“We inflate our paper currency, we repair commerce
with unlimited credit, and are presently visited with unlimited
bankruptcy.”
— Ralph Waldo Emerson, The Young American,
1844
Whether with respect to America’s foreign policy or its economic
policies, more and more conservatives find themselves agreeing with
liberals that many of George W. Bush’s policies are wrongheaded and
dangerous. This agreement was illustrated most dramatically last
week in the U.S. House of Representatives when the left wing of the
Democratic Party coalesced with the right wing of the Republican
Party to defeat the Bush Administration’s bailout of Wall
Street.
Conservatives and liberals alike were repulsed by the
President’s effort to panic Congress and the American public into
ceding him unprecedented power and tax dollars to reward Wall
Street’s high rollers for their bad decisions. Conservatives were
particularly appalled by the complete abandonment of prudence,
common sense and free-market principles in the President’s
proposal. Liberals found the idea of forcing the little guy on Main
Street to bail out fat-cat bankers on Wall Street a total violation
of everything for which the Democratic Party professes to
stand.
The left/right coalition of opposition did not understand the
true nature of the problem, however, and therefore could not
effectively counter the hysterical assertion of the Administration
and the Washington Establishment after the bailout’s defeat that
“doing nothing is not an option.” Nor could Members in opposition
conceive of a truly effective workout plan to substitute for the
Establishment’s bailout proposal, offering instead bailout-lite
alternatives in the form of loans and guarantees. Thus, by
proclaiming that bailing out Wall Street was necessary to prevent
economic devastation on Main Street, the Administration and the
congressional leadership were able to peel away enough votes from
the opposition coalition to pass a plan the Members did not like
and did not believe would work.
Although there remains serious disagreement about what policies
are necessary to solve the immediate banking crisis, there has
emerged, ironically, an ill-conceived bipartisan consensus both
about the causes of the financial crisis and the remedial policies
that should be enacted to prevent its recurrence. This new
consensus blames the financial crisis on lax government regulation
and markets gone wild.
For example, during the first presidential debate, Senator John
McCain said it was “regulatory agencies that weren’t doing their
job that has brought on this crisis.” Governor Sarah Palin followed
up in the vice presidential debate by blaming the crisis on
predator lenders on Main Street, greed and corruption on Wall
Street, and lax oversight out of Washington. Both McCain and Palin
promised to punish greed and corruption with more oversight and
regulation.
This new-found Washington consensus, while in perfect sync with
traditional liberal views, illustrates the extent to which
conservatives have lost their economic bearings. Markets do not
spontaneously go wild, and there is no evidence that the human
vices have become any more prevalent today than they were in the
past to account for the crisis. There certainly was no lack of
government regulation on the books.
THE REASON THE OPPOSITION COALITION fizzled out and the source of
the muddle-headed Washington consensus stem from a failure to
comprehend the true source of the problem — the debauching of the
currency and the resulting boom/bust cycle of inflationary credit
expansion followed by financial panic, which is inevitable under a
central-bank-managed fiat currency. John Maynard Keynes said it
best in 1920: “There is no subtler, no surer means of overturning
the existing basis of society than to debauch the currency. The
process engages all the hidden forces of economic law on the side
of destruction, and does it in a manner which not one man in a
million is able to diagnose.”
There is no doubt with the price of gold soaring from $265 an
ounce in January 2000 to $920 in August 2008, the Fed has debauched
the dollar. A debauched currency corrupts everything it touches,
short-circuiting price signals, aggravating the worst traits of
human economic behavior — greed, gambling, dishonesty — and
clouding the judgment of average people and the most astute
businessmen. Although Alan Greenspan used to talk a lot about
“taking away the punch bowl,” America during the first decade of
the 21st century under his tenure as Fed chairman has been living
on one long spring break, guzzling from a spiked currency-punch
bowl.
If the currency is sound, markets work properly and are robust.
They provide continuous negative feedback, which combines with an
intricate system of market rewards and penalties to adjust
automatically, which provides for “self-control” of human vices as
a result. Properly functioning markets act as a flywheel on the
economy, restraining greed by dampening profits, which in turn
dampens risky and dishonest behavior and channels capital to its
best and highest use. Beyond a basic amount of monitoring to ensure
free information flow and to minimize fraud and corruption, markets
truly are self-regulating if prices are left free to transmit
information efficiently.
When a surfeit of money saturates society, however, these
negative feedback mechanisms short circuit; price signals go
haywire; information is distorted; capital is misallocated; people
make bad judgments and engage in crazy, risky behavior based on bad
information. Positive feedback replaces negative feedback, which
results invariably in a financial implosion. If government tries to
keep the binge going with more hair-of-the-dog liquidity, it only
prolongs and exacerbates the agony. If government tries to correct
the problem with price controls to fix asset prices above
market-clearing levels, it further distorts economic signals and
sends the economy into a tailspin.
IN THE ABSENCE of sound money, there is no other choice but to
restrain people’s behavior and transmit information through
stringent bureaucratic rules and regulations. Yet, regulations
cannot substitute for the discipline that comes with functioning
markets, and in fact the more stringent the regulations are, the
more they diminish economic activity and distort business
decisions. There arises a hue and cry to “deregulate” to prevent
sending the economy into a decline. When deregulation of financial
markets combines with debauchery of the currency, the stage is set
for what we are experiencing now.
Rules, regulations, and laws are a part of the normal civilized
order but to work they must be gentle, select, simple,
understandable, consensual, and they don’t need excessive
enforcement because they support the automatic order, not
substitute for it. They are the rails on which civilization runs,
not the locomotive that drives it. When the automatic order breaks
down, it looks to people as if the gentle, targeted, lightly
enforced regulations/laws are to blame. An uninformed consensus
arises that this mess never would have happened if the regulators
and policemen had been on the job, which misplaces the blame by
mistaking a symptom for the root cause.
The single most important thing Congress can do now is eliminate
the Fed’s discretion to debauch the currency by requiring it to
conduct monetary policy subject to a simple rule that would
maintain the value of the dollar, which will prevent markets from
slipping the traces and running into a ditch. Congress should enact
a law setting the dollar-price of gold statutorily somewhere in the
range of $800 to $900 an ounce. The law also should provide that
the Fed must conduct open-market operations (i.e., buy and sell
federal securities in the open market) so as to maintain the dollar
price of gold within a narrow statutory band about the statutory
price of gold. Markets will enforce the law and automatically
maintain a sound dollar if the law provides further that the U.S.
Department of the Treasury must upon demand redeem dollars for gold
and gold for dollars at the statutory price of gold.
Making the dollar as good as gold once again would hit the reset
button on the American economy and launch it forward toward
stability and prosperity.
