….talk for a long time on this Ricochet podcast about Tina Brown and Niall Ferguson and Todd Akin and focus groups and the professional composition of Congress, not to mention Game of Thrones, demographics, and all manner of other nonsense. Plus a preview of the next “Enter Laughing” in the September issue. Jonah and Rob are both COMMENTARY contributors whose work I have edited, but judging from how I go on here, I’m the one in need of editing—verbal editing. Even so, perhaps you will enjoy it. This is scheduled to be a monthly endeavor, and the podcast needs a name, so feel free to suggest one in the Comments. If you win, you will find yourself garlanded on the next podcast.
Topic: Niall Ferguson
The so-called financial-reform bills now working their ways through each house of Congress are, like the health-care-reform bill before them, not about reform at all. They do not reform anything. Instead, they make the federal government the major player in a major industry. Just as the health-care-reform bill will transform private insurance companies into the equivalent of public utilities, whose every major decision needs government approval and whose returns on capital are more or less guaranteed, these bills would do the same for big banks and other financial institutions.
President Obama gave a typical speech yesterday in the same room where, a 140 years ago, Abraham Lincoln gave a most untypical speech. Well, perhaps typical for Lincoln: eloquent, tightly reasoned, profound, and consequential in its effect. (As an aside, I have spoken in the Great Hall of Cooper Union myself and had a powerful feeling that I was standing upon holy ground while I did so; Obama, I suspect, felt he was only adding to its sanctity.) Obama’s speech was typical in that it set up straw men, fearlessly knocked them down, assigned blame without evidence, told falsehoods while demanding that others stop lying, and asked for discussion as long as every discussant agrees with him. Everyone else and every other opinion is “illegitimate.”
Wall Street was hardly blameless regarding the financial crisis of 2008 and reforms are necessary to prevent the same things from happening again. Niall Ferguson and Ted Forstmann explain what’s needed in today’s Wall Street Journal. (In a nutshell: moving derivatives trading from back rooms to exchanges and limiting the leverage that banks can use.) The Senate bill wouldn’t do that. Instead it would move most derivatives trading to exchanges but allow the chairman of the Commodity Futures Trading Commission to decide what derivatives can still be traded over the counter. Does anyone see there a hugely empowered federal official (not to mention a golden lobbying opportunity for banks and members of Congress alike)? Is a back room at the CFTC an improvement over a back room at Goldman Sachs?
And Fannie and Freddie? They were at the heart of the mortgage meltdown and political piggy banks that were so badly (and corruptly) regulated that they are likely to cost the taxpayers $400 billion when all is said and done. But neither of these bills even mentions them. Fannie and Freddie are classic examples of crony capitalism, where government and business are in bed together. Obama wants to expand that disastrous model to the likes of JPMorgan Chase and Goldman Sachs.
It is the business of business to take risk and seek profit. It is the business of government to regulate business to ensure that the public interest is not put at risk. That’s exactly what government failed to do before 2008. As Judge Richard Posner put it in his most recent book, The Crisis of Capitalist Democracy, “Calling bankers greedy for taking advantage of profit opportunities created by unsound government policies is like calling rich people greedy for allowing Medicare to reimburse their medical bills.”
The Obama administration’s ruthless pursuit of ever greater concentration of power in Washington — and calling it reform — just keeps getting scarier.
In 2009 the federal deficit was 11.2 percent of GDP. And that was the deficit if you count the Social Security and other trust-fund surpluses as income, which the government does. The national debt in 2009 increased by 11.7 percent of GDP.
The reasons given for this enormous deficit are the financial crisis and the recession it caused. But the last year in which unemployment hit its current level of 10.2 percent, in 1982, the deficit was only 5.5 percent of GDP. In 1933, when a financial crisis was so severe that the president closed the country’s banks and the stock exchange remained closed for 10 days, the deficit was 4.61 percent of GDP. Only when the nation was fighting a great war has the deficit hit anything like its current level. In 1942, the deficit was 11.6 percent of GDP and reached 27.5 percent in 1943. Beginning in fiscal 1947, the first year of peace, the government began running surpluses (4.6 percent of GDP in 1948).
That’s not going to happen in the near future. The Congressional Budget Office projects that the federal deficit will decline from 11.2 percent of GDP this year to 9.6 percent in 2010, 6.1 percent in 2011, and 3.7 percent in 2012. The CBO foresees its remaining above 3 percent for as far as the green-shaded eye can see. If the economic projections of the CBO turn out to be even a little too optimistic (and they are, in reality, only guesses), it could be far worse.
In a new Newsweek article that is well worth reading, the distinguished economic historian Niall Ferguson discusses the possible consequences of a national debt that rises to a dangerous level. Those consequences aren’t pretty. As he points out, when interest payments on the debt of Great Powers have risen above 20 percent of government revenues, trouble has always been on the way. Thanks to very low interest rates right now, interest on the debt will be 8.38 percent of the budget in fiscal 2009. But interest rates are sure to rise if economic recovery is robust and the federal government (and other national governments) continues to run up big deficits. It is by no means unlikely that we could find ourselves at the danger level in another decade. In a decade after that, we could be going the way of 17th-century Spain, 18th-century France, and 20th-century Britain, with our power to protect American interests severely curtailed.
The public is aware of the situation and in poll after poll puts deficit reduction as its No. 1 priority. So what will the greatest deliberative body in the world — as the U.S. Senate loves to call itself — spend the month of December deliberating about? The greatest expansion of the federal government’s responsibilities since Lyndon Johnson left the White House 40 years ago.
The best argument against the health-care bill now before the Senate is, simply, that we can’t afford it. The public increasingly knows that. Why doesn’t the Senate?