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April 02, 2009


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The communist Chinese leaders of the last century were trapped in the authoritarian politics of the grand gesture.  But gesture can hide failure only for so long.  Every five years the collective leadership concealed the dismal numbers that revealed economic failure and proclaimed another “Great Leap Forward”.  [http://www.historylearningsite.co.uk/great_leap_forward.htm  .]  The Chinese regime was finally chastened by catastrophic failure, the collapse of the authoritarian, anti-business model that brought down the Soviet Union.  In the triumph of experience over ideology the Chi-Coms were finally driven to embrace ‘Capitalism Lite’ in order to survive.  Now their leaders are lecturing the US on the virtue of paying our debts and fiscal responsibility.   


Politics corrupts free markets. 


Let me unpack that aphorism.  Politics is the allocation of political power (principally to tax, take, regulate and directly allocate resources) in the service of politically determined objectives.  Free markets represent the allocation of resources by volitionally determined demand and practically determined supply.  The signature element of a healthy free market is the win-win bargain.  The signature element of politics is the win-lose decree. 


I’m not asserting that free markets are inherently moral any more than people are.  And I’m not asserting that politics is inherently immoral any more than politicians are.  But market processes are honest in the specific sense that a price set by the operation of the law of supply and demand is honest.  And political processes attempt to set prices and allocate resources according to political outcomes.  In a free market, competition favors efficiency and productive novelty. The political economy is all about the distribution of electoral spoils.  In the political game, competition favors dominant interest groups.


After the collapse of the Marxist command economies, the egalitarian left was forced into more pragmatic game:  Just how much political loading can free market capitalism endure and still supply the spoils that fuel the political economy?  We are just now learning the limits of political exploitation of the economic engine.  We’ve tested the limits of welfare loading.  Sweden, for example, is just now attempting to unload some of its excessive welfare state burden.


The Credit Game


The current political game began in earnest when the allocation of credit became part of the spoils of political victory.  Remember the ‘stop the redlining’; credit game of the 70’s and 80’s?  Banks were directly pressured by activists to make more loans to questionable borrowers in bad neighborhoods.  Eventually naked political power was employed to that end.  This was all about using the federal regulatory power to force lending to underqualified borrowers in blighted neighborhoods.  The anti-redlining movement was the beginning of a ‘lend to the poor’ political gambit that in due course generated legislative pressure on Fanny May and Freddy Mack, the politically controlled mortgage lenders, to make increasingly bad loans to increasingly underqualified borrowers for increasingly overvalued real estate.  Finally, in an unprecedented greed-alliance with Wall Street financial institutions, the left’s agenda was financed by wildly overleveraged credit instruments in the form of immense bundles of bad loans transformed by con men alchemy into marketable assets.  This generated a new bubble, larger and more dangerous than the dot com craze; it swelled to unimaginable proportions then popped in the burst that was heard around the world.




This was not the failure of free market capitalism, but just the latest and most egregious example of the catastrophic results of the well intentioned political manipulation of markets. 


The current administration proposes to solve this problem by “privatizing” only the upside in order to attract the now-burned investor class back into the game, but socializing the down side, by ensuring that our children and theirs will be paying off debt...essentially forever.  [http://online.wsj.com/article/SB123862779016180329.html  and http://www.ibdeditorials.com/IBDArticles.aspx?id=323476417767055  and http://www.nytimes.com/2009/04/01/opinion/01stiglitz.html?em  ]


A vast, imprudent credit binge encouraged by bad federal policies is now to be fixed by a vast, imprudent binge of federal borrowing.  In one of the great ironies of history, the newly-prudent Chinese advise otherwise.


The greedy Wall Street alliance with their political handlers on the left was the symptom of a fairly widespread moral dysfunction in the culture.  You would think that a promise to pay should be kept.  We used to believe that making such a promise with no real intention of ever repaying is profoundly immoral. Some of us can still discern that affirmatively hiding one’s own fiscal leprosy to the detriment of those innocents who rely on you is fraud.  But these judgments presume a level of ethical literacy now absent among many of the governing intelligentsia.  When you couple moral and economic illiteracy you get a train wreck.  Ask not what your country can do for you; ask what it can do to your children’s children....






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