What Now? Controlling the Narrative

So the bailout has passed and politics has triumphed once again over good economics.  Other than giving up hope, what can those of us committed to free markets and limited government do?  I think the most important task right now is "controlling the narrative."  We are not going to change what government is doing, nor have much influence in stemming any problems that arise from it.  We can, however, speak to history by doing our part to ensure that the political causes of this crisis are well understood and that free markets don't take yet another undeserved hit in the histories of the future.

It is imperative that we continue to point out that this crisis was caused by a whole host of government interventions, from the Fed to the GSEs to the CRA to land-use regulations and so on.  We need to constantly argue that this was not the result of "free markets" or "deregulation." It's also worth noting that the one bit of deregulation that did take place in recent years (the 1999 repeal of Glass-Steagall) has been key to avoiding a worse disaster by allowing commercial banks to buy up investment banks and allowing the struggling investment banks to go commercial to keep themselves afloat.  If this bailout becomes the disaster that many of us believe it will be, we need to make sure we pin the blame where it belongs.

What we want to avoid, I would argue, is a repeat of what is now the conventional narrative of the Great Depression:  It was capitalism that caused the crash, it was Hoover's inaction that turned it into a Great Depression, and it was FDR's interventions that saved us.  As we now know, that's wrong on all three counts, particularly on the issue of Hoover's inaction.  He was quite the interventionist and those programs, picked up later by FDR, made matters much worse.  The analogy to the current situation is pretty striking.

We need to be sure that if the bailout indeed makes matters worse, we are prepared to make the argument that more intervention didn't solve a problem created by prior intervention.  It's certainly possible that the bailout will get forgotten like Hoover's very activist Reconstruction Finance Corporation did in the mists of history and that the worse mess it creates will get blamed on the "free market" driven mortgage/credit crisis.  Our job is to make sure the truth doesn't get buried as it did 75 years ago.

One final thought:  if one really believes this bailout will make matters worse, especially significantly worse, I think it's a reason to vote/root for Obama.  Should McCain win and things go downhill, it will be much easier to blame the mess on "free markets" and "deregulation," not because McCain believes those things but because of GOP lip-service to them and the perception that they've acted on that lip-service.  With Obama in office, and things going south, it might be more akin to the late 70s under Carter, where the blame is less likely to be laid at the feet of markets.  I might be wrong about this, but given the disastrous combination of free market "talk" but statist action by the GOP, I think I'd rather have the folks who don't even talk the talk at the helm when the waters get very choppy.

Comments

[Sheldon Richman]

Hear, hear! Especially your last point. No one would be blaming this current mess on Al Gore's or John Kerry's "laissez-faire-hate-the-government" philosophy.

[Joe Godwin]

The point about GOP playing lip-service to free markets is dead on, and why I have been hoping Obama wins over McCain (but don't plan to vote for either). I have thought for a few years now that the Republicans have done much harm to the cause of liberty specifically because of this point.

[Unit]

Any chance the bill might be found unconstitutional by the supreme court?

[The Charters Of Dreams]

A lot of my friends are repeating the Washington D.C. "We need stronger/more regulation." I'd like to answer them with specifics, but I don't know exactly.

The best explaination I've heard comes from Yves Smith: Magan Mcardle interviews Yves Smith:

http://bloggingheads.tv/diavlogs/14850

What Yves is suggesting is that the government credit rating agencies, the SEC, the entire regulatory structure is part of the problem, and as is, it can’t “fix” anything because it’s part of the problem. Worse, because the “mixed” system (i.e., the credit markets and government regulation) is a ‘tight-coupled’ complex system, the unintended negative consequences of any government intervention and new regulation will overtake and overwhelm any “good” the intervention and regulation was designed to do.

If she’s right (and I think she is), the invention will make things worse in a way that can only be understood after the fact. It’s better to let the system “as it” find its own way to a new equilibrium, which is sort of what’s happening now (bank failures and mergers) but the bailout is throwing uncertainty and hesitation into the process. There is a role for government, and there are lots of helpful things it could do, but they’re small and targeted, and the Bush Administration, which is pushing the bailout through fear-mongering, is not in the mood, for whatever reason, to take the time and effort to work out those details: they’re pushing this exactly the same way they pushed Iraq.

However, I think this type discussion is too academic & vague and it would just go over most people's heads.

If regulation and intervention really caused the problem, or made an existing problem worse, what's the simple straightforward and specific story?

John Bird and John Fortune (the Long Johns) hilariously describe their idea of the mindset of the investment banking community in one of their satirical interview. Of course, they make all the market players seem like greedy idiots, and I think it's how people see the crisis -- their "story" is easy to understand and, even though it's satire, it makes a kind of sense, a kind of sense that leads one to think "yup! we need more/stronger regulation:"

http://www.youtube.com/watch?v=mzJmTCYmo9g

~ Best,
Charters Of Dreams

[Steve Horwitz]

Charters,

See this: http://myslu.stlawu.edu/~shorwitz/open_letter.htm

[Brian N.]

Let's be a little too cozy for our own good and lay the end of the depression at 1941. Rothbard's history of said appeared in 1963. That's 22 years before a sound Austrian analysis hit the presses. There was no organized Austrian movement back then. Let's see when this monster comes to wraps, how long it takes for an analysis of equal lucidity, scholarship and most of all forceful argumentation to come to the fore from the Austrian School. I really hope the job gets done much faster.

[Daniel J. D'Amico]

Steve,

I agree that lip service paid by republicans towards free markets does harm rather than good. But I'm unsure (not in disagreement, just remain in uncertainty) that that harm is less than the potential harm that could be caused by an Obama administration given the green light to fix the economy.

Now these harms are obviously of different types. One is harm done to the image and narratives of liberty and markets and its subsequent effects upon the economy. The other is the more direct effect of economic planning. It seems that to make the point you're trying to (which might be right and I'm interested to entertain) you have to believe that total economic collapse and reconstruction is closer at hand than is an ideological victory for liberty and markets.

Do you agree, am I missing something, or misinterpreting?

[Steve Horwitz]

Not quite Dan. I think we're likely in for a bad stretch (not a total collapse) for the next bit and I'd rather the blame for that went to the folks not known for even paying lip service to free markets.

[Pete]

Excellent overview Steve. Just wanted to let you know that we linked to this post on the "Intellectual Ammo" portion of our "Crasher Challenge 2: Set the Record Straight on the Socialist Bailout".

Keep up the good work.