6th
Laissez-faire is lazyfare. If you want to save the economy, you have to deregulate - the hard way (part I)
I love me some deregulation! Don’t you? Can I get an amen?
Silence. Crickets debate, tumbleweeds tumble.
These are not the glory days of deregulation. In fact, right about now the only people clamoring for deregulation are a few leftover zealots bunkered down in the Masada of the Vice President’s Office. Rot on them.
Unfortunately, they are right…for the wrong reasons.
Deregulation is a necessary part of a free market economy. Its almost axiomatic - for a market to be free there can be no regulations throttling it back. Reagan’s big magic act was marrying the Business/National Security Right to the Social Conservatives. Deregulation was the wedding band they shared. Deregulation meant small government, no meddling in matters of capital or social norms. It was packaged as the dismemberment of FDR’s progressive New Deal, which gave rise to bloated bureaucracies, an activist federal government, and 50 years of Democratic congressional dominion. Deregulation was the war cry to tear down the Jericho walls of Big Democrat government and end its back alley assignations with socialism.
Bah. Rot on them.
Here’s a revolutionary thought: the national economy belongs to our nation. Oh, I can hear the fanatics slapping their heads, wailing about socialism. Breathe, Sicarii, everything will be clear soon enough.
The American economy belongs to the American nation. It is ours. It serves us. All of us.
Free market capitalism is a powerful engine of wealth creation and must be the central mechanism of our national economy, but without proper discipline it is nothing more than a deadly cancer. Look at our economic history. It is a series of financial bubbles and contractions; some recessions, others catastrophic depressions. I personally find the term ‘bubble’ to be a dangerous one. It implies something light, airy, insubstantial, tenuous - when they are nothing like this except at the fleeting moment of their collapse. An undisciplined financial expansion is a cancer, fueled by fear and greed, until there is no more liquidity to consume, and then it implodes, destroying the national wealth in its failure. That national wealth is not some abstraction either. It is your wealth, your family’s liberty, your parents’ security, and your childrens’ dreams.
It is this for all of us.
After each successive collapse, wealth retreats from the hands of the average person, collecting more and more in the grasp of those who are faster or less encumbered by conscience. Underlying free market capitalism is the ugly truth that every man is for himself. Free market capitalism began as a revolutionary program, unleashing the organizational power of the individual to determine the optimum use of their own resources to their own benefit, throwing off the crippling yoke of millennia of monarchial command and control of human commercial energy. In its youthful emergence, free market capitalism provided the financial muscle to the Industrial Revolution which leveraged Western civilization into the leadership of the modern age. Now free market capitalism has reached an age where it no longer recognizes national boundaries except as localized marketing and legal systems, and it pays attention only to those with capital - and allegiance to none.
Free market capitalism has a dangerous Achilles heel: it needs cheap inputs - commodities, labor, transaction costs - and liquid market places. In the American economy, the middle class has admirably played this dual role of manufacturing core and avid consumer since the end of the Second World War. ‘Made in America’ was a iron-clad guarantee of quality and confidence. The US dollar was the sail under which the global economy grew. But the free market is driven to drive down production costs, so manufacturing was shifted outside the United States to maximize labor savings, and inside the United States there was extreme institutional pressure to reduce wages and cut back benefits. In short order, the family unit was under siege by its own economy. No longer could an average, high-school educated father make a living that would support his family, no longer could a mother afford to stay at home to raise her family. With the rise of the two-income household began the decline of the family as a traditional, stable social unit. Advanced education, that engine of upward mobility, lost much of its steam as a guarantor of future individual prosperity as white-collar American jobs were also sent to lower cost international labor centers. Computers and telecommunications were once ‘safe’ careers in America, which ironically as they advanced led to their migration to cheaper shores.
The American middle class has been strip mined, which directly conflicts with their other role as primary consumer of the global economy’s goods and services. We Americans became addicted to expensive gadgets, vacation homes, recreational vehicles, dining out on a whim - and worst of all - cheap credit. Sign on a line and make a minimum payment, tomorrow you can pay it off…
As our incomes fell and social systems frayed, we embraced our consumer goods as existential signs of success, doubling down on our debt for another spin of the wheel, to enjoy more of good times to which we believed we were entitled. And by an insidious confluences of economic circumstances - a Democratic measure to reduce barriers to low-income home ownership and a Republican measure to remove federal oversight of derivatives (a cheap and highly volatile type of equity, think of it as the crack cocaine of Wall Street), the American middle class took advantage of a rare opportunity to increase its wealth by investing in that great symbol of prosperity, the family home. The newly arrived to the middle class exploited the negligible borrowing requirements to purchase new homes, the established took the opportunity to take equity capital from their homes to leverage (hint: leverage is a fancy word that means to pay a little now and promise to pay the rest later, like credit) a better lifestyle, or even to purchase additional homes in the expectation that they would be sold at a profit. Wealth generation without end.
But it ended.
Our global financial system is predicated on cheap credit. Our global economic system is predicated on cheap oil. Everything in our global economy is driven by the availability of petroleum - transportation, agriculture, heavy industry, consumer goods - everything. Petroleum, however, is a finite resource. Unfortunately there is so much of it that the conception of its ending is difficult to ponder. So difficult that we do not. This massive denial of immutable fact underlies our current crisis. Sometime in the past year or two, we reached Peak Oil - the point where we have extracted the maximum rate of petroleum. From here out we are in a period of terminal declining production. If you imagine only 100 gallons of oil in the world at the beginning of the age of petroleum, we just used of 50th gallon. There will only be less from now on. Supply is diminishing daily just as the Chinese and Indian economies unleash their own cash-saturated middle classes and resource-hungry manufacturing sectors into the global petroleum marketplace. Price is the intersection of supply (failing rapidly) and demand (rising rapidly). As the price of petroleum advances, the cost of everything else is increasing in its wake; transportation, agriculture, heavy industry, consumer goods - everything. Even sectors not directly related to petroleum are seeing their cost of transacting business increase. These costs were passed along to the consumer. When businesses and consumers pulled back their spending, unable to meet these higher prices, they stalled the availability of liquidity to the capital markets which fuel expansions. High food and gas prices crushed average consumers, who began defaulting on their mortgages as unemployment flared through the economy, mortgage lenders collapsed, the banks guaranteeing the mortgage lenders collapsed, the insurance and financial services companies managing the risk portfolios of the banks collapsed - and in two weeks at the end of September, the largest mortgage lenders, banks, insurance, and financial services firms collapsed in on themselves. Treasury Secretary Paulson’s bailout bill, ironically, was like an attempt to fight a raging oil well fire by smothering it with liquidity, but now the entire global financial system is on fire.
In a manner of speaking the point of Peak Oil was the point of Peak Capital. Free market capitalism is not over, but the economic assumptions of cheap oil and cheap credit are. Rome is on fire (burning rapidly).
So what about deregulation? How will it rebuild things so that our economy is strong and healthy again?
If you come back tomorrow, I will tell you.
