FAREWELL TO FRIEDMAN-HAYEK LIBERTARIAN CAPITALISM
By Paul A. Samuelson, Tribune Media Services,
Samuelson, Paul
Posted 10/15/2008 at 7:00 pm EST
Pure capitalism prevailed in 1915-1929, my own childhood days. Who killed it?
Republican President Herbert Hoover and his billionaire secretary of the treasury,
Andrew Mellon, were guilty before and after the fact.
Who brought it back to life? Franklin Roosevelt's middle-way New Deal did that.
But it did take seven years after Roosevelt's March 1933 Inauguration Day to do it.
Let me fast-forward to the present worldwide financial bust-up.
Unregulated market systems eventually will do themselves in.
Is this the end of the market system? As a Main Streeter, I hope not. A thousand
years of economic history testify objectively how indispensable market systems
are.
Marx, Lenin and Stalin were village idiots as economists. Mao was even worse.
Let's try to forget about Castro in Cuba, Chavez in Venezuela, and whoever it was
who reduced North Korea to starvation and stagnation.
What then is it that, since 2007, has caused Wall Street capitalism's own suicide?
At the bottom of this worst financial mess in a century is this: Milton Friedman-
Friedrich Hayek libertarian laissez-faire capitalism, permitted to run wild without
regulation. This is the root source of today's travails. Both of these men are dead,
but their poisoned legacies live on.
These are strong words that I will have to justify. But let me warn readers that my
long and varied experience in economic history has made me an incurable centrist.
Worse than that, I've learned the hard way to be incurably eclectic.
I was a star undergraduate at the 1932-35 conservative University of Chicago. I
loved my world-famous economics teachers, and they showered me with top
grades. But. But. Whenever I looked out the campus windows, I saw
unemployment rates of almost 50 percent. (Pre-Hitler Germany presented much
the same story.) None of that squared with what was written in my prescribed
textbooks.
Why were my four undergraduate summers spent on Lake Michigan's sandy
beach? My family was not poor, but neither was it filthy rich. There were no jobs to
be had then. None means zero. Virtually all the banks in neighboring Indiana,
Illinois and Wisconsin went bust.
How did the benevolent President Roosevelt and the perfidious Adolph Hitler each
restore near full employment six long years after 1933? What finally did the trick
was massive deficit budgetary spending that raised public debts! You won't find
this story, as I have just told it, in most post-1970 Ivy League Ph.D. theses.
(Evidently science both improves and dis-improves.)
My sentences connect up with the puzzling future of rescue efforts that are taking
place on five continents.
First clear the decks as to whom to blame for making circa-1995 stability and
growth turn into 2008-? chaos.
1. Never forget George Bush's idiocies in geopolitics. Future history will document
that story.
2. Since Ronald Reagan's 1980 election to the White House, America has
increasingly become a nation of dis-savers (1) at the family level, (2) at corporation
levels and (3) at public levels a la radical-right supply-siders.
At an uncertain future date, when there is a disorderly lethal run against the dollar
as a currency, the surviving U.S. hedge fund traders will be leading short sellers of
the dollar. Those Reagan legacies will have played a crucial role.
3. George Bush's promised programs of "compassionate (sic) conservatism"
turned out to be a program of massive tax cuts solely for people like my
prosperous neighbors.
4. Designed promotion of inequality did not accelerate U.S. total factor productivity.
Instead, the obscene spike up in CEO pay made the whole system of corporate
governance dysfunctional. CEO careerists did best for themselves by telling lies
about true corporate earnings. Even after being caught out, they walked away
laughing all the way to the bank.
Indeed, Bush appointees to the SEC, like his first chairman, Harvey Pitt, were
picked only because they would deregulate rather than continue sensible centrist
regulating. Pitt was picked primarily because he had been a lawyer for all of the
four leading accounting firms, who themselves were newly fabricating misleading
measures of true profitability.
5. Put those accountants on the witness stand. They get paid by those they are
supposed to police -- a glaring case where monitoring and regulating are a prime
necessity.
6. Leave room in court for the big three rating agencies: Fitch, Moody and S&PMcGraw
Hill. They are supposed to give AAA approvals only for safe stuff. But if
one of the three got objectively truthful, the remaining two would get all the
business. That reeked of conflict of interest. Congress, take note.
7. To save space, I'll move on to the new "fiendish Frankenstein monsters" of new
"financial engineering." I and colleagues at MIT, Chicago, Wharton, Penn, et al,
may get rough handling when we face St. Peter at the portals to heaven.
What's the beef? Derivatives and swaps can provide rational risk-sharing and
thereby reduce total risk. Yes. But they also can completely obliterate all
transparency.
For decades I've served on nonprofit boards with CEOs from New York to
California. Not one of them ever understood anything about the Black-Scholes-
Merton formulas for valuing assets. All they knew, or thought they knew, was that
new, wonderful, risk-free profit centers had invaded their offices. It beat the
alchemy that changed manure into gold.
Apparently no one learned the lesson from the 1998 near collapse of Long-Term
Capital Management (LTCM), which necessitated an arranged rescue by the
Federal Reserve Bank of New York. Financial engineering is what enables you to
go from zero leveraging up to say 50-to-1 leveraging. And when the resulting builtin
risk explodes, once again all that happens is that your CEO and chief financial
officer laugh happily all the way to the bank.
Bear Stearns turned its billionaires into mere millionaires overnight.
Emperor Nero fiddled while Rome burned. Bear Stearns' chieftain played in bridge
tournaments while his shareholders were being reduced to toast.
Since this was one of the brokerage firms that handled plenty of LTCM's
transactions, shouldn't they have learned something about lethal hyper-leveraging?
Bottom line. Most losses will be permanent -- as they were in 1929-1932. However,
with enough creation of new money by the Fed and the U.S. Treasury, recovery
and stability will be possible.
Following the middle way of Roosevelt-Truman-Kennedy-Clinton could have
avoided today's chaos and bankruptcies.
Scholars still debate whether Columbus brought syphilis to the New World or vice
versa. But it cannot be doubted that the 2008 world meltdown carries on its label
the words Made in America.
Unborn children from Iceland to Antarctica will learn to shudder at the names of
Bush and Greenspan and Pitt. Of course, I exaggerate. But only a little.
(c) 2008 PAUL SAMUELSON DISTRIBUTED BY TRIBUNE MEDIA SERVICES,
INC.
