The financial sector in the US is suffering through a crisis that we have not seen in my life-time. Who is to blame? And who can fix it?
On the morning talk shows -- CNN, Fox, ABC, CBS, and NBC --- this is subject of conversation. But I have not heard one word of sense uttered. Mitt Romney gave us this general rule for bailouts --- when the failiing of the firms will hurt taxpayers more than the cost of the bailout we should bail the firm out. And he added that when we not only bail them out, but the government takes ownership of part of the firm when it turns around government can earn a profit. Bill Richardson just keeps insisting that hope and change includes higher taxes and more regulation.
F. A. Hayek once remarked that the unfortunate fate of the economist was to be called upon more than any other scientists for his opinion on public policy only to have that advice dismissed almost as soon as it is uttered.* If an economist of the skill of F. A. Hayek had his words dismissed, then it should be no surprise when those who are his less skilled followers don't even get an initial hearing among the power elite. But part of that reason is that the message that Hayek and pre-Keynesian economists offered was one that challenged the presumption that whoever the President was could be in control of a complex economic system. An individual or a party (either one) cannot fix our economic problems.
Instead, government must instead get out of the way of market adjustments. Government is NOT a corrective. More often than not, it is the source (as in this case) of our economic difficulties. No bailouts, eliminate regulations, certainly no nationalizations, no priming of the pump with easy money, just allow firms to be weeded out that made imprudent decisions, allow capital to be reallocated, and permit prices to adjust to the new market realities. David Hume argued that the foundation of society was stability of possession, transference by consent and the keeping of promises. It is easy to see why violating those priinciples of social interaction would result in chaos --- e.g., 'societies' governed by predation, stealing, and betrayal do not even warrant the label society. But the persistent and consistent application of Hume's principles is also hard for people to follow. So rather than a policy regime of well defined and enforced property rights, the allocation of resources based on contract and market forces, and the honoring of promises, we have attenuated property rights, government intervention in the market, and breach of contracts or modification of the terms based on political status. Hayek argued in The Constitution of Liberty that government policy if the desired goal was to be consistent with the rule of law (as opposed to the rule of men) had to follow the 'generality norm' --- no policy shall be pursued which permits discriminatory coercion to favor one party at the expense of others ... see this discussion by James M. Buchanan of non-discriminatory politics.
Where is this discussion today?
One final point, whatever happened to Milton Friedman's wisdom about the long and variable lag in our current political economy discourse? Ironcially, I was talking on the phone last night with my brother --- a very wise man who has in fact worked his adult life on the ground in the construction industry in NY/NJ. We were talking about Wall Street and the financial problems, and I just said well it is going to make for an interesting election. My brother wisely stopped me and asked why, "what are either of these jackasses going to do to fix this?" He then went on to utter Milton Friedman's argument about the long and variable lag (as far as I know my brother doesn't know who Milton Friedman was let alone the details of his argument, but Fred nailed the argument). He explained to me how our current financial crisis is the by-product of policies that Clinton introduced over a decade ago and Fed policy. The President, he told me, cannot fix this and we shouldn't be looking to the government for the solution. I laughed at the end of my brother's comments and simply said, Fred I couldn't say it better.
Why don't others get it?
*Hayek's best remark concerning economists and their task is arguably from The Fatal Conceit where he argues that "The curious task of economics is to demonstrate to men how little they know about what they imagine they can design." This statement is exceedingly relevant.