President Barack Obama's economic team is pushing to complete a bank-rescue plan that can be twinned with the $825 billion stimulus package being negotiated with Congress to alleviate the rapidly deepening financial crisis. While full details of the rescue haven't been settled yet, people familiar with the deliberations said the package is likely to include a $50 billion-plus program to stem foreclosures, fresh injections of capital into the banks and steps to deal with toxic assets clogging lenders' balance sheets. – Bloomberg
Dominant Social Theme: The adults plan a rescue.
Free-Market Analysis: We get feedback! Some have indicated a discomfort with a rush to judgment as regards America's brand new president – Barack Obama. In fact, we would have to plead guilty – not to a rush to judgment perhaps, but certainly to having a certain discomfort with the kind of cult personality that seems to be building around him. Hasn't America already been lulled deep enough into a "bread and circuses" society? As brilliant as he is, we humbly point out that he is likely still a human being who puts on pants one leg at a time.
But let's focus on policy issues. The number one issue is the economy, and how Obama and administration approach it. Now come reports – on the heels of others – about what he and his administration intend to do. Most of it has to do with additional funding. Money will stem foreclosures, more money will build up bank balance sheets and the money doubtless (though this is unstated) will come from central bank printing presses. Now more from Bloomberg:
Officials "feel like they need to move quickly to provide some sense of calmness and assurance to the market that the government isn't going to let this problem get out of hand," said John Douglas, a partner at the Paul, Hastings, Janofsky & Walker law firm and a former general counsel at the Federal Deposit Insurance Corp.
Good news, surely. We are pleased to see the emphasis on tackling the financial crisis from an adult perspective, and impressed, as we are meant to be, by the alacrity with which Obama has tackled the great problems of the economy. But since we are a free-market oriented paper, we have been compiling a list of our own solutions. For the record, they are:
– Cut taxes drastically, in fact move towards a user-pay system
– Reduce regulation and limit lawmaking
– Reduce government spending
– Let prices fall (more money to spend on other necessary items)
– Reduce monetization by the Fed with an eye towards shutting it down entirely
– Link currency and credit to an asset chosen by the free-market (Honest Money – gold and silver)
The above, maybe with some additions, is a very good start toward bringing the current crisis under control. Let us examine the "bread and circuses" approach the American Obama administration apparently has in mind:
– Cut taxes a little, here and there
– Expand regulation of the financial sector
– Fund green-industry initiatives
– Create a huge public works program
– Micro-manage industries (auto and banking) that have received bailouts
– Monetize aggressively, generating inflation
– Prop up bank balance sheets
– Create a "bad bank" for sour assets
– Continue ad hoc bailouts of both industry and the consumer
– Project confidence in the economy
There. Two laundry lists. We submit, ladies and gentlemen of the jury, that the free-market menu of solutions, despite the pain inherent in its application, is the more cogent, direct and reasonable. All six suggestions are aimed at reducing government involvement in the economy and in the creation of money. Each suggestion is intended to ensure that government lives within its means, and the end result would be an entity that would spend less not more. This would expand the private sector while taking the pressure off the monetary system and ensure that inflation became less rather than more of a problem.
These solutions also recognize that the real difficulties that Western economies face is not one of sour mortgages but have to do with the money system itself. The difficulties have been building at least since the early 1970s, when America severed the last formal link between central banking and an underlying asset. Now central banks are free to print as much money as they want – and they do. Print too much money and you create a euphoria, a boom that turns into a bust. That's what we have now. A bust. A big systemic-wide one. The solution is to reduce the power of central banking and of government in general. That's the free-market approach. It's an approach that encourages personal responsibility and the employ of human action by citizens seeking to satisfy self-interests. The moment someone purports to be more concerned with your interests than their own – head in the other direction.
Let's analyze what is shaping up to be Obama's way. To us it seems all over the map. It is essentially a laundry list of political responses to an economic crisis. Are banks underfunded? Give them money directly to bulk up the bottom line. Are banks then using the money for their own purposes instead of lending? Demand accountability in the form of monthly reports and additional government oversight. Are America's car companies going broke? Prop up the bottom line but demand accountability – which in this case means pushing car companies to build more "green" vehicles.
The administration goes further of course. It plans some sort of nationalized "bad bank" and additional aggressive public works; it even apparently intends to set up a bureaucracy to encourage full-fledged environmentally conscious industries, and will pay for all of this by monetization (unless it radically prunes federal spending in other areas). The result of what the administration plans can thus be summarized this way: bailouts, regulation, oversight and monetization. The result will be more micromanaging of the economy in America and throughout the West, less recovery and more inflation, perhaps even hyperinflation. Is this the preface to another 1919-1923 Weimar Republic experience? Who's interests would that serve?
Yes, even were the administration to monetize its way out of current difficulties, the result would be an aggressive inflation that the administration would then have to confront with various money-draining measures including higher interest rates. This, in turn, would retard whatever progress the economy had made. One step forward, one step back.
We hope we have clarified our criticisms – and made some modestly persuasive arguments in favor of the free-market approach to the current economic crisis. Allowing the private sector to expand by cutting regulation and taxes, and giving it access to sounder money via asset-backed linkages that create honest money – these solutions will help protect what is valuable and allow for a faster recovery. Interfere further in the economy – mandate industrial policies, regulate, monetize, create inflation – this is the recipe for prolonging what is wrong and then for generating, eventually, a further economic contraction.
You see, we are perfectly willing to give the Obama administration "a chance." But there are reasons for our skepticism. For the record, we think he is a lovely man with a wonderful family – and his life is doubtless an inspiration. But if his policies are not grounded in the realities of the marketplace, then they will fail, or at least be less effective than they would be otherwise.