Wednesday, April 20, 2011

Peter Foster: Keynesianism’s systemic failure

Post-crisis stimulus stimulated little but insupportable debt and inflation

From Peter Foster at The Financial Post:

While the United States has been hit with a prospective debt downgrade in the wake of President Obama’s defiant statism, the even more statist European Union is trying to keep the lid on the consequences of its own regulatory pretensions and its members’ fiscal fecklessness.
Greece denies any need to restructure its debt, but the market doesn’t believe it, and has forced its borrowing rates to junk levels. There is backroom panic over the recent Finnish election results, which saw the rise of an anti-bailout party called True Finns. Since EU bailout packages have to be approved unanimously, there is fear that True Finns may bring the game of European musical chairs to a halt, revealing a paucity of seating.
This puts the unwanted spotlight on Portugal, which needs to keep jigging through a major bond redemption in June. It is even more necessary to keep the Spanish castanets clicking because Spain is “too big to bail.”
The real question about the still-mounting subprime government crisis is why anybody would have imagined that it had been solved — or even addressed — rather than exacerbated by the kind of trillion-dollar Keynesian pronouncements made at the G20 by the likes of former British Prime Minister Gordon Brown, whose successors are struggling with the disaster he left them. Indeed, it was arguably the G20 mentality, with its delusions of universal economic security, well-planned regulatory “architecture” and panoptic “macroprudence” that created this fiasco in the first place.
Free markets are based on risk and will always be prone to particular failure. Only government attempts to prevent or compensate for particular failure can threaten the systemic variety.
Post-crisis stimulus stimulated little but insupportable government debt — and now inflation. It was joined by a downward manipulation of interest rates that has promoted what Austrian economists called “mal-investment,” plus asset inflation.
The astonishing aspect of all this — as pointed out numerous times in this space — is that spend-yourself-rich Keynesianism had already been comprehensively refuted in theory and had spectacularly failed in practice by the late 1970s.
The good news is that fettered capitalism has made the world a good deal richer since then, and thus arguably more able to withstand policy incompetence. The bad news that the tax-and-spend interventionist state has grown in parasitical lockstep, if not even faster, thus both hobbling progress and mortgaging people’s future via increasingly unsustainable health and welfare commitments. Few would dare to question the validity of a welfare state; but few could deny that it consistently threatens to grow out of control.
The Obama administration’s solution is more of the same. It wants to up the government’s credit-card limit, which the EU now does on an ongoing basis. Brussels and the European Central Bank are reluctant to acknowledge the obvious need for a Greek restructuring (i.e. default) because the EU banks that were rash enough to take on Greek debt are allegedly not strong enough to take the required “haircut.” They thus require further time at the state spa on the taxpayers’ tab.
All this further weakens institutions and economies and promotes even greater moral hazard. However, if you suggest this to the agents of the regulatory state and its elaborate multinational offshoots such as the IMF, their response would be: What other way is there?
Friedrich Hayek identified the “fatal conceit” of believing that markets are flawed and can always be rectified and/or improved and/or fine tuned by bright people with big brains and good intentions. However, the fatal conceit is not just, or even, a cognitive error; it also inevitably features a good deal of self-interest. People come into government to do good and stay on to do well. (my emphasis!!!-SP)
The EU started out as a thrust to reduce trade barriers and enable industrial rationalization across postwar state borders, thus reducing the chances of further intra-European conflict. It was also promoted as a bulwark against Soviet aggression. However, in their inevitable hunger to acquire more power, the agents of the European regulatory state sought monetary union, knowing that monetary union would require central co-ordination of economic policy if it wasn’t to fall apart. However, economic policy remained in the hands of individual states, so the system is falling apart. Some governments inevitably pursued (extra) feckless policies precisely because they knew that Brussels would have to bail them out to keep its expansive dreams alive.
As my colleague Terence Corcoran noted yesterday, Standard & Poor’s warning about a possible downgrade of U.S. government debt should come as no surprise, and certainly no comfort that either ratings agencies or global regulators have a clue about how events will unfold. Indeed, they are in a state of professional denial. In the Borg-like mind of super-bureaucracy, policy failure is merely a temporary glitch, the prelude to more and bigger — and invariably “smarter” — policy. Indeed, policy failure is regarded as synonymous with the acquisition of valuable input that will make the next policy truly potent. The one policy that is rarely countenanced is more reliance on market freedom. Liberals might at this point rage at all the Wall Street malefactors who have dodged the slammer, but that reflects yet another failure of fundamental state responsibility. Any state should deal with the issues that are within its mandate and competence before it seeks to confirm the political Peter Principle that the more expansive the scope of regulation, the more likely it is to fail.

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