The Charmed Circle

(cross-posted at Heritage)

Candidates running for president in recent decades have sounded in their speeches more like they believe they are running for the position “God” rather than the position “President of the United States.” John Stossel pointed this out in his recent special on 20/20.

Politicians claim that they can solve economic crisis, prevent natural disasters, keep the enemy at bay, create millions of jobs, and so on. Gene Healy argues in his book The Cult of the American Presidency that the executive has incredible power outside its original constitutional limits in part because we have fallen for this idea that the president can save us. The candidate we like we think can cure all our ills, while the one we dislike will destroy the country over night. But, he argues, in fact both are probably about equally destructive because the power given to the position and the scope of the government’s role is the core problem, not who sits in the office.

It wasn’t always this way. Although government was a tiny fraction the size it is today, Calvin Coolidge was a proponent of privatizing those concerns where the state had taken control and failed. There are so many time when these words would have been appropriate these past decades, but so few times when this sentiment was aired, and fewer when the action was taken:

If anything were needed to demonstrate the almost utter incapacity of the National Government to deal directly with an industrial and commercial problem, it has been provided by our experience with this property.

In that speech Coolidge mentions the “enormous debt” of $30 per person or $150 per 5-person household. Adjusted for inflation, $30 would be about $352 dollars today. Our per capita national debt today is about $35,000. Yet, he saw the debt as a serious concern, and vowed to reduce it. Just a few years later he was able to make these remarks – just imagine we could say this today:

We have substituted for the vicious circle of increasing expenditures, increasing tax rates, and diminishing profits the charmed circle of diminishing expenditures, diminishing tax rates, and increasing profits.

Four times we have made a drastic revision of our internal revenue system, abolishing many taxes and substantially reducing almost all others. Each time the resulting stimulation to business has so increased taxable incomes and profits that a surplus has been produced. One-third of the national debt has been paid, while much of the other two-thirds has been refunded at lower rates, and these savings of interest and constant economies have enabled us to repeat the satisfying process of more tax reductions. Under this sound and healthful encouragement the national income has increased nearly 50 per cent…

Notice that he spoke of the “national debt” not the deficit being paid off. What America needs today is not a president who promises hope and dreams, and to cure our ills with more spending, but a president that sees how far outside constitutional bounds we have come, and vows to get us on the path of that charmed circle of reducing expenditures, cutting taxes and increasing our private prosperity.

America Serves

(cross-posted at Heritage)

President-elect Barack Obama has quietly changed the meaning of the American Dream and introduced a proposal for American Serfdom. In America, what it means to serve one’s country is very clear. It is voluntary and for the purpose of defending the country during a time of war, or for the purpose of upholding the constitution by serving, for example, as a judge or on a jury.

Obama has reinterpreted the American Dream of “life, liberty and the pursuit of happiness,” as a collectivist ideology. He believes it is a dream about the collective happiness. He connects the notion of “service” to the American Dream, as he interprets it:

When you choose to serve -- whether it's your nation, your community or simply your neighborhood -- you are connected to that fundamental American ideal that we want life, liberty and the pursuit of happiness not just for ourselves, but for all Americans. That's why it's called the American dream.

Obama is wrong. It is called the American Dream because in America the individual is secured rights and liberty, and with those rights protected and liberty ensured anything is possible. The American Dream is an individual dream. It is the dream of each of us, not the dream of a collective hive, or a collective outcome. This is not to say that private charity in un-American. Private charity and civil society are very much part of the American spirit. But this is because they are private and voluntary.

But then Obama goes on to describe what it means to him to serve. He has a list of new “corps” to add to his expansion of the Peace Corps. Then he lists “a plan to require 50 hours of community service in middle school and high school and 100 hours of community service in college every year.” That is, 500 hours of mandatory community service.

Obama says that it is when “you choose to serve” that you are connected to the American Dream. But this quote is used to bolster support for a program which includes mandatory community service for every American child and college student. So, now mandatory community service is the American Dream. Now, it is not an independent pursuit of a better life but performing manual labor for the state that constitutes the American Dream.

Now to serve one’s country in America will have the taste of being a servant to the state, a serf, rather than the proud voluntary service of a free man.

Bureaucrats and Diapers

Recently, I came across this article. I laughed - it was funny. But, I kept thinking about it. It is really an important example of why regulations are dangerous. In this particular case the government just "promoted" the use of cloth diapers, they did not regulate disposable diapers, as far as I know, nor certainly ban them. But, the story illustrates why it is so good that they did not take that step.

