A Review of 2008: A Legacy of Misinformation Continues
By Staff News & Analysis - January 01, 2009

This is the first full-fledged credit collapse and debt deflation since 1930, bringing with it a violent economic decline and a surge of unemployment. How did it happen? For half a decade, a toxic stew of abusive and explosive mortgages, subprime securitization and complicit ratings companies was allowed to simmer, piling leverage on leverage, while credit default swaps spread risk until risk no longer could be traced. This was market failure. But it happened because of a deep failure of the state. The government has the power to prevent such things. But the state abandoned its post. Marching under the banner of free markets, the government turned regulation over to agents of a predator class. Thus the unchecked growth of derivatives, tax havens, regulatory arbitrage and the carry trades. Thus Bernard Madoff, undetected by the Securities and Exchange Commission. In August 2007, the banks peered into their books, where each saw the mirror of the others. None could know what they were worth. Trust and clarity and interbank lending broke down. It took a year, via Northern Rock Plc and Bear Stearns Cos., for the larger world to understand. When it did, panic ensued. And panic is deadly to finance. – Bloomberg

Dominant Social Theme: If only the state could do better!

Free-Market Analysis: Mr. Galbraith is the son of the recently departed economic writer John Kenneth Galbraith and son and father share (or shared) at least one similar trait: They don't, apparently, much like the free market – at least not in an untrammeled form. John Kenneth Galbraith, whose prose was as lucid as his economic views were not, apparently never met a market that was not either entering or leaving "market failure." A young aide to Franklin Delano Roosevelt, he wrote in a way that you left convinced that if only the right hands were at the governmental tiller, the problems of modern society would soon, in some fashion, be ameliorated.

Reading John Kenneth Galbraith's books, with their wry patrician tone, one is impressed by his sweeping grasp of history, especially American history. But put down the book, wait until the daze diminishes and then ask yourself this: Isn't government a great deal bigger than it used to be – and has its expansion improved the quality of life? Chances are you will answer no. The biggest government of all in the 20th century was in Moscow, but that doesn't seem to have made the Soviet Union a pleasant place to live, or even a tolerable one.

James Galbraith would no doubt find the above analysis somewhat unfair – as his point in general is that government must be "good" to be effective. Like his father, Galbraith is obviously a believer in the Well-Regulated State (as opposed to the Predator State) but in reading his work, one begins to believe he has substituted sincerity and disdain for his father's sardonic wit. This does not make his writing or perceptions better or worse, but it probably does make him slightly less fun.

In another part of the article excerpted above, Galbraith writes: The challenge facing the American government now comes in two parts. The first is to maintain spending in an economy that cannot, for the duration, draw spending power from the poisoned wells of private finance. The second part must be to reconstruct the necessary economic functions of government — beginning with effective global financial regulation — for our own sake and as a model for the world. The inauguration of President-elect Barack Obama offers hope that these matters have been understood.

In Galbraith's argument about "maintaining spending," one catches a whiff of the Keynesianism that his father was so well known for. While American revolutionaries in ages past believed in the "perfectibility" of the people, Galbraith and others like him seem to believe in the perfectibility of government. CNN's Lou Dobbs is another one who seems to believe that if only government was better, problems would be reduced. A third individual in this triumvirate is "flaky" Lyndon LaRouche, who has actually provided very interesting historical economic analysis in books and articles. Unfortunately, LaRouche, too, is someone who believes that the solution to bad government is good government. And he has somehow convinced himself that an even more extreme form of Franklin Delano Roosevelt's activist American government is what is called for today.

After Thoughts

The largest economic debacles that face the world on a regular basis are usually the result of government policies, deliberate or otherwise. Even the long-ago Tulipomania of Amsterdam can apparently be seen within the context of certain adjustments that were imposed on the marketplace by the government of that time – which suddenly made Tulips more valuable. In fact, when examined clearly, the "madness of crowds" is almost always sparked by one government policy or another. But for the Galbraiths and their ilk, such a viewpoint will never do. They want the popular madness to be both unpredictable and illogical. That way, the good government can step in and save the day. James Galbraith apparently believes that Barack Obama is a good government type. Good luck.

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