Among businesspeople, bankers, and investors, there is a growing fear that the economy is headed towards recession or already in one. But that alone is not the source of worry. After all, an economy if left alone to function in freedom can recover. The real problem has to do with the political response. There is every indication that no matter who comes to be in charge in November, we face a future of massive spending, inflating, and regulating.
And here is the real danger. One only needs to look at such preposterous measures as the “stimulus package” that congress passed to much fanfare. Dumping money into consumers’ hands, drawn from wherever they can get it, is the only means these guys can dream up to shore up prosperity. That only proves that they don’t know what brings about prosperity in the first place, which is not congress but free enterprise.
Economist Robert Higgs compares a “stimulus package” to getting water out of the deep end of the swimming pool and dumping in the shallow end — all with the expectation that the water level will rise. As he emphasizes, economists should never tire of asking where the money for stimulus is going to come from. Mankind has yet to invent a machine to create it out of nothing: it’s either taxing, inflating, or going into debt that has to be paid later (and crowds out capital creation now). There is no other way.
Then we face the frightening prospect of a Bernanke-driven inflation. His entire public career has one theme only: the merits of credit expansion without limit. Alan Greenspan at least had some intellectual conviction, way back in his personal history, that there is a downside to printing money without limit. Bernanke seems to think that the printing press he now runs is the Holy Grail of economic recovery.
He never speaks without insinuating that more credit expansion is on the way. He somehow believes that offering this will spread relief and even glee, as if he alone has his hands on the machine that will solve all the world’s problems, and he alone knows how to work it. I tell you, it’s creepy. What’s more, he seems to be the only one who truly believes it.
And consider the way Washington has handled the subprime mortgage crisis and what that portends for our future. Throughout the 1990s, especially after a now-discredited Federal Reserve Bank of Boston propaganda study, banks were hounded by federal regulators to end "discrimination" against people with either poor or no credit ratings. In practice this meant that banks were threatened into giving loans to people regardless of their ability to pay them back. The lending standards that have been an essential part of banking practice from time immemorial were repealed.
Now the same banks are under fire for having granted mortgages to those who can least afford them, even as Washington again considers legislation that would mandate that banks take on less risk in the future. So we have here a politically created problem that is followed by a politically generated non-solution to the problem. It’s as if Washington will consider any trick to patch up problems of its own making other than simply letting the market work.
In a very strange way, we find ourselves in a position similar to that of 1932, when the United States was in a depression, people were crying out for answers, and free market logic was ignored or denounced. To be sure, today there is a vast class of pundits, teachers, and other intellectuals who understand, and are constantly aghast at the old-style Keynesianism that is driving public debate. But bridging the gap between private opinion and official policy will require nothing short of a miracle. One need look no further than the presidential election, which could easily be confused for a dictator election.
It is indisputable that, given the state of things, bad economic times will be a forerunner to bad and worse economic policy. The Democrats will give us more spending, regulating, war, and inflation. And this is despite all promises they will give us before the election. Recall that FDR himself ran on a platform of balancing the budget and letting private enterprise cure economic crisis, as John T. Flynn’s Roosevelt Myth shows.
And the Republicans, absent Ron Paul, will give us, well, the same thing. All these people need to look around at what private markets are doing today. Instead of destroying other people’s wealth, they are cooperating with all nations of the world, serving the consumer, and finding innovative and better ways to feed, clothe, house, heal, and entertain us. And what has Washington done? Rob us, badger us, and take us to war.
To be sure, Washington does have obligations. Cutting spending and taxes is a great start. Abolishing agencies that inhibit recovery is essential, starting with the egregious Transportation Security Administration that has done so much to destroy airline travel in this country over the last seven years. It is a Bush-created agency, and one of the great policy errors of the last, well, seven years.
It’s true that confidence in the economy is waning. But the response by Washington so far has done nothing to inspire optimism. The more they do, the greater the fears grow. There is a Victorian story about a creature who wonders why everyone is running from him, until he sees a reflection of his own frightful face. It is time for the whole of Washington to look in the mirror.