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Pundit’s Mailbag — More Credit For Banks, More Debt For Families

Jim Prevor’s Perishable Pundit, February 6, 2009

As the industry and the nation mull over the matter of a giant national stimulus program, we might do well to turn to the wisdom of Joe McGuire. We’ve quoted Joe before — in this piece, where he spoke of “special interests,” and in this piece, where he accused the Pundit of being excessively socialist.

Since then we’ve had a chance to watch Joe in action. He was one of our students at the United Fresh Produce Executive Development Program — the deadline for which is coming up fast so register here) and, most recently, he was at the PMA FIT Leadership Symposium down in Dallas, so we had a chance to observe him raising trenchant points during the breakout sessions.

Now by day Joe is a mild-mannered Vice President of Sales at Rosemont Farms. On nights and weekends, however, he is obviously a student of classical economics, as is evidenced by this letter he submitted to us at the peak of the financial crisis and specifically in response to our piece, Laws Encourage Imprudent Behavior On Wall Street

It seems to me that your remedies could be addressing the symptoms and maybe not the core illness. I think we really need to diagnose the problem of why the patient is so sick, why he keeps getting sick and how we can cure him. I think it would be helpful to examine the system of money and banking. Even The Wall Street Journal recorded the primary “sin” of the current crisis as the policy of excessive credit (easy money). Read “The Mortgage Fable”, from September 22, 2008. It strikes me as odd that some think we can cure the problem of excessive credit with more credit.

I am not an economist but it seems awfully bizarre that bankers and politicians would have the power to determine the amount of money that is in circulation through monetary policy. Why wouldn’t that be a function of simple supply and demand? It would seem to me that the market would evenly match the supply of and demand for savings through the cost of money-lending and the return of savings. Or, in other words, the interest rate for money is determined by the market and it is the great equalizer..

Everybody wants to blame the immoral mortgage banker but we need to ask where he got the money in the first place to create the loan?

Don’t get me wrong, I think he is guilty as well but not necessarily the core of the problem.

So where does all the ‘new’ money come from and who benefits most from it? I read this article, What We Learn from a Play Money Auction, and it appears to me that the people who created the crisis will benefit the most from the supposed cure because they will be closest to the new money creation. Now that is immoral. We should look closer at this.

Do you think there is any room for fundamental change in the current system of money and banking that we have in America? It seems to me that the Federal Reserve is failing woefully in its job of price stability.

— Joe McGuire
Vice President Sales
Rosemont Farms
Boca Raton, Florida

We were reminded of Joe’s letter by a piece by Dick Armey, both a former majority leader of the House of Representatives and a former Economics Professor, who wrote a column in The Wall Street Journal titled, Washington Could Use Less Keynes and More Hayek:

In the long run, we are all dead,” John Maynard Keynes once quipped. An influential British economist, Keynes used the line to dodge the problematic long-term implications of his policy proposals. His analysis of the Great Depression redefined economics in the 1930s and asserted that increased government spending during a downturn could revive the economy.

President Barack Obama and congressional Democrats (very few of whom likely have read Keynes’s 1936 book, “The General Theory of Employment, Interest and Money”) have dug up the dead economist’s convenient justification for deficit spending in defense of their bloated stimulus legislation. But none ask the most important question: Was Keynes right?

According to Nobel economist Friedrich Hayek, a contemporary of Keynes and perhaps his greatest critic, Keynes “was guided by one central idea . . . that general employment was always positively correlated with the aggregate demand for consumer goods.” Keynes argued that government should intervene in the economy to maintain aggregate demand and full employment, with the goal of smoothing out business cycles. During recessions, he asserted, government should borrow money and spend it.

Keynes’s thinking was a decisive departure from classical economics, because arbitrary “macro” constructs like aggregate demand had no basis in the microeconomic science of human action. As Hayek observed, “some of the most orthodox disciples of Keynes appear consistently to have thrown overboard all the traditional theory of price determination and of distribution, all that used to be the backbone of economic theory, and in consequence, in my opinion, to have ceased to understand any economics.”…

Hayek, who famously debated Keynes in a series of articles after the release of “General Theory,” gave what I believe to be the most devastating critique of government action to stimulate “aggregate demand.” Hayek viewed the boom and bust of the business cycle as primarily a monetary phenomenon created by governments’ artificial inflation of money and credit.

Sound money policy, conversely, allowed the disparate knowledge of millions of economic actors to be conveyed through the price system, rationally allocating capital and labor through relative prices. The problem with government attempts to manipulate the economy through fiscal policy — spending that takes resources away from those who are productive and redistributes it to politically favored interests — is that it is audacious. It assumes that government knows better how to spend and invest than individuals acting in their families’ best interest.

“The real question,” according to Hayek, “is not whether man is, or ought to be, guided by selfish motives but whether we can allow him to be guided in his actions by those immediate consequences which we can know and care for or whether he ought to be made to do what seems appropriate to somebody else who is supposed to possess a fuller comprehension of the significance of these actions to society as a whole.” …

There are many details of the stimulus bill that are debatable. Is it large enough? Is it too large? Will the money be spent too slowly? Will it be spent in areas of the economy with spare capacity? One could go on and on.

The key question though is whether, even getting the details right, is “stimulus” what we actually need? Or as Joe puts it, “It strikes me as odd that some think we can cure the problem of excessive credit with more credit.”

The issue is this: All across America families feel the need to rebuild their balance sheets so as to compensate for declining real estate and stock values. To “compensate” for this reduction in demand, the proposal is to burden each family with additional debt that will have to be paid with taxes in the future. Does that actually make sense? Is that really the road to prosperity?

Many thanks to Joe for helping us think through this important topic.

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