Free Markets, Free People

A Recipe For Economic Disaster

A level of economic government intrusion is now being contemplated like none we’ve ever seen before.  If you didn’t understand the one of the main purposes of the tea parties, perhaps this will help.

But what Obama rarely says about ending the “cycle of bubble and bust” is this: he’s prepared to intervene to make sure that kind of red-hot growth doesn’t occur.

And he’s willing to do it with added government regulation if needed to prevent any one sector of the economy from getting out of balance – the way the dot-com boom did in the 1990s and the real-estate market did earlier this decade.

According to Austan Goolsbee, a key Obama economic adviser, the president plans to focus on stopping bubbles along with preventing busts. And in an interview with POLITICO, Goolsbee said the administration will be on the lookout for new bubbles, like the tech stocks or housing prices.

If new threats are spotted, he said Obama would use “regulatory oversight to prevent guys who want to make a quick buck from doing real harm to the economy. . .That is what it means to get out of the bubble and bust cycle.”

In other words, government would decide what is or isn’t a “bubble” and move to stop what it determines is a bubble. As CATO points out, one man’s expansion might be another’s “bubble”. Are you comfortable with government calling that shot?

And government would also arbitrarily decide who was or wasn’t entitled to profit from that market – it would be the final determiner of who was or wasn’t making a “quick buck” from the growth.

Any idea what that would do to any market in which the government stepped in to slow down?

Yeah, nothing could go wrong that that idea, could it?

Bottom line: you have a governing elite picking winners and losers.

Thankfully, it isn’t quite as easy as you might imagine to do what Goolsbee and Obama would like to do.

…[T]here’s not much an administration can do in practical terms to burst a developing bubble. The best way to cool things down is raising interest rates, which is the purview of the Federal Reserve. Another option would be for regulators to order banks to curtail lending to buyers of certain kinds of assets.

The lesson here, of course isn’t necessary the plan itself, but the fact that those in a position of power are contemplating this seriously. Those aren’t the plans of a moderate, and certainly not those of a capitalist. They’re the plans of a group who apparently believes that complex economies can indeed be controlled and manipulated successfully from above.

Amazing hubris. Even more amazing arrogance. Most importantly, incredibly dangerous economic thinking.

~McQ

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35 Responses to A Recipe For Economic Disaster

  • So his plan is to take the “bust” part out of the cycle by stopping the “boom” part

    What can POSSIBLY go wrong?

  • BHO will repeal the business cycle with magical unicorn farts…YES HE CAN!

  • If the Fed set interest rates based on market forces, rather than artificiallly lowering them in order to encourage borrowing & lending when savings are low, there would not be a boom-bust cycle.

    • I’m not so sure about that, because there was a boom and bust cycle before the Fed even existed.  I think that SOME manipulation of interest rates is useful in softening busts; perhaps somebody who knows more about economic policy can throw some light on this.

  • “The best way to cool things down is raising interest rates, which is the purview of the Federal Reserve. Another option would be for regulators to order banks to curtail lending to buyers of certain kinds of assets.”

    2 options, 1 could never have gotten into the hands of the congress/president, the only other option was given to the congress through the TARP…..conspiracy?

  • It’s very unlikely that, within the next eight years, we’ll have another bubble. Goolsbee is bright enough and well-enough informed to know that. Obama is neither, obviously. But Goolsbee’s pretending to take this seriously. That seems very strange to me. 

    Secondly, if this pair of Keystone Kommissars had been in charge in the 1990s, how many internet-related companies would they have killed? Where would we be now? The internet looked a bit frivolous at the time. I don’t think this precious pair would’ve seen much value in it at all. Maybe they would’ve; maybe not. THAT IS WHY WE DON’T LET ONE TECHNOCRAT RUN THE WHOLE DAMNED ECONOMY. Not even if he’s really handsome and has a resonant voice. 

    Anyhow. This is the same brainlessness that’s killing us in dozens of ways: The belief that our Prime Directive is to avoid the nearest and most obvious pain by the dumbest and most flamboyant methods possible, and all else is frivolity. Which is what Mencken thought we “deserved to get good and hard”. 

  • Another point: They’ve got the broad outlines figured out here, but the details of what they do, and when, and to whom, are going to change to match conditions as they emerge. 

    In plan English, how many millions is it worth to you for your industry to be allowed to boom just a bit extra? Or maybe your industry is an important part of the economy, and some newfangled industry is trying to steal your customers unfairly with unproven innovations. How much does it cost to have that newfangled industry declared a bubble that needs to be supressed? For everybody’s good, of course. Maybe not the entrepreneurs’ good, but after all, if the telegraph and the abacus were good enough for grandpa, what makes you think you need one of these, whaddyacallem… “computers”?! 