It was lucky that they were able to discover their mistaken assumption - that in fact in order for cloth diapers to produce as little a carbon footprint as disposable diapers they must be washed at a moderate temperature and line dried. Typical use of cloth diapers produces a larger carbon footprint than typical use of disposables. If government had taken the "moral and responsible" step that many activists advocated and either banned, regulated or highly taxed the disposable diapers: it would have led to a larger carbon footprint.

The truth came out in this study - the truth about the carbon footprint. But even what this "carbon footprint" means is not entirely clear. We think we know what greenhouses gases do, which are the worst, what is the right way to combat them according to environmental science, etc. But the "truth" we know today is different from the truth we knew 10 or 20 years ago. New studies poke holes every year in things we thought we knew, or produce new information that changes what we think we know today.

Science is a constant evolutionary process. We are always learning. The market too is a constant evolutionary process, always evolving and innovating. The market immediately begins to adapt to every new piece of information, new signal about resources, and new evolving preferences. Fighting to better serve customers, firms make products more efficient - less wasteful. If consumers care about the environment then firms will respond with products with a small footprint. Even if consumers don't care about that, more efficient product innovations may reduce the footprint anyway.

But government commands are not an evolutionary process, they are an intervention into the evolutionary process which diverts resources along another path, interrupting the flow of information, blinding the actors involved in the learning process. Government itself has the wrong incentive structure. Fighting for their own self-interest but in a bureaucracy instead of a competing firm, government officials use rent-seeking to expand their power in the market instead of improving a product to sell to customers.

Anyway, I wrote this to the EPA:

It is noble to want to prevent disaster. Government is clearly trying to pursue a goal - less global warming. But, particularly when scientists cannot come to complete agreement on exactly how different technologies affect this goal, it is extremely dangerous to pursue the end through stringent government regulations that reduce personal and economic freedoms.

Government agencies can often become over-zealous in pursuing their goals, and may do much more harm than good. Recently, after promoting the "green" solution of reusable diapers for years, the Department for Environment, Food and Rural Affairs (Defra) in the UK did a study and discovered that, unless an "extreme" approach was taken to laundering, in fact disposable diapers produced a smaller carbon footprint.

Thankfully disposable diapers had not been banned. However, another lesson came from that incident -- the study was hushed. Embarrassed that they had been promoting the wrong choice for so long, not wanting their so-obviously "green" solution to be blemished, the agency instructed civil servants not to publicize the conclusions.

The bill proposed here would expand the powers of our own green energy agency, but we could make the same kind of mistakes and restrict freedom unnecessarily. We could do a lot of damage in pursuit of a noble goal but with limited information and limited means. The government can only command and ban, it cannot innovate and find creative solutions. And it is often wrong, and often over-zealous.

The private sector came up with efficient disposable diapers to serve a need. Despite the noble will and immense power of the government, the government was wrong about the need to intervene and return to a more primitive replacement, and then it tried to hide its mistake. If the government takes the further step to regulate or ban the product it perceives as harmful and if government does not stumble upon the science that redeems the product, or if it refuses to turn back, the harm could be much greater.

This proposal would give the EPA far too much power to regulate and ban products which may not cause the great harm which the agency perceives. I believe the agency is acting in an over-zealous manner and must be restrained.

Not that I expect self-restraint from bureaucrats. This will have to be decided in the Supreme Court (again) as usual.

Planning Insights from a Non-Austrian

An interesting article in the QJE from 1964 offers some nice non-Austrian insights into the problems of central planning, by looking at problems of large organizations , be they large firms or governments, and their bureaucracy.

The first insight is in this nice paragraph, imagine yourself standing in a central statistical bureau of the government - or maybe the Fed - trying to work out how to save an ailing economy:

Statistics at the center must lose cognizance of individual psychologies, attitudes, and tendencies that are too detailed, amorphous or untactful to put into summary reports, but that can be thoroughly useful in decisions. The central staff live in the midst of aggregates, trends, averages, and over-all generalizations. They are remote from the individual reality behind the words and figures that flow and jumble over their desks. They are dealing with symbols: their input is items on paper, and their output is items on paper. The individual is expendible-- both to the American Telephone and Telegraph and to the Soviet Union.

