Throughout history, governments have always used crises to justify blatant power grabs. Often the crisis subsides, but the expanded government powers remain. In America this week, the tendency came into sharp focus. Congress signaled that it is preparing to perpetuate the Bush Administration’s domestic wiretapping program, and has even abandoned the pretense that warrantless surveillance be confined to terrorism. Similarly, even though our financial crisis has yet to reach full flower, Treasury Secretary Paulson announced plans to give the Federal Reserve new and explicit powers to oversee and regulate the financial services industry. However, a sober look at his plan reveals that it is tantamount to giving the fox complete autonomy to guard the henhouse.
What few economic leaders have acknowledged is that the Federal Reserve itself is responsible for the real estate and credit bubbles, which are the source of our current troubles. By keeping interest rates too low for too long, the Fed ignited a speculative fever and engendered a disregard for risk management that pushed asset prices above rational levels. Should we blame the private sector for taking advantage of all the cheap credit, or the Federal Reserve for supplying it? If a kindergarten teacher passes out handfuls of Pixie Sticks, and then leaves her classroom unattended for several hours, should we blame the five year olds for the hysteria that ensues?
The reality is that we should be restricting, rather than expanding, the powers given to the Federal Reserve. Since Greenspan, Bernanke and company have already inflicted so much damage with the weapons already in their arsenal, why provide them with heavier artillery? Only in Washington do those who screw up get rewarded for doing so.
Since the Fed has demonstrated complete incompetence at setting interest rates, why not return that function to the market? Instead of allowing the Fed to inflict unbridled havoc on our economy, why not re-impose some discipline? Instead of looking for new ways to regulate Wall Street, why not find an old way to regulate the Fed? Actually there is a simple answer to all of these questions; it’s called the gold standard.
In his speech outlining these proposals, Paulson stated that during the past fifty years the performance of the U.S. economy has been second to none. I do not know what planet Paulson has been living on these past fifty years, but it is certainly not Earth. If Paulson were referring to the prior fifty year period, from 1908-1958, his statement would have been correct. But from 1958 to 2008, the U.S. economy has blown a lead even greater than the one the Lakers enjoyed over the Celtics in game four of the just concluded NBA Finals. In fact, it may well qualify as the biggest economic choke in history.
In 1958 the U.S. enjoyed a standard of living so unmatched that the rest of the world still lived in the Stone Age by comparison. Our per capita income was so far ahead of our nearest rival that it seemed impossible that any other nation would ever catch up. Today not only is per capita income in the U.S. barely in the top ten, but we are being rapidly overtaken by countries that up until a few years ago were barely discernable in our rear-view mirrors. When it comes to economic performance during the past 150 years, the U.S. is the Big Brown of economies. 1858-1908 was the Kentucky Derby, 1908-1958 was the Preakness, and 1958-2008 was the Belmont Stakes.
Not only did the U.S. surrender a substantial lead, but in many respects our current standard of living is lower than the one our grandparents enjoyed. Sure we have a few more gadgets, larger televisions and more prevalent air conditioning, but the quality of life has actually declined. In the 1950’s, the average man earned enough money to fully support a wife and four kids, all while saving for retirement and paying off his mortgage. Today the average man can barely support himself. It takes two bread winners in most families to make ends meet, and that is assuming only two children. Even with both parents working, the typical mortgage on the family home will never be paid off and retirement is now a pipe dream. Flush with high pay, low debt, and a strong currency, the Ugly American in the 1950’s could vacation in Europe like a king. Now he can now barely afford the gas for a day trip to a Six Flags theme park.
If Paulson can be so completely clueless regarding the Fed’s role in the current debacle and in America’s economic stumbles over the past two generations, why would anyone place any faith in his proposed remedies? In fact, an unaccountable and unelected Federal Reserve, which nonetheless has lately proven to be as politically craven as any two-bit politician, does not hold the keys to our economic revival. However, with its increased willingness to rescue the big financial firms from their own excesses, perhaps Paulson sees an expanded Fed as the best way to ensure the continued prosperity of his former pals on Wall Street.