Obama promises to end bailouts 'once and for all' … President Barack Obama (left) promised an end to taxpayer-funded bailouts "once and for all" as the US Senate prepared to start debating this week an overhaul of the financial system to restore confidence in Wall Street. Mr Obama called on Congress to pass the most wide-ranging changes to oversight of the financial market since the Great Depression and said the changes would help revive the economy and "put an end to the cycles of boom and bust … In the absence of common-sense rules, Wall Street firms took enormous, irresponsible risks that imperiled our financial system – and hurt just about every sector of our economy," said the president in his weekly address. "Some people simply forgot that behind every dollar traded or leveraged, there is family looking to buy a house, pay for an education, open a business, or save for retirement." – UK Telegraph
Dominant Social Theme: What must be done.
Free-Market Analysis: We think President Barack Obama's statement that the upcoming US financial regulation bill could end boom-and-bust cycles is an unfortunate one. It illustrates a fundamental rhetorical dishonesty, because even the socialist economist John Maynard Keynes did not directly associate regulatory policy with ending the business cycle. For Keynes, a recession was merely an indicator of lagging demand, which could be rectified having central banks rev up the printing presses. For free-market economists, recessions were an inevitable outcome of central bank manipulations of the money supply.
First too much money is printed causing a boom, according to free-market economics, and then, eventually, the mal-investment from so much money causes a fairly severe downturn. The solution, Austrian, free-market economists proposed, was to do nothing – to let the economy unwind the mal-investments so that new capital could flow to healthy enterprises. Unfortunately, today, as before, central banks have flooded Western economies with fresh money, which has seemed to promote a "recovery" but which has actually just frozen the mal-investments in place and set the stage for another boom-bust cycle, an even more extreme one.
It's not as if Barack Obama, who is a very smart man surrounded by smart people, does not know this. As libertarian Congressman Ron Paul (R-Tex) has pointed out, those running the Federal Reserve and those in Congress involved with monetary issues are well aware of the business cycle and free-market business cycle analysis. Yet one only has to look at textbooks and the larger economic and policy conversations of the 20th century to see that an Austrian analysis is almost entirely lacking. Only the Keynesian perspective is well represented. And at the governmental level this obviously continues to be the case. Here's some more from the Telegraph article:
With negotiations between Democrats and Republicans on the details of a 1,300-page reform bill continuing late into the night, there were hopes that it could be taken up as early as Monday. "We are going to get this bill, I think in the next few days … and it's going to be a major achievement for this country," said Democratic Senator Chris Dodd, the chairman of the senate banking committee on NBC. "We need to get on with this. It's 18 months since someone broke into our house and robbed us and we haven't even changed the locks on the door."
Richard Shelby, a Republican senator from Tennessee who has led months of negotiations with Mr. Dodd, said: "We are getting there, I think conceptually we are very, very close. We are trying to improve two or three things in it, but we are closer than we have ever been." Amid voter fury about the billions used to revive banks, which quickly returned to profit while the regular economy continued to suffer, both parties have vied to portray themselves as the defender of ordinary man.
Republicans said that the bill drafted by Mr. Dodd did not do enough to ensure that no institution became so large that its failure would endanger the whole economy, as happened in late 2008 … Republicans have also raised objections to a provision that would set up a $50 billion industry-supported fund to cover the cost of liquidation of failed financial firms, arguing it would set up a permanent bailout of Wall Street banks. Mr. Obama has said the accusation is "simply not true."
Regulation as a methodology for curing the central-banking induced business cycle simply doesn't work – because it is not a monetary solution. But we can see in the last paragraph of the above excerpt why regulation is so attractive to the powers-that-be. Republicans rightly observe that a "$50 billion industry-supported fund to cover the cost of failed financial firms" is a recipe for continued bail-outs, not for ending them. Now the federal government will have the wherewithal to proclaim a company a failure and begin to unwind it. This procedure opens tremendous avenues for abuse and political shakedowns
Only free-market economic analysis explains what has regularly gone wrong with Western economies over the past 100 years. Prior to central bank induced booms and busts, the business cycle existed but in a far more milder form (absent government interference) and was regional in nature as well. In fact, much was regional, including interest rates, inflation and other monetary factors as money was not a uniform commodity organized by a centralizing bureaucracy. Among the other problems with the coordinated activities of central banks is that they replace myriad money effects with powerful single surges. When one country heads downhill, others follow. Central banking policies are all interlinked and each does what the others do.
Policy-makers continually claim to be puzzled as to how subprime mortgage-contagion spread from the US to everywhere else in the world, but one reason that helps explain it is this inter-relatedness between economies. Policy-makers, as well, are prone to maintain that this inter-relatedness is merely a result of modernity and cannot be helped. But that is not true. The inter-linkage between economies and monetary policy is deliberate and man-made. Absent money-tampering and centralization, economies would be a good more robust.
Proclaiming that regulation will do away with boom-and-bust cycles does not make it so. But what is perhaps more important is that many people have learned about free-market economics thanks to the Internet. Thus the rhetoric of the leadership class is not only less persuasive, it can be seen increasingly as downright meretricious.
One of the problems with the current sociopolitical conversation is that the increasing knowledge is giving rise to real impatience with the proposed solutions of the political class – not just in America but throughout the West. As the Internet continues its process of free-market education (as it has for several decades now) the tension will continue to rise between a populace that increasingly knows better and their leaders who are still playing by an old-fashioned rule-book. Keynesian curatives were never intended as a panacea but as a method of imposing further control. As Keynesian rhetoric is increasingly seen as dishonest, the ability of the power elite to promote traditional public rhetoric will contract accordingly. The process will continue until a tipping point is reached at which time, hopefully, the conversation will grow more rather than less honest.