A Tale of Two Commentators

In the aftermath of reading Lew’s excellent piece on the Fannie/Freddie “Stabilizing Conservatorship,” I then would urge readers to look at the latest socialist missive from Paul Krugman in today’s New York Times. (Yes, that same “Newspaper of Record” that gave us Walter Duranty, Jayson Blair, Judith Miller, and the demand that we believe in Harry Potter Science in order to explain why it enthusiastically supported Mike Nifong in the Duke Lacrosse Non-Rape Case.)

The contrasts are stark. Lew tells us that the real problem ultimately is that of economic calculation, the mainstay in Austrian business cycle theory, and the Austrian view of socialism. When government intervenes and seeks political outcomes in the market, ultimately the economic results come to the fore and expose the malinvestment of resources, and the malinvestment must be stopped or the economic crisis will get worse.Krugman, on the other hand, tells us that the real crisis comes in the lack of regulation in the financial system. What I find interesting is that the response of both Cato and Heritage is pretty much like that of Krugman, who supposedly is their arch-enemy. All of them agree that the fully-socialist FF Gang should be tightly regulated in order to avoid further financial mishaps.

I would like to make two observations here. The first is that most so-called economic conservatives (not to mention the Paul Krugman’s of the world) do not understand the nature of malinvestment. To them, a financial crisis occurs because of lack of liquidity in the system or some other problem that keeps markets from proceeding in an orderly way. As we can see in the latest crisis, both sides agree that more regulation is needed.

What neither side can understand is that in a market in which government stands behind failure, there can be no liquidation of malinvested resources, and that liquidation is vital if there is to be a recovery. When one does not understand the nature of malinvestment, then the response to a crisis is to call for government to try to minimize the damage that government already has caused.

My second observation is that the return to the 1930s-era cherished government controlled financial system that Krugman demands every week in his columns is a call for a return for a pure, government-created and maintained financial cartel. You might remember that the “junk bond” industry arose during the late 1970s and early 1980s as a way for new entities to be financed that could not receive finance under the New Deal system that was in place in the traditional banking-finance operation that dominated Wall Street.

(Krugman apparently believes that news entities like CNN and a whole host of telecommunications and computer entities really did not need to be created, anyway.)

So, contrast the two columns today. One calls for liquidation of malinvestments that cannot be supported in today’s markets. It calls for sound money and the end to financial socialism. The other one complains that the financial system is not socialistic enough.

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6:16 am on September 15, 2008