Wednesday, March 10, 2010

Raspberry for Barney Frank

‘I would let people gamble on the Internet, I would let adults smoke marijuana; I would let adults do a lot of things, if they choose. But allowing them total freedom to take on economic obligations that spill over into the broader society? The individual is not the only one impacted here, when bad decisions get made in the economic sphere, it causes problems.’
– U.S. Rep. Barney Frank (D-Mass) Apr 23, 2009 interview with

I think Rep. Frank means he wants to restrict the freedom of the powerful financial institutions to make economic decisions (“take on economic obligations”) on their own. After all, the big private financial institutions made the decisions that led to the mortgage meltdown and the current crisis. Well…I don’t think so.

The federal government’s record of making economic decisions, controlling how private firms take on economic obligations, is abysmal.

The Federal Reserve Act, and related legislation in 1913, nationalized financial markets and financial institutions, making them the most regulated sector in the American economy. The Federal Reserve Act was intended to stop the periodic recessions (sometimes called “panics” in the 19th century) that plagued the economy every dozen years or so. Promoters declared that the Federal Reserve, authorized by the Act, would end the up-and-down business cycles by implementing “rational” policies in the management of the money supply, credit, interest rates, and the value of the dollar relative to gold and other currencies.

Since the nationalizing of the currency, we have had recessions every six years, on average. Gee, that worked.

Government Failures, not Free Market Failures, Cause Recessions
The recession of 1920 was caused by decisions made by the Federal Reserve during and after WWI. The crash of October 1929 was caused by federal policies that reduced the money supply. The Crash of 29 turned into the Great Depression because of economic and monetary decisions made by the Federal Government and the Federal Reserve – most notably continuing to decrease the money supply, unpredictably changing interest rates, and arbitrary changes to the price of gold. The crash of 2008 was caused by federal monetary and credit policies.

Woa! What about the mortgage companies that made all those bad loans, and the financial traders who created all those toxic derivatives and scattered them throughout the world markets? Wasn’t it the economic decisions of those private corporations that caused the crash?

Government Policies Affect (or even control) Private Actions

Well… How do you think Government policies are implemented? By encouraging (or forcing) certain behaviors by private organizations.

As I said earlier, the financial markets are the most heavily regulated sectors of the economy. The economic behavior of private financial organizations is heavily influenced, if not controlled outright, by Barney Frank and his fellows in the government. And the policies of the President, including dumb decisions made by Pres. Bush.

Government policies can create perverse incentives and penalties that will inevitably lead to perverse behavior by those regulated.

So, after perverse government policies forced financial organizations to make perverse, dangerous, and stupid decisions, Rep. Frank wants even more control.


Did I say forced? Yes. As in “your bank charter won’t be renewed unless you take on a certain percentage of high-risk, sub-prime mortgages.” These mortgages were then backed by Fannie Mae and Freddie Mac” – “private” institutions wholly owned by the U.S. government.

These private financial organizations took on stupid economic obligations because not doing so would have put them out of business.

This oversimplified explanation (WAY oversimplified) is not meant to pick on Rep. Frank but to point out the fallacy of a way of thinking: that the government can run things better than free market, the extended order of voluntary human cooperation. Government restrictions of liberty beyond the minimum of protecting private property, keeping the peace, enforcing contracts, and protecting from invasion are the causes of economic problems, not the solution.

Nothing is Usually a Good Thing to Do

Oh, remember I mentioned the crash or recession of 1920? It was about as bad as the crash of 1929. But the economy worked its way out of the recession by the middle of 1922. What did the government do to fix the problem? NOTHING. Well, taxes and spending were reduced. But other than that NOTHING.

The crash of October 1929 turned into the Great Depression because, unlike President Harding, President Hoover actively tried to fix the problem. Then President Roosevelt continued and expanded Hoover’s policies (while mendaciously claiming Hoover did nothing).

Government management of the economy is a great idea as long as you ignore its uninterrupted string of failures.

‘Politicians have immense power to do harm to the economy. But they have very little power to do good.’
– Walter E. Williams

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