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Bailout Blues
Some thoughts by yours truly on bailouts, “stimulus,” and Our Enemy, The Fed, on Doublethink Online. Check it out! Free sample:
We are told that capitalism is inherently unstable, that its inevitable crises must be met with interventionist countermeasures, and that new regulation will prevent future shocks. Many also blame greedy financiers, who irresponsibly concocted exotic derivatives that no one fully understood, and which were traded in ill- or un-regulated markets. The emerging anti-market consensus was crystallized last year by Slate’s Jacob Weisberg, who has proclaimed libertarianism to be discredited by the financial meltdown, now and forever.
In short, a consensus has emerged that the crisis was caused by an excess of capitalism, abetted by bubble-era irrationality, from which only vigorous government action can save us: public works spending, aggressive monetary stimulus, a willingness to bail out distressed industries, re-regulation, and goodness knows what else.
Where is the response of the supposedly free-market side of the ideological divide? David Brooks bemoans the irrationality of markets and pegs blame for the financial mess on a cascade of psychological factors, which cannot possibly be grasped using tools of “classical economics.” In another column, he embraces stimulus as a solution while criticizing the Obama plan’s unfocused character. National Review, meanwhile, expresses skepticism at the effectiveness of any stimulus, but has hardly taken a consistently hard line against government intervention. In fact, in one blog post, Rich Lowry criticized congressional Republicans who opposed the massive TARP bailout as “extremely irresponsible.” Are there any voices left who can raise a compelling defense of free-market capitalism?
Enter the dogmatically free-market Austrian school of economics, and the Austrian theory of the business cycle, which holds real explanatory power over the current mess and convincingly places blame for financial panics and recessions firmly at the feet of government intervention.
According to the Austrians’ theory (despite their name, which dates back to the early twentieth century, today’s “Austrians” are mostly found in the United States), boom-and-bust cycles are, at root, not the consequence of rampaging greed, psychological mania, or insufficient regulation, but are the inevitable consequence of an excess of bank credit, which is the result of Federal Reserve policy.
