A Crisis of Stupidity

Since the economic meltdown began, we have been treated to an overwhelming dose of Big Government in recent weeks.  President Bush has already signed two bailout bills totaling over $1 trillion and the Fed has been busy pumping hundreds of billions more into banks and mortgage companies in the hopes of staving off disaster.

But where will all this money come from and when does the madness stop?

And none of this has been lost on the presidential candidates, as they have gotten in on the act.  Barack Obama promises massive increases in government spending and has no plans to scale back his proposed spree one bit.  He is still planning big tax hikes and big programs despite the problems.

McCain, rather than being the Anti-Obama, has joined the chorus, also proposing government solutions to the crisis.  His $300 billion plan for failing mortgages sounds like something right out of the socialist playbook.  And with his support of the latest bailout, at a pork-filled $850 billion, McCain has now lost all credibility on his opposition to overspending and earmarks.

With these two, it seems that limited government and the republican ideals of the Founders are dead, maybe forever.  This financial crisis puts us on a dangerous slippery slope, to the dark valley of socialism.

During the 19th and early 20th centuries, the American economy also endured financial panics, as they were called then, in approximate 20-year intervals – 1819, 1837, 1857, 1873, 1893, and 1907.  The Fed was created in 1913 to end this “boom-bust” cycle, which we know hasn’t happened.  But even though many of these early depressions were severe, they did not last long, precisely because American statesmen let the market regulate itself and did not interfere with an infusion of government bailouts. 

But since Woodrow Wilson and the Progressive Era, the ideas of laissez faire capitalism have been shelved, with the exception of the Harding-Coolidge years when a harsh post-World War One recession was overcome in months with a hands-off approach.

During the severe economic crises of the 1920s and 30s, various governments responded in a variety of ways, all using government power to some degree.  Let’s briefly examine two – Germany and the United States. 

After World War One, Germany was in a state of financial chaos.  The Allies imposed a massive reparations plan that would require the Germans to pay for the total cost of the war, with installments lasting until 1989!  The German economy was buckling under the pressure.  So in the hopes of alleviating the strain, and to make their payments, the German government, under a new, and foreign, republican system, cranked up the printing presses.  As a result, hyperinflation set in.

Whereas the German Mark was pegged at 4 to 1 against the dollar in 1921, by 1923 it was several trillion to 1.  People were literally using a wheelbarrow full of money to buy a purse full of goods.  Lifetime savings were wiped out.  There are stories of German families actually burning paper currency in wood stoves because it was cheaper than using the worthless money to buy firewood.  These conditions allowed tiny fringe parties, like the little-known Nazis, to gain widespread support.

When the global depression hit in the late 1920s, the United States responded, initially, with the opposite approach, by tightening up its money supply in what the late great Nobel laureate Milton Friedman calls “the great contraction.”  By FDR’s first year in office, the Fed had pulled a third of the money out of circulation, and that coupled with the massive New Deal programs, which further hampered the economy with higher taxes and oppressive regulations, its little wonder the economy struggled throughout the decade to regain its strength.  A crisis that started in 1929 continued to see unemployment at nearly 10 percent on the eve of Pearl Harbor, despite a major military buildup.

Government stepped in to tackle the problems in both countries, and in each instance government failed.

Our current mess is not so much a financial crisis but a crisis of stupidity.  It is not, as the leftwing press headlines, a failure of capitalism.  Borrowers stupidly took out mortgages that they could not afford and banks and other lending institutions stupidly loaned the money, in many cases pushing prospective homebuyers into even bigger houses.  Now the government is stupidly intervening in the hopes of cleaning up the mess, a mess it has a part in. Washington is asking hardworking taxpayers to step in and pay for the stupid on Wall Street and the irresponsible on Main Street. 

This is the wrong approach.  The federal government must stay out of the crisis and allow the market to correct itself.  These troubled banks and mortgage lenders must be allowed to fail.  Taxes on capital gains and retirement plans, as well as other government restrictions on success, must be ended.  Only then can the economy regain its footing on a sound basis, not one propped up on a house of cards. 

As Newt Gingrich has recently written, we are like someone who continually mops up water as it pours in from a leaky roof, but will not fix the roof, or even admit there’s a problem.  If this isn’t stupidity, I don’t know what is.