Priceton student Brett R. has sent an e-mail from down under with the subject line, “What the hell is going on in America?” Brett aspires to know, more specifically, what the hell is going on as it pertains to the meltdown in the financial markets and the government bailout that has been proposed to fix it. Since, for some years, Brett and I have taken swings at each other from across an ideological Grand Canyon, I am touched and flattered that he thinks I can explain the current mess. To repay his misplaced confidence, I humbly offer the following.


The Hazard of Government

“It seems beyond the conceptual abilities of most people that current problems might have been based on too much rather than too little regulation. Somehow people can ignore that the U.S. financial institutions that recently stumbled were subject to comprehensive oversight by the Federal Reserve, the SEC, the Federal Deposit Insurance Corporation and others. They have a blind spot to the role of government programs and policies in promoting the housing bubble, and of facilitating institutions, especially Fannie Mae and Freddy Mac, that were widely perceived as being government backed (and ultimately were)…. As Richard Salsman points out…, far from being due to too much laissez-faire, the present turmoil was inevitable in a system that had been both massively subsidized by deposit insurance and over-regulated….

What is so stunning about public attitudes towards the capitalist system is that finance can be regulated eight ways from Sunday and still be written off as ‘unfettered’….

[A] less-regulated system…would be one in which people were a great deal more careful with their money, knowing that when they made mistakes they would have to pay for them. Under the existing heavily regulated alternative, when moral hazard inevitably rears its ugly head, the taxpayer gets lumbered. Such an arrangement is obviously attractive to incompetent managers and overweening bureaucrats, but it’s astonishing that it would be supported by the average person.”

–Peter Foster, Financial Post, Sept. 24, 2008



The fact that I’m not an economist, and certainly no expert on the markets, ought probably to dissuade me from weighing in on the current “financial crisis”, as it is being called. But then, in re the economy, there are no experts, least of all those who call themselves such. We are about as close to a scientific understanding of that dismal branch of human activity (I should probably include all the “social sciences” here) as medieval leeches were to a science of medicine.

If it were possible for any individual, or group of individuals, to understand and predict the trajectory of the economy, the Soviet Union would now be the world’s only economic superpower, and aging Russian apparachiks would currently hold the patents on the personal computer, the Internet, and high-definition T.V. As it happens, the Russians are still building cars with carburetors.

We’ve done rather better in the West, because no particular group of financial “experts” has managed to persuade our government “planners” to meddle in any more than a few sectors of the economy at a given time, and, at that, not for very long. It is not, that is, because of, but rather for the lack of, economic expertise that we, in the free-market economies of the West, have thrived. If you don’t share my skepticism, look at the performance of those actively managed mutual funds for which investors continue to pay a hefty premium, in exchange for the assurance that smart people with advanced degrees and a sophisticated knowledge of the markets will be picking the right stocks for them, and buying and selling them at the right time. For a while in the Eighties and Nineties, I recall that some fund managers were so sycophantically feted, by the economic washed and unwashed alike, that their names became as familiar as those of celebrity chefs. Yet, if one had bothered to check, one would have discovered that seventy-five percent of such funds have traditionally failed to do as well as the Index. You’d have a better chance of making money in the market by donning a blindfold, sitting yourself down in front of a list of the S&P 500, and feelingly checking off a dozen names, than if you happened to be the godchild of Sir John Templeton.

When I say that Economics is only presumptively scientific, I don’t, of course, mean that it is irrational. In fact, we have been aware of the simple laws according to which the markets have worked since the days when men traded spices and trinkets out of carpet bags on camels. Every transaction between a buyer and a seller, when acting as free agents, is to the advantage of both. The “value” of a commodity is neither intrinsic nor arbitrary, but whatever price at which a free agent agrees to sell it, to a free agent who agrees to pay it. When supply outpaces demand, prices fall; when demand exceeds supply, they rise. Arbitrarily fix the price of a commodity lower than the market would otherwise pay for it, and no one will produce it, leading to a scarcity, and higher prices. Collude to fix it higher, and everyone and his brother will get into production, whereupon the price will fall. When the costs of certain commodities rise, consumers use them more frugally; decrease the cost by fiat, and the population will descend into profligacy. Subsidize or insure against certain risks, and people will confidently take them. Give people something for nothing, and they’ll treat it as if it were worthless.

These are the immutable laws of the market, because they are the immutable laws of human nature. Economic law is thus highly rational, which is one reason why the central planners of command economies (including our own “free” democratic welfare states) always fail so miserably to understand it. Central planners don’t particularly like human nature. They think it ought to be reformed, and they think that only they know how to reform it.