    Stability, gentlemen! Stability is our watchword!

    It really is like living in a bad Ayn Rand novel, isn’t it? 

  • Given that what we did in not regulating the bubbles has led us to a crisis that could be as bad if not worse than the great depression, with economic imbalances and a credit seizure, it’s hard to imagine that Obama’s plan could lead to anything worse.  The critics of Obama seem to forget that we’re experiencing the cost of de-regulation and wild speculation.  Defending the status quo approach seems insane, it is a PROVEN cause of economic disaster!

    • Oh I see…  To do differently what has been done for ages is a bad thing if it reduces governmental authority and power (education, welfare, etc), but it is a good thing if the change will increase said power.

      Yeah, you’re totally not a statist.

    • Okay smart guy, what regulations would have you imposed on the dot-com bubble?  As a warm up, explain how you would have regulated the beanie baby bubble first.  

    • “As bad if not worse than the great depression”

      Dear god!  If you didn’t already have zero credibility Scotty, it would’ve gone out the window with this one.

    • What we are experiencing, Scott, is the result of the government pushing an industry towards growth, via Freddie, Fannie, CRA, low interest rates, etc. The housing bubble was caused by government intervention. Indeed, besides the government push on the market to encourage additional housing, the government also increased housing costs via environmental regulations, etc.

      This was a highly regulated market, and a bubble driven by polticians, mostly Democrats. Hell, Obama even played a part, as a lawyer for ACORN, suing Citibank because they were not granting enough loans to those who couldn’t afford them (thanks to Carter’s CRA and Clinton’s “improvements”).

    • The crisis came from forcing banks to lend to bad risks, not from “de-regulation” and “wild speculation.” Obama’s plan (a continuation of Bush’s) is the original mistake writ large: forcing taxpayers to “lend” to bad risks, i.e., failed corporations and other entities in “need” of a “baliout.” With that in mind:

      Defending the status quo approach seems insane, it is a PROVEN cause of economic disaster!

      Mussolini style fascism (a more accurate description of Obama’s brand of socialism) is, after all, a proven cause of economic disaster. Why you think it “couldn’t lead to anything worse” shows you are completely unable to learn any lessons from history.

  • Please Erb, tell me how forcing banks to make loans to unqualified recipients can be called de-regulation.
    Someone at this forum, pre-election (SDB?) said this republic had withstood bad Presidents before and we’d survive this bad one too. I’d like to hear their thoughts now.

  • That’s it.  Screw this.  I’m stealing a big boat, moving to the Great lakes, and becoming a damned pirate.

  • Okay, this kind of governmental intervention is fascism.  Dictionary definition, no ifs, ands or buts.  It’s also not currently happening, so it’s still a stretch to say “Obama is a fascist.”  But it’s still darn creepy, and once again:  Bush only said that it’d be easier if the presidency were a dictatorship.  Obama seems intent on making it so.

  • As Shannon Love pointed out over at ChicagoBoyz.net, commercial real estate is far less regulated than residential markets, and benefitted from the same low interest rates. What the commercial real estate market did not have was a Community Reinvestment Act nor a Fannie Mae or Freddie Mac to buy up sub-prime loans (and their associated risk) from lenders. And guess what else commerical real estate markets don’t have? They don’t have a problem. There is no foreclosure crisis, nor collapsing prices. Commercial real estate debt is routinely securitized and sold too, but those securities aren’t toxic in the least. There was a commercial real estate boom too, their just wasn’t a bubble.

    yours/
    peter.

  • Greenspan kept interest rates far too low for a period of time that helped create the current mess. So, explain to me how government and the Fed will do better now? Maybe they have learned their lessson and human error will never happen again? I doubt it.

    There is also the little problem that there was a mountain of wealth created in Asia that was damned certain to invest somewhere…I am not sure you could stop that – if you raised interest rates, it might even come faster to the USA. Then what? Ban investing in housing? It would have slipped into stocks…or some other area of the economy.

  • Amazing hubris.

    I don’t see it as particularly Amazing.  Some of us knew what the country was buying.  We didn’t like it, but we knew.

  • Does anyone, as Retardo mentioned, think there will be a bubble in the foreseeable future given all the new taxes, rules and regulations that are being enacted.  OK, maybe a bubble in horses, saddles and hay after the EPA gets done with us.

