Lawless Fed, Lawless Americans

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.


16 Responses to Lawless Fed, Lawless Americans

  1. E says:

    Let them eat cake.

  2. E says:

    In other news, Ben Bernanke, Federal Reserve Chairman, appearing to be “in touch” and not at all ten steps behind the average street-person, warned Congress today that the economy may be in a recession. Finally calling a spade a spade after months of shucking and jiving, and hoping not to sound as if he were reading from the White House “Talking Points”, Bernanke openly admitted something 100% of the population and investors already know, “the unemploymnet rate edged down in February and remains at a relatively low level.” Further, “consumers are pulling back” — as if we needed his assessment to realize this phenomenon. Word on the street is that next month, in a bid to sound credible, Bernanke will add 2 plus 2 on a white board in a nationally televised press conference and state, “with concern, the answer is 4.”

  3. E says:

    Whoops, my bad… Ben did say that the unemployment rate was headed down, but they’re actually headed up: “Concerns about employment and income prospects, together with declining home values and tighter credit conditions, have caused consumer spending to decelerate.”

  4. E,

    The Independent in England ran a story yesterday “USA 2008: The Great Depression”

  5. Bob G. says:

    Complex rules and regulations in the financial and tax environments are the result of legislators and regulators trying to engineer certain outcomes or results that the markets and participants in those markets would not ostensibly come to on their own.

    What we lack are guiding principles in these environments that are equally applied to all with no engineering by ignorant and well intentioned or easily bought legislators and regulators by those who seek to slant the enviroment in their favor.

    Information, transparency and consequences for decisions – good or bad, along with the absolute preservation of property rights are the principles which would yield the most robust, innovative and successful outcomes with the highest standard of living across the board.

    The understanding that certain methodologies of risk avoidance, that have pushed it to places that literally do not exist (like some giant ponzi scheme), is one of the biggest illusions ever perpetuated will come in the same way that agriculture gave way to industry and manufacturing gave way to information/technology.

    The frequency of change and current expontential nature of data (not necesarily useful knowledge) has, ironically, made complex orders and environments harder to achieve due to the complicated rules and regulations that are created which act as barriers to creating outcomes that could never be convceived in the minds of the legislators and regulators that we elect.

    Bob G.

  6. Bob,

    Someday the wisdom that you expressed will be easily understood by any citizen of even a modest education. Unfortunately we are at least decades away from that education being the norm.

  7. Jim D says:

    I am often amused these days by the pronouncements of politicians and bureaucrats. Bernanke’s statements that we “may” be sliding into a recession are laughable to those in the classes who have suffered the most: those in the lower end of the economic spectrum working for a living. The price of gas hurts low paid laborers far more than it hurts Ben and his cronies. The rising cost of food hurts waitresses and small restaurant owners more deeply than the executives at Bear Stearns who are still getting bonuses. The construction workers who have been laid off for months now knew quite a while ago that we’ve been in a recession. Because of the delay in reporting numbers, I figure the Fed can be no closer than a fiscal quarter behind in knowing that we are in a recession. Unfortunately, it appears that we are approaching the old time aristocracy, where those at the top (the money managers and top-level buraeucrats) scratch each other’s backs at the expense of the working class. Where is the accountability? What happened to responsibility? Our society has quickly come to demand its “rights” (since when did a guaranteed rise in stock prices become a right?), but quickly screams for bailout when the responsibility for its poor choices comes around. I agree that you will never hear a politician say it or act on it, but the only way to “fix” these problems is to let those who made bad decisions (did people really think interest rates could remain that artificially lower forever?) suffer the consequences. A very simple rule that our founding fathers understood as a core component of a robust economic system.

  8. Jim,

    I agree with you that the split in society is becoming more pronounced between those who work for a living and those who thrive off a rigged game. Allan Meltzer who I quoted as saying “I do not believe the current system can remain if the bankers make the profits and the taxpayers share the losses,” is no radical. He is one of the world’s foremost authorities on monetary policy.

  9. igli1969 says:

    The fact that those elites are becoming more blatant in rigging the game is only exacerbating one of the most corrosive problems our (or any) society faces: envy.

    Envy is not only the political force behind many bad decisions, but as noted in the essay, drives people to do things they might not otherwise consider. The vandalism, IMHO, is a reaction to the perception that, “others are getting away with jobbing the system, and I’m getting screwed.” Which may be true, but most of those people made a bad decision or two along their particular path which more successful people did not. And this envy, along with the despair at losing a dream, pushes some of them to violate the property rights of others. (Yes, some of those “others” are far from blameless in this situation, but that doesn’t change the fact of ownership.)

    I’m currently re-reading Barbara Tuchman’s “The March of Folly.” The theme of the book is governments/rulers making a series of decisions that lead to disaster despite contemporaneous advice to the contrary, and seemingly against their own self-interest. We may be witnessing a new chapter now. It has been said that people get the government they deserve, but I resent getting the government that so many envious voters have dumped on us over the last several decades.

  10. Chris,

    It has been said that the time horizon of a politician is very short–until they have to start campaigning for the next election. In that light their bad decisions, which as you say only exacerbates envy, make sense. Of course a true statesman does not behave this way.

  11. igli1969 says:

    Still, a politician, statesman or not, has a longer time horizon than that of the mainstream media, which is less than 24 hours. The shallow, nearly content-free reporting that characterizes most of what passes for news coverage today drives far too much of the only information flow seen by most people.

    I understand that the majority of people have no interest in taking the time to educate themselves in politics, economics, and the often obscene relationships engendered by the combination of the two. But it seems that, after being slapped about the head and shoulders so many times in the same manner by the politicians and their media enablers, the public shouldn’t get to maintain that they “didn’t see *that* coming!”

  12. I agree, the level of economic illiteracy is simply frightening and it will have grave consequences.

  13. Kevin says:

    Benny is just a fall guy…he will be replaced in a few years….Paulson is really running the show.

    p.s. Just found your blog Dr. Brownstein, I’m one of your former grad students.

  14. Frank v2 says:

    Dr. B et al,
    At some point we are going have to pay the piper. The longer we wait, the more it is going to cost us. As a result of the Fed and its new found powers, our dollar continues to loose strength against the currencies of the world, and lower interest rates do nothing to reverse this trend. Somebody is going to have to own this mess. Unfortunately, I think it will be my granddaughter and the rest of her generation. It is sad that greed and the need for instant gratification have gotten us into this predicament. And now that the “R” word has finally been said, nobody has the appropriate “brass ones” to grab this nation by the boot straps and turn things around. Instead our politicians, regardless of the party they represent, continue to prescribe more of the same drug that has turned us all (present company excluded, I’m sure) into materialistic junkies. As the sign that hangs on my refrigerator suggests: “God bless this mess”.

  15. Kevin,

    I’m glad you found my blog. Your Baltimore Housing Blog is very helpful.


    Very few Americans have not gone through a stage in their life where they accumulated. Nothing wrong with that except when it becomes excessive and it becomes something that you feel others should pay for (bailouts, subsidies etc.)

  16. Frank v2 says:

    Dr. B,
    I concur with your comment. I was not suggesting that there is anything wrong with consumerism. After all it is the engine that drives our economy. I just have a problem with people who buy more than they need or worse, can afford, and then want somebody to make everything OK again when they can’t pay their debts. So to your point, bailouts, subsidies etc, are problematic. We need to take ownership of our own fiscal decisions. That begins at home, but also should be a core value in our government as well. Spending our grand children’s future to make our pain go away today in my mind is a fool’s game.
    Frank v2

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