One needn’t go back very far in history to illustrate the obduracy of these laws, and the havoc that has been wrought by the various “compassionate” and “progressive” politicians, bureaucrats, and social engineers who have tried to circumvent or repeal them. Most recently, it was our state planners and green activists who alone failed to predict that subsidies for ethanol—already recognized as yesterday’s technology–would lead to skyrocketing prices for corn, wheat, and other grains, significantly increasing the cost of food to householders in the industrialized world, and resulting in starvation for many in the developing world.

To be sure, this sort of benevolent meddling has gone on since the birth of the modern welfare state at the beginning of the last century. But it only achieved unstoppable momentum a little over thirty years ago, when politicians began to fantasize about eliminating poverty and economic inequity by declaring “war” on them (and you thought George Bush’s project of militarily imposing democracy in the Middle East was a fool’s errand?), and creating that paradise on earth that the likes of Lyndon Johnson called “the Great Society”. The criminal follies committed by such reformers in the name of progress and social justice are too numerous to recount. Let me confine myself to a couple of examples of which even today’s Economics majors will have had some immediate experience.

In the early seventies, rents were rising in many North American cities faster and to higher levels than most renters would have liked. Being economically obtuse but very adept at counting votes, mayors and city councilors astutely calculated that there were more renters than landlords in their constituencies, and so imposed what they called rent controls (i.e., they fixed the price of housing at an artificially lower rate than the market, operating freely, would otherwise have assigned). Of course, since it was no longer profitable to build new apartments, private developers erected condominiums instead, leading to a critical scarcity of rental units. The same urban planners who then argued for rent controls are now decrying the forest of condo towers that currently block out the sky in places like Toronto and Vancouver, and lamenting the fact that the poor and working classes have been driven clean out of the city.

Around the same time as we had the “crisis in affordable housing” that led to rent controls, we also had an “energy crisis”—just one more in a series, as it turns out, of such apocalypses, of which the current “financial crisis” is the latest. The world was one fill-up away from running out the oil (it still is) to which Americans had become so wickedly addicted (they still are, as that supposed shill for Big Oil, George Dubya, has been admonishing). Something had to be done. It was then that governments at all levels in both Canada and the United States began to impose a raft of regulations upon (and offer a raft of tax breaks and subsidies to) the auto manufacturers. Cars became smaller, lighter, and more fuel efficient: not in response to the spontaneous demand of consumers, mind you, but to the central dictates of bureaucrats and environmental lobbyists with the power to incarcerate those who didn’t share their vision. Never mind. Detroit finally gave us cars that got thirty plus miles to the gallon, and who can argue with that?

Politicians and environmental lobbyists are still congratulating themselves on these “timely” and “responsible” interventions in the market–even as they continue, paradoxically, to chastise naughty Americans for their dependence upon cars and oil. Apparently, we are still depleting the earth’s oil reserves at the same alarming and unsustainable rate, in spite of our government-mandated fuel-efficient cars. But then everybody knew that this would happen, except the experts. When you make cars more fuel-efficient, you effectively reduce the price of gasoline. Drivers adjust their habits accordingly, as reason dictates, increasing the frequency, and the distances, of their trips, and burning, in the process, more or less the same quantity of fuel as they had burned in their pre-crisis gas-guzzlers. (They also die in greater numbers on the highways—not only because they are travelling more, but because the smaller, lighter cars into which they have been shoe-horned by the experts are environmentally responsible death-traps. But then saving the planet is worth the sacrifice of a few human lives.)


I challenge my readers to identify a single such “timely” and “responsible” government intervention that hasn’t failed as utterly to end the “crisis” for which it was prescribed, or had similarly “unintended” consequences. Such consequences are about the only thing, in fact, that is predictable about the market. To the extent that those who buy, produce, and sell within it enjoy whatever residual freedom has been left them by the leviathanic state, they will exercise it, and often in ways that are quite at odds with the utopian reveries of central planners.

Even in the nascency of the welfare state, when governments began weaving the safety nets intended to break the falls of citizens thrown from cruel Fortune’s ever-turning wheel, this principle was already well known. The insurance industry denominated it “moral hazard”, clearly recognizing in so doing that the markets function in accordance with the ethical laws of human nature. The principle was first observed at work when governments legally required the owners of real estate to purchase fire insurance. Immediately thereafter the incidence of both accidental and deliberately set fires doubled. Knowing their properties were insured against loss, owners—again, with a certain plausible rationality—gradually overcame their primordial fear of this explosive element, and became less vigilant against its catastrophic potentialities. It should have been no surprise, then, that after governments required the owners of automobiles to purchase accident insurance, drivers were involved in a much higher incidence thereof, and people were being maimed and killed on the highways in unprecedented numbers.

