I’ve been viewing the HBO series on John Adams. It is hard not to be struck by the strong belief in principles that the founding fathers were able to articulate and were willing to sacrifice so much for. As regular readers of this blog know, I am alarmed by how rapidly we are squandering our rich inheritance.
For many years, I had been explaining that the knowledge of these principles needs to be “stored” by study and by personal reflection during good economic times. During bad economic times, people lose their heads out of fear. Yet, if enough individuals remain sane—in part because they have stored the seed corn of understanding—then as a society, we weather the crisis. My own fear is that during these past decades of prosperity, we have been squandering—not adding to—our store of the seed corn of understanding. Although we are still at the early stages of our current economic crisis, recent events seem to be bearing out my fear.
Last week in this blog, I wrote of the lawless behavior of the Fed in bailing out Bear Stearns. Taxpayers are to be forgiven if they are more than a bit miffed. As Allan Meltzer, professor of economics at Pittsburgh’s Carnegie Mellon University, observed, “I do not believe the current system can remain if the bankers make the profits and the taxpayers share the losses.”
This week the Bush administration proposed to give the Fed sweeping new powers over the financial system. Yes, the same Fed that helped to create the housing bubble. The same Fed that has engineered, since its creation in 1913, a decline in the purchasing power of the dollar from $1 to 4.59 cents. Gregory Valliere of the Stanford Financial Group aptly draws the parallel that charging the Fed with maintaining market stability “is like putting Eliot Spitzer in charge of the morals division.”
We have gotten the Fed we deserve. We have not understood and accepted the reality of economic cycles. Because of this, the Economist observed in January, 2006, we will ultimately have an ever larger crisis:
How should Mr. Bernanke respond to falling house prices and a sharp economic slowdown when they come? While he is even more opposed than Mr. Greenspan to the idea of restraining asset-price bubbles, he seems just as keen to slash interest rates when bubbles burst to prevent a downturn. He is likely to continue the current asymmetric policy of never raising interest rates to curb rising asset prices, but always cutting rates after prices fall. This is dangerous as it encourages excessive risk taking and allows the imbalances to grow ever larger, making the eventual correction even worse. If the imbalances are to unwind, America needs to accept a period in which domestic demand grows more slowly than output.
Can you imagine Bush, McCain, Obama, or Clinton giving a speech where they explain that our past excesses have created the mess we are in and that more bailouts and cheaper credit are not the way out? The hard truth is that excesses must be liquidated so as to set the conditions for future sustainable growth. You may be thinking that this is not going to happen anytime soon. You are correct.
Even more troubling is that we are seeing early signs of a breakout down in societal norms. Last week the Wall Street Journal ran a front page article about homeowners who have been foreclosed on in Las Vegas. The new trend is for these homeowners to trash the house before they vacate. The article describes such acts of destruction as smashing walls, pouring concrete down toilets, dumped paint on carpets, and leaving behind pets locked in the vacated house.
Rather than being an occasional act, this destruction is becoming so common that banks are offering monetary bribes to foreclosed homeowners if they vacate without first destroying the house. Huh, you might say, how about the “bribe” of staying out of jail? How about the “bribe” of following the dictates of centuries of human morality? Not to worry—if you did destroy the house, banks have declined to press charges. As alarming, some people, such as real estate broker Joe Kraemer, express understanding for the criminal behavior of the foreclosed homeowner:
When you’re losing your dream, and you’re paying all this money to it…and you’re hoping that it’s going to go up, and you’re going to make 100 grand like everybody else did, and it doesn’t happen — you know, people get upset.
You may view a brief Wall Street Journal report on this alarming trend.
So what do we currently have? We have a lawless Fed. We have candidates for the presidency who advocate more lawlessness and who are bound by no principle other than expediency. We have the early stages of a societal breakdown in respect for property. I can point to little that suggests that these trends will change anytime soon—the consequences are likely to be felt for generations.