Given that we’re suffering from a recession and also given that it hasn’t gotten better in the aftermath of the election, it would be political malpractice of me not to write a few words about it. Unlike previous topics I have covered, this topic is a sober one and as such, it deserves serious consideration as a matter of policy and as a matter of interest to every Wesleyan student.
I will try, with what little knowledge I have, to enumerate the issues within this crisis and to begin to set out a possible track for recovery. This will be a primarily speculative endeavor, considering that most professional economists are still sorting out the details.
There has been much disagreement over whether the financial crisis was caused by under-regulation or over-regulation. This is a false dichotomy. What caused the financial crisis was politics, and not politics of either the sensible Left or the sensible Right.
Both of these groups would have seen the problems in the competing agendas which caused this crisis, and would have proposed different but equally sensible plans of action to deal with it. Perhaps neither plan would have been sufficient, but it certainly would have been better than what we got.
Firstly, because it is what I am least accustomed to doing, let me see if I can explain what role my own party played in this crisis. In the defense of my own ideas, however, I will point out that it was not conservatism that caused this crisis, but rather an unpleasant distortion of it known as modern Republicanism.
It is beyond question that President Bush has expanded the national debt beyond any reasonable level, and while the economic effects of this behavior are not always immediately apparent, reckless spending from a highly public source of authority can have even more devastating psychological effects. Let’s deal with both.
The economic effects of a national debt are manifold. Firstly, a national debt increases U.S. dependency on foreign sources of money, which means that if another country has a bad year, the U.S. is likely to have a bad year. Moreover, this means that the U.S. must constantly find ways to justify new loans by coming up with artificial and increasingly unhealthy economic ways to keep its currency afloat. Stimulus packages and unsound short-term monetary policy are two examples of such behavior. The latter was especially problematic in this case because in order to artificially prop up the dollar, the Federal Reserve flooded the market with cheap credit, which ultimately did nothing other than create a short-term gain in finances which would soon vanish once the market adjusted for inflation. The market is in the process of doing that now, which is one minor cause.
But the psychological effects on expectations are far more damaging. National debts have a pesky problem of needing to be paid back, and this means that any deficit automatically becomes a tax on the resources of succeeding generations. What this does is pressure businesses to sell everything they can in the short term to avoid the inevitable fall of income in the future when the debt comes due. As such, the supply of goods on the market goes up. Worse yet, politicians now have political incentives to try and make the short-term cash crop pay off for them in whatever way they can, meaning the influence of lobbyists goes up.
At that point, national policy ceases to be set according to economic efficiency and becomes a matter of juggling which K Street interests one wants to listen to. Needless to say, K Street does not always have the interests of either liberal America or conservative America or both at heart. Lobbyists are largely unprincipled entities concerned solely with short-term gain. That is not a moral judgment, but simply a statement of what they are paid to be, and what they should endeavor to be precisely because they are not policymakers. Once they become de facto policymakers, however, this incentive becomes highly problematic.
So in brief, President Bush’s profligate spending and my party’s unfortunate tendency to listen to lobbyists created a psychology of short-term incentives which ignored the looming long-term dangers. That settles that.
What did the Democrats do? Well, for starters, in the ’90s they blocked Republican efforts to reform the system which required banks to make loans to unreliable borrowers because of an unhealthy attitude that people had a “right” to own a home or a “right” to credit. At least, that was the rhetorical justification. The actual justification probably also has more to do with lobbyists and political incentives.
Say what you like about Jack Abramoff, but Senator Chris Dodd (D-CT) and Representative Barney Frank (D-MA) shouldn’t come out of the Countrywide Scandal smelling like roses, either. The Democratic policy on loans created the problems with the current foreclosure market, and only helped facilitate the excessively short-sighted, short-term mentality which said that if you just bought whatever you wanted now, you could let someone else clean up the mess later. The combination of this no-risk mentality and the governmental requirement that those who actually were risky still be allowed to gamble with other people’s money was hardly a match made in heaven.
Several things must be done about this. Speaking as a fiscal conservative (not the same thing as a fiscal Republican), I would suggest that the first thing that needs to be done is that credit needs to be cut to make up for the previous inflationary expansions, the laws requiring banks to give bad loans must be taken off the books and the debt has to be addressed, preferably through spending cuts and increases in trade to increase capital inflow to the United States (many of the world’s wealthiest companies are U.S.-based).
In short, the rules of the game must be altered to read more like Risk than like a carnival sideshow, where everyone gets a prize.