FEIN: Masterly inactivity

By Bruce Fein | Tuesday, October 14, 2008

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COMMENTARY:

Glendower: "Why I can summon spirits from the vasty deep."

Hotspur: "Why, so can I, and so can any man, But will they come when you do call for them."

Modern-day versions of Glendower have been on display during the ongoing frenzy of government maneuvers to reverse the nation's wrenching credit crunch and stock market plunge. President Bush, Treasury Secretary Henry M. Paulson, Jr., the Republican and Democratic presidential and vice presidential nominees, and members of Congress repeatedly profess to be crowned with the knowledge and power necessary to cushion the economic downturn, banking crisis, and housing market collapse. They chorus that such a happy reversal of the nation's economic fortunes can be achieved with constantly shifting plans to bailout banks, other financial institutions or intermediaries, or hard-strapped state treasuries.

On Sept. 23, Mr. Paulson testified to the Senate Banking Committee in favor of government purchases of bank-held mortgages or mortgage-backed securities in lieu of owning bank stock: "Some said we should just stick capital in the banks, take preferred stock in the banks. That's what you do when you have failure. This is about success."

But that wisdom was superseded by professed new wisdom as early as last Friday. Mr. Paulson both announced his intention to buy equity stakes in banks and gave the idea marquee billing in the scheme du jour to save the economy: "We can use the taxpayer's money more effectively and efficiently, get more for the taxpayer's dollar, if we develop a standardized program to buy equity in financial institutions."

Mr. Paulson was unfazed by his inconsistency, which cast doubt on his presumed economic omniscience. He probably took comfort in Ralph Waldo Emerson's axiom: "A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines."

Dubious claims are chronically made by politicians in the expectation that voters will support a candidate who advertises that he knows of a government cure for every economic ill. Their wishes are fathers to their thoughts. Hope springs eternal. Human nature readily believes that for every adversity a painless remedy can be devised.

No amount of empirical or logical proof will convince the ordinary member of Congress or executive branch officials that masterly inactivity is the best strategy for quickening economic revival.

The evidence, however, is persuasive. The government first intervened to rescue Bear Stearns without result. That was followed by Fannie Mae and Freddie Mac government takeovers. Then came an $85 billion lifeline to AIG, which was supplemented by an additional $39 billion.

The auto industry secured $25 billion in loan guarantees, but General Motors and Chrysler were soon flirting with a merger because the auto market continued to tumble. The $700 billion Troubled Assets Relief Act of 2008 was passed on Oct. 3. By the end of stock trading last Friday, the Standard & Poor's 500-stock index had dropped more in the previous week than in any other corresponding period since 1933. Despite the accumulating evidence of the government's economic follies, Congress is slated to convene a lame-duck session to vote hundreds of billions more in nostrums as senseless as spending money to practice alchemy.

These government capers are aggravating the length and depth of the economic nosedive. Reckless lending and borrowing have been rewarded; and funds to stimulate the private sector have been hijacked by unfathomable levels of government borrowing.

Professional economists are generally complicit with politicians in claiming expert knowledge to fashion government manipulations of the free market that would allegedly improve on the decisions of private economic actors who wager their own money and labor. Their motivations are the same as the politicians': to enhance their stature and compensation. Imagine how few video interviews on CNN, Fox or MSNBC would be commanded by an economist who confessed that neither economic experts nor politicians were capable of designing a government economic recovery plan superior to doing nothing. And imagine the disdain in Congress for an economist whose calling card was an exhortation to masterly inactivity - no match for a campaign slogan promising a dazzling government elixir.

In 1948, West Germany was mired in the economic doldrums. Government interventions were pervasive on the premise they were necessary to prevent a West German depression. Economic Minister Ludwig Erhard appeared as a deus ex machina. Price controls were ended. The currency was deregulated. The day after the government began doing little or nothing has been described by Henry Wallich. "[G]oods reappeared in the stores, money returned to its normal function, black and gray markets reverted to a minor role, foraging trips to the country ceased, labor productivity increased, and output took off on its great upward surge."

Erhard understood that as in medicine, the first rule of government in the realm of economics is, "First, do no harm."

Bruce Fein is a constitutional lawyer at Bruce Fein & Associates Inc., and author of "Constitutional Peril: The Life and Death Struggle for our Constitution and Democracy."

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