Blame the Government

by Murray Sabrin
by Murray Sabrin

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If America were a laissez faire economy, it would be impossible to create the financial bubble we have just experienced.

Critics of President Bush as well as some pundits in the media claim that deregulation and our "laissez faire" economy have been responsible for the financial markets' meltdown. Nothing could be further from the truth.

Here's what President Bush recently told a visiting group of journalists in the Oval Office about the recent $700 billion bailout package:

"We might have done nothing. That would have been utter ruin. Instead, we met the situation with proposals to private business and to Congress of the most gigantic program of defense and counterattack ever evolved in the history of the Republic. We put it into action."

You may be wondering how our grammatically challenged president came up with such an articulate response to a question about his administration's reaction to the financial crisis.

Well, the above was not uttered by Bush but by another president who has been vilified by historians and others as a "do nothing" president, Herbert Hoover. Hoover accepted the Republican nomination for president in 1932 to seek another term in the midst of the financial meltdown that engulfed the United States more than 75 years ago; he made the above remarks in accepting his party's presidential nomination.

The historical record is clear, according to the late economist and historian Murray Rothbard in his classic America's Great Depression. Hoover intervened massively in the economy from the time of the stock market crash in October 1929 up until he left office in March 1933.

Easy money policies

As Rothbard documents in his 1963 study, the financial bubble of the 1920s was caused by the Federal Reserve's easy money policy that pumped up real estate and stock market prices. When the bubble burst in 1929, Hoover did all he could to prop up prices in the name of stability and recovery.

All his efforts failed.

The economy continued to spiral downward. Hoover's legacy was sealed.

However, court historians and mainstream economists have been blaming Hoover's "inaction" for nearly eight decades instead of his big government policies that turned a much needed correction into a full-scale panic and massive depression.

If America were a laissez faire economy (and limited government society), it would be impossible to create the financial bubble we have just experienced. For example, in a laissez faire economy, the federal government would not be able to subsidize housing for families who could not afford mortgages.

In addition, there would be no government-created entities like Fannie Mae or Freddie Mac that could buy subprime mortgages from banks. And banks would not be forced by laws such as the Community Reinvestment Act to lower lending standards for low-income families, many of whom are now defaulting on their mortgages.

So history is repeating itself in terms of the cause and effects of another Federal Reserve-created bubble. How do we end once and for all the booms and busts that have characterized the American economy for decades?

First, a laissez faire economy would end the moral hazard of the financial system and the mortgage market. In a laissez faire economy, banks would not be able to borrow short and lend long, creating a huge amount of leverage in the banking system. There would be no FDIC, which means depositors would have to be vigilant about how their banks are lending their money.

Banks therefore would extend credit only to the lowest-risk borrowers so depositors would have confidence in uninsured banks, knowing that depositors would not tolerate lax lending practices.

Second, in a laissez faire economy there would be no barriers for entrepreneurs to enter the banking business as there are today. More competition would mean stronger banks. Wal-Mart or other enterprises could enter the banking business and compete against the entrenched subsidized financial elites.

No central banks

Third, in a laissez faire economy, there would be no central bank like the Federal Reserve that could print money out of thin air and manipulate interest rates to ridiculously low levels. Instead, interest rates would be set by savers and borrowers, not by the actions of a few unelected members of the Fed's open market committee.

In a laissez faire economy, inflation would be abolished because the dollar would once again be as "good as gold." All dollars therefore would be convertible into real money.

With both McCain and Obama voting for the bailout bill, there is indeed virtually no difference between the GOP and Democratic presidential standard bearers. They are both subservient to the financial elites who influence the federal government's policy agenda.

Make no mistake, we still have one-party rule in D.C., the Washington Party, an observation I made in 1971, when another Republican president, Richard Nixon, turned his back on limited government principles and imposed wage-and-price controls and severed the last link between the dollar and gold.

This article originally appeared in the North Jersey Record.

October 10, 2008

Murray Sabrin, Ph.D. [send him mail], is professor of finance in the Anisfield School of Business, Ramapo College of New Jersey, where he is executive director of the Center for Business and Public Policy. He is the author of Tax Free 2000: The Rebirth of American Liberty.

Copyright © 2008 Murray Sabrin

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