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Unprincipled madness

Tony Curzon Price
Tony Curzon Price
1 October 2008

Yesterday, I (and many others, I imagine) were surprised to discover how polarised American politics really is. Tactical explanations of the vote abound--Mark Thoma points to Bloomberg's report that explains the Republican anti-vote as `Because somebody [Nanci Pelosi in her speech to Congress] hurt their feelings they decided to punish the country.' Jeff Frankel concludes wearily: ``I suppose it is not surprising that Congressmen facing elections in 5 weeks don't want to go on record supporting something so unpopular.'' Brad De Long gives up on analysis and appeals to extra-economic solutions: ``raze the Republican Party to the ground. Plough it under. Scatter salt in the furrows so it can never grow back. We need another, very different opposition party to face the Democrats. We need it now. ''

 

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But tactics arise out of a climate of belief. Yesterday's surprising discovery of polarisation was here. Vocal voters in marginal districts think and believe--this is what connects tactics to fundamentals. They phone Representatives with opinions influenced by media, church, thought, conversation. Willem Buiter comes closer to a real account when he writes that there were two types of vote against the bail-out: Libertarians (mad but principled) and voter-scared populists (mad and bad). He wishes a short recession to the first and a nasty recession to the second. I imagine the compartments are not so water-tight: the populist is responding to a climate of opinion carefully nurtured by the ``mad but principled''. What are these mad principles, and what are they saying tactically about the bail-out vote? I set out to find Buiter's ``mad principled'' voices to understand the climate of opinion which leads to the electoral tactics we saw yesterday.

I go first to Chicago economist Gary Becker to find the thoughtful Libertarian commentary. Gary does not like the plan much, and picks away at the details that Dodd and the Democracts insisted should go in. He wants the economy eventually to move away from ``too big to fail'' banking institutions, hoping for a less brittle, less catastrophe-prone system:

the "too big to fail" approach to banks and other companies should be abandoned as new long-term financial policies are developed. Such an approach is inconsistent with a free market economy. It also has caused dubious company bailouts in the past, such as the large government loan years ago to Chrysler, a company that remained weak and should have been allowed to go into bankruptcy. All the American auto companies are now asking for handouts too since they cannot compete against Japanese, Korean, and German carmakers. They will probably get these subsidies, even though these American companies have been badly managed. A "too many to fail" principle, as in the present financial crisis, may still be necessary on hopefully rare occasions, but failure of badly run big financial and other companies is healthy and indeed necessary for the survival of a robust free enterprise competitive system.

But--and this quote is from a pre-vote analysis--he concedes that short term intervention is needed.

I get closer to the principled objectors at the Cato institute web site where Jagadeesh Gokhale writes of the vote: ``score one for supporters of the free market who insist on allowing market reorganization of the financial sector to continue unimpeded...albeit at high risk to the economy over the next few months.'' Although thin on analysis, Gokhale is getting closer to the view that catharsis is needed, that a no-vote is a necessary sacrifice in a long battle of principle. In a separate, pre-vote piece, Gokhale analyses the problem as coming from low post 2001 interest rates; a (causally related) pressure on banks to find more and more projects to invest in, even where their quality was dubious (the subprime crisis) and a failure on the part of regulators to control bad lending. It might seem odd to have the mother-ship of all libertarian think-tanks blaming bad regulation, but the subtext of Gokhale's analysis is that Greenspan was operating in a system of highly government-manipulated interest rates, but justifying a laisser-faire approach in just a subset of the economy. No wonder, goes this view, that laisser-faire failed: it was not real laisser-faire. (The structure of the argument is very familiar in ideological thinking and brings to mind the very common--and similarly correct--argument that the Soviet Union did not represent ``real Communism'', where ``real'', rather strangely, refers to the ideal system and not the real one).

Gokhale's analysis, however, is still not the principled Libertarian objection to the bail-out I am looking for. It leaves room for a Becker-style accommodation with short-term intervention. ``We're not (yet) in Libertarian utopia, and the path to it is strewn with compromise,'' can be the line from Cato.

I find what I am looking for at the Ludwig von Mises Institute , where Frank Shostak argues that ``The Rescue Package Will Delay Recovery''. Skip two sections of throat clearing ideo-babble and you get to the commentary on where we are:

  1. Loose monetary policy since 2001 has led to money creation through bank credit expansion and bad investment decisions that happen to have appeared in the mortgage sector;
  2. The tightening of monetary policy since 2004 has slowly been taking funds out of ``bubble activities'', so the finance industry that serviced those bubble activities is naturally going to be hit hard
  3. Bank balance sheets look bad because banks made bad business decisions, and re-capitalising banks is not going to help the basic problem of wasteful investment-- Decades of nonproductive consumption (consumption that is not backed up by production) that emerged on the back of loose monetary and fiscal policies have severely damaged the store of wealth that serves as the foundation for credit markets [...] it will be futile to try to boost lending by pushing more money into the banking system. Some creative destruction of banks and other firms will be necessary now.
  4. The errors have all already been made--credit expansion, bad investments--and the bail-out is self-servingly chasing symptoms of these errors
  5. The virtues of thrift and careful lending must be resumed as soon as possible and the mistakes of the past must be paid for.

From a purely analytical point of view, this position has a surprising amount in common with Ann Pettifor's here on openDemocracy . The surprise is that the hard-core Libertarians should share their diagnostics so closely with Ann Pettifor's progressive radicalism. Her 2003 book and article point to credit expansion, first permitted by Nixon's abandonment of dollar-gold convertibility in the face of the need to finance the Vietnam war, as the false-foundation of apparent globalisation-led growth. She asks for an end to ``easy money'' in much the same way that Frank Shostak points to loose bank lending as the mistake made many years ago, and not solvable by a bail-out now. It is no surprise that neither Pettifor nor Shostak are pro-bail-out.

Both have the sense that the financial system has produced an illusion of wealth while actually, in important ways, eating at the core of what makes for a good society.The difference comes in a disagreement about the nature of the good society, and not in the analysis of what has gone wrong with our own bad societies. Pettifor stands for social equity, Shostak for market-faith. Pettifor goes much further in her analysis of the manufacturing of demand for debt through consumerism and her analysis of the distributional consequences of low input price for banks (in the form of cheap money) and high output prices for banks (in the form of expensive consumer debt).

Nevertheless, Shostak and Pettifor are in a strange analytical agreement over the mechanism of the mess we're in. It is therefore slightly less surprising that many Republicans and many Democrats voted against the bail-out: the orthodoxy at the centre of American politics is under attack--under an analytically similar attack--from both left and right. The vocal voter phoning in to their Representative is pretty likely to be able to justify a strong sense of indignation against the bail-out, whether they are free-market mystics or Democratic progressives. Buiter correctly identifies some of the anti-bail-out sentiment as ``mad but principled''. If the shrinking centre-ground means that it is made up of the ``unprincipled but sane'', it may be time to abandon the centre and to have the real argument over the shape of the good society.

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