Posted on 08/30/2014 1:34:48 PM PDT by Kaslin
“Doing nothing new and simply working with pre-existing [federal bankruptcy] procedures would have been much better than anything we’ve done so far.”
–Harvard Professor Jeffrey Miron, “The Case for Doing Nothing,” July 10, 2009
I’ve been a big fan of the Austrian school of economics and have written books on the subject, including “The Structure of Production” and the first purely “Austrian” textbook, “Economic Logic.”
The ideas and policies of giants like Ludwig von Mises and Friedrich Hayek have much to offer the world. They are better than other schools in identifying the imbalances in the global economy that can cause trouble down the road. The Austrian school of economics was one of the few to warn of impending disaster coming from the real-estate bubble.
But I have my doubts about Austrian school policy recommendations during a financial crisis. Most Austrian economists advocate “doing nothing” and letting the whole unsound monetary system collapse, thus forcing a return to a sound gold standard, and discouraging banks and financial institutions from engaging in “moral hazard” in the future.
But there are unintended consequences of this severe “austerity” program. The Austrians ignore the real danger that such a collapse in today’s dependent society would result in economic chaos, untold misery to millions of innocent citizens whose jobs and wealth would be destroyed and the possibility that tyranny would replace a constitutional democracy.
This week, theWall Street Journal(page A2, “2008 Crisis Worse Than Depression”) reported that former Fed Chairman Ben Bernanke told a federal court the following: “September and October of 2008 was the worst financial crisis in global history, including the Great Depression.” He went on to say that of the 13 “most important financial institutions in the United States, 12 were at risk of failure within a period of a week or two.”
My view is that “doing nothing” would have done little to handle the enormous crisis of 2008.
In case you missed it, I encourage you to read my e-letter column from last week about the perception of some that the government can do no wrong.
That’s the best solution. Let the economy work out all the distortions.
People who make bad bets must be financially punished or they won’t learn from their mistakes, and will make the same bad bets again but bigger next time.
Actually that was NOT the author’s conclusion. See quote:
“But there are unintended consequences of this severe “austerity” program. The Austrians ignore the real danger that such a collapse in today’s dependent society would result in economic chaos, untold misery to millions of innocent citizens whose jobs and wealth would be destroyed and the possibility that tyranny would replace a constitutional democracy.
This week, theWall Street Journal(page A2, “2008 Crisis Worse Than Depression”) reported that former Fed Chairman Ben Bernanke told a federal court the following: “September and October of 2008 was the worst financial crisis in global history, including the Great Depression.” He went on to say that of the 13 “most important financial institutions in the United States, 12 were at risk of failure within a period of a week or two.””
This last sentence: that 12 of 13 most important financial inst. were at risk of [quick] failure, is the meat of the problem. Why aren’t we forcing those institutions to shrink in size as we did with giant oil early last century. We cannot continue with “TO BIG TO FAIL” operations or it will simply happen again.
Exactly! Just look at the current behavior of Jimmy Cayne and Richard Fuld. LOL!
You either believe in free markets, or you believe in interventionism, which starts small in some academically-acceptable amount and grows in scale to the level of Stalin or Mao.
A few years later, the same thing happened. Herbert Hoover panicked and did a million things to fix the economy -- and things only got worse. Then FDR got elected, and he did 2 million things to fix the economy. And that's how Great Depressions are born.
How is it better if you divide them all in 4 and 48 of 52 are at risk of quick failure?
Dividing giant losses into smaller pieces doesn't reduce the total amount of losses.
that's not even half of it. Sure, you want to teach people not to play with fire, but intelligent bankers already know that. RATHER it is preventing a society where insiders are able to game the system, because of their ability to influence politics.
It was Warren Harding who said "Nope", and cut the size of government. The post-World War I depression was over by the time Harding died and Coolidge took over.
But that is what must be done, if we are to fix it. To do this slowly only ensures the pain is longer and deeper and it doesn’t stop somebody from reversing course.
If we aren’t willing to do it, it will be done to us.
Far fewer of the smaller banks were at risk of failure. Also there have been moves to separate investment banks from commercial banks which helps. It’s the investment banks that were the bundlers and high fliers.
As if the actions of the Fed won’t produce the same results, magnified by the exponential exposure created by our never-ending “quantitative easing”?
If every administration since Clinton hadn’t spent every waking moment consolidating economic and political power into a monolithic oligarchy, maybe we wouldn’t have ended up in this situation. National banks have been a hazard since their inception. Before you start screaming about lack of capital, consider how that capital has increased over the past couple decades and tell me how the growth was reasonable.
There is no rationale that can account for the asymptotic growth that has occurred over this period. The accumulated debt during this period dwarfs the entire output of capital for the rest of human history. Oh yes, we are better off since the Fed has ensured complete economic collapse.
Palliatives are so much easier to swallow. Biting a bullet is a hard—so what if the patient may have lived. Suicide is painless, it brings on many changes...
Thanks. I should have double-checked. Coolidge was VP but Harding made the call. I think Harding doesn’t get the credit he deserved; not a bad president at all.
Interesting pair of articles. Perhaps the unintended takeaway is that the wrong people are in jail - the little guys got jail time while the big shooters got unbelievably rich. Angelo Mozilo, former CEO of Countrywide Mortgage, Barney Frank and his Rat politicians that lowered the bar on mortgage qualification requirements and the big bank bundlers who put those toxic financial packages together and pumped them with one hand while selling them short with the other, etc, etc. None of the REAL CROOKS did jail time!
You miss why capitalism works and why government intervention does not.
Using your example, if there were 52 banks rather than twelve, it is very unlikely that you would have had one only concept of how to operate.
So maybe half would have gone broke and the rest would have survived.
Capitalism succeeds because given a particular problem, there will be many different opinions as to how to solve the problem and some will be right where others will be wrong.
You see the result of government meddling in the concept of the federal reserve.
Bernanke called the shots and it was his way or else.
Let me modify that a little.
You are right if the banks are already broke.
You must break them into the 52 pieces early on so that each can operate according to its management’s concept of what a bank should be.
Anything that is “too big to fail” needs to be broken up.
Uh oh, is “too big to fail” going the way of “the Politics of Personal Destruction” and “the Loyal Opposition”?
Who would have thunk it?
To little, way too late.
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