BOOK REVIEW: Recovering from 2008

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ALCHEMISTS OF LOSS: HOW MODERN FINANCE AND GOVERNMENT INTERVENTION CRASHED THE FINANCIAL SYSTEM
By Kevin Dowd and Martin Hutchinson
Wiley, $27.95, 432 pages

The Wall Street financial crisis of September 2008 swept Barack Obama into the White House. His utter failure so far to revive the economy and create jobs might well be dooming him to be a lame-duck, single-term president.

Economic policy matters, but after owning the issue for most of the past 30 years, conservatives are still in disarray over how to identify the problems that led to the 2008 crisis and how to solve them while preserving the free market. However, this welcome new book by Kevin Dowd, a former academic and policy economist, and Martin Hutchinson, a former merchant banker turned financial journalist, is an excellent place to start.

Mr. Dowd and Mr. Hutchinson maintain a traditional conservative skepticism for the cumbersome workings of government regulation. It was certainly the case that the two-term administration of President George W. Bush flatly refused to rein in the raging speculation generated by the new derivatives markets. On the Bush watch, the fraudulent financier Bernie Madoff scaled up the biggest Ponzi scheme in history with not a peep out of the supposed watchdogs of the Securities and Exchange Commission.

But the Obama administration, while bailing out the sacred cows of Wall Street with a deluge of public money, has not done any better in real terms through its obsession with direct intervention in the economic process. And it has run the federal budget deficit up to genuinely catastrophic levels.

Mr. Dowd and Mr. Hutchinson do an outstanding job wading through the usually impenetrable thickets of invective and self-interested obfuscation that characterizes most of financial coverage and commentary in 21st-century America.

They clearly show that the crisis of September 2008 was caused by financial manipulations that distorted the untrammeled operation of the free market. They argue that U.S. financial institutions need to be refocused on their traditional role of raising money for the private sector rather than indulging in wild and ultimately catastrophic speculations that only generate empty bubbles. And they have a rich series of final chapters in which they recommend a package of measures to restore effectiveness to the market.

According to the authors, one of the greatest myths is that Mr. Bush and his administration supported the free market when in fact all they did was talk about it. Like Herbert Hoover nearly 80 years earlier, the Bush economic team actually wrecked the natural, self-correcting mechanisms of the free market and ensured that a catastrophic financial collapse was bound to come.

Mr. Dowd and Mr. Hutchinson note that it was Hoover who fatefully tried to solve the Great Depression by incompetent state-intervention policies, a precedent that Franklin Roosevelt later followed, too. Hoover also massively raised taxes at the height of the Depression and even made them retroactive, thereby triggering the great bank crisis of spring 1933 - points already also made by Jude Wanninski and Paul Johnson.

Hoover froze wage and price levels, thereby destroying the very operation of the free market that had ensured rapid recovery from previous depressions and recessions, especially the Woodrow Wilson depression of 1920. Mr. Dowd and Mr. Hutchison tellingly note that the second Bush administration was obsessed with keeping interest rates artificially low, down to virtually zero indefinitely. This ensured that a colossal bubble of toxic debt would build up in the real estate market. In September 2008, the whole house of cards came crashing down.

How should the American financial system be rebooted to recover from the collapse of 2008, while preserving and restoring traditional free market effectiveness? Mr. Dowd and Mr. Hutchinson have so many suggestions they have actually written a basic primer in free-market financial responsibility.

Additional regulation, they urge, is usually a top-heavy waste of time. The Federal Reserve Board - that inept, if not actually infernal, creation of Mr. Wilson - should be rebuilt, they recommend, along the far more cautious and constructive lines that German Chancellor Konrad Adenauer insisted on for the creation of the Bundesbank in 1958. The elderly Adenauer remembered at firsthand the nightmarish great inflation that destroyed the credibility of democracy in 1920s Germany and he was determined not to let it happen again.

The authors, learning those lessons from Der Alte (“The Old Man,” as Adenauer was known) are insistent that a smoothly functioning free-market and financial institutions are designed to enrich the American economy, American industry and the American people rather than bleed them dry.

Tea Party activists, conservative pundits and congressional staffers alike should order multiple copies of Mr. Dowd and Mr. Hutchinson’s work. It will provide them with the authoritative guide they have lacked for so long. This book is an essential contribution in the long battle ahead to repair the American financial system and restore it on sound, minimum-government intervention and free-market lines.

Martin Sieff is chief global analyst for the Globalist. He is the author of “Shifting Superpowers: The New and Emerging Relationship between the United States, China and India” (Cato, 2010).

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