Ideas to get us out even worse than those that got us in

January 28, 2009|By RON SMITH

Bad ideas abound these days. It's not so much that the people advancing them are stupid, but rather that they can't find many good ones under the circumstances we now face. In the matter of the world's seriously ill economy, for example, virtually all the "experts" - that is, those people whose previous policies and prescriptions resulted in this illness - are joining the chorus singing the Keynesian hymn, "We Must Spend Ourselves Out of Trouble, Dear Lord."

OK, I made that up - the hymn part, that is - but what the mock title pronounces is the plan most economists and virtually all politicians are touting as a remedy for the ailing economy. The newly minted Nobel laureate in economics, Paul Krugman, also a New York Times columnist and a man of considerable leftward leanings, has been nagging our leaders for some time to get on with it and pump ever more newly created debt into the clogged lending system. Most economists, save those of the Austrian School, have come to believe, many with reluctance, that this is the only thing that might work. No doubt you have noticed that, so far, it hasn't. Tax money is funneled in torrents into the hands of private Wall Street bankers, whereupon it disappears: no oversight, no accounting, no explanations required.

The Austrians, disciples of Ludwig von Mises and Friedrich Hayek, not of John Maynard Keynes, have always insisted that the best thing is to let nature take its course, to have economic excesses (bubbles) purged by letting them go "poof"; the incompetent are weeded out and their remaining assets bought by the competent, so the business cycle can resume another growth phase. Unhappily for them, and for the health of the financial system, modern politicians cannot allow this historically natural boom-and-bust cycle to occur without their harmful interference.

Were they to bow to the necessity of letting economic nature take its course, massive unemployment would be the unpalatable result, followed no doubt by monetary deflation and social upheaval. Instead, the present course is recommended, one that, down the road, will almost certainly lead to an accelerated destruction of our currency. One desperate idea being floated inside the Washington Beltway is to create a "Bad Bank," one into which all the most "toxic assets" - loans that will never be repaid - would be dumped. The theory is that the Bad Bank buys the soured loans at market prices from the rest of the banks, forcing them to write off their losses and clean up their balance sheets. They can then be back in business, perhaps as nationalized institutions, another bad idea and one that would put the finishing touches on the plan of taking the risks from private bankers and saddling the taxpayers with them.

When the banking business was booming and the big shots raking in enormous amounts of cash, the last thing they wanted was the government horning in on the racket. But now the racket is no longer profitable, so they welcome anything that will forestall the collapse of their industry.

About the dangers of nationalizing banks, financial writer Bill Bonner says this: "The bankers make mistakes, but at least their intentions are pure; they are motivated by greed. In the fat hands of government, on the other hand, decisions will be more political - they will be made to appease pressure groups, to favor trendy causes or punish opponents. Instead of being driven by naked, honest greed, in other words, the economy will be whipped forward by corruption, favoritism and hidden political agendas."

Speaking of which, Rep. Barney Frank, the Massachusetts Democrat who, as chairman of the House Financial Services Committee, was a chief enabler of Fannie Mae's disastrous lending excesses, has now embraced the notion of giving greater "oversight power" to the Federal Reserve. He would make the Fed a super regulatory agency with the task of managing the entire financial system. The hope is that the Fed could oversee everything better than the numerous federal agencies that screwed up their regulatory tasks beyond all belief.

We're not supposed to notice that the folks bringing us these "reforms" are the same people who constructed and benefited from the system that just broke down. Maybe they - and we - will have better luck with the new one. However, having observed their work for some considerable time, I doubt it.

Ron Smith can be heard weekdays, 3 p.m. to 6 p.m., on 1090 WBAL-AM and His column appears Wednesdays in The Baltimore Sun. His e-mail is

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