    • Tech bubble, real estate bubble, commodity bubble…..where will the bubbles end?

      T-Bill bubble.

  •  
    I have attended 5 Tea Parties and have met many people who are first time protesters.  And the organizers were regular folks, not political organizations although some were present.  Most I talked to do not seem to know what to do immediately after the parties other than believe we need to work for changes in the next election; assuming ACORN and their allies don’t interfere with that idea.  However that is 18 months away and at the rate congress and the administration are moving towards changing our society, that is to far away to help slow this down, IMHO. 
     
    Being one of those extremists in multiple ways as defined by DHS, I have been pushing at the 912ers meetings and website postings, tea party organizational meetings, and even hinted in my one tea party speech that if the tea party grass roots rallies do not move congress, and they apparently haven’t yet by recent votes since the tea parties started on February 16th, then following MLK’s civil rights movement tactics, picketing of local congressional offices of the politicians voting for spend and tax should commence.  If that doesn’t work, then it would be on to civil disobedience with sit-ins.  Of course this was the type of tactics that Shays’ people utilized in 1786 that led to the rebellion when the state government ignored their more civil actions.  Hopefully congress is more astute than was the Massachusetts government in Shays time or Southern Democrats were during the civil rights movement.
     
    We 60 something retirees have the time, even to spend in jail if necessary, and should have the motivation to save our children and grandchildren from economic rumination and a loss of their freedoms.  The Greatest Generation saved our nation from Fascism so we owe future generations a serious effort to return to the economic and personal freedom they fought so bravely to retain.  As I expected I have convinced few people of the necessity of such actions; therefore I may have go it alone.
     
    Take care and be safe

  • “”Full employment” and “economic growth” have in the past few decades become primary excuses for widening the extent of government intervention in economic affairs. A private free-enterprise, it is said, is inherently unstable. Left to itself, it will produce recurrent cycles of boom and bust. The government must therefore step in to keep things on an even keel. These arguments were particularly potent during and after the Great Depression of the 1930s, and were a major element giving rise to the New Deal … These arguments are thoroughly misleading. The fact is, the Great Depression, like most other periods of severe unemployment, was produced by the government mismanagement rather than by any inherent instability of the private economy … In 1930 and 1931, it exercised this responsibility so ineptly as to convert what otherwise would have been a moderate contraction into a major catastrophe … “
    – Milton Freedom, Capitalism and Freedom, p. 37-38

    Written in 1962, the more things change….

  • er… Milton Friedman..

  • The mainstream media wouldn’t do it. So we are trying to get your important messages to the American people. 8 This post is a suggested read at, http://aresay.blogspot.com/

  • A free market capitalist economy isn’t perfect??!! Oh, the horror! I am shocked! By all means, we must replace it with the proven method of a state controlled economy. It worked so well in the former USSR. Perhaps someone who has been there can tell us of the  wondrous results of central planning .

    Oh my goodness, we have such a person! Perhaps the wise and unemotional Erb, who not only has been there but also has the academic credentials to understand it and teach it to us ignorant know-nothings, would deign to explain in detail how government management of an economy works and why it is so successful.

    • Part of the problem is that this is only a partial free market economy. Our current problem is due to governmetn intervention:

      1) CRA (and the whole Carter/Clinton legislation mess)
      2) Fannie and Freddie
      3) Interest rates
      4) Environmental regulations (driving up values by limiting new development)
      etc . . .

      Erb et al lie to attack free markets and freedom, and propose more government intervention . . . which will cause more problems, more lies, and more calls for government regulation.

  • When some sector starts to go crazy, as tech and housing have done in recent years, there are things to do besides raising interest rates. Regulations and tax policy can make a huge difference. Here’s what we should have done in 05.

    Tighten leverage limits, and apply them to investment banks.
    Eliminate the cap gains exclusion for houses.
    Reduce the interest deduction on mortgages.
    Tighten regulation of Fan/Fred, limiting their take-up of the wilder mortgages.

    That would have kept things from going off the deep end.

    And how do you tell when to act? You can’t, definitively, but it was pretty obvious then that prices were out of whack, and it made sense to move counter to the trend.

  • it’s hard to imagine that Obama’s plan could lead to anything worse.

    That’s only because you don’t have much of an imagination.

    • Sorry, I have to disagree. I’ve read Erb’s case study on the 1991 invasion of Iraq and his version of how the Cold War ended. His imagination is just fine.

  • “Eliminate the cap gains exclusion for houses.
    Reduce the interest deduction on mortgages.”

    Not politically possible.