(my emphasis)

Of course, if AT&T deals with you that way, you, hopefully, can find another phone company (so long as government hasn't given them a monopoly). The point about aggregates goes deeper than is made clear here. In particular, aggregates cannot tell you the micro-level reasons for problems with coordination and growth, and macro-level targets cannot aid individuals in the coordination necessary for growth, to reach those targets.

Another good paragraph is this one. Think of Obama's community service projects and call to the spirit of "public service". Hopefully the insight is well known, if often forgotten:

Conventional wisdom in most communities of the world approves of harnessing the "highest motives," rather than the strongest motives, to achieve social goals. Down-grading the profit motive (discussed above) is only one example. Public exhortation and praise are focused on community service, mutual help traditions, and cooperate ventures. Looking after oneself, and one's own family, earns no special applause. But economic efficiency and progress mainly depend, as Alfred Marshall advises us, on making effective use of the strongest, and not necessarily the highest, motives of mankind.

He then cites Khrushchev who tried to invoke Lenin, when he realized the need for profit motive, and stressed to the people "the exceptional importance of the Leninist principle of material incentives," explaining that "It is completely erroneous to oppose material stimuli to moral ones, material incentives to ideological-education work..." -- Indeed, Adam Smith couldn't have said it better.

The two points come together when the author then goes on to discuss corruption. The author makes the important point that planners can only make decrees, they cannot set up institutions that allow the actors to fulfill the goals by following their own strongest motives. If they did the latter, they would not be planning, but providing an environment for free choice -- a market. Instead the planner must use command, which cannot ensure the target is met, but just direct the actions of the individuals. If the actions won't produce the desired ends of the individual, he may break the law, making the results unreliable. If he follows the law from fear, but knowing it won't achieve the ends, the plan won't be fulfilled.

To the extent a central authority relies on incentives-- income, status, etc-- to get work done, it is trying to make the public interest and private interest coincide. To the extent it relies on regulations or laws -- backed in the case of government by police, courts, and army -- it is forcing people to do, in the purported general interest, what they would otherwise not do. That is, giving incentive to avoidance, evasion and corruption.

On the point of corruption, the author also wins my heart with this footnote about how the more laws imposed, the more are broken, creating a social acceptance of violation of law:

It seems plausible to estimate that the average respectable citizen in the United States breaks at least one law a day (for example, did he come to a complete stop at the last stop sign?), whereas in 1800 it is doubtful whether his predecessor broke one law a year (did he murder or steal last year?).

Thank you-- still respectable even if I get fined for California stopping.

The new New Deal

Cross Posted at Heritage

Could the current crisis usher in a new “New Deal”, with a new brand of corporatism to replace the free market system? Certainly European leaders are arguing that case. The current economic “crisis,” may itself have been caused by bad policy. Yet, is provides a great pretext for an expansion of government.

During the 1930s, as part of the New Deal, Franklin D. Roosevelt nationalized banks, set prices, wages and work hours, and promoted public works programs to employ the unemployed. The New Deal, or the National Industrial Recovery Act (NIRA) to be precise, was supported by many industrial leaders, some of whom had helped draft the legislation. Cartels, inflated prices and subsidies were great perks for established business, especially those that would have trouble staying ahead in a free market.

Businesses then, as now, cried to Congress about their need for a bailout, and the disaster which would be wrought by their bankruptcy. NIRA was eventually declared unconstitutional. The decision made the important point that “extraordinary conditions do not create or enlarge constitutional powers.”

Until then these laws were widely supported and considered critical to recovery from the economic crisis of the time. Yet intervention did more to cause and prolong the crisis than to aid recovery.

Although these measures were defended as being necessary during an emergency, and only temporary, many still exist today. For example the emergency farm supports created with the Agricultural Adjustment Act (AAA) have morphed into the current Farm Bill, which still pays farmers not grow food.

Like the New Deal period, we are seeing waves of nationalization, bailouts of unrelated industry, and expansion of central bank power. The nationalization of banks during the New Deal was actually smaller than what we are doing today – as a percentage of GDP it was the equivalent to about $500 billion. Today the state took shares in the largest nine banks and bailouts total well over a trillion dollars.

As John Goldberg points out, the stake that government now holds in these banks is actually greater than the stake it held in Fannie Mae and Freddie Mac, and it is quite likely that this temporary measure might too become the regular state of affairs.

