“Principles And The Case For Federal Action”

Thursday, September 25th, 2008 1:29 pm by Neal

That is the title of this John Hood piece posted at National Review’s the Corner. It is a must-read. Hood offers some alternatives that fiscal conservatives will appreciate because they are grounded in the realities of market principles which have been studied and utilized for hundreds of years. These are dangerous times for our Republic, and we should heed Hood’s concluding words,

“A conservative should never abandon his principles in a time of crisis. He should employ them. That’s what makes them principles, not fashions.”

Principles And The Case For Federal Action:

As others here have said, while critics of the Paulson Plan — as well as any scary leftist mutation of it — are abundant and proliferated, few seem to be arguing for federal inaction. They do believe that timely and significant federal action is needed. They just don’t like the specifics or the precedent proposed by the administration.

This should not be interpreted, or pitched, as a “rejection of market ideology.” I cringe every time I see conservatives seek street cred with clueless but exultant journalists by dutifully admitting that the country or the economy “trumps” their supposed market ideology. Whether intentionally or not, these politicians and commentators are making a horrid situation even worse. Make no mistake: this moment isn’t just fraught with economic peril. It has the potential to be an inflection point in American political history, the beginning of a new and painful bear market for liberty.

Some kind of federal reaction is warranted because the federal government is a major cause of the crisis, and taxpayers are already on the hook for a good chunk of the financial failout. For years, Congress protected and egged on Fannie Mae and Freddie Mac while refusing even to consider rethinking the mortgage-interest tax deduction that encourages investment in residential housing over other forms of capital formation. Federal policymakers compelled financial institutions to take on additional mortgage risk through regulatory blackmail (thanks, Barney Frank and ACORN!). The Federal Reserve moved its eye off the price-stability ball and alternatively loosened and tightened the money supply in whipsaw fashion. Millions of people responded to these perverse federal policies by taking on additional risk and steering more capital from more-productive investments to the housing market. To argue that because Washington has screwed things up in the past, it should stand back now and see what happens may be tempting, but it is based on an old fallacy. A good analogy is an arrow wound. If someone shoots you with a barbed arrow, your life may be threatened. That doesn’t mean that the best response is just to yank it out, which will further imperil your life.

To say that Washington must act, of course, is not to say that it should allow itself to be stampeded into an expensive, counterproductive bill. Great care should be taken to minimize moral hazard, further distortions of the financial markets and banking industry, and the further erosion of economic freedom. While remaining pragmatic, conservatives ought to try to reduce the taxpayers’ exposure, avoid Hayekian nightmares about Treasury lawyers pretending to second-guess the collective wisdom of the world’s investors, and insert provisions that may actually have long-term benefits.

For example, why not work for a package that reduce the size of the federal debt purchase, suspends perverse accounting rules, and immediately slashes the marginal tax rate on saving and investment? Frankly, it doesn’t make sense to me that authorizing $700 billion in Treasury debt plays is the only thing that can avert crisis, but a combination of, say, only one-third of that amount to the Treasury and the equivalent of hundreds of billions of dollars in other responses — immediately lower taxes on capital and higher asset values through accounting reform — would be trivial and ineffective.

You know why I (and many other conservatives) think that way? Because our judgment is informed by our principles. An ideology is simply a way of understanding how the world works. If it assumes Earthly perfection, ignores contradictory data, and amounts to an article of faith rather than a set of empirical insights, such an ideology could indeed become a barrier to understanding and necessary action. But market principles aren’t abstract theory or religious dogma. They are based on decades of modern empirical research, hundreds of years of political practice, and thousands of years of human experience and common sense. There were good reasons to suspect the Paulson Plan, hatched in a few days by well-meaning people in panic, because we know from history how such panicky policies tend to turn out. There were good reasons to doubt what Wall Street lobbyists and Fannie/Freddie apologists are saying about the crisis, because they have strong incentives to spin us and avert our eyes from their own culpability.

Many supporters of the Paulson Plan are in thrall to an ideology, essentially Keynesianism, that tells them that problems like the current financial crisis are caused by irrational animal spirits. They have diagnosed America has having an economic psychosis, from which it can only be raised by wise government therapists, just as Keynes believed that the way out of the worldwide depression of the 1930s was to trick people with pump-priming gimmicks. Critics know better. They understand that investors will respond rationally to the prospect of higher future returns on capital. They further understand that government bureaucrats are highly unlikely to possess superior understanding of and make better decisions about how to manage the nation’s stock of mortgages and its banking and financial firms.

A conservative should never abandon his principles in a time of crisis. He should employ them. That’s what makes them principles, not fashions.

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