The moral hazards created by government safety nets are, naturally, no less hazardous than those created by private insurers. It is hardly surprising that welfare and unemployment “insurance”—paying people not to work—has led to an increase in unemployment, multi-generational dependency, and devastated lives; that, under the illusion that health care is “free”, Canadians visit their doctors for the most trivial of ailments, thereby swamping the system, and making it all but impossible to get a timely appointment for even the gravest of conditions. In every sphere of life, the welfare state is now the insurer of last resort. Why shouldn’t folks build houses on the flood-plains of the Mississippi or the sub-marine swamps of New Orleans? Even if private companies, sensibly enough, won’t insure them, they know that FEMA (i.e., the taxpayer) will quickly row to their rescue. (As the government is doing at this very moment in bailing out the sinking ships of bankers and mortgage holders who were similarly encouraged to buy and sell below financial sea-level.)


It’s hard to argue against these measures when the cameras of CNN are trained on the floating corpses of beloved family pets in New Orleans, or on the dusty caravans of the dispossessed leaving their humble cottages in the Arkansas hills, having been foreclosed upon by the evil Wall Street bankers. No less than CNN, politicians know the power of these Steinbeckian images, and how to mobilize support for their compassionate interventions by casually slipping into the conversation the dreaded D word.

In the case of the current financial bailout, there is the added incentive for the government of being able to abominate the capitalist classes even while making them its beneficiaries. Inevitably, the genesis of the crisis has been ascribed to the avarice and corruption of the Wall Street firms who once again enriched themselves “on the backs of the poor”. It’s the Reagan “era of greed” coming back to haunt us. We’re merely reaping the whirlwind for all those years of irrationally exuberant, unrestrained laissez-faire capitalism, of de-regulation and getting government off our backs. If we’d only had a little more government, more regulation, the robber barons of Wall Street wouldn’t have gotten us into this mess in the first place. (And I’m paraphrasing Bush, McCain, and Palin, by the way.)


The Republicans have reflexively been accused of being the party of the rich, but this sort of class-warfare demagoguery has always leapt as naturally to their lips as it does to those of the Democrats. McCain’s descriptions of the Wall Street financial community might as well have been taken from one of Antonio’s harangues against Shylock.

The ironic truth is that it’s not pre-eminently “da liddle guy” (to quote our own former Chief Advocate of the Deserving Poor, Jean Chretien) who has an abiding interest in diabolizing “corporate America”, but the omni-wealthy state. Wherever the state, by bringing its unlimited prosecutorial resources to bear against an Enron, a World Com, or a Conrad Black, can foster the populist image of the private sector as a “corporate kleptocracy”, it is able to deflect attention from government’s vastly more depredatory regime, even while depicting itself as the champion of the people. Conrad convicted of skimming six million from his shareholders? Government leaders and functionaries waste, misappropriate, or steal more than that measly sum every minute of their working day. But how often do you hear the phrase “socialist greed”, or “government kleptocracy”, or the “robber barons of Parliament Hill”? The idea of governments–who confiscate half of our incomes every year at gun-point–protecting us against corporate greed really is rich. Almost as rich as bombarding the populace (especially the poor) with advertisements for federal and state lotteries while excoriating Wall Street financiers as “high-rollers”.

I confess that I am at a loss to understand how it is that in the popular imagination the “corporate culture” (Big Oil, Big Drugs, Big Box Retail, Big Everything, with the notable exception of Michael Moore’s or Oliver Stone’s Big Hollywood) is universally vilified, while Big Government enjoys a prima facie presumption of innocence. What could be more selfless than the government’s desire to provide school lunches for children or drugs for seniors? It is simply assumed that government interventions in the market—government activities in general–are prompted by the most altruistic and communitarian of motives. Whether they act to eliminate socio-economic inequity, relieve human misery, promote some virtuous technology, or save the planet, governments by definition seek the “common good”. Even though they are comprised of ordinary, individual human beings, once they are sworn into office or hired into the bureaucracy, the selfish gene apparently lapses into dormancy. The lust for power, wealth, and glory that disfigures ordinary human nature and the capitalist classes especially has evidently been “put off” (in the words of St. Paul) by New Governmental Man. Governments have transcended original sin.

What compounds the mystery is that wherever you go, you hear people complaining that politicians are liars and thieves, magnets for bribery and graft, monsters of self-enrichment and corruption. But, let them announce some new program to help the lame, the halt, or the fat, the victims of volcano or tidal wave, children with ADD, mothers with PMS, fathers with TMJ, and the electorate starts to believe in Santa Claus again. All their world-weary cynicism evaporates into infantile credulity.


