It has been over a year since the financial collapse that has triggered unprecedented gloom about the long-term prospects of the American economy. These fears have been reinforced by the initiatives of a radical administration’s attempt to increase the reach of government. At a time like this, it is refreshing to remind ourselves of the resilience of people in a still largely free economy. Brian Wesbury, Chief Economist at First Trust Advisors, is arguing that the creativity of Capitalism will trump pessimism in his just published book “It’s Not as Bad as You Think: Why Capitalism Trumps Fear and the Economy Will Thrive”
Wesbury is no fan of the Obama administration’s policies or of the Bush TARP plan that was initiated a year ago. He recognizes the severity of the recession and how it has affected millions of people.
However, he argues that the financial collapse does not represent a failure of capitalism, but rather a failure of government policies.
The Federal Reserve’s policies kept interest rates at record lows earlier this decade. At the same time, policies promoted by government-sponsored mortgage giants Fannie Mae and Freddy Mac encouraged lenders to lower qualifications for mortgages. Home prices posted record increases. Mortgages were bundled into securities that were bought by investors and financial institutions around the world. When the bubble burst, the investment banking firm Lehman Brothers, the insurance giant AIG and the two government-sponsored mortgage companies Fannie Mae and Freddy Mac failed and (with the exception of Lehman Brothers) were taken over by the federal government. Panic set in and a lot of financial transactions required to support economic activity dramatically slowed or ground to a halt.
Wesbury argues that mark-to-market accounting rules that required banks to mark down the value of their assets to current market prices destroyed balance sheets overnight and made the crisis worse. In spring of this year, the Financial Accounting Standards Board (FASB) eased this rule allowing companies to value the assets on their books as if they were unloaded in an “orderly” sale rather than dumped in a forced or “distressed” sale. The economy has been improving since then and has returned to growth in the third quarter of 2009. Franklin D. Roosevelt made a similar change in 1938 during the Great Depression when the rule unnecessarily destroyed banks.
Wesbury believes that the current increases in the stock market are largely driven by the Federal Reserve’s easy money policy. He compares the current stock market rally to a similar episode in the mid 1970s right before inflation increased and sent the economy into another recession. He is concerned that unless the Federal Reserves gets the timing right in reversing current easy money policies, the recovery could end in a year or two.
Despite these concerns, Wesbury argues from economic history that capitalism is resilient and will ultimately triumph. Conservatives share his confidence in capitalism and freedom. To some extent, our economy can weather adverse policies and adjust around them.
There are two important lessons from Wesbury’s book. First, government policies, not capitalism are the root causes of the current economic crisis. Second, the Obama administration’s policies of expanding government power are NOT the solution to economic problems, but rather will make things worse. Conservative and libertarian supporters of freedom and limited government need to continue to oppose current legislation on health care, cap and trade and increased regulations and ultimately defeat the proponents of these policies in the elections of 2010 and 2012.
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