When B is A

Friday, October 10, 2008

The real news is all bad this morning, with the headline, "Plan B: Flood Banks with Cash" taking the cake.

Nice. The government, which has precipitated this crisis by meddling with the financial markets -- in the form of vast infusions of capital -- will now attempt to solve it by doing the same thing more quickly and with even less thought! And the clueless media will fixate on the inconsequential details rather than reporting the real story.

The reporting routinely calls this a "panic", which it is, but fails to notice who is panicking or why.For this mess, we can thank two cultural causes: (1) a widespread disdain for abstract principles, helped along with positive feedback from a common inability to use them properly (and thus appreciate their survival value), and (2) the fact that what few principles many people have managed to absorb are often completely wrong.

A few paragraphs from the second page of "Plan B" ought to illustrate this point nicely.

Ideologically, this is not what either Republicans or Democrats would have proposed a few months ago. But desperate times produce desperate tactics.

"The central bankers all learned the lesson of the 1930s," said Robert Barbera, the chief economist of ITG, a Wall Street firm. That lesson was that if the choice is between allowing the system to collapse and writing a lot of checks, you write the checks and forget about ideology.

Unfortunately, none of them learned the lesson of the 1920s, which is that when asset prices soar, it is not a good idea to sit around doing nothing, as the Fed did for most of the housing boom. Cheerleading, which it sometimes did, is even worse.
The first paragraph is pure pragmatism. Abandon your "convictions" when in trouble. Do what seems expedient at the moment. Determining whether your convictions were wrong and, if so, in what way, is a waste of time. Never mind the fact that doing so would quickly reveal that you are about to make essentially the same mistake all over again! So much for the alleged practicality of Pragmatism. And for the notion that blowing off abstract thinking can save time.

The second and third paragraphs illustrate my second point, which Amity Shlaes (paraphrased by Nicole Gelinas of City Journal) backs up with a historic example drawn from both decades referenced above:
Shlaes argues that the 1929 stock-market crash wasn't a well-deserved punishment for Roaring '20s greed. Many profits that drove up the market in those days were real - the result of private-sector managers' ingenious exploitation of new technologies.

Nor did the crash guarantee that a decade of depression would follow. Decision-makers, beginning with Herbert Hoover, helped to make it so.

Hoover wasn't unfeeling or incompetent. Before he was president, he'd been a successful businessman, and had won praise as commerce secretary for his compassion and management expertise when he aided the victims of the 1927 Mississippi flood.

After the market crashed, President Hoover immediately applied this same can-do attitude to the economy. To protect workers, he called upon big businesses not to cut jobs or wages. And to protect big business, he gave in to protectionist sentiment and signed into a law a huge tariff on imported goods.

Hoover wanted to help, but instead, he hurt. The tariff ignited a trade war that harmed companies and consumers. Encouraging employers to keep wages and employment up when the economy couldn't support such measures ensured stock prices' continued fall.

After Hoover, President Franklin D. Roosevelt launched his own wave of economic experiments, detailed by Shlaes, ranging from ambitious public-works programs to fiddling with the dollar's value.

Shlaes makes a good case that Roosevelt didn't do any one thing that protracted the Depression. Instead, with his bold and oft-changing ideas, he created an air of economic uncertainty that was deadly to private-sector recovery. Investors had no idea what might come next, so they were afraid to move on. [bold added]
Our leaders are already acting like FDR, and many economists have obviously never learned the lessons they should have from what history ought to call the "Great, Avoidable Depression". And they never will, until they question whether the government ought to attempt to run the economy at all, be it directly by means of the explicit ordering-around of regulations; or indirectly by the encouragement of poor decision-making of endless, doomed bailouts.

When the government attempts to replace the reasoning of countless individuals by issuing orders to all of them, it attempts the impossible task of performing better than they with a comparatively minuscule number of central planners. Central planners are human beings, and, like you and me, not omniscient. This approach will fail.

And when the government blinds countless individuals to the differences between levels of investment risk by saving some people from the consequences of poor decisions, it also removes (although in another way) what is most needed from the market right now: The careful long-range planning of those in the market who do know what they are doing, all the way from holding the correct conceptions of how to function in business, to intimate "on the ground" knowledge of their areas of expertise.

The government needs to stop second-guessing everyone, and it needs to stop preempting their decisions.

I have often heard some people described as "having more money than sense". That phrase aptly describes our entire economy right now -- thanks to the government forcing it to be that way for everyone, rather than letting things play out naturally!

To end our financial crisis, we (meaning as countless individual free to make our own best decisions) need to throw less money and more sense at the problem, and the only way to do that is for the government to get out of our way.

-- CAV


Chuck said...

In spite of all the recent government interventions, the markets continue to plunge, and companies continue to fail. The government is trying to fake reality, but the market isn't letting them.

It looks to me like the economy is correcting itself in spite of all the government's efforts to prevent it. And when the economy begins, finally, to recover, there will be one final disaster: people will believe, as they did with FDR's New Deal, that it was the government that rescued the economy from capitalism, rather that the truth, which is that capitalism rescued the economy from the government.

Gus Van Horn said...

If you're right about the market, you're right about what will be credited.

Having said that, I wonder how much of the plunge comes from the necessary correction, and how much reflects uncertainty about the sudden lurch towards statism that is occurring in the US.

But still, the government is going to be much bigger and far more involved with the economy after this. There will be serious lasting damage.

Anonymous said...

Have you noticed that the same altruistic idiots blaming overspending and American profligacy, are always, always, always taking about private consumption (McMansions, credit cards, yachts, cars etc.... including what seems to have become the symbol for all of it -- the flat-screen TV) NEVER EVER mention government spending?

I'd like to see the numbers comparing those two.

Gus Van Horn said...

Nor do they, when lower tiers of the government start running into trouble, speak of reducing spending, but only of federal aid!

And look who's first in line.

Mike said...

I posted this over on Myrhaf's blog, but I realize I was actually thinking/reacting to your post here. The Washington Post today ran a column titled "The End of American Capitalism?" The thing that struck me about the absolutely wrong-headed evaluation of the economic collapse in that column was that it was actually impossible to tell whether the writer was just a useful idiot for the socialist left or whether the writer knew full well what he was doing and knew that the only way to defeat capitalism, as Rand put it, was to chain it down and then blame free markets for the resultant turmoil. The Kossacks I'd credit as being useful idiots... nobody who is "in" on the leftist scheme will be given an unfiltered conduit to the world. Too much chance of a loose cannon moving off the message. But the newspaper columnists, who presumably bring more competent writing and analysis to the table? Ellsworth Toohey would be proud, I suppose.

Gus Van Horn said...

Not especially to quibble with you, but I have trouble even letting many Kossacks off the hook.

Socialism has been tried a million times and failed a million times around the world. To not have at least some suspicion of that would require, if not some culpability, a degree of ignorance and mental passivity bordering on brain damage. (And for an interesting glimpse at culpability, look who's bitching about the British bailout plan and consider why they might be doing so!)

Not that this can't happen, thanks to our "educational" system....