Mommas, Don’t Let Your Babies Grow Up to Report on the Government’s Financial Reforms
By Robert Higgs on Jun 14, 2009 in Bailouts, Business, Economics, Federal Reserve, Money and Banking, Politics, Property Rights, Regulation, The State
If you do, they will almost certainly disgrace your family by writing reports that can be interpreted in only two ways: (1) the reporter is a shill for the government, passing off government propaganda as news and analysis; and (2) the reporter is dreadfully incompetent and naïve with regard to government policies. Sad to say, many reporters display both sorts of failings simultaneously.
I am provoked to make these observations not merely by having been exposed to the mainstream news media for the past fifty years or so, but also, just this morning, by having blundered across an Associated Press article headlined “Obama Seeks to Overhaul Financial Rules.”
Of course, the headline can’t be accurate. Barack Obama knows nothing about finance, so he would not have the foggiest idea where to start in overhauling the existing financial rules. But let’s be generous. The story attributes to the emperor himself a project that is actually being carried out by his scheming lackeys in the Treasury Department, the Federal Reserve System, and other parts of his vast bureaucracy. These faithful (and some, no doubt, not-so-faithful) servants are of course acting in the emperor’s name, whether or not he understands the details of their machinations.
“The goal,” the article informs us, “is to prevent a recurrence of the economic crisis that erupted in the United States and exploded last fall with devastating consequences still reverberating around the world.” This claim cannot be right. My best guess is that the actual goal is to give the impression of taking actions that will prevent a recurrence of these recent troubles, the better to shift the blame away from the actual perpetrators—various government officials and their harmful policies—and thereby in effect to place the blame on various financial actors and institutions in the private sector (if indeed there remains much of a truly private financial sector in the wake of all the recent government takeovers).
The article goes on to say that “in devising new regulations and oversight, the administration is looking to address four perceived weaknesses in the current system.” Let us briefly consider them.
First alleged weakness:
The need for an all-seeing government entity to detect institutional stresses that threaten the entire financial system. Think of the mortgage-backed securities that are still weighing down bank balance sheets.
Should we laugh or cry? “An all-seeing government entity to detect institutional stresses”? Unless this expression is meant as a joke, the reporter here reveals either terrible incompetence or shameful complicity in spreading government propaganda. The idea that a government agency, or a hundred government agencies all rolled into one gigantic can of red-tape worms, can be “all seeing” in its purview of the country’s financial transactions is ludicrous. We have miles and miles of financial laws and regulations on the books now. Most of them have been in force for decades. We have thousands of lawyers, accountants, economists, and other charlatans working for dozens of government agencies at every level who are, and long have been, charged with ensuring that nobody engages in financial hanky-panky. Did anyone in this kingdom of jobbery foresee the financial debacle that reached crisis proportions late last summer? Did not all of these supposed watchdogs, instead, devote themselves to proclaiming ceaselessly for years on end that everything was hunky-dory and that they had matters well in hand. Are we supposed to believe that these people will now, inexplicably, develop an acute case of competence?
Second alleged weakness:
The inability to step in and unwind large and complex institutions before they fail and become the thread that unravels the fabric of the system.
Ah, yes, we must empower the government to mount preemptive attacks against the greatly dreaded dragon of systemic risk. In this case, however, St. George seeks the power to slay a dragon that exists more in the hyperbole of government press agents than in reality. We have been told repeatedly that the financial system contains a number of large boulders, any one of which might set off a world-crushing avalanche if it were allowed to begin rolling down the hillside freely. But scientific evidence of such potentially destructive big rocks is as rare as hen’s teeth. The tale makes a splendid accompaniment, however, to a raid on the Treasury by a big bank or other mega-institution that, seeing its chance, seeks to snatch trainloads of money while the snatching is good.
Even if systemic risk does exist, why should anyone believe that the fakers and time-servers employed by a government regulatory agency will have the ability to gauge its magnitude and to identify the specific firms that must be eased away from the precipice—always, of course, at the great expense of taxpayers and holders of dollar-denominated assets?
Let’s be frank: systemic risk is the greatest—and perhaps the phoniest—excuse for unwarranted bailouts ever devised by the mind of man. After all, who wouldn’t prefer to cough up hundreds of billions of dollars to ill-managed banks, rather than enduring the collapse of the world economy?
Third alleged weakness,
The undercapitalization of large financial institutions. Heading into the financial crisis, too many banks were leveraged with significantly more debt than equity.
