate concentration, and putting the heads of industry in charge of regulating the economy. At the time, many more Americans openly embraced fascist economics by name. Today, many Americans believe in the same thing but call it something else. Whatever we call it, Obama is continuing FDR's policy of corporate socialism. In practice, this is what social democracy, the third way, compassionate conservatism and New Dealism all boil down to: Capitalism and democracy in form, corporatist oligarchy in reality. Some degree of economic fascism is inherent in a mixed economy. This explains the paradox of Geithner simultaneously feigning outrage at these corporate fat cats while shoveling hundreds of billions of dollars their way and saying business and government need to work closely together to address the crisis. The government typically moves in claiming to protect the little guy. Invariably, it is more practical for politicians' true loyalties to lie with the wealthy and powerful. The mixture of free-market profit and loss with statism is almost always a socialization of risk and a privatization of benefits -- those close to power have the most to gain and sometimes very little to lose. Taxpayers are forced to underwrite multi-billion dollar institutions while being told it is to protect them from greedy predators. So one force pushes the economy toward increasing intervention, while practical considerations favor the mixed economy. But the instability of all interventionist systems, as dictated by economic law, is still there. Eventually, something will give. The crisis in America's mixed economy is predictably leading the political mainstream to call for more intervention. But the financial bust is far more serious than the central planners probably recognize, their "solutions" far more destructive and the underlying causes too foundational. They go to the very root of our mixed economy, and especially our governmentally monopolized monetary system. Even as many left-liberals now claim we need social democracy more than ever -- more welfarism, more stimulus, more spending and inflating -- it is their half-way system that has failed. The Federal Reserve was supposed to keep inflation manageable and iron out the business cycle. Instead, it has presided over several devastating bubbles and busts, including the Great Depression, the dotcom recession and our current woes, and it has caused a 95% devaluing of the dollar. So far. Other Progressive Era reforms and all their progeny were supposed to prevent unsustainable mergers, but our economy has never been more precariously centralized in a handful of important but insolvent institutions. The New Deal reforms were supposed to ensure there would never be another Great Depression. But from the false security of FDIC to the housing subsidies started by FDR, we can see the New Deal's fingerprints all over today's financial crime scene. The Great Society was supposed to eradicate poverty. Not only has poverty remained in about the same state despite trillions of dollars thrown at the problem, but middle-class Americans are now much poorer than they were led to think they were, thanks largely to a culture of relentless borrowing and spending, rather than saving, that the government has encouraged since the 1960s. At the same time, New Deal and Great Society programs have now racked up trillions of dollars in unfunded liabilities to be faced in the coming decades. Fannie, Freddie, and a whole slew of federal policies were supposed to make homeownership affordable. Now these agencies and the government are doing all they can to keep the insanely inflated home prices from sinking. Nevertheless, the market is being blamed. Bush supposedly represented an era of "market fundamentalism" -- even though his administration pushed monetary central planning, in opposition to all free-market principles, to create the biggest bubble ever. When all you have is a hammer, everything looks like a nail. The government believes only more power, more corporatism, more regulation, more inflation, borrowing and spending will do the trick. But it's very likely they will not be able to reinflate this bubble. There is simply too much debt, the dollar is increasingly distrusted internationally, and there are too many factors beyond their control. But in the process of trying, they will cause lots of damage to the economy and delay recovery. So it comes down to the very important intellectual battle over these next months and years. Now more than ever we must defend the market economy, on which civilization itself depends, against those who attack it in its very name. We must defend it against the left-liberals and Keynesians in power, as well as the faux "free-market" conservatives whose profligacy and monetary interventionism were key in bringing on the crisis. But there are more Americans who understand sound economics than during the New Deal or probably ever before. More people are skeptical than ever as they see big government, big business and big media sing a chorus of more intervention and more money creation to get us out of the mess. The Fed is being questioned. Ron Paul's Audit the Fed bill is picking up lots of cosponsors. Some of the mainstream press is talking about gold. The man on the street distrusts the masters in Washington. Conservatives are beginning to rediscover concerns of fiscal responsibility. Some liberals are criticizing the bailout as an indefensible giveaway to Wall Street. Obama's approval is hovering around 50%. Thus it is time to be vigilant, but also hopeful. Never before has the market needed our passionate, patient and thoughtful defense. But Americans are coming around to asking the right questions, and only the answers provided by sound economic and ethical principles explain the mess we are in. |
Also by Anthony Gregory:
The Audacity of Obama's State of the Union 01/29/10
The First Anniversary of Hope and Change 01/20/10
The Drug War vs. the Bill of Rights 01/14/10
Corporatism and Socialism in America 12/31/09
Happy Bill of Rights Day 12/15/09
View all 19 articles by Anthony Gregory
Discuss this article (26 comments)