If Obama is the next president, he would like to see a return to union domination and government mediation in wages and hours. Obama also favors public works programs to employ those out of work. He has already proposed at least two kinds of programs like this: his “transitional jobs” program which hires the unemployed, and his National Infrastructure Reinvestment Bank. With the excuse of an ongoing recession, he could easily roll these into New Deal sized public works projects.

But, prior to the New Deal we had small government. Prior to this new “New Deal” we already have enormous government and massive debt. The Deal we sign today would be for European style socialism, with European style unemployment and stagnation.

Causes and Cure for the Credit Crunch

This crisis is often complicated way out of proportion to what is necessary. It is really quite simple. This article makes a nice rundown, and I will give you some basic bullet points. Then I will attempt to convince you that the best medicine is to let the market detox.

Causes

The crisis was triggered by a collapse in housing. There was first a bubble - with housing prices rising and rising and rising and everybody knew it couldn't last - and then it popped. Crash. And then - oops - it took down all related lending, since so many firms had a major portion of their lending wrapped up with mortgages. Hence, credit crisis.

Now, what could have caused the bubble and the pop? Well, before jumping right to culprits, lets remind ourselves what drives prices up and down: supply and demand. So, for prices to rise, there must be greater demand than supply (lots of bids on few houses) and for prices to crash, there must suddenly be greater supply than demand.

OK. So what could have gotten supply and demand out of whack? In normal times, if demand is high and prices rise, more suppliers will come in, prices fall again; but here the supply never caught up with demand. Why?

Supply and Demand

Several policies and programs have been put into place to encourage home ownership, but which drove a wedge between supply and demand. These include:

(1) Fannie and Freddie which ensure cheap mortgages as they buy bad loans back from places like AIG and which dominate at least half of the housing market, drove reasonable lenders out of business, and made poor lending and bad loan packaging possible by being a massive customer (read: subsidy) to places like AIG.

Demand: Much more demand by the lower income buyers, demand for bad loans by gov.
Supply: Private market crowded out by Fannie/Freddie except those making loans that gov. buys

(2) The Community Reinvestment Act which forces lenders to offer cheap loans (with quotas) and which, together with Fannie and Freddie, led government to create the securitized secondary mortgage market, and which also drove potentially profitable lenders out of business, expanding Fannie and Freddie's dominance.

Demand: Much more demand by the lower income buyers, demand for bad loans by gov.
Supply: Private market crowded out again, only the few big ones can meet gov. quotas

(3) Fed-induced low interest rates which made mortgages more affordable, tax write offs and personal tax credits for mortgages, etc.

Demand: Much more demand by all buyers
Supply: Supply contingent on interest rates staying low, otherwise defaults


Now, what was the point of Fannie and Freddie? Their charter states that it is to ensure loans to those who cannot normally afford them by buying low-income private loans up on a secondary market. This is not a recipe for profit maximization, it is a recipe for excessive risk. Now, it is non-profit insurance - risk sharing - in theory. If that could work.

But it can't for several reasons. Moral hazard and plain old demand will go up, when rates are this low, so losses grow. Government has actually fed the demand of low income buyers, not only by offering them cheap housing but also by driving interest rates down, offering tax credits, etc. In fact, they kept expanding and expanding further into low-income and sub-prime lending, in the dream of reaching 70% home ownership.

Meanwhile those who would offer low-income loans at rates which would allow profit are all crowded out of the market. The only ones left who can make a profit are those who depend on Fannie and Freddie to buy their risky loan packages. So long as Fannie and Freddie stay in business, they are OK. But Fannie and Freddie can only appear as if they are above water so long as housing prices keep rising, so long as fuel keeps going on the fire of demand.

But they are going deeper and deeper and crowding out everything around them. They are swollen with risk and poised right in the center of the credit market, waiting to explode.

Why did it all come a head now? Because:

Between 2005 and 2008, Fannie purchased or guaranteed at least $270 billion in loans to risky borrowers — more than three times as much as in all its earlier years combined, according to company filings and industry data.

Boom.


Cure

I keep stressing that we understand what caused the problem. The reason for this is that (as the first link above mentions) the cure that we are putting in place is actually more of the same-- more of what caused the crisis. If the crisis was caused and fueled by these policies, why do we expect them now to save us?

Fannie and Freddie caused the crisis by not pursuing profitable business strategies - by risky lending and loss-making pricing - and yet, Paulson promises that to cure our ails he will make sure that Fannie and Freddie stop worrying about being profitable. Put the homeowner first.

Fannie and Freddie caused the crisis by expanding into the sub-prime market, the answer to foreclosures a year ago? Expand Fannie and Freddie's mandate for low-income lending. Today? More of the same.

Fannie and Freddie caused the crisis by subsidizing a risky secondary market for mortgage-back securities. Our initial response a year ago? Buy more bad loans. Our current plan? Buy more mortgage backed securities (bad loans).

The fed fueled the fire with easy money. Answer? Easy money.

This is classing government intervention feeding on itself.

What is the right cure? Leave it be. Let the market restructure. Don't feed the crisis. If you think it will hurt, you may be right. But won't $700 billion in transfer from taxpayer to government also hurt? Won't feeding the loss-making machinery of socialized companies, which will need to be bailed out again and again hurt? Won't subsidizing failing companies which drive out regular business hurt too?

There is no pain-free answer. But there are cures that hurt because they detoxify, and there are cures that feel good right now, like a mamosa over breakfast after a drinking binge, but fail to actually solve the problem. In fact, they make it worse. And the final detox hurts more.

This crisis, the more I learn of it, the more it reminds me of the transition in Russia. We have to cut the strings. We are being made a muppet.

What I wrote to my Congressman

Mr. Congressman,

I urge you with all my heart to vote NO on the bailout bill. I was very pleased when the bill first failed in the House - finally Congress had heard the American people, and refrained from rushing blindly to enact desperate and far-reaching legislation that would only exacerbate economic troubles.

The new bill is hardly any better than the old bill. Passing the bill would be foolish, short-sighted and a slap in the face of the American taxpayer, and voter.

I urge you to stop, consider carefully other options, and consider what the market can do on its own. The people are even ready to accept a short term economic hit, if it will lead to a necessary shakeup, so that this won't happen again.

Government has stepped outside of its constitutional role - as Senator Coburn pointed out - for too long. Government and the Federal Reserve is to blame for this mess, and a government bailout will only make it worse, as it will prevent the adjustments that need to be made, and allow companies to keep making bad decisions.

Several letters have been written and signed by economists which object to the bailout and which offer alternative policy proposals. The American public deserves serious consideration of alternatives.

Please, I urge you, VOTE NO on the bailout.

Your concerned constituent,

Guinevere Nell

Will Warren Buffet be seen as a savior?

For some reason, when someone can make a profit on something, it is rarely seen as moral, while if its done unprofitably, and even with taxpayer money, it holds the moral high ground. So, when pharmaceutical companies save millions of lives, they are greedy profiteers; but when government hobbles together a weak program to deliver medicine, it is doing vast good.

Now, we can compare government’s massive $700 billion proposed bail out program, with one man’s $5 billion purchase. Sure, it’s a lot smaller, but what if a few dozen of the richest men all decided to buy failing or at-risk companies cheap, restructure them and try to profit from them? Would this be hailed as the greatest men of Wall Street coming together to save the economy? Somehow I doubt it. Instead, it would likely be seen as the greedy profiteers taking advantage of a dire situation to buy up all the world’s riches. They would be called names like “robber baron” or “viper.”

But, how does a program of private for-profit purchasing of the firms differ from a government program? There are the things that make it less “moral”:

1. You won’t have to pay more in taxes in order to pay for the purchase.
2. You won’t lose your job because others have to pay more in taxes.
3. The companies will be restructured with the intent of making each of them more profitable, so they will likely become more efficient and begin hiring more people, driving your wages up.


There are other differences, especially if we end up having to compare nationalizations with private purchases – but with a little luck, the proposal won’t go that far. Still, I have to wonder whether we wouldn’t be better off if government refused to do anything, and people like Warren Buffet came to the rescue.

Bailouts Making the Crisis Worse?

Economic policies often have unintended consequences. While the decentralized actions of individuals in the market can effectively coordinate the supply of goods – Adam Smith’s invisible hand – centralized government actions cannot. So, when market crises come about, it is important to ask certain questions before looking to government to correct the failure.

First, was it a failure of decentralized actors? Was a market failure, or irrational speculation, at the root of the problem, or was it government intervention that caused it? The financial markets have not been free of regulation, and they have been bailed out before. Those companies most regulated were the ones that led the crisis. Similarly, in countries with even more regulated and state owned financial sectors, the crisis has taken down those nationalized firms.

If it was intervention that caused the problem, then there may be no need to tie the hands of the market to prevent future crises. Instead we could roll back the interventionist policies we’ve been using, potentially allowing firms more flexibility to solve market failures on their own. Even the most benign regulation might prevent the market from innovating, adapting and spurring growth. Literally throwing money at the problem, and then seizing companies at will, cannot solve the underlying problems.

Second, it is important to ask both what would happen without bailouts and what is likely to happen with them. Many commentators simply consider the first, and have a doomsday scenario, but they have not considered carefully how the bailing out itself might cause both short term, and of course long term, damage. In the short term some say that the bailouts “are actually making it harder for financial firms to raise the money they need to muddle through the credit crunch.”

Further intervention is likely to make it worse if intervention caused the crisis in the first place. In the long run you have serious moral hazard problems – this is well known. Trying to dodge some of these problems, the Fed is being inconsistent in its bail out policy. Playing favorites is a well loved perk of discretionary policy making because it allows for rent-seeking by firms and politicians. With bail outs and subsidies, bad firms and bad investments are propped up like petty dictators, serving themselves but not the people. All this waste is laid at the foot of the tax-payer.

Finally, if we create a crisis through use of intervention and then respond to the crisis with more intervention, which in turn makes the crisis worse, and then respond to that crisis with yet more intervention – when will it ever stop?

As CNN reports, “This is the federal government's most far-reaching intervention in the financial markets since the Great Depression of the 1930s.” It will cost hundreds of billions now, and much more later, if it causes more crises down the road. So, it is critical that we ask: do we need these bail outs, and what are we setting ourselves up for?

Mortgage Socialization

Cross-posted at Heritage.

Fannie Mae and Freddie Mac were created during the New Deal by the Roosevelt administration in order increase home ownership. With government backing and price controls, the supply of housing was artificially increased, with the funds coming from the taxpayer.

Even when Fannie and Freddie were made into government sponsored enterprises (GSEs) in the 1960s, they were still provided the financial support of the Federal Government. Because of their implicit government guarantees, these policy-based suppliers came to dominate the housing market.

As GSEs, Fannie and Freddie purchased 44% of subprime mortgage securities and were the biggest buyer of Countrywide loans. They became an industry duopoly, owning or guaranteeing about half the $12 trillion mortgage market. Risk was socialized, spread across all taxpayers through government guarantee, while profit was concentrated and private. This is a prototype case of government thriving on “concentrated benefits and dispersed costs.”

The ability to do this is what drives government expansion, taking from the masses and channeling the money to a minority – or special – interest. With these special interests, campaigns were launched, politicians entrenched and bureaucracy expanded. Hence Fannie and Freddie represent a massive rent seeking operation, to funnel money into the hands of officials at the expense of the taxpayer.

And yet none of this was sustainable, because it wasn’t profitable. Inevitably there would be collapse. Fannie and Freddie engaged in Enron-style accounting, and mafia-like corporatist tactics. It was their privileged status that led to the corruption, and that distorted the housing market and helped to inflate the housing bubble (also made possible by loose monetary policy).

The government takeover only makes all of these things worse. In the short run there is relief that a market collapse won’t occur imminently, but like the Soviet Union during perestroika, the fear of pain during reform can only lead to the delay of collapse and a more painful landing. Further concentration can only cause further waste, as competition, profit guidance and valuable price signals give way to bureaucracy, rent-seeking, inflation and misdirected investment.

As nationalized firms, Fannie and Freddie are government agencies, relying entirely on public funding. They have no reason to keep costs low, and every reason to allow short-term political objectives to guide their choices instead. Indeed, the Treasury has made it very clear that they will specifically move away from profit guidance. Treasury secretary Paulson said on Sunday that the entities “will no longer be managed with a strategy to maximize common shareholder returns.”

Paulson has promised that the fees they charge banks for loan securitization services will be examined “with an eye toward mortgage affordability,” even as they are neck deep in bankruptcy. This reminds me, again, of the logic of perestroika – instead of freeing prices up and allowing some market adjustment, so that the economy could finally get on track, a compromise was made. Prices would be “based on social costs,” companies were allowed to “take into consideration cost-effectiveness” but “speculative price increases aimed at excessive profit” were forbidden.

The logic of the expanding U.S. government is becoming just as warped. The socialization of risk caused the housing crisis, and the response is to nationalize. Risky lending driven by policy not profit caused the collapse and the “reforms” will reduce fees and shun profitability. If we keep moving in this direction, we’ll pass through our own reverse perestroika, and end up a socialist state.