STAFF NEWS & ANALYSIS
Revolt of the Nihilists
By - October 02, 2008

House Republicans led the way and will get most of the blame. It has been interesting to watch them on their single-minded mission to destroy the Republican Party. Not long ago, they led an anti-immigration crusade that drove away Hispanic support. Then, too, they listened to the loudest and angriest voices in their party, oblivious to the complicated anxieties that lurk in most American minds. Now they have once again confused talk radio with reality. If this economy slides, they will go down in history as the Smoot-Hawleys of the 21st century. With this vote, they've taken responsibility for this economy, and they will be held accountable. The short-term blows will fall on John McCain, the long-term stress on the existence of the G.O.P. as we know it. I've spoken with several House Republicans over the past few days and most admirably believe in free-market principles. What's sad is that they still think it's 1984. They still think the biggest threat comes from socialism and Walter Mondale liberalism. They seem not to have noticed how global capital flows have transformed our political economy. We're living in an age when a vast excess of capital sloshes around the world fueling cycles of bubble and bust. When the capital floods into a sector or economy, it washes away sober business practices, and habits of discipline and self-denial. Then the money managers panic and it sloshes out, punishing the just and unjust alike. What we need in this situation is authority. Not heavy-handed government regulation, but the steady and powerful hand of some public institutions that can guard against the corrupting influences of sloppy money and then prevent destructive contagions when the credit dries up. – David Brooks, New York Times

Dominant Social Theme: Let the Republicans do the right thing.

Free-Market Analysis: Global capital flows have indeed transformed the American economy, and other Western economies as well. But where do these capital flows come from? Watching the American debate over the economy has been dispiriting because even with the addition of the recent Libertarian presidential campaign of Ron Paul (R-Tex) (who ran as a Republican) the larger US punditry doesn't seem to have a clue.

The latest breakdown of what passed for economic debate in the United States over the current economic "crisis" has seen the "right" square off with the "left" – mostly over regulations. The regulations in question include those that did away with certain regulatory barriers between banks and brokerages and those that nudged the largest American banks and quasi-government mortgage lending entities Fannie Mae and Freddie Mac to provide large loans to fairly impoverished families.

On the left side of the American spectrum, the reaction has been just as clear and unfortunately ill considered. For American leftists the problem very obviously is not enough regulation and too much greed. The answer is first a government bailout and then, eventual, prosecution of selected individuals to make sociopolitical points about the way the economy and government should interact.

Lost in this right-left debate is the reality of how economics works and what ought to be discussed. The initial starting place of the left is greed and deregulation. The initial starting point of the right is too much regulation and social engineering, ill applied. But these perspectives are actually only variants of the same vision, and that vision is presented as a sliding scale of government activism.

Because neither Republicans nor Democrats will discuss the underlying problem generating the crisis, the overprinting of money by the American Federal Reserve, the debate has a certain sterility and the outcomes have the quality of a cul de sac. What the House Republicans did in rejecting the "bailout" package was probably the right thing, philosophically, but the refusal to engage in any forceful explaining of the underlying problem has rendered this position illogical to many.

Not to fear. Sooner or later, the US Congress will likely pass a bill that gives the American executive branch much of the power it wants to spend US$700 billion as it wishes. This position is likely more reasonable, in an economy awash with "money" because it is an attempt to deal with economic reality. But the conclusion that will be drawn by tens of millions is that economies are prone to failure and that the government must step in.

In truth, the debate should have been over the policies of the Federal Reserve and over the necessity and advisability of central banking itself. But the spectacle of the banking establishment itself providing the trail forward has essentially blocked that direction of inquiry. (How can you have a public discussion about underlying economic problems when those who created those problems are an inextricable part of building a consensus solution?) Absent a real discussion about the grave issues facing America, and the West in general, the problems that have occurred will continue to reoccur as the business cycle spins.

After Thoughts

Each time that central banks "prime the pump" and create too much money out of thin air, the business cycle is reignited. A sector is inflated and then exploded, investors lose money and industrial sectors and even nations teeter. The solution is eventually provided: grand government actions and financial consolidation. Unfortunately, these actions become evermore radical and drastic in size and scope.

Centralization is the inevitable outcome of a fiat-money system because the problems posed by the overprinting of money can only be dealt with in two ways: shutting down the central banks printing the money or using the power of government to help them print more money and extend more credit. People grow infuriated facing endless economic "crises" because they know something is missing in their frame of reference but they can't put their fingers on just what. And so the cycle turns, with solutions as phony as the faux problems. Meanwhile, the real economic and sociopolitical freedom in the West erodes. Even more tragically, lacking the frame of reference to understand real problems, people deprive themselves of the defense against inflation and central-banking monetary debasement that gold and silver can provide.

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