Hi D. Austin.
A fascinating article you posted from Investors Business Daily on Senator Phil Gramm's perspective on the role of the Federal Reserve. Of course, it's exactly what one would expect from Senator Gramm. Please see the following on Phil and Wendy Gramm:
Enron and Phil and Wendy Gramm
nctimes.net
I completely concur with the IBD conclusion that:
"Gramm's proposal would open the door to a lot of mischief, depending on who's in charge."
... but for entirely different reasons.
History is a wonderful teacher. And the 1920's and 1930's provide an extraordinary case study on what can go wrong when Capitalism itself is left unchecked, and when the Money Supply is managed only in the interests of "price stability" or "stablization of exchanges". The series of posts from Professor Quigley's Tragedy and Hope at the beginning of this thread discuss this matter in some detail.
Also, the problems of orthodox liberal economics that became so visible in the 1930's are the very same problems that exist with the "Washington Consensus" of the IMF, World Bank, and the Clinton and Bush administrations - that was such a powerful economic orthodoxy in the 1990's.
The failure of this orthodoxy in the early 1930's set the stage for the adoption of Keynsian economic principles throughout the 1930's in various industrial nations. Here, the problem was one of an aggregate demand collapse, which precipitated a collapse in the demand for credit and an industrial collapse. Essentially, the free market pricing mechanism was no longer to properly allocated the distribution of goods and service in the economy (which remember, is first and foremost a society - i.e. real people).
Franklin Roosevelt's Keynsian economic strategy was termed the "New Deal". It represented a very strong role for the government in providing the aggregate demand to revitalize the economy. It is interesting that in Professor Stephen Cohen's book on Russian Economic Reforms of the 1990's, in the 2001 ed. of his book, he mentions that Russian Economists and Politicians having witnessed the total economic collapse and destruction of their economy and society under IMF-led "Washington Concensus" type economic policies are now speaking precisely about a Russian version of a Franklin Roosevelt "New Deal". Of course, I doubt you'll read about this in the Washington Post or New York Times, though I would love to be proved wrong.
Of course, turning back from liberal orthodox economic "reform" (a somewhat odd term, given the enormous human costs that have been inflicted on many emerging countries that have opened up their economies and financial systems to IMF-inspired "free market" approaches), is something quite horrifying to the Big Money elite represented by the Fed. The reason is very simple, if Brazil or Russia or Argentina or whomever were to take their government revenues and enact policies that genuinely represented the interests of their peoples, (i) it may involve (and would justly involve IMO) reneging on Big Money owned debt (what is Brazil's debt, $500 billion?), and (ii) giving back to the people some a good chunk of the resources that were "in spirit" plundered from the national inheritance of a country's people. I remember reading that one of the reasons Argentina had to default was that the country's natural resources had been so thoroughly plundered by foreign investors (Enron was sold rights to the water supply I believe) and local elites, that the country had no further collateral to back up the massive outstanding loans.
Certainly in Russia, inevitably much of the nation's plundered natural resources will have to be renationalized.
By arguing the above BTW, I am not arguing against a market economy. Nor do I believe that a government should have the primary role as a stoker of aggregate demand in normative economic circumstances. What I "would" argue, however, is that it is not simply a matter of black and white, good and bad, right and wrong, big government vs. no government, free markets vs. a socialist economy. Throughout the developing world there is much talk these days of a "third way", or even "many ways". It is an expression of a "post-modern" world that refuses to believe that the classic "ism's" of the so-called "modernist" period are necessarily the proper analytical contstructs by which to guide their economies and societies forward. Such a quest for a third way rejects Fundamentalisms of all kinds - Communist Fundamentalism has already died an ungraceful death. It's finished, Kaputt. IMO, so-called "Free Market" orthodoxy of the "Washington Consensus: variety is well on its way do dying a similar death.
So, back to the IBD article D. Austin.
To my reading, the article seems to suggest that Politicians are "evil" (well, actually the article really just suggests they're "bad" or well, "dumb", but the message is the same), and that society's monetary and economic savior can really only be trusted to "experts" in the Federal Reserve Board, who will manage the money supply with all the orthodox "purity" that will not be overly-concerned with real economy issues such as "are people losing their livelihoods". Much more important to simply focus on the "absence of inflation" and everything will work out just fine.
But this is a fallacy. In normal economic circumstances this may be the case. However, the 1930's clearly illustrate that when faced with a massive aggregate demand shock and an imploded credit system, the government can play a very important role in stimulating an economy.
It is not surprising that Enron-implicated Phil Gramm would argue for unrestrained and unregulated control of the nation's money supply by Big Money, and wishes the government to have a minimal amount of regulatory or policy involvement in matters of money and economy. It sets the stage for criminal Corporate and Financial behavior of the precise variety we are now seeing with Enron, Arthur Anderson, Worldcom, and on and on.
One last thing, the gist of the IBD article is the role of the Central Bank in keeping inflation under control. That is not the problem faced by the current Fed IMO. Rather, massive debt default resulting in extremely powerful deflationary forces are a much greater threat IMO.
Well, that's it. I welcome any other views or alternative perspectives. After all, I'm just starting to learn about this stuff. But you know what, I'm finding that the basic issues aren't really that hard to understand. And that by understanding the basic issues, I can take greater responsibility for my world, and lobby for changes to the existing system.
Regards,
Glenn |
