It’s been two years since my last major post on this issue. A lot has happened since then, much of which points out the truth of what I said.
If governments could be powerful enough to insure the security of individuals, and not harm the ability of the economy to grow, I would not be as strident on this point as I am. I agree with Minsky on description, but disagree on prescription. Minsky’s prescription was that of Keynes, but on steroids. Run a hyper-stimulative monetary and fiscal policy. Well, we have that now, and it is not helping much; it only balloons the national debt. The right answer is to do almost nothing, but provide for ways to expedite bankruptcy claims.
Why such a harsh prescription? We don’t want financial institutions, much less large ones, to rely on the idea that the Federal Government has their back. That leads to excessive risk-taking. We also should not want the US Government to be deeply involved in the financial sector for several reasons:
- The Treasury will be captured by financial interests (already done!)
- Fair pricing of loan yields versus marginal cost of taxation will get muddled.
- Political haggling will choke Capitol Hill.
- The blob will grow. No, not the Department of Education, a la William Bennett. I am talking about the Fed.
- Individuals and corporations will be more cautious about their finances, and will manage them more prudently.
Aside from constraining the total leverage of the economy, which I have suggested in the past, there is no way of escaping the pains of the boom-bust cycle. I would say to everyone, “Grow up. Our Government can’t control the economy in the long run, so accept that, and live with the boom-bust cycle. Eliminate government meddling, especially the Fed. All attempts to smooth the cycle lead to a bigger bust later. Would you rather take some pain now, or risk the creditworthiness of our nation?”
One reader has recently asked me about sovereign defaults. I need to think about that, and give you all a better piece later, but this is not a time to be careless about the US, unless the political mood so changes, that large tax increases would happen.