The Washington Post editorial board isn’t exactly free-market HQ — so I was pleased to see this sensible editorial, which begins…
The market that failed was not exactly free.
IS THIS the end of American capitalism? As financial panic spread across the globe and governments scrambled to contain the damage, reality seemed to announce the doom of U.S.-style free markets and President Bush’s ideology. But this is wrong in two ways. The deregulation of U.S. financial markets did not reflect only the narrow ideology of a particular party or administration. And the problem with the U.S. economy, more than lack of regulation, has been government’s failure to control systemic risks that government itself helped to create. We are not witnessing a crisis of the free market but a crisis of distorted markets.
It’s true that the Bush administration has stood for light regulation of capital markets. But it did not invent this approach. By the middle of the last decade, experts across the spectrum believed that U.S. financial institutions faced outmoded restraints on their ability to innovate. Thus, the Clinton administration, supported by then-Federal Reserve Chairman Alan Greenspan, refused to tighten regulations on financial derivatives, memorably dubbed “financial weapons of mass destruction” by Warren Buffett. The 1999 repeal of the Glass-Steagall Act, a Depression-era law separating commercial banking and investment banking, passed with overwhelming bipartisan support in Congress and was signed into law by President Bill Clinton.
We’ll never know how this newly liberated financial sector might have performed on a playing field designed by Adam Smith. That’s because government interventions of all kinds, from the defense budget to farm supports, shaped the business environment. No subsidy would prove more fateful than the massive federal commitment to residential real estate — from the mortgage interest tax deduction to Fannie Mae and Freddie Mac to the Federal Reserve’s low interest rates under Mr. Greenspan. Unregulated derivatives known as credit-default swaps did accentuate the boom in mortgage-based investments, by allowing investors to transfer risk rather than setting aside cash reserves. But government helped make mortgages a purportedly sure thing in the first place. Home prices seemed to stand on a solid floor built by Washington.
Government support for housing was well-intentioned: Homeownership is a worthy goal. But when government favors a particular economic activity, however validly, it must seek countervailing control to ensure the sustainable use of public resources. This is why banks must meet capital requirements in return for federal deposit insurance. Congress did not apply this sound principle to Fannie Mae and Freddie Mac; they were allowed to engage in profitable but increasingly risky activities with an implicit government guarantee. The result was that taxpayers had to assume more than $5 trillion of their obligations. Contrast U.S. experience with that of Canada, where there is no mortgage interest deduction and the law requires insurance on any mortgage over 80 percent of a home’s purchase price. Delinquency rates at Canada’s seven largest banks are near historic lows.
The new capitalist model that emerges from this crisis must operate according to more consistent principles. The Fed should set interest rates with the long-run value of the dollar in mind. Government must be more selective about manipulating markets; over the long term, business works best when it is subject to market discipline alone. In those cases — and there will and should be some — in which government intervenes on behalf of social goals, its support must be counterbalanced with taxpayer protections and regulation. Government-sponsored, upside-only capitalism is the kind that’s in crisis today, and we say: Good riddance.
Don’t miss Russ Roberts WSJ op-ed — making a priority point — as a generalization, the best thing for politicians to do is nothing. There are rare exceptions — which are obvious at the time.
People ask me if the current mess feels like 1929. But the right comparison is 1932, when Herbert Hoover was desperately trying anything, anything at all, to get the economy going. The stock market had crashed. The economy was starting to follow it down. So what did Hoover and his fellow policy makers do?
In 1930, Congress passed a massive tariff increase, in hopes of protecting American jobs. Hoover signed it. But it simply accelerated the economy’s slide. The Federal Reserve contracted the money supply, taking a recession and making it into a depression. By 1932, real GDP was 25% lower than three years earlier.
Hoover increased federal spending steadily, including an increase in real terms of about 40% in 1932. At the same time, fearful that deficits were harmful, Hoover raised income taxes.
Nothing worked. So Franklin Roosevelt came into office pledging stronger medicine. Enter even bigger increases in government spending. Government nationalization. Bigger deficits. Destruction of crops and livestock in the name of raising prices. Government-organized cartels. A greater empowerment of unions. It was a whirlwind of activity without any real plan.
It worked for a while, but then, in 1938, the economy turned sour again…
A curiosity of this Presidential campaign has been the way former media idolaters of John McCain have suddenly turned on him. They now claim to be horrified by his choice of Sarah Palin, or by his ad hoc economic decision-making, or his TV ads, or something. Whom do they think they’ve been praising all these years?
