“It’s a terrible idea. It’s undemocratic. It’s bad economic policy, and it’s bad social policy. And it has a very little chance of solving the problem in a meaningful way.” — Allan Meltzer, Carnegie-Mellon University
Beware of politicians or business leaders who say, “I’m a firm believer in the free market, but…”
“But” thinkers have come out of the woodwork during this financial crisis: Conservative economist Bruce Bartlett proposes tax increases…..Patrick Byrne, the new CEO of the Milton and Rose Friedman Foundation who calls himself a “classical liberal,” demands that Congress impose a transactions tax on every stock market transaction to stem speculation. (This so-called “Tobin Tax,” named after Yale economist James Tobin, would reduce liquidity and make buying and selling stock more difficult.)
Then, of course, there’s Secretary Hank Paulson himself. A former CEO of Goldman Sachs, he professes to be a strong free-marketeer. "But we must act or face disaster," he warns. Then he proposes the largest power grab in history. Have you seen Section 8 of the bailout plan? It states: "Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency."
If this stands, it is giving incredible and unprecedented dictatorial power to the Secretary of the Treasury.
Fortunately, there are a few sane voices out there. I was delighted to see that Allan Meltzer, a famous monetary expert from Carnegie-Mellon, lambasted the $700 billion bailout in a PBS interview yesterday.
Meltzer is writing a multi-volume history of the Federal Reserve. He drew upon his extensive background as a monetary historian to criticize Secretary Paulson’s handling of the credit crisis. “I’ve listened to governments tell me for 40 years that there was a crisis and the world was going to fall apart if we didn’t do this or that,” he said. “But there have been a few cases where they weren’t able to do that. One was the commercial paper crisis in 1970. There have been several others. The world did not fall apart. Last week, we had Lehman Brothers went into bankruptcy. Within three days, most of the assets were sold.”
AIG had three offers to buy the company before the government took over and offered a better deal. Merrill Lynch was sold to Bank of America when it ran into trouble. Last night it was announced that JP Morgan bought Washington Mutual’s deposits.
Meltzer concludes, “We need to get the government’s hand out of this, and let’s see whether we can’t get a market solution.”
Given that monetarists often favor intervention during a crisis, it’s great to see Meltzer taking a strong laissez faire stance.
Where’s J. P. Morgan When We Need Him?
I too am a historian of finance, and one of my favorite stