Fair Weather Friends of the Market
Many, it appears, have simply panicked. Starting late last summer, the financial markets began to exhibit tremendous volatility, officials at the Fed and the Treasury began to act as if imminent disaster loomed, and media commentators and reporters completely lost their composure. Even people who should have known better began to talk and to act as if the economy stood on the brink of complete collapse unless the government took unprecedented actions immediately. When one extraordinary action failed to calm the waters at once, another extraordinary action was taken, then another, and another.
We now look back on four months littered with ad hoc bailouts, new regulations, institutional takeovers, a gigantic bail-out statute, massive lending, asset exchanges, and loan guarantees never before made by the Fed and the Treasury – all on a scale that no one foresaw six months ago. We might understand that the big bankers and other financial masters of the universe who had got themselves and their mega-institutions into such deep trouble would have worked hard to create a sense of crisis and to exploit it as a pretext for cushioning their slide from the financial pinnacles — peaks so high that the air is thin and the brain does not function effectively, so that even such workaday necessities as due diligence are overlooked. Blessed with friends in high places, these financial titans snatched loot by the hundreds of billions while the snatching was good.
But why have free-market economists and other commentators expressed approval of this blatant piracy? It now appears, I am saddened to report, that these free-market experts were not so expert after all. Indeed, many of them seem to have failed to understand how markets work and how government actions can hobble or kill those workings. Many have talked as if they actually believe in vulgar Keynesianism or other crackpot ideas — about “systemic risk” where none exists or about “missing markets” for poor-quality assets that only a fool would try to sell privately when the alternative of a munificent government buyout shimmers on the horizon.
Despite the evidence of how counterproductive all of these frantic government actions have been, of how they have served above all to produce “regime uncertainty”about what the rules will be tomorrow or the next day, and thereby to paralyze private arrangements, the market’s fair weather friends are now clamoring for various species of government “stimulus” as soon as the Obama regime takes power. Of course, the Obamistas’ motives are purely political, as befits a pack of office holders and their lackeys, so it is pointless to indict them — a rattlesnake is not to be blamed if it strikes, because its nature impels it to do so. But why are well-known free-market economists going along with this nonsense?
Back in my days as a professor, I always endeavored early in the course to teach my students the fundamental importance not only of the first laws of demand and supply, but also of the second laws of demand and supply. Thus, the first law of supply states that the greater the price, the greater is the quantity supplied per unit of time, other things being equal. And the second law of supply states that the own-price elasticity of supply is greater, the greater is the time allowed for response to a change in price. The first and second laws of demand are expressed similarly, mutatis mutandis. Thus, although we can expect markets to respond to price changes, we must recognize that the responses take time; and the greater the time, the greater are the responses. Anyone who expects markets to restore a disturbed equilibrium instantaneously will be disappointed. People cannot discover the relevant changes, confirm and assess them, consider alternative arrangements of their affairs, and carry out those changes in an instant. The competent economist appreciates the necessity of patience in evaluating the market’s operation. Simply because the market does not appear to have reconfigured itself fully soon after a shock, we have no warrant to conclude that “the market doesn’t work anymore” or that “the market doesn’t work the way it used to.” Such statements manifest an economic crackpot, and economists who talk this way discredit their professional competence.
A clever riposte, of course, is the one that Keynes himself famously made in response to criticism of inconstancy in his views: “When the facts change, I change my mind. What do you do, sir?” Glibness, however, is a poor substitute for good sense, and Keynes’s critics were right to call him to account for his frequent shifts with the winds of events and intellectual fads. Nothing that has happened recently invalidates in the slightest the solid corpus of sound economic understanding. Indeed, such understanding allows us to comprehend how a variety of government policies created the incentives that, by various paths, led to the current difficulties; and such understanding informs us that piling new, equally foolish polices on top of the ones that got us into these straits is a recipe for short-term salvation at best, and for long-term troubles galore, even if the short-term “stimulus” should appear to have the desired effects.
Decent analysts know these things; I am not breaking new ground here. So, we can only shake our heads in wonder when we see well-known free-market economists and other formerly sound analysts and commentators embracing unsound and ill-considered positions. Among other things, we must appreciate that the sky is not falling, even if the news media and the politicians talk and act as if it is.
Yes, house prices have fallen substantially, but what did people expect – that the bubbled-up values achieved between 2001 and 2007 would be sustained forever or rise even more preposterously? We are witnessing a correction. If real estate prices have been driven up absurdly by easy credit, reckless lending, and silly expectations, then real estate prices must come down substantially. To act as if prevention of this correction represents the sine qua non of recovery is to begin one’s journey on the wrong foot. And to suppose that throwing taxpayer money mindlessly at real-estate-based securities or at people who cannot afford to make regular mortgage payments only portends a new and greater collapse of house prices later on.
Of course, the new New Deal idea of the Obama regime’s “creating jobs” by bankrolling infrastructure “investments” might as well come with a written guarantee attached that it will generate nothing but resource waste and the pork-barrel distribution of vast amounts of taxpayer money to satisfy the appetites of congressmen, local politicians, construction unions, and real-estate interests. Even if a road, a bridge, or a sewer system ultimately comes forth as a visible result, the unseen alternatives forgone are almost certain to have greater value for those from whom the grasping hand of the federal state has stripped the wherewithal to pay for the projects. Free-market analysts ought to understand such matters, which are scarcely arcane, and anyone who has watched the government’s responses to previous recessions, from 1929 to the present, ought to understand the present situation without remedial instruction from me.
Yes, unemployment has risen, as it always does during a recession. But the rate of unemployment last month was only 6.7 percent. During the Great Depression, the unemployment rate often exceeded 20 percent, and many workers who had jobs in those days had only part-time employment even when they wanted to work full-time. So, despite the numerous Chicken Littles running about excitedly, the present situation does not bear comparison with the mass unemployment of the 1930s; nor does the ample safety net that now stretches beneath the unemployed — a refuge that did not exist in anything like its present setup during that difficult decade. I do not belittle the problems that involuntary unemployment may pose for people even now, but it makes no sense for policy makers to burn the house down because they have discovered that a few rats have taken up residence in it.
Above all, policy makers, economists, other analysts, and news media commentators need to cultivate an understanding of and appreciation for the wisdom of the aphorism, “don’t just stand there, undo something.” The greatest mistake made in previous occasions of this sort has been to add new government burdens to the ones that helped to bring on the troubles in the first place; hence the ratchet effect in the growth of government. If only we had the wisdom to recognize a crisis as the most compelling occasion for getting rid of accumulated government burdens and idiocies, then we could throw the ratchet effect into reverse, with highly beneficial long-run consequences, including greater economic liberty and faster economic growth.
Unfortunately, many people are now urging exactly the opposite policy, joining their voices with those of the usual suspects who, like Obama's lieutenant Rahm Emmanuel, seek to exploit the prevailing sense of emergency to lock new government controls and burdens onto the economy in order to gain their political ends and solidify their state powers, at the expense of our purses and our liberties. I beseech these former friends of the market: please pause and reflect; do not allow yourself to be stampeded into support for measures that probably will not work as advertised even in the short run and will certainly prove counterproductive and oppressive in the long run. The sky is not falling; do not act as if it is or lend your support to those who recognize hard times as the perfect opportunity to realize their grandiose dreams of social engineering, wealth redistribution, and central economic planning.