The Economy

How did we get into this mess?  How do we get out of it?

We got into this mess because our elected officials, in the name of unrestrained, unregulated, laissez-faire economics have steadily dismantled the financial regulations that were built up after the great depression to prevent a repeat.  Lo and behold, we had a repeat. 

There is no more powerful force for wealth creation than capitalism.  But it’s misguided to think that free markets are a panacea.  For one thing, free markets cannot operate efficiently without law and order, without infrastructure, without a stable government.  What has made America great is the combination of free market capitalism with our liberal institutions of government that promote and secure the values of a free society and ensure a level playing field.  The level playing field is critical not only to social justice but to the efficient operation of the free market. 

In normal times, the destructive forces of capitalism are what allow the constructive forces of competition and innovation to create value.  I believe in the free market, competition and innovation as the key drivers of prosperity. However, our current situation finds consumers and business de-leveraging from debt accumulated during the last ten years and unwilling to lend, borrow or invest.  We have 9.1% chronic unemployment (much higher if you count those that have given up looking for jobs).  Since consumer spending accounts for 70% of our GDP, having so many over indebted, underwater, and unemployed consumers creates a downward economic spiral.  We are on the verge of entering a permanent stage of deflation like that which has afflicted Japan for more than two decades.  The only reason we are not already in a depression is because of the Obama stimulus.  We need more, not less, to pull ourselves out of the crisis.  We need permanent job creation; we need to keep our teachers, firemen and policemen employed.  We need to make sure that our citizens have hope for the future.

Regulation

The question is not whether we have too much or too little regulation.  The question is do we have appropriate regulation?  The purpose of regulation is to prevent entities from engaging in activities that deflect the cost of their activities onto others.  Examples of such actions would include business dumping toxic chemicals into rivers whose water we drink or spewing pollutants into the air we breathe.  It includes Wall Street banks creating financial instruments that are worthless and selling them to investors even while they are taking short bets against those same instruments.  Or allowing these firms to leverage up to more than 30 times assets such that a decline of a few percent in their assets left them insolvent. It includes insurance giants like AIG selling credit default swaps and creating counter-party risks that we, the tax payers, have to cover to prevent financial Armageddon.