American government has one good thing about it. It has Inspectors General. The government ignores what they say, but at least they give us a measure of truth about government.
The truth these days on the extent of government bailouts is undeniably mind-boggling. It may make you feel queasy. It may set off alarm bells.
There is something called The Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP). Congress, you will recall, created the TARP program in 2008 in its Emergency Economic Stabilization Act.
The SIGTARP is a man named Neil Barofsky. I like his honesty. I like his integrity.
Mr. Barofsky tells the Treasury what it should do to administer TARP in an above-board, efficient, and business-like manner. The Treasury ignores what he says. Consequently, no one out here knows what’s happening to the money; and probably no one in there at the Treasury knows either:
"One of SIGTARP’s first recommendations was that Treasury require all TARP recipients to report on the actual use of TARP funds. Other than in a few agreements (with Citigroup, Bank of America, and AIG), Treasury has declined to adopt this recommendation, calling any such reporting u2018meaningless’ in light of the inherent fungibility of money."
Congress is doing one main thing. It is having the Treasury buy loans and debts (like mortgage loans, credit card loans, auto loans) that banks created in the boom. The government is also buying the securities of banks. It is not paying ready cash from tax collections or its bank accounts for these loans and securities. It does not have the vast amounts it is spending, and it cannot tax us enough to cover the amounts being spent. So instead it is buying them on credit in the same way that you or I buy something on credit. It is taking out loans to get the cash to buy these other loans. The government does this by running big deficits and issuing Treasury securities.
These exchanges with banks are not sales in an open market. They are negotiated. The prices of the exchanges are unknown.
Even if the Treasury executed these transactions in an entirely above-board way, the program would still fail. That’s because the strategy the Congress is following in order to stabilize the economy cannot stabilize the economy. No economy can be made productive and efficient by people (through their government) buying up the bad loans that banks made during a boom. That encourages these and other banks to make more bad loans in the future and rewards them for having made bad loans in the past.
The Congress thinks that an economy works as follows. (1) Consumers obtain funds from banks. (2) Consumers buy things from producers. (3) Producers pay workers who then repay loans. They think that if they deliver funds to consumers, by flooding the banks with the wherewithal to lend, then they can get the economy to grow. In this strategy, the banking system’s provision of funds almost always leads to prices rising in some asset markets, speculation, capital misallocation, and eventual recession and bad loans. The economy does not go onto a sustainable growth path. The excess loanable funds cause prices in individual markets not to do a good job of reflecting shifts in demand and supply. Market distortions arise and then a recession.
The entire process of government manipulation of bank loans is simply one version of a command economy, and command economies always fail.
In its analysis and solution, the Congress is badly mistaken. It misapprehends the role of money and lending. Money creation does not drive an economy forward. The production of goods and services does. Non-inflationary money is a veil. An economy more nearly works as follows. (1) People work to get the buying power to buy things from others who also work. (2) The buying power is the real goods they produce. (3) They use money to express the buying power they have produced so as to avoid having to barter. In this system, prices adjust mainly as a result of real demands and real supplies. This helps production to be quickly adjusted to shifts in demand and supply.
In this scenario, a consumer who gets a loan to buy something is getting an advance against his future work product, which is the real source of his buying power. A business that gets a loan is getting an advance with which to pay workers; the business expects to repay the loan when workers buy the product it produces. The loans and money that circulate facilitate the production-exchange process. They do not cause it or give it its motive power. Real production and exchange of real goods do that. Furthermore, the existing banks, the central bank, and government money are not even needed to create the credits that smooth the workings of a money economy. The people doing the transactions can create new banks or create these credits themselves.
The latest report of Barofsky’s office is here. The grand total of all government and FED programs aimed at absorbing or supporting bad loans has now reached $23.7 trillion. This is $237,000 for each of the 100 million households in America. This is government and the FED truly in panic mode and running wild. There are frightened little men here who are doing all the wrong things. There are 23.7 trillion reasons here for buying gold.
The recuperative powers of people left to their own devices is wondrous. They will create a robust and growing economy. This is not at all where America is now headed. We often hear the right words from officials about exit strategies, free markets, lowering government deficits, and controlling inflation. But the actions are all in the other direction. The budget plans for the future that point to a greatly enlarged government only reinforce the existing huge expansion of government into the business world.
In the space of the last 12 months, the American political economy has drastically changed. The government has taken over Fannie Mae and Freddie Mac, with their huge debts. This places the government at the heart of the housing industry. The government has taken positions in hundreds of banks. It has gotten involved in executive compensation. It has gotten involved in bankruptcies of auto companies. It is now on the receiving end of more requests for capital than ever from business firms, both healthy and ailing. The FED has joined up with the government in major fiscal actions and in allocating credit to selected firms and sectors. The government has started to run unimaginably high deficits. One large recession has altered the society dramatically, and it is not yet over.
America at this time is not on a sustainable free market growth path. It may not have been on such a path for a long time, but the shift away from it and toward an economy that depends ever more heavily on government has made this even more evident.
Deng Xiaoping showed that a government can reverse its policies, even if only in part, and move an economy in a more favorable direction by removing burdens. Ludwig Erhard has been lauded by none other than Alan Greenspan for his role in the recovery of Germany and Europe after World War II. It takes courage, firmness, and political savvy to make these changes. One cannot take naps and leave matters in the hands of insubordinate subordinates who have other ideas.
America is not going anywhere within the present political setup until it gets beyond its benighted economists, its useless and shallow mainstream media, its frightened authorities, its parochial Congressmen, and its ignorant leaders.
Michael S. Rozeff [send him mail] is a retired Professor of Finance living in East Amherst, New York.