Ghosts of 1929

President Barack Obama is ignoring the causes of the economic crisis.  He is looking for solutions in the Keynesian economic myth that government interventions got America out of the Great Depression.  Yet, the foundation of this economic crisis was laid out in 1938 by the very policies he espouses.

Contrary to the popular myth, the Great Depression was not a failure of markets.  It was the direct consequence of Federal Reserve monetary policies.  Throughout the 1920s, the Fed pursued an “easy-money” policy that caused credit expansion and unsustainable economic growth.  Eventually the expansion ended and America entered a recession in 1929.  That recession became the Great Depression because the Fed allowed the money supply to fall by 33 percent from 1929 to 1932.  As economists Milton Friedman and Anna Schwartz demonstrated, the Great Depression was a failure of government.

Contrary to the current liberal myth, this economic crisis is not a failure of markets nor was it caused by Wall Street greed.  This economic crisis results from massive and sustained government interventions in the mortgage and credit markets and from the easy-money policy of the Fed.  Just like the Great Depression this economic crisis is a failure of government.

A government-sponsored mortgage industry

Government intervention in the mortgage markets began in 1938 with Fannie Mae.  It increased in 1970 with Freddie Mac.  As the federal government implicitly guarantees their debts, Fannie and Freddie took risks that normal lenders would have avoided.  Not surprisingly, they are at the center of the current economic crisis.  But government intervention did not end with Fannie and Freddie.

In 1970, the Community Reinvestment Act forced banks to finance home purchases in all geographic areas regardless of risk assessment.  Beginning in 1977, the Congress of the United States pressured mortgage lenders, including Fannie and Freddie, to increase subprime loans.  In the early 1990s, the Clinton administration designed the National Homeownership Strategy to increase home ownership above the 65 percent mark.  Even the Fed joined in the homeownership frenzy.  In 1992, a Boston Fed study called for looser credit standards in order to enable more low-income Americans to buy homes.  Gradually, banks abandoned prudent lending criteria and loosened lending standards to accommodate the government homeownership policy.

Repeated government interventions in the mortgage business caused a dramatic erosion of mortgage lending standards.  Government, de facto, re-defined mortgage lending rules.  And homeownership became a government-sponsored venture.  So massive is government involvement in the mortgage market that Fannie and Freddie hold 50 percent of outstanding residential mortgages and accounted for 75 percent of new ones in 2007.  America’s residential mortgage business is on its way to becoming a government monopoly.

Subprime lending is a policy tool designed and implemented to further homeownership with “easy-mortgages.”  Subprime lending exists and reached the scale it did because of massive and repeated government interventions in credit markets.  Subprime lending is neither the by-product of a market economy nor is it a consequence of Wall Street greed. Continue reading . . .

Free to work

The European Parliament has voted to end national opt-outs on the 48-hour week, setting up a clash with member states. MEPs voted by 421 to 273 that the opt-outs should end by 2011.

Ignoring the increasing insidious usurpation of accountable democratic power by these tin-pot dicto-bureaucrats, and not even touching upon the fact that these are chains that no other human should ever burden another with, this act shows how utterly out of touch the passengers on the Euro-gravy-train are from the recession that is now striking the people of Europe.

While most people across Europe feel lucky if they still have a job, the European Parliament has once again voted against the interests of the man or woman on the street. Of course union leaders such as Unite’s joint general secretary Tony Woodley are very happy with this turn of events. It would help bring down the more productive non-unionized workers to the level of the unionized workers. Unions are paid to represent the workers, not the rest of us.

France scrapped its 35-hour week for very good reasons. The IMF sums up as follows:

In sum, the 35-hour workweek appears to have had a mainly negative impact. It failed to create more jobs and generated a significant—and mostly negative—reaction both from companies and workers as they tried to neutralize the law’s effect on hours of work and monthly wages.

John Cridland, CBI Deputy Director is spot on when he states that this will “replace opportunity with obstruction”. The question for Cridland and all right-thinking people is: “If your partner has lost their job, should Brussels stop you from putting in extra overtime to support your family?” Exactly.

Found on AdamSmith.org

Failure, failure, failure

Bernard Madoff making off with $50bn of other people’s money; public sector pensions being overpaid; a ’stupendously incompetent’ efficiency drive at the Department of Transport. A pattern is emerging here.

The point of having regulators is so that swindlers like Bernard Madoff get found out. As they say on Wall Street, when the tide goes out, you can see who’s been swimming naked. But the point of regulation is that you shouldn’t have to wait for the next recession to be confident that your money is safe. It turns out that the Securities and Exchange Commission hadn’t actually examined Madoff’s hedge fund since he registered it in September 2006; his audits were done by an obscure accounting firm in a tiny office; and frankly, the list goes on. Sure, it’s fraud. But it’s fraud that was allowed to happen because of a failure of regulation.

Meanwhile, the UK government says it’s accidently been overpaying public sector pensions since the 1970s. But that’s all right – no public sector workers will be asked to repay any of the money. That’s in contrast to all the folk in the private sector who have yet to see compensation for pension fund collapses (brought about largely by Gordon Brown’s tax and regulation of them); or the farmers who had to wait up to two years to get the farm payments they were promised; or all the families on tax credits who were asked for immediate repayment when the Revenue messed up and overpaid them. Continue reading . . .

What is government really worth?

Yesterday I wrote a piece about asking where you should live if you believe in free markets and limited government. And as I said then, Switzerland is often touted as an attractive option.

All the more so, I suppose, if you are super-rich (and I, sadly, am not). One of the interesting peculiarities of the Swiss tax system is that if you are wealthy enough, you can locate there without paying normal Swiss taxes. Instead, you can negotiate a flat-rate annual fee with the government of whichever canton you decide to live in.

