More Financial Crisis

1.
“Money is much too serious a matter to be left to central bankers”

- Milton Friedman

In an attempt to understand better what has been happening on Wall Street and in Washington the last few days, I reread Milton Friedman’s 1992 book Money Mischief. It seemed a good place to start. Professor Friedman was both a great economic thinker and good writer, and there certainly seems to be some mischief going on with our money. A couple of his observations can perhaps make some of the recent events make a little more sense. First and most important, he makes the point that money is whatever the people in a society agree that money is, and that money stays valuable as money only so long as people continue in their belief that it is money. While this is true even of commodity-based money such a gold and silver coins, the element of belief is especially important with regard to the fiat money of our era. Second, he notes that there “is strong evidence that a monetary crisis involving a substantial decline in the quantity of money is a necessary and sufficient condition for a major depression.”

During the last few weeks we may have seen a both a danger of a drastic drop in the amount of (broadly defined) money and a risk that people would start to wonder if their deposits and money market funds and other money instruments really were money after all. If so, then perhaps governments around the world may have been right to guarantee everything in sight and to manufacture lots of new money out of debt and thin air to replace what had vanished. However, even if they were right in principle, we still have to worry about a botched execution. They could do too little too late and fail to prevent a deflation, or they could do too much and cause crippling inflation down the road. We can hope they get it more or less right. However such hope would not be based on any experience, but on the notion that, like a guy in a one for 28 hitting slump, they might be due.

We also have to worry about moral hazard, the precedents that have been set, and the glaring obviousness of it all. The micro effect of much that has been done is to punish the prudent and rescue the reckless. Bitter and sensible taxpayers are saying “gee, maybe I should have bought a bigger house too”. No one in Washington wants to be around on the day that productive and responsible people figure out fully and en masse that our government has declared clearly and over decades that productivity and responsibility are for suckers. It is surely in the interest of the government to forestall this realization in some fashion and keep the goose laying.

2.

As to the two candidates for president, neither one is making much sense. In fact their public comments on the question pretty much reduce to the following:

Obama: Bush did it. Don’t blame me.

McCain: Frank and Dodd did it. Don’t blame me.

Obama: I can save our bacon, just me by myself.

McCain: I can save our bacon, just me being bipartisan.

Obama : I will give every American forty acres.

McCain: I will give every American forty acres and a mule.

Obama: I will give every American forty acres and a mule and a hat for the mule.

McCain: How about two hats?

However, we must remember that they are in a tough race in which most of the knowledgeable and principled voters have already made up their minds. They are left in a serious struggle for the undecided votes of the less ideological and generally more ignorant and gullible of our citizens. So the dissembling is understandable. We should hope that whoever wins knows that he is blowing smoke and will be more sensible after he takes over.

Who's Worse, Who's Worst

The question of who are the best and worst American presidents is an interesting one that can make for good conversation among historically minded people. I’ve long thought that Washington and Lincoln are clearly the two best presidents, with the only really tough question being which of them should be first. I rate Washington slightly higher, because his accomplishment in creating the nation seem to me to be even greater than Lincoln’s in preserving it. However, it is close, and there are valid points each way. (I hope that there is never a third candidate who belongs with them, because I hope the nation never faces dangers dire enough or situations severe enough to allow one. )

I have also been consistent for years about who belongs at the bottom. My bottom four have been Woodrow Wilson, Lyndon Johnson, Richard Nixon ,and Jimmy Carter, listed chronologically since I have vacillated about who among them was really the worst. While allowing that each of them had his successes and accomplishments as well, I think they have earned their rankings.

President Wilson led America into an unnecessary major war in which our presence helped to destabilize Europe and lead to the wars and tyrannies that followed. His administration gave us the income tax, an invasion of Mexico, gross violations of the civil rights of dissenters, a government takeover of the railroads, botched post-war peace negotiations, and federal drug and alcohol prohibition (to be fair he did veto the Volstead Act, though it is said for only technical reasons). To boot, he re-segregated federal offices and bureaus that had been integrated under prior administrations.

Lyndon Johnson’s record includes the Vietnam War, the grossly failed programs of the so-called Great Society, massive increases in the size of government, inflation, serious personal corruption, the collapse of the post war anti-communist consensus, and use of the IRS, the FBI, draft boards and other parts of the government to suppress dissent.

Richard Nixon gave us race quotas, OSHA, the EPA, the DEA, wage and price controls, the endgame in Vietnam, a failed détente policy of accommodation with the Soviet Union, continued suppression of dissent ,more inflation, an energy crisis, and, just for fun, the 55 mph speed limit. He was forced out of office under the threat of impeachment.

Jimmy Carter’s legacy includes the Departments of Energy and Education, rampant inflation, the overthrow of the Shah of Iran, double digit interest rates, economic decline, defeat after defeat in the Cold War, the Iran hostage fiasco, another energy crisis, a serious decline of America’s position in the world, malaise, weakened American armed forces, a dispirited nation with people buying wheat grinders and freeze dried food at survivalist stores, and being chased by a rabbit.

These guys are hard to beat. However, we may now have a fifth who belongs in there with them. Consider the record of George W. Bush. He can claim the Iraq war, the McCain-Feingold restrictions on free speech, exploding domestic spending, record federal deficits after a period of surpluses under his predecessor, the TSA and the Patriot Act, a huge drop in the value of the dollar, the federal response to Hurricane Katrina, a stock market that will likely be lower in even nominal terms after eight years than when he took office, the destruction of the post September 11th consensus against terrorists, and now the subprime mess and the panics and bailouts in financial markets. I think he’s a contender.