The Financial Industry Conflagration

Ron Paul is a man I very much admire, despite the fact that I often disagree with his positions.  He is nevertheless a principled man, with principled opinions.  His views are extreme, but only insofar as they are classically American.  They hearken back to the early days of this country, and to the basics of our Constitution.  He is an advocate of the freest sort of free-market, a critic of the Federal Reserve, and an isolationist, which is primarily where he and I differ.

His commentary on the current rather terrifying Government bailout of big business is an incredibly insightful look into this crisis.

He discusses the illusion of economic prosperity that Americans have been under.

For years they thought the economy was booming, growth was up, job numbers and productivity were increasing. Yet now we find ourselves in what is shaping up to be one of the most severe economic downturns since the Great Depression.

The reason for this, Paul believes, is exactly the same thing as the Government’s propsed solution.  Government intervention in the free market has artificially inflated prices, made money too easy to come by, and forced banks to lend to previously overly risky buyers.

These governmental measures, combined with the Federal Reserve’s loose monetary policy, led to an unsustainable housing boom. The key measure by which the Fed caused this boom was through the manipulation of interest rates, and the open market operations that accompany this lowering.

The subsequent fall in prices after the burst, Paul believes, will make for both winners and losers.  And on this point I couldn’t agree more:

This lowering of prices brings the economy back into balance, equalizing supply and demand. This economic adjustment means, however that there are some winners — in this case, those who can again find affordable housing without the need for creative mortgage products, and some losers — builders and other sectors connected to real estate that suffer setbacks.

The government doesn’t like this, however, and undertakes measures to keep prices artificially inflated. This was why the Great Depression was as long and drawn out in this country as it was.

Indeed, the Government seems to care far more about the interests of the big businesses who were party to this collapse than to the average American.  I, for one, live in an area where housing has shot up and up and up and has effectively made the town uninhabitable for average working people, teachers, professors, and basically anyone not making at least $100,000 a year.  High housing costs have also driven up rent, which is now almost as unaffordable.  Rich second-homers have moved in, driving up costs even more.

I would like to see the housing costs go down.  Then maybe young families could afford to stay here.  As it stands, it’s pretty much impossible.  Young families are constantly moving, making this town a whole lot less fun and diverse.

Paul also believes that this sort of Government rescue will lead to more risky behavior from the financial institutions, and why wouldn’t it?  If you don’t have consequences for your actions, then where is the imperitave to change?  We certainly (obviously) cannot trust our banking industry to look out for us.

Additionally, the government’s actions encourage moral hazard of the worst sort. Now that the precedent has been set, the likelihood of financial institutions to engage in riskier investment schemes is increased, because they now know that an investment position so overextended as to threaten the stability of the financial system will result in a government bailout and purchase of worthless, illiquid assets.

Using trillions of dollars of taxpayer money to purchase illusory short-term security, the government is actually ensuring even greater instability in the financial system in the long term.

But my struggle comes down to this: Can we successfuly weather a change away from Government interference?  Business seems only too happy to ask Government to step out of their way, while at the same time expecting a hand-out, favorable policies, subsidies, and eventually bail-outs.  In other words, Big Business seems to want to have its cake and eat it, too.  They want the Government out of the way (or in a “support” role) until their scams run amock and then they come running to the Government–and to the taxpayers–to give them their corporate welfare check to the tune of, this time, $700 billion dollars.

Is this a free market?  Well, if free means free money for failed business, then yes.  But it doesn’t if we’re speaking of the sort of free market that depends upon survival of the fittest, wherein businesses that follow bad business practices die off; wherein the winners in a housing crisis born of artificially inflated housing costs are those initial losers forced out of the false market, and the losers are the ones who caused the problem in the first place.

Free markets are based on natural order and  balance.  We need to either embrace them, or cast them away.  We need to either get government out of the interference and corporate welfare game or we need to socialize this country.  We can’t have it both ways.  And free markets don’t necessarily mean no government oversight at all.  Our Government can still have its white-collar police force, making sure that businesses aren’t breaking the law, and that the industries we depend upon are on the up and up.

Paul writes:

It is time this process is put to an end. But the government cannot just sit back idly and let the bust occur. It must actively roll back stifling laws and regulations that allowed the boom to form in the first place.

The government must divorce itself of the albatross of Fannie and Freddie, balance and drastically decrease the size of the federal budget, and reduce onerous regulations on banks and credit unions that lead to structural rigidity in the financial sector.

I agree, but I don’t know how it can be done.  I don’t believe that it will be done.  Will our lawmakers find ways to regulate with intelligence, stripping away old, bad regulations and laws and replacing them with basic rules that actually make sense, or will they simply add new regulations and laws on top of the old ones, creating even more of a behemoth than before?

This is a confusing time in American economics.  A part of me has felt that the free market has been a failure, that corrupt businessmen and corrupt politicians make it an impossible dream–a lovely ideal.  That part of me believes that these businessmen should pay the price, not we tax-payers.  I also feel, when I hear McCain speak of less regulation, that the GOP has been false, that their conservatism has been overly focused on social concerns, and not on the fundamentals of fiscal policy.

They claim they want less regulation, that they are advocates of the free market, but then they propose this enormous corporate welfare project, which sheds a great deal of light on their true nature.  As far as I can tell, the Republicans are only free-market advocates so long as business is good.  They won’t take to the task of letting the sick die so that the healthy can live, and so now we have a business climate that is overcrowded, fragile, and unsustainable.

In forestry terms, it is like an old growth forest that has not been thinned in ages.  All the small fires have been quickly put out.  Before human intervention, there was nobody there to douse these small fires, and so the forest remained naturally thin, and the fires naturally small.  But over the years as fire after fire was suppressed, and foolish legislation prevented healthy logging, the once thin forest thickened, and unsustainably, even dangerously so.  Now when fires sweep through it they are ever larger, ever more deadly.

Now a fire can bring the whole forest down.

UPDATE: Thanks to Mr. Dodds for bringing this latest development to our attention.

Hey, remember Ron Paul? Well, I know you have all been eagerly waiting to hear who he would endorse this election cycle, and he has made his decision: it’s Chuck Baldwin of the Constitution Party! Whoopee! ‘Cause everyone knows Christian theocrats make the best libertarians.

Just goes to show, once and for all, the kind of conservative Ron Paul really is.

Heh.  Which just helps throw me for another loop.