The John McCain of this campaign is the same as he ever was. The former Navy pilot’s politics has always been more personal than ideological. His core convictions are duty, honor and country. He has always been passionate to the point of being impulsive, an unguided policy missile until he locks on target. Then he can be tenacious, and sometimes moralistic. These traits have characterized the McCain candidacy for better or worse and, we suspect, would also mark his Presidency. What the media can’t say with a straight face is that they are shocked by any of this; they should admit they’ve simply found a new romance in Barack Obama.
If the 2008 election were solely about character and experience, Mr. McCain would be winning in a walk. Few Presidential nominees have been better known or more admired. A McCain Presidency would have its surprises, but they would not be from personal vice or political scandal. His courage has been tested far more than most — both in a personal sense in Vietnam, and in a political sense during the Iraq war.
Arguably the finest hour of Mr. McCain’s career was his support for the Iraq surge at the height of the war’s unpopularity. It was gratifying to see this virtue vindicated as he won the GOP nomination. But in an irony of history, his very far-sightedness on Iraq and the success of the surge have made national security seem less urgent as Election Day nears. His commanding edge over Mr. Obama as a Commander in Chief seems less compelling to many voters than do their current fears about the economy.
If Mr. McCain does lose, a President Obama would also now inherit a far more stable and pro-American Iraq thanks to the Republican’s efforts and no thanks to Mr. Obama’s antiwar opportunism. In a further irony if he loses, Mr. McCain would return to the Senate and do his utmost to support a President Obama’s campaign in Afghanistan or against Iran. That favor would not be returned if Mr. McCain wins. This too is a sign of the Arizonan’s honorable character.
More…
Which candidate do the rulers of Iran, North Korea and Russia hope to see in the White House? Who do the people of Iraq, Afghanistan, Estonia, Georgia or Poland hope to see in the White House?
It might be — though this is a rear-view-mirror perspective. The trailing P/E could turn out to be tiny in relation to the future actual P/E. I’ve heard several credible forecasts of S&P 500 earnings in the $60 to 70$ range vs. recent consensus forecasts of $95.
But equity markets generally bottom before the indicators turn positive.
Here’s the specifics on this data series:
This metric was created by dividing the PE ratio of the S&P 500 by the price the market will pay for a dollar of long term treasury yield (expressed by 1 divided by the 10 year treasury return.) Numbers indicate the % by which people will pay more or less for S&P earnings versus treasury interest dollars. Thanks to Peter C. for recommending this chart.
You may find this free “401K Calculator” a shock — try it. This was developed by Americans for Tax Reform.
Shannon Love:
This article [h/t Instapundit] shows that the U.S. has a more progressive tax code than the democratic-socialist states of Europe.
Such a state of affairs should not come as a surprise. Our own history shows that the very wealthy benefit from leftist policies of high tax rates, “targeted” taxation and industrial policy.
The ugly truth is that the really wealthy can manipulate the political system to their own ends better than ordinary people. They can lobby for specific tax breaks that only they can take advantage of. They can get government trade protection for their companies. They can get bailouts. If all else fails, the truly wealthy can simply relocate their wealth into whatever area the government policies du jour make the most profitable.
In the extremes, they can simple sit on their wealth and wait for the political winds to change.
The history of Europe since WWII has shown that it really pays to be a big company in a socialist country. Socialists like stasis. Socialist politicians like to guarantee jobs. They like predictable tax revenue. To this end they select a handful of major companies and in return for heavy regulation, protect them internal and external competition. The largest companies in Europe are much larger compared to the size of their national economies than are the largest companies in America. The largest companies in Europe also keep their top positions while a great deal of turnover by comparison occurs in American companies.
America saw the same thing happen between 1945-1980. At the zenith of the Left’s influence in America the tax code grew so riddled with loopholes and shelters that the wealthiest paid little taxes. For three years in the 1970s, Malcomb Forbs, then the world’s richest man, paid zero income tax. After the Reagan tax reforms, such a thing would be unthinkable today.
The Democrats want to put us on a road back to the 1970s when the rich got off scot free, corporations grew fat and lazy behind trade barriers and high taxes, and inflation and deteriorating government services slammed the middle class. It will happen again. The perverse outcomes are guaranteed by the incentive structure built into our political system.
Why do we have to go through all that again?
There are also several very interesting comments.
An ABC reporter notices that Obama promises don’t make sense:
Once you get past the soaring oratory, to experience a speech by Sen. Barack Obama, D-Ill., is to be hit with an astoundingly lengthy list of promises.