The same childlike trust of the nanny state and cynical distrust of the markets has, inevitably, befogged the discussion of the current “financial crisis”. Who’s to blame? Here’s an answer to the question that practically nobody will dare to give: the principal culprits are those who defaulted on their mortgages. The good folks who, with that original advocate of the impecunious classes, Wimpy, promised, “I’ll gladly pay you next Tuesday for a hamburger today”. Those who blithely borrowed money from banks and broke the contracts they signed to pay it back; who fraudulently represented themselves as being able to pay it back, but weren’t, and didn’t.

I know it’s unfashionable to inculpate individuals so directly and specifically–especially the poor–, rather than to blame some impersonal abstraction like the “system”, or look for “root causes” (we’ll get to those in due course). But let’s try a little thought experiment to see how you might react in the situation. Imagine that an impoverished college friend comes to you asking for a loan of a thousand bucks to buy, let’s say, a used car. “I’ll pay you back in monthly installments, with modest interest, over the course of a year”. But six months go by and he’s yet to make a payment. (Meanwhile, he’s totaled the car.) You confront him, and he replies: “Look, it’s your fault. You wanted the interest, and aggressively marketed the loan. It was wrong of you to sell me a loan knowing that I didn’t have the means to repay it.”

Do you feel guilty now? This, I believe, is what most normal folks (including those within and without the Jewish banking cabal) would call chutzpah. And it is with similar audacity that, once again, the current financial crisis is being blamed on Wall Street.

It seems only decent to pause for a moment before the lynching commences to consider what the bankers of Wall Street are being accused of. The more specific charges, so far as I can understand them, are these. First, that they made imprudent loans to those without the financial wherewithal to repay them. Second, that they sold off these liabilities in elaborate Ponzi schemes, distributing tiny parcels of their otherwise unsecured risk around the globe. And, third, that they connived to get rich doing so

Certainly, offering mortgages without requiring a downpayment from under- or unemployed borrowers was stupid. (Of course, if government had resisted the temptation to cure the malady, the banks would have been justly punished by the markets for their stupidity.) But re-packaging and dispersing the risk was about the only prudent thing Wall Street could have done. Financiers have been doing that sort of thing since Lloyd’s of London first insured tobacco and rum against catastrophic loss at sea.

That the bankers hoped to make money from these schemes is the perennial and fundamental indictment of capitalist America. It’s not just that entrepreneurs and their financial backers expect to earn a profit; the besetting sin of capitalism is evidently in wanting to make as Big a profit as possible. Capitalists want to make “windfall” profits. Imagine that. Windfall profits. No ordinary, socially responsible, liddle guy would ever wish for such a thing for himself. That’s why whenever liddle guys win the lottery they refuse to cash in their tickets; why union leaders don’t try to negotiate as Big an increase in pay for their socially responsible members as possible; and, why, whenever their bosses offer to double their salaries, employees always just say no.


With the financial meltdown, we now enter the latest chapter in the Manichaean mythology of the cosmic clash between corporate America’s armies of greed and the public sector’s soldiers of mercy.

Since the seventies, practically every politician who has run for office at practically every level of government in the United States has intoned some version of these words: “I want to make the dream of home ownership a reality for every American.” And they have.

Does anyone remember the campaigns of Jesse Jackson, Al Sharpton, et. al., vilifying the major banks as bastions of white old boy racism for refusing to “serve the needs” of the residents of the Black inner cities? Thanks to their racial huckstering, and the egalitarian arm-twisting of governments, banks have now been shamed into opening unprofitable branches in depressed underclass neighbourhoods throughout America.

Home ownership, like medical care, legal care, jobs, food, and clothing is just the latest of those desiderata to be advertised by the compassionate classes as a universal human right. (The working definition of a “universal human right” is anything that you want but can’t afford, and that your altruistic government will force others to purchase on your behalf.)

In pursuit of our politicians’ populist dreams, banks have been strongly encouraged not only to open in dubious locations, but (as part of aggressive government “outreach” programs in which their products were marketed amongst the poor and financially under-served), to offer sub-prime and variable rate mortgages to borrowers who had neither the equity nor the income to pay them off—self-interested borrowers, that is, who were hoping to profit from cheap loans. Not only was the risky behaviour of the banks morally enjoined by governments who urged them to be “good corporate citizens” and all that, but it was tacitly underwritten by them. Having been exhorted to take a chance on the deserving poor, the banks assumed, with plausible rationality once again, that those public sector lenders of last resort, Fanny Mae and Freddy Mac, or some other governmental agency, would rescue them if their creditors defaulted. And who can say that they miscalculated?