Confusion About Government at the Huffington Post

Arianna Huffington's article “Does McCain Still Agree with Reagan that Government is the Problem?” is rife with ignorance of history and economics. It's hard to decide where to begin.

Her proposed questions to Sens. McCain and Obama are as good a place as any:

“Sen. McCain, given the part deregulation played in the current economic crisis and your support of a massive government bailout of the financial industry, are you now ready to break with Ronald Reagan's assessment?”

And, to be even handed: “Sen. Obama, in 1996, Bill Clinton cheerfully announced that 'the era of big government is over.' As the Dow plummets and Wall Street and Main Street turn to Washington for big government bailouts, are you now ready to break with President Clinton's assessment?”

One has to ask, what deregulation is Mrs. Huffington talking about? When did the era of big government end? The question for Mrs. Huffington is why do you take these pandering and manipulating politician's words so seriously?

The financial industry remains highly regulated. As I point out in a comment to the article being debunked:

The problem is & was the government. There has been no deregulation only a rewriting of the rules. The financial industry remains tightly controlled. Starting with the Basel Accords, FDIC, Office of the Comptroller of the Currency, Office of Thrift Supervision, & the Fed, they have created a government banking cartel. It was the Fed that pushed interest rates ridiculously low creating the money to be loaned in the first place. Then there is the Community Reinvestment Act which requires banks to make loans in low income areas. Fannie Mae & Freddy Mac pushed the sub prime loans too:

[link edited for length]

Putting it all together, it was the government, not some nonexistent free market, that created the present mess.

With all those rules and people watching the financial markets it's hard to understand how any rational person would call them deregulated.

One somewhat thoughtful commenter tried to argue otherwise. He posted this reply to my comment:

You must have been living on some other planet since 1999, the date of the NYT article you referenced. Two months after the NYT article you referenced, Congress repealed the Glass-Steagall Act that had regulated the financial sector since the run on the banks in the Depression. Believing that bearing the high risks undertaken in underwriting insurance is not good banking practice, Congress had extended GSA in 1956. The Bank Holding Company Act further separated financial activities by creating a wall between insurance and banking–banks were permitted to sell insurance and insurance products but were prohibited from underwriting. In November of 1999, Congress, led by Sen. Phil Gramm and joined by Reps. Leach and Bliley (all Republicans) repealed the GSA with the establishment of the Gramm-Leach-Bliley Act, which eliminated the GSA restrictions against affiliations between commercial and investment banks. Furthermore, the Gramm-Leach-BlileyAct allows banking institutions to provide a broader range of services, including underwriting and other dealing activities. In that same year, the Commodities Futures Markets were effectively deregulated. These actions were taken in response to the Republican philosophy Huffington correctly states in her article. As a liberal Democrat, I am ashamed of my own party for having sat by while Reagan sold this snake oil and not standing up for something they knew was wrong.

A nice try, but one that misses the essential point. Repealing the Glass-Steagal Act by implementing the Gramm-Leach-Bliley Act was not deregulation, it was merely a rewriting of the rules. The Fed, FDIC, state regulators, Freddie Mac, Fannie Mae, and the Community Reinvestment Act were all still there. These changes would have been good in a free market environment with privately issued currency. In the actual inflationary scenario with a central bank holding interest rates down and pumping money into the economy they were disastrous. At least on that we, no doubt, agree.

Mrs. Huffington also shows an ignorance of history when she writes, 'Stanford professor Lawrence Lessig says that if Americans recognize that the financial crisis — and the need for a government bailout — is due to “policies McCain still promotes… this could well be the event that effected a generational shift in governmental attitudes. Think Hoover vs. (the eventual) FDR.” ' .

The reality is that Hoover was very much the advocate of government intervention in the economy. So much so that FDR had choice words to say about him. FDR claimed Hoover's spending was “reckless and extravagant”. Garner, FDR's first Vice President, said Hoover was “leading the country down the path of socialism.” Hoover himself said of the Depression:

We might have done nothing. That would have been utter ruin. Instead we met the situation with proposals to private business and to Congress of the most gigantic program of economic defense and counterattack ever evolved in the history of the Republic. We put it into action. No government in Washington has hitherto considered that it held so broad a responsibility for leadership in such times. For the first time in the history of depression, dividends, profits, and the cost of living, have been reduced before wages have suffered. They were maintained until the cost of living had decreased and the profits had practically vanished. They are now the highest real wages in the world.

Creating new jobs and giving to the whole system a new breath of life; nothing has ever been devised in our history which has done more for “the common run of men and women.” Some of the reactionary economists urged that we should allow the liquidation to take its course until we had found bottom. We determined that we would not follow the advice of the bitter-end liquidationists and see the whole body of debtors of the United States brought to bankruptcy and the savings of our people brought to destruction.

Hoover's taxes, spending, and regulations only made matters worse. FDR's New Deal failed to end the depression and succeeded only in prolonging it . By 1938 unemployment has back up to 1932 levels, it was called the Roosevelt Recession.

Which brings us full circle to the present. Once again practitioners of government interventionism are being called free marketeers. Once again a nonexistent free market is being blamed for our troubles. Once again there are calls for more government action. We go down the same road they did in the thirties. Sadly, most people don't seem to realize that once again these policies will fail.

They always say that one should offer an alternative when one criticizes, so here it is in an oversimplified nutshell. Go over to a system of free banking by abolishing the Fed and repealing the legal tender laws. Then repeal the income tax and abolish the IRS. Cut government spending by more than the amount of the revenues that the income tax brought in. Begin a programmed abolishment of the myriad of regulatory agencies that stifle our economy.

With this program we will have the fundamentals of our economy in place and have stable growth and prosperity. The transition may be painful but it will be worth it. It's the only way out anyway.