And why, pray tell, did the bank managers think that they did not need more equity? Might the answer have something to do with the various explicit and implicit ways in which the government has placed itself in readiness to bail out a big bank whose ultra-risky bets turn sour? Might government deposit insurance explain why depositors continued to hand their money over to banks run by high-stakes gamblers? If people had known that their own funds were always at risk and that they, and they alone, would have to bear fully any losses that arose, they would not have behaved as they did between 2002 and 2007. Government actions and promises to take the risk out of risky behavior produced exactly what any thinking person would have expected: massive moral hazard. Now, the government’s huge bailouts are validating all the expectations that the banking gamblers and others entertained during the boom, thereby setting the stage for the next destructive, government-induced boom in malinvestments. Moreover, the same government officials who were fundamentally instrumental in making possible the malinvestments of the past decade (and in some cases their chosen successors in office) have the gall to pretend that they are now fixing the system, even as they actually do nothing but reinflate the same ill-fated bubble.
Fourth alleged weakness,
Consumers and lenders whose unwitting or reckless credit and borrowing decisions placed families under staggering debts and contributed to the instability of the financial system. Obama [sic] is likely to recommend creation [of] a financial services consumer protection body with oversight powers over mortgages and credit cards and other consumer financial products.
I tell you, these guys could do stand-up; they’re hilarious. They have the outrageous chutzpah to imagine that they—the most financially irresponsible parties in the history of the world, the very people who control a government whose unfunded obligations run in excess of several times the country’s gross domestic product, the same people who whipped and goaded Fannie, Freddie, and the banks to dish out these dodgy mortgage loans in the first place—will henceforth oversee how private lenders and borrowers conduct their transactions, to insure that everyone acts with becoming prudence and responsibility. Ha ha ha ha—I’m rolling with laughter, I tell you. Does anybody take such drivel seriously? Really, anybody?
Well, okay, maybe the reporters for the mainstream media do. At least, they continue to file their reports with straight faces. But behind the scenes, Barney Frank, Chris Dodd, Chuck Schumer, and the rest of the congressional carnival barkers have to know better. They also have to know, however, that even though they played key roles in shoving first the financial system and then the whole economy over the brink, they have emerged from the mess that they made smelling like roses. They still have their power; the campaign contributions from the fat cats keep pouring into their coffers; and they continue to drive the Obama administration’s make-believe financial-reform bills through the congressional maze toward their ultimate enactment as the next round of bad financial law—the selfsame sort of bad law under which this country has suffered ever since Ben Cohen, James Landis, and Tom Corcoran fired up this destructive locomotive during the early New Deal.
Don’t expect the financial reporters to make any sense of all this, however. The evidence seems overwhelming that they are either clueless or co-opted by the government—and quite possibly they are both.
Devastating! The media bigwigs and their pathetic “reporters” don’t know enough to be ashamed of themselves. As a former reporter, I am embarrassed by my old profession.
Sheldon Richman | Jun 14, 2009 | Reply
This is an amazing piece, thank you. I believe you not only hit every nail on the head but managed to land a few blows on the guilty as well.
Jr Deputy Accountant | Jun 14, 2009 | Reply
Fantastic Article. It is such a pleasure to have someone write who actually has and shows common sense. Kudos to you!!!
Frank Coll | Jun 15, 2009 | Reply
Please submit this article to Counterpunch, NYT, The Conservative, San antonio Express News(?), etc. , while I send and hand out copies to friends everywhere.
richard smith | Jun 16, 2009 | Reply
Hunky-dory? Do you youngsters know what that means? it reaches back to my age category. A-OK has pretty well taken its place. Robert Higgs knows whereof he speaks.
I have used principles of engineering to determine economics more than finance, which is not the same as economics. A fair share of financiers have very little understanding of the principles involved in economics which is subject to the laws of physics the same as engineering is. You cannot bend those laws to suit your fancy. Also a lot of economist are like many “experts” They have learned more and more about less and less till they know practically everything about nothing at all, least of all the source of prosperity.
Roosevelt launched the New Deal. My great Uncle, 83 at the time, said if we have three Democratic administrations in a row it will change our form of government. Was he right? I think he was.
Roosevelt planted the seed and set the course for our current financial difficulties. One of the things he instituted was get big or get out. This caused undertows and eddies in the flow of commerce. The banks kept merging and merging till they were top heavy and root light. The government took more and more control which pushed more and more mergers till we have a virtual monopoly run from Washington. This could not have been done except we disregarded our own Constitution.
In the northern winter our lakes freeze over till they can support the weight of traffic. In the spring that ice begins to thin till it will no longer safely support traffic. All the hot air coming out of Washington is thinning the ice that supports our economy till, sooner or later, we are going to break through and drown. The ice is getting pretty thin and we need to get our feet on solid ground.
The government hires bureaucrats to run its business. These are employees, not CEOs who come up with concepts and take risks that grow into huge businesses producing thousand of opportunities for employment. Every business traces back to a single mind but that single mind cannot do all the work that needs to be done. There is nothing in our bureaucracy to generate these concepts. Therefore we need to keep our government functioning as a referee, not as the CEO. There is room for much more thought in this line and if we want everything to be hunky-dory we will put effort into it.
