Column: Government Intrusion Causes, Exacerbates Economic Crisis

This story was written by Boris Ryvkin, Brown Daily Herald

Memories of the Great Depression were fresh in Britons' minds as they went to the polls in the 1945 parliamentary elections. Clement Attlee's Labour Party swept into power with over 300 mandates and quickly set about planting the foundations of what became the deepest, most entrenched welfare state in Western Europe. Copper, coal, steel, rail and the Bank of England were nationalized. The National Health Service was introduced. Post-war food rationing was kept to curb consumption, while a labyrinth of labor protections helped to artificially maintain full employment.

The philosophical foundation of Britain's resurgent statism came from the economic theories of John Maynard Keynes. Writing during the Great Depression, Keynes argued that government must act to increase aggregate consumer demand for goods and services during an economic downturn through spending and taxation, even at the cost of budget deficits.

In Attlee's Britain, since economic planning and state intervention had beaten the Depression and won the second World War, the public believed they would most certainly win the peace. For the next 25 years, few among the political elite questioned Keynesian wisdom, and a bipartisan consensus emerged supporting bigger and bigger government.

Things came to a head during the Winter of Discontent in 1978 when Britain, suffering from high inflation and unemployment, faced a tidal wave of trade union strikes and recurrent shortages of basic services. Margaret Thatcher's conservatives won the 1979 election, the economy changed course for the better and the Keynesian consensus died or did it?

When I read the statements and hear the speeches of our two presidential candidates, it is difficult to escape the thought that Keynesianism has made a comeback. Why aren't the candidates being honest with the American public and acknowledging that bad government policy, not deregulation, is the chief reasonthe United States isin this economicmess?

I don't hear the candidates discussing the artificial housing bubble caused by the Federal Reserve lowering interest rates by 5 percent between 2003 and 2004, which not only gave questionable consumers access to a sea of easy credit, but incentivized banks to lend beyond their available asset reserves. When the Fed started increasing rates a year later, the seeds of disaster were sown.

Now, the bubble has burst. Homeowners with unaffordable mortgages face foreclosure and significant sunk costs. Meanwhile, falling housing prices mean banks can neither recoup their losses nor lend reliably to creditworthy businesses and individuals.

Why is this story not being told? Why are we still hearing the nonsense of greedy Wall Street suckering the victims on Main Street? More importantly, why aren't we seriously debating how to end the Fed's monopoly over the money supply?

The candidates are working overtime to show the public they are "doing something." The Fed did do something after the 1929 stock market crash: It cut the money supply by a quarter over three years, which led to an interest rate spike and reduced national income,an action considered by a growing number of economists to be what actually triggered the Depression.

In stepped the politicians. Hoover's Smoot-Hawley tariff reduced market competition and increased prices for consumers just as the country slipped into recession. FDR's New Deal extended the disaster by several years and installed some of our most burdensome social welfare programs. Haven't we learned anything?

What I wouldn't do for the following three-part statement from one of the candidates:

First, admit that government intervention and misguided policy caused the crisis. Next, acknowedge that the bailout and similar schemes to socialize market losses will only prolong the agony by stalling the housing bubble's natural deflation and prevent the most efficient liquidation of bad assets. Finally, accept that it is better to do nothing and let the economy adjust naturally.

The seriousness of the financial situation demands clarity and honesty irrespective of election necessities.

John McCain is on record as saying the Treasury Department ought to buy up bad mortgages to shore up housing values. He also wants some federal officials fired and a new stimulus package. This begs the question: How much more money will be pumped into our sinking ship before it is all said and done?

Barack Obama sees the financial bailout as a mere "first step." To go into further detail would be akin to beating a dead horse. With congressional supermajorities guiding his statist agenda, our harvests will be bitter for quite some time.

Does a new Keynesian consensus beckon? All indications suggest the affirmative. The public has turned to the state to bail it out. The parties are trying to out-intervene one another in their responses. The candidates systematically feed the electorate disinformation. How I wish this all to be just a passing phase!