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Friday, March 14, 2008


the potential for real problems

there's a canard in american political history that herbert hoover did nothing to alleviate the onset of the depression. such was the angle of attack from franklin roosevelt in 1932, and so successful was that campaign that its propaganda became embedded in american mythology.

it's not so, of course -- hoover was a very activist commerce secretary who took an active role in creating the credit excesses of the 1920s, and then an even greater activist stance in forestalling the bust. the new deal was his deal, by and large, carried out in grand scale by roosevelt as the depression wore on.

one can argue about the wisdom of government intervention in the aftermath of the bubble bursting, of course. but the original sin is in the creation of the bubble -- something that can only be done with government at minimum standing aside from its natural regulatory role, and indeed which in this case was facilitated by manipulation of interest rates and the underwriting of massive credit backstops in the form of the GSEs.

many american conservatives are so totally divorced from reality on the issue as to be dangerous. they generally have encouraged all manner of government facilitation of the credit bubble under the bush administration since 2000, but there remains underneath an ideological and utopian desire for non-interference. and now that long-building problems which arose with government complicity are surfacing, the animal desire to flee the problem (and all responsibility for creating it) is also surfacing -- in the form of belated laissez-faire.

moral hazard aside, an honest history of capitalism will reveal that every major crack-up since the tulip mania of the 1620s was addressed with government-taxpayer bailouts on some level. it is part of capitalism to do so -- the losses, once too great, are socialized, and this is the price paid for the long-term benefits of price-driven resource allocation. that this fact isn't part of the ideological mantra of capitalism as defined by the zealots and high priests is as meaningless as the fact that the doctors and philosophers of communism were disappointed by the impurity of their ordained system in practice. and it is very important for in situ leadership to understand that ideological purity is a noose by which they will be hung if they insist.

what has happened in the united states is not good, but it is probably manageable IF government recapitalization of the banking system gets underway. however, the sort of public denial of deep-seated problems at the heart of the system that our executive leadership is apparently willing to forward -- beyond being yet another dimwitted escapade of a kind with that which led them to eschew the "reality-based community" over iraq -- can have massive ramifications if it results even in just a significant delay of action. once a deflationary credit unwind gets underway, it can be extremely difficult to stop. the key will be to support the banks well before that happens, and then to move into the credit markets with a measure of regulatory zeal longer-term to prevent the kind of credit underwriting lapses that characterized 2002-2007.

it seems almost comic that the tragic administration of george w. bush -- unsatisfied with trashing american soft power and cultural advantage, unsatisfied with plunging this nation into a fiscal and military morass in the middle east, unsatisfied with widening and hardening virtually every division in the american political landscape -- would take its infamous conflation of raging incompetence and ideological zeal to the final length of sealing the american economy in a tomb. and yet it might. if the administration draws a line against government recapitalization and tries to defend it, it will actually become what roosevelt once only painted the adminstration of herbert hoover as. and that would have the potential for real problems.

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