Richard L. Whitford | Jun 16, 2009 | Reply
While as far as we can tell this is 100% true of the criminal aspect of government. Being the actual source, and the House and Senate in particular, that no action to prosecute is being considered only predetermines the total failure of our government as a trustworthy body of moral men and women.
To say Americans have been duped and the game rigged is a gross understatement.
Chris Thompson | Jun 16, 2009 | Reply
Fed Chairman Ben Bernanke was interviewed on “60 Minutes” and he talked up at least the first three points. He wants more regulation, the ability to “wind down” companies in trouble, and of course, the Fed needs to keep a sharp eye on a bank’s capitalization! I think the job has gotten to him. Driving the truck is not the same as studying it.
Reuven Koblick | Jun 16, 2009 | Reply
Time will tell us both if what Obama is doing will work. He certainly is attempting something of unprecedented scale. I hope he succeeds.
Joel Parkes | Jun 16, 2009 | Reply
Joel, if you need time to decide then you will not succeed.
M W Baumeister | Jun 16, 2009 | Reply
Richard, a great reply. The most useful course I ever took as an engineering student in Golden, CO, was Economic Analysis and Investment Decision Methods by Frank Stermole. We learned about the time-value of money, the effects of compound interest, how to evaluate two mutually exclusive projects, lost opportunity costs, etc. All good stuff I still use today.
Too many people think next year’s money is worth the same as this year’s! They talk about a break-even point in five or six years as if it were a good deal.
Simple equations—but they give you big power. I just know that anyone who drives a hybrid does not understand or care about economics.
Greg Staff | Jun 17, 2009 | Reply
Mr. Higgs and Students of Richard,
I’m not yet 35 and may be too young to remember, but I don’t think the mainstream media was considered biased to the left until very recently, maybe the Nixon years. They don’t report the way they used to, that’s for sure. These days they summarize White House press releases and, when it comes to explaining causes and effects, they regurgitate the generally accepted public consensus. That seems to be what you were quoting, an innocuous presser summary. If the media is truly a southpaw, it should be jumping all over Obama’s ongoing failure to impact much of anything.
You quote the reporter: “The inability to step in and unwind large and complex institutions before they fail and become the thread that unravels the fabric of the system.”
What, instead, should the reporter write? Would AIG’s complete failure not unravel a thing or two? Would it’s failure not most likely result in other failures? AIG was involved in a lot, and a lot was involved with AIG.
I see where you’re going: He could have said, “They want the ability to take control and attempt to either execute a peaceful breakup.” Or maybe you’d prefer, “They want the power to step in with their bureaucrats and screw things up more.”
As for what you consider the underlying cause of the current situation, you yourself sound like either a yes-man spewing hyperbole or a naive functionary. The government giving incentives or easing restrictions to encourage lending to poor people is not the same as forcing it upon banks. Private companies, acting out of self-interest (”GREED” and “moral hazard” are useless expressions) engaged in that breed of lending with hopes of making money. Those brilliant businesses of one mind, capable of innovation and generating millions of jobs, lent to people who couldn’t pay them back.
I agree that the banks had no incentive not to take silly risks. The point of backing investments was to prevent bank runs. Some great economists argue that the Fed’s creation was unnecessary, that the bank runs would have been solved by competition. That’s probably true of today. Whatever the case, the Fed is a government agency that was primarily created and conceptualized by the private sector. JP Morgan’s own founder was a key contributor to the Fed’s original design. It’s unrealistic to separate the government’s role as regulator of industry from its indispensable role as guardian and servant of industry.
You need an army to protect foreign investments and secure markets; you need roads to transport goods and move consumers; you need courts to uphold contracts; and you need police to protect property and keep the peace required to encourage going out and spending money.
If business is to be left alone to work it’s magic and maximize value, it should be left alone completely. Private army’s and police to enforce contracts by whatever means necessary; private fire companies (like the old days); and privately built and maintained roads (no more unnecessary projects!).
The U.S. government was intended to carry out the interests of its citizens. In the economic world, in which everything participates, the government is not a business as much as it is a non-profit spread-risk pool. The CEO analogy doesn’t work—the gov’t is not a private company. It generates most of it’s money through donations. It needs enough money to continue operations and promote the interests of its donors. The ultimate goal is not simply profit. Taxpayers invest too much money and blood to see themselves merely as stockholders waiting for a dividend. As a country assumed to be governed by its citizens, we are the contributors to, and (in theory) the beneficiaries of, this spread risk pool. We all agree that certain things are needed and so we pool our money. (One giant keg party.) Acting out of self interest, we can’t necessarily consider the government successful if businesses are doing well. But that’s not to say we don’t want that. I could go for a mere dividend right about now.
Francis Cid | Jul 10, 2009 | Reply