The Price of Excess

Bill Steigerwald
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Posted: Oct 20, 2008 2:59 PM
The Price of Excess

Russell Roberts is pretty good at spreading free-market economic ideas into places where they might not ordinarily be appreciated -- namely, National Public Radio and the op-ed pages of The New York Times. A professor of economics at George Mason University, he is a frequent commentator on NPR's "Morning Edition" and "All Things Considered" and co-blogs at www.CafeHayek.com with his GMU econ department boss and Trib columnist Donald Boudreaux. Roberts has also written three "economic novels," including his latest, "The Price of Everything," which tells the story of how prosperity and growth are created.

I talked to Roberts Thursday by phone from his offices at George Mason.

Q: If you were writing a novel, how would you describe the global financial crisis?

A: Shakespearean. I guess that’s more of a play than a novel. It’s a big cast. We’ve got a lot of players. And what I find fascinating about it is that most commentators, pundits, academics, officials, pick one piece of the puzzle to complain about or hold up to ridicule or blame, when in fact it is a much more complicated situation. I’m a big fan of simplification, because the world is inherently complex to grasp, and to grasp it in any way, you have to simplify. But in this case I think simplification is leading us to confusion about what the cause was and how to get out of it.

Q: Is this a financial meltdown, a total world crisis?

A: The question I’ve gotten recently is, “Does this remind you of 1929?” -- which is a reference to the stock market crash. But what this reminds me of is 1932. In 1932 we had the feeling that we had to do something. The myth of 1932 is that Herbert Hoover did nothing but fortunately FDR realized that something had to be done because otherwise we’d wallow in crisis forever. That’s a myth.

Herbert Hoover actually was quite an activist in trying to turn the economy around. He failed, which is why he wasn’t re-elected. He ran large deficits. Then he tried a tax increase to get rid of the tax deficits. He signed a large tariff. And his Federal Reserve chair under him was aggressively contracting the money supply, which most people feel is the opposite of what he should have been doing.

Q: So they made a serious recession a depression?

A: You could debate for a hundred years as to what would have happened had they done nothing and we’ll never know. What we do know is that FDR came in and tried lots and lots of things. Most of them didn’t work. There was some improvement in the economy and then it started to fall off the table again. Unemployment began rising dramatically until 1938 and then started to go back down again, but it wasn’t like the New Deal was a magic charm. It did not work. But he did something. I think we’re in a similar position today. I don’t even know if we’re in a crisis. What I find depressing about this as a moment in American democracy is the lack of transparency in all of the moves that have been made by the government. ... When the sale of Bear Stearns was managed by the government and many of us, including myself, decried it as an arbitrary expansion of Federal Reserve and government power, we were told, “It had to be done. It just had to be done.” Why? If Monday morning had come along and Bear Stearns had been unable to meet its obligations, they would have brought everybody down with them. So it had to be done.

I have interviewed many illustrious people about how serious a problem it would have been, and many people cannot provide in any detail or provide any evidence other than to say, “Well, they were all tangled up with everybody.” OK, fine. It was a weekend. They were in a hurry. They felt it was a potential catastrophe, so they acted. Perhaps many of us or all of us would have done the same under the circumstances. But ironically, of course, it did not stop the problem. It perhaps made it worse and a sequence of events occurred after that. Each time we were told it was inevitable -- that something had to be done. We had to put Fannie Mae and Freddie Mac into conservatorship. We could not let them fail. We had to bail out AIG. Lehman Brothers we watched go down the tubes; for some reason they didn’t draw the brass ring.

But everybody else got bailed out on the grounds that if we didn’t, it would be a catastrophe. So we bailed them all out and now we have a catastrophe. Now when I say we have a catastrophe, again I think there is quite a bit of non-transparency. There is a claim that credit is frozen. We know that’s not totally true, because anybody can get a house loan right now with 20 percent down and a decent interest of about 6 percent for a 30-year mortgage. So credit markets are not frozen. There’s a claim that commercial credit is frozen -- or banks are not lending to each other. That may be true. I don’t know anything about it, though.

I find it remarkably bizarre that we have given an immense amount of arbitrary power to the Treasury, the secretary (Henry Paulson) and his department on the grounds that otherwise we will have a disaster. We continue to have a disaster. There is no evidence as to the scope of the disaster that made this intervention necessary, just merely the claim that we’re about to have a disaster -- sort of as if the experts don’t have the time or patience to explain to us mere mortals what the state of affairs is.

I find that extremely frightening, to be honest, not just depressing and disturbing and damaging to economic activity in the future, but frightening. $700 billion? Even for the United States, that’s real money. There seems to be nothing we’ll say "no" to. $200 billion for Fannie and Freddie? Yeah, we’ll do that. The Iraq War? Sure, we’re in that. $700 billion in open-ended spending? Yeah, OK. How about some cuts? How about somebody with the maturity of an adult in the political class saying, “You know, we’ve overextended ourselves. We’re going to have to do without something”? Yet this entire problem in many ways is the result of the failure of people to say we can’t have everything. We’ve tried to have everything and now we’re reaping the whirlwind.

Q: What should we maybe have to do without?

A: They say “yes” to every bailout but they don’t say “no” to anything else. They don’t say, “If we’re going to spend $700 billion on buying up distressed assets, we’ll have to have less of something.” In fact, we did the opposite. Every member of Congress should resign in shame over the fact that they refused to pass this bill until it was gussied up with another $100 billion of goodies. That is just a tragic statement about the current state of affairs in American politics. My favorite example is a special subsidy to electric cars. But not just any electric car -- mainly the Chevy Volt. If you want to buy another electric car, you won’t get that subsidy. Too bad. When you have a 400-something page document, that kind of thing just slips through and nobody notices. But a few of us did.

Q: As an economist who understands and appreciates the free market, do you get especially disgusted or depressed about economic crises like this one and how they are handled?

A: Well, they are often used as an excuse to accrue power to particular people to use it to their advantage. We’ve even heard talk that Henry Paulson might stay on in the next administration. Here’s a guy who’s basically destroyed financial markets single-handedly. You could argue that they would have been destroyed anyway, I guess. But he’s done nothing constructive as far as I can tell except we had a good day a couple days ago. (laughs) We’ve had a really bad month. ...

So far, the jury is still out. But so far here is one of the most least-effective Treasury secretaries in American history, who has through a set of actions failed to stem the tide, and perhaps -- and I emphasize “perhaps,” because I don’t want to make a claim I can’t defend -- has caused a large share of it himself through these actions. But either way he has certainly changed, probably for a generation, which is my fear, the mix between government and financial decision-making.

I mean, nationalizing the banks? It didn’t work if the goal was to stop the stock market decline. You have to be careful: the stock market and the economy are not the same thing. The fact that the stock market’s gone down is not proof that it’s not working. But again, I don’t have any data. You got any data? Does anybody have any data? How we’re doing? Is it working? It’s a war mentality. You have the president and his cabinet members stand up and say things like, “We’re working on this. We’re fixing this. We have to take dramatic steps, don’t worry the economy will be stabilized." We’ve got to have some data.

Q: Do you worry that this crisis will discredit what’s left of free-market capitalism’s good name?

A: That’s a good question. A lot of people are sure working hard at it to discredit it. I haven’t Googled it or done a Nexis search, but the number of people who blame this on Milton Friedman -- it’s pretty creative. There are a lot of people who say this is proof once and for all that markets don’t work. Of course, those of us who like the free market can always argue that it’s not a free market, and of course it’s not. The other side can always say, "Well, these are the kind of excesses you get when you don’t regulate and especially when you don’t regulate well." It’s a very, very difficult situation for the average person to make an independent assessment of what really happened.

My worry is that this is going to be a watershed event like the Great Depression was in condemning markets -- fairly or unfairly, and I think unfairly. But it’s certainly going to be the people who are opposed to markets who will want top-down centralized control of things in the hands of experts as opposed to decentralized, emergent decision-making.

The people in favor of the top-down strategy are certainly going to try to use this to their advantage, and clearly have. Having said that, I think both private and public decision-making have much to do with where we are today. The interaction of the two, the innovation of Wall Street combined with the press from Washington for higher home-ownership rates, really was a perfect storm in creating this mess. I think we could easily have had a mess without bad public policy, but it is also clear to me that bad public policy made it dramatically worse by overinflating the housing market through various policies that pushed up the demand for housing and as a result made it much easier to sell securities that were based on risky loans.

Q: Who will ultimately pay the tab for this crisis?

A: You children and mine. Not in the form of debt, which is the standard answer, although they'll pay for that too. But the real cost is, to me, that we will lose the goose that lays the golden eggs -- which is our unbelievably flexible and powerful financial system. We have -- until recently -- had the best capital market in the world. We look across both the stock market down to venture capital to angel investing -- the opportunity to find financing for great ideas was really unparalleled in the United States. That right now is at a standstill. If it does not come back, we will all be poorer for it.

Q: Do you see a silver-lined cloud anywhere?

A: There are a lot of trivial silver-lined clouds that people point to -- things like, “The gas prices are falling!” Yeah, no kidding. When you’re really poor or if there are people who think you are poor, it’s going to reduce the demand for gasoline and bring the price down. Or, my favorite, “The trade deficit is going to fall because of this!” Yes it will. And the trade deficit is a symptom, not a cause. It rose when we were doing well and prospering and now if we do not prosper it will shrink.

In terms of true silver linings, the only real silver lining will be if we learn the appropriate lesson, which is the risk of trying to manage the housing market from the top down. I would love if the people would realize that Fannie and Freddie were intellectually bankrupt as entities and that it was impossible to create a schizophrenic entity that pursued profit and was backed by the government and that we could manage it in a way that would make sure it turned out all right. I hope we’ve learned the lesson that that is a bad idea. If we learn that, that will be the silver lining. I’m not sure we’re going to learn that lesson. The temptation by politicians to create those kinds of entities is very, very powerful.

Q: Is there a basic economic lesson that you wish to heaven -- or hell -- that all Americans would learn from this crisis?

A: One is the one I just said -- the dangers of trying to micromanage the housing market from the top down, which we are very guilty of as a public-policy pursuit. There is another lesson, and I think this is much more of a fantasy if not a utopian point: It would be nice to think that we’ve learned the lesson that we can’t have everything we want. We can’t have infinite housing ownership with no money down and no consequences from it. Both the private and public sector gave in to that. Individuals gave in to that. Lenders gave in to it. It’s a nice thought; it’s not a realistic one. It’d be nice if we could learn that lesson. It’s very hard to learn. We want to find ways to make other people pay for what we want, and that’s a very unhealthy situation.

Q: For the record, how do you define the economics you believe in?

A: I’m what was once known as a “classical liberal” -- I believe in limited government and personal responsibility and I would remind everyone that we live in what is ideally a profit-and-loss economic system. It does not work without losses and this recent debacle is partly in an attempt to avoid losses. They must come, or we will end up living under a state that is much more powerful than it has been in the past and I do not believe that such a state will lead to prosperity or freedom. So I think it’s extremely important to try to return to basic principles. Those principles are somewhat less popular than they were before. I’m hopeful they’ll have a comeback.