Whatever the rights and wrongs of such a system, it does pose an interesting question: if you could freely negotiate a price with the government for the services if offers, how much would you actually be prepared to pay? Much less than you pay in tax at the moment, I suspect.

Indeed, when I think about it, the government really does very little for me personally, given the amount of tax I fork over. There are the roads, streetlights, refuse collection and street sweeping, there is subsidy on my bus, train and tube travel, then there’s London’s parks, the police, and that’s about it. Maybe a very occasional trip to the GP or dentist, but no more than one a year.

No, it’s definitely not a good deal.

Found on AdamSmith.org

The better option

The blogger, Harvard economist, and former chair of President Bush’s Council of Economic Advisers, Greg Mankiw had an interesting piece on his blog yesterday regarding the relative merits of spending increases and tax cuts as ways of boosting the economy. In a nutshell, tax cuts are better:

Bob Hall and Susan Woodward look at spending increases from World War II and the Korean War and conclude that the government spending multiplier is about one: A dollar of government spending raises GDP by about a dollar. Similarly, the results in Valerie Ramey’s research suggest a government spending multiplier of about 1.4…

…By contrast, recent research by Christina Romer and David Romer looks at tax changes and concludes that the tax multiplier is about three: A dollar of tax cuts raises GDP by about three dollars.

Of course, I would argue that public spending doesn’t really boost the economy at all, since it necessarily involves taking capital away from the (more productive) private sector in the form of taxes or borrowing. Public spending also crowds out private spending which, again, would probably have been more effective in boosting the economy. Still – even if you do accept that public spending is an economic stimulus, the research suggests tax cuts remain the better option.

Hat-tip to James Forsyth on Spectator CoffeeHouse

Do markets corrupt?

Certainly, some seem to think so. That all this naked materialism, this incessant competition for the daily necessities of life darken, even blacken, our souls. However, consider the alternatives:

First, if the market corrupts, the various negations of the market corrupt absolutely. Look at fascism. And look at that other hatred of the market that preceded and followed it: communism. I doubt that anyone would posit communism as the fulfilment of character and soul for its victims or agents. Second, if these corruptions must be ranked, it is patently obvious that the communist or the fascist corruption through the negation of the market is significantly deeper, deadlier and more irreparable than the first. That was obvious for fascism from the start and it eventually became obvious for communism too.

The truth is of course that markets aren’t the way in which we compete with each other. Not, at least, in the sense we do under either communism of facism, where we are competing for the set amount of political power over our fellows. Rather, markets are the way in which we cooperate with each other.

Finally, a third corollary: because the free market develops the qualities of taking initiative and making decisions, because it places individuals into relationships with each other, because it is a regime that makes sense only if its subjects relate to one another, the free market remains a factor promoting socialisation, a means of connecting human beings, even of creating fraternity or, in any case, mutual recognition. Hence, it is the opposite of corruption. We should read Emmanuel Levinas on the question of money. He argued that, far from isolating and atomising individuals, money is, in fact, the medium of their interchange. And so it is necessary to conclude that there are good uses for the market, since it is one of the means that human beings have found to resist the all-out war of everyone against everyone else, diagnosed first by Hobbes and then by Freud.

Quite so, markets are (and money simply facilitates) voluntary exchange, something which is at heart simply cooperation with those around you and those further away. Markets are many things of course, they are price discovery mechanisms, they are distribution mechanisms, but their basis is simply humans dealing with each other on a daily basis. And what could be corrupting to the soul about that?

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Found on AdamSmith.org

Good news for patients

According to the BBC, the number of NHS patients choosing to take their public funding to a private hospital (on the basis that the private provider matches the NHS price) has risen ten-fold in the last year or so, to more than 3,500 a month.

There is an obvious reason for that. Private providers, who are motivated by profit and whose livelihood depends on attracting more customers, are far more attentive to patient needs than the NHS monopoly. No waiting lists, private rooms, clean wards, more communication between patients and clinicians – in other words, a better experience all round. And at no additional cost too!

You might think that everyone would consider this a good thing, but unfortunately you would be wrong. Just read the BBC article I linked to above, the implicitly negative slant jumps off the page every bit as much as the organization’s left-wing bias. Take the first paragraph as an example: “Thousands of patients a month in England are using a government reform to get what is effectively private treatment paid for by the taxpayer.”

Couldn’t they just have said, “Thousands of English patients are now getting better treatment at no additional cost to the taxpayer”, instead? Continue reading . . .

Investors Chronicle: Will the stimulus package work?

The fiscal stimulus package announced on Monday by the Chancellor of the Exchequer was nothing if not radical. Rarely has a government let borrowing rip to the extent that Mr Darling is prepared to do in order to stimulate the economy and keep consumers spending. But will it have the desired effect?

You’ll find our thoughts on the matter here, but to help us make sense of this week’s inaugural Big Question are two appropriately eminent commentators: Will Hutton, executive vice chair of the Work Foundation and best-selling author, and Tom Clougherty, policy director of the Adam Smith Institute, a prominent free-market think tank. Continue reading . . .

The police state

The arrest of Conservative immigration spokesman Damian Green MP last week – seemingly for a crime no greater than embarrassing the Home Office – shocked Westminster and has slowly grown into a much bigger story than the government would like. Voices from the every part of the political spectrum have condemned the police’s heavy-handedness and the gross violation of parliament it entailed. The newspapers and their columnists, from Trevor Kavanagh in The Sun to Jackie Ashley in The Guardian, have joined in too.

I’m glad to see people finally waking up to the vandalism the current government and their servants have wrought on the relationship between the state and the individual. If the Damian Green affair changes the way we view authority, and makes voters less willing to trust the police with whatever powers our authoritarian rulers want to give them, then at least some good will have come of it. Continue reading . . .