The People Will Decide

The mortgage crisis is still with us, it is just not on the front page any more. Oil and its rapid rise in price per barrel has grabbed the spotlight.

In the Sunday Business section of The New York Times is an article by Peter L. Bernstein titled When Should the Fed Crash the Party? I think it is well worth your time to read this article. Bernstein, who is nearly 90 years old, draws on a lifetime of knowledge and experience. In an early posting, I mention that his book, A Primer on Money, Banking and Gold ,was one of the first books I read when I started on my journey in 1968.

Years ago, the head of the Fed was a man by the name of William McChesney Martin. And, he is supposed to have been the first person to say that the job of the Fed is to take the punch bowl away just as the party is getting started. In other words, raise interest rates before easy money lead to a bubble in the economy. This is when the Fed believed in managing the growth rate of the money supply.

Back in the 1950’s, economics and the role of government in the economy were much different than today. The Great Depression of the 1930’s was less than a generation away. Many older attitudes about the Federal government’s role, like in helping the economy, were still very much a part of people’s attitude that the government should do nothing.

Bernstein starts his article with a quote from Andrew W. Mellon, Treasury Secretary during the 1930’s. I also remember a quote from Secretary Mellon from my days of studying 20th Century American History. Secretary Mellon suggested that men cut wood for a garbage can of left over food. Yes, Secretary Mellon was no Keynesian in his view of the government’s role in aiding the economy. John Maynard Keynes was an economist that reasoned that government had a role to play to minimize the suffering of the people and put forth his ideas that government spending could be used to pull the economy out of the depression. At the time Keynes put forth his views on the government’s role, many people believed that the Federal government should not have a role in helping the economy out of the depression. Some historians would argue that it was the Second World War that brought the American economy out of the depression. But, that is another story.

We are 68 years away from the end of the 1930’s. Society and the attitudes held by society have changed over those 68 years. Philosophies change, as first by newspapers and books give way to TV and then the Internet. New ideas get a hearing in the market place of ideas and with that attitudes change.

Yet, there will always be at least two sides to the argument: how much government help is too much? In the 1950’s, it was Chairman Martin and the punch bowl. In 2008, it was Chairman Bernanke facilitating the sale of Bear Stearns to JP Morgan Chase. Some today think that the Fed should have let Bear Stearns go bankrupt, while others point out the unnecessary pain and suffering of families not responsible for the greed and/or mismanagement that brought the fifth largest investment bank in the U.S. down.

Economics is more science than philosophy, but philosophy, or the attitudes of the people, as seen through the eyes of their elected representatives, is what determines government policy and therefore government action or inaction.

Many people point to Katrina as an example of government inaction. Many, in my opinion, correctly reason that had the same thing happened in Georgetown just a few blocks from the White House, that the Federal government’s response would have been greatly different.

And, so we come back to the Bear Stearns solution on the one hand and the lack of a comprehensive solution for people losing their homes on the other. Has our society evolved into the the privatization of profits and the socialization of losses? Why do we hear that the White House will veto measures designed to help families stay and hold onto their homes?
Is the pendulum swinging back the other way now? Have we reached the end of compassion for the family unit? Are only the large corporations what matters when it comes to the Federal government bringing relief? What would Andrew Mellon say today? Do we want to go back to the days when it is suggested that men out of work can cut wood for a garbage can of food for their families?

Do we believe that the majority of families that are losing their homes are losing their homes because of greed? If that is the case, then I guess we should let them go under. But, I do not believe that. Do we do nothing because a few people may get away with playing the system? I think we can afford to take that risk.

We have workers’ compensation for the injured worker, but even in the best of systems there are individuals that try to take advantage of the system. But, we do not eliminate the whole workers’ compensation system because a few would attempt fraud.

So, we come full circle. Economics can only take us so far. It will be up to the people to decide what kind of society we will have, and November is less than six months away. Stay tuned.