Hounding Obama 3 – Stimulus?

Like FDR, Obama faces opponents who propose that government should do nothing to resolve the recession. Ellen Fitzpatrick, professor of American history at the University of New Hampshire, on the Lehrer News on February 9, asserted that the problem was that if the government did not bear the burden of rescuing the economy, the American people would have to bear it, which would be unconscionable. Wow!

Who then is it that bears the burden of whatever the government does, if not the people?

It does not matter that the expense of the economic recovery cannot be paid for by the current generation, but must be born by our children and grandchildren. The people will have to bear the burden.

The cost of doing nothing is that all the insolvent banks fail and with them the insolvent manufacturers and services companies. The capital that was invested in them, or rather mal-invested, is then freed to move to where it can be productive instead of wasted. A sudden crash without the prospect of years of recovery efforts would open the doors to a new beginning. Everyone would know the future is up to them. Uncertainty would be gone, and expectations leveled.

Obama's quest for a quick recovery is wrong-headed. We must learn from history or we are doomed to repeat it. Was it not excessive spending and too much credit that got us into this mess? Why does anyone think that curing this mess requires massive credit to get people spending? Rather than that, what will keep a Recession from turning into a horrible inflationary Depression is to turn to capitalism. For once, let us try capitalism!

Laissez-faire capitalism remains, as Ayn Rand once called it, “the unknown ideal.” “The flood of misinformation, misrepresentation, distortion, and out-right falsehood about capitalism,” she wrote, “is such that the young people of today have no idea (and virtually no way of discovering any idea) of its actual nature.” If we are to escape this financial crisis with as little damage as possible, we must learn capitalism's actual nature by studying the great laissez-faire theorists. There is no better place to start than Rand's essay “What is Capitalism?” Dead economist predicts housing crisis 62 years in advance, by Alex Epstein suggested an additional source:

I was recently reading an excellent account of the government-created incentives that helped cause the catastrophic housing boom and bust.

Government-guaranteed home mortgages, especially when a negligible down payment or no down payment whatever is required, inevitably mean more bad loans than otherwise. They force the general taxpayer to subsidize the bad risks and to defray the losses. They encourage people to “buy” houses that they cannot really afford. They tend eventually to bring about an oversupply of houses as compared with other things. They temporarily over stimulate building, raise the cost of building for everybody (including the buyers of the homes with the guaranteed mortgages), and may mislead the building industry into an eventually costly overexpansion. In brief, in they long run they do not increase overall national production but encourage malinvestment.

If this paragraph had been written yesterday, I would admire it as a remarkably precise explanation of recent events. But the truth is much more impressive: it is from a book first published in 1946, Henry Hazlitt's Economics in One Lesson.

It is typical among today's commentators to treat the theorists of laissez-faire capitalism–such as Hazlitt, Von Mises, and Ayn Rand – as somehow refuted by today's disasters, which are billed as a “failure of the free market.” This would be laughable if the issues were not so serious. There has not been a remotely free market in housing and finance, especially over the last decade. And laissez-faire theorists, as Hazlitt illustrates above, have painstakingly explained exactly how government intervention in the economy leads to injustice and disaster.

There is no escaping the burden of unwinding the unwise borrowing and spending. We will be paying dearly for the mistakes of government over the last few decades:

1. Greenspan's easy money, low interest rates and money supply growth
2. The Community Reinvestment Act, intended to give loans to minorities, which had to be higher risk loans, meaning the loans would not be held but sold to third parties, and securitized, spreading the risk over most of the world
3. Jawboning to create an ownership society
4. Creation of Fannie Mae and Freddy Mac, which encouraged even more borrowing
5. Putting too much emphasis on creating jobs and minimum wages, which extracts and redirects money that businesses had other plans for, destroying jobs and reducing our companies' total output
6. Rating agencies Standard and Poor's and Moody's giving sub-prime securities the triple-A rating, totally misleading investors

Rather than telling us the truth, Obama and his friends in Congress Barney Frank and Chris Dodd (who gave us much of the legislation behind the above list), are telling the press that we, the citizens are the guilty ones. We the people caused this recession; we borrowed too much, spent too much. But their cure is over a trillion dollars of new borrowing and spending. Will we be blamed once again what that spending backfires?