“I don’t know how any reasonable person” could think he’d really be able to accomplish everything he’s pledging to do, said the mother-in-law of a colleague, a Missouri woman who intends to vote for Obama.
The following list from just the FLA speech is staggering…
One of the commenters wrote the following:
How Reason Works
What if Obama had the strongest record of bipartisanship in the Senate, with major bills to his credit like the 2002 McCain-Feingold campaign reform, the 2003 McCain-Lieberman climate stewardship and the 2007 McCain-Kennedy immigration reform acts.
What if McCain had the most extreme partisan voting record in the Senate?
What if Obama offered a broad, sensible energy policy that embraced both emerging and current resources, including building the greenest power plants possible with nukes?
What if McCain declared that the nuclear waste technology we’ve invested hundreds of billions in over the last three decades is unacceptable, and refused to build nukes until we invent something better than Yucca Mountain?
What if Obama offered sensible tax policies that have historically led to healthy business growth and financial freedom for more Americans?
What if McCain promised to cut taxes for 95% of us while proposing almost a trillion dollars in new spending?
What if Obama had called for reform and oversight of Fannie Mae and Freddie Mac in 2006 that could have prevented the current financial collapse, only to have his efforts squashed by the opposition party?
What if McCain was the second highest recipient of political donations from Fannie and Freddie in his short Senate career, and had the former head of Freddie heading up his VP-vetting team, and the WaPo published the fact that the disgraced former head of Fannie was a financial advisor to his campaign?
What if Obama had been the leading supporter of the surge strategy that has won the war in Iraq?
What if McCain’s primary claim to fame was his leading the charge to lose the war by withdrawing all our forces in Iraq where Al Qaeda declared their new caliphate?
What if Michelle Obama devoted her time and wealth to charitable organizations over the last couple of decades, and she adopted a Bangladeshi girl with a cleft palate on a visit to one of Mother Teresa’s orphanages?
What if Cindy McCain got a $200,000 raise in her job as a Community Relations Director in a hospital when her husband became a Senator, and once in the Senate her husband put in a $1M earmark for her employer U of Chi Hospital, and she declared that when her husband won the nomination for Presidency was the first time she was really proud of her country?
What if Joe Biden had a proven record of opposing his own party and winning, and confronting Big Oil and winning, and sharing the revenues he levied on Big Oil with the citizens of his state?
What if Sarah Palin imagined we and the French “kicked Hezbollah out of Lebanon” and said President Roosevelt “went on TV in 1929″ (before TV existed) to talk to Americans about the Depression (before FDR became President in 1933)?
Well, hell, I’d vote for Obama. There’s nothing racist about it.
Slate’s chief political correspondent John Dickerson reports on how Slate quickly demonstrated that there cannot be technical barriers as claimed by Obama:
Barack Obama refuses to release the names of the 2 million-plus people who have given his campaign less than $200. According to campaign officials, it would be too difficult and time-consuming to extract this information from its database.
So how come we were able to do it in a couple hours? Not literally—we don’t have access to the campaign’s list of donors—but we created a database of similar size and format in a Web-ready file and posted it online. (You can view a sample text version of it here. The full version is 824 MB.)
But before we get into the technical details (though, if you’re with the Obama campaign and want to skip ahead, please do), it’s worth dwelling on the reasons for the Obama campaign’s reluctance to disclose this information. It can’t be legal: No law prevents Obama from releasing these names.
Politically, there would be several advantages in releasing the names. Obama has campaigned (effectively) on a platform of making government more transparent, citing his efforts to do so in Chicago and Washington as signature achievements. He has also disclosed the bundlers who raise large amounts of money for his campaign. Finally, making the list public would rebut McCain’s broad and unsubstantiated claims that the list (and the huge sums of money it represents) is shot through with fraud.
John McCain released all of their donor data. Similarly, McCain honored his public financing pledge. I don’t recall any pledges that Obama has honored. Speculation: Obama won’t release the data because it will reveal the volume of illegal contributions.
…some droll from Arthur Laffer.
The average deadweight loss from taxation is about 40% — that’s in addition to the waste, inefficiency and overhead exacted by the troll. And the deadweight loss of taxation rises with the square of the tax rate.
Then there is the leadweight loss from regulation.
And if elections are insufficiently depressing, one can study the deadweight loss of Christmas.
Of course, your mileage may vary… as demonstrated by the Seekerblog commenters who seem to favor higher taxes to be paid by “other people”.
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