by Joe Cobb
I wrote an article for Reason magazine back in 1974 in which I opened with the comment that “credit” is a Latin word, 3rd person singular, translated means “he believes.” (“I believe” is a credo, first person singular.)
A modern economic system, as Adam Smith pointed out, grows more productive to the extent that it is able to promote specializations and wider trade among more people. Free international trade promotes growth and prosperity because it removes barriers that constrict and make a market smaller with fewer people to divide the labor among.
Barriers to trade make a market smaller, and specialization is reduced, and people are poorer.
There is an analogy here with a collapse of trustworthiness in a financial market. It will have the same contraction effect as any restriction in a goods-and-services market: it will produce a slowdown in trade, and a slowdown in growth. If a lender cannot trust he will be paid back, the cooperation between lender and borrower cannot occur. This is just as powerful a barrier as forbidding or taxing them, as a tariff would do.
Every economist agrees the Smoot-Hawley tariff of 1930 was a major cause of the Great Depression, and Jude Wanniski pointed out in his book, The Way the World Works, that as the tariff legislation was moving through Congress in 1929-30, the stock market was responding exactly the same way as it was responding last week to the votes in the House and Senate on the bailout.
The new collapse on Monday, Oct.6, seems to have been led by European and Asian markets. They have not been able to get their act together to agree on any credit bailout process. And, sometimes these things turn into an unstable (short term) panic just because so few people can really see the big picture. They respond to short term emotionalism.
What is the Answer?
One thing that bothers me is that there is no “partial” libertarian answer. The government creation of “Fannie Mac” and the Community Reinvestment Act of 1977, which forced the lowering of credit standards in housing, and the on-going pressure from Congress to promote “affordable housing” over the past decades, intensifying since 2003, has caused this collapse. The creation of the Federal Reserve in 1913 was the first of many ways the financial markets were rigged. The Glass-Steagall Act created artificial “investment banks,” which have finally disappeared in bankruptcy and mergers. FDIC insurance in 1934 was another way the financial markets have been protected from competitive pressure. This has not been a “deregulated” market; it has been rigged.
Yet, for me or anyone to suggest a partial libertarian solution without going all the way to advocate a total elimination of government national currencies, central banks, etc. would not work. And to advocate a total libertarian solution would look like very silly and impractical suggestions. This is very similar to the situation Ayn Rand observed when she contemned David Nolan for founding the Libertarian Party. She said “nothing short of a total philosophical transformation” would work. She was correct. But for a rational person, that is like asking for a transformation of human nature itself, including everyone waking up tomorrow morning and acknowledging “there is no god.” It just won’t happen.
Here is my suggestion for a transition system, which could function like an emergency “back up” method of pricing and payments for financial assets, outside of the Federal Reserve.
Each of us can regret we did not foresee the drop in the stock market last week, and sell all equities long ago, but at least I did sell half my holdings last year, a bit too early since the market boomed to a new high in October 2007, but at least I can point now to my having sold at higher prices than those shares commanded yesterday.
I bought a house – a large, foreclosed real estate investment for cash and qualified for a $200,000 renovation loan, getting part of my down payment out of the property at a profit as we build. I hope by early next year to be living in my asset, and also to have cashed out enough profit from the loan to buy back some severely depressed shares of stock too.