Thursday, October 02, 2008

Davey chimes in, or maybe just vents

Readers will recall at least a few posts here on the Stool in recent days mocking the penchant - nay obsession - of conservatives to blame everything bad that happens on the government. Spot will repeat a quote that he thinks is especially trenchant:

On economic questions the standard [conservative] exculpatory maneuver is even simpler. When some free-market scheme blows up, one needs only find an institution of government in close proximity to the wreckage and commence accusing.

Thus we hear from some on the right that the disaster on Wall Street was the handiwork not of those with unbridled pecuniary motives but of Fannie Mae and Freddie Mac, which were government-sponsored enterprises and therefore partially exempt from market discipline and of theoretical necessity the sole culprits.

Spot was quoting Thomas Frank in response to Captain Fishstick's howl that the government was responsible for the current financial crisis. Now, that lion of economics, Davey Strom, agrees. Davey nods to the sages who have come before him (meaning Sticks' post referred to earlier):

First, let’s acknowledge that imbalances in the market are at the root of the current troubles. There is no doubt that a housing and lending bubble formed, and that the popping of that bubble has helped lead us to where we are today. Others have shown how lending rules set by politicians and monetary policies set by the Fed helped distorted the market for housing, but even without those prods this or another asset bubble could easily have formed. Markets are not infallible.

Davey says that Washington feels our pain:

Ironically, Washington's initial attempts to stem the bleeding transformed the painful but necessary correction into today's market rout. As in 1929 and the early 1930's, it was government intervention into the workings of the market that turned a serious problem into a crisis.

In the 1930's the government helped create the Great Depression by making a number of blunders that helped destroy the underlying financial system. In particular the Federal Reserve stood by as bank failures led to a massive contraction of the money supply, drying up credit and leading to massive deflation that destroyed the American economy. This time around nobody can accuse the Fed of being stingy with money.

That darn government; it screwed up again. Spot will bet, boys and girls, that you didn't know that the government caused the Depression. Spot didn't. Although as far as Spot can tell, Davey is saying that in the Depression, the government intervention blunder was not to intervene.

Maybe the point will come to one of the boys and girls; it eludes Spot. All Spot can come up with is Herbert Hoover: he did too much.

But according to Davey, here's the problem this time:

From early this year the Fed and Treasury seem to have been following what I would call a “reverse Goldilocks” strategy, doing both too much and too little and getting the policy just wrong.

You made that up, Spotty.

No, grasshopper; Spot did not. Davey expands:

Two things were made abundantly clear by this pattern of events: first, in the judgment of the Fed and Treasury our financial system was on the brink of collapse; and second, they had no plan for how to deal with the impending disaster. They were shooting from the hip, and that's not a great way to aim.

It was signals sent by Washington that destroyed the underlying confidence that is the bedrock of any financial system. Investors, rationally viewing Washington's actions, quickly rushed to the sidelines in order to wait and see what the government was going to do in order to clean up the mess.

Because of the government, we lost faith in ourselves. Will we ever be able to look at ourselves in the collective mirror again?

Seriously, it is obvious that Davey has no idea of exactly what the government did wrong during the Depression, nor in the current crisis. But one thing is sure: it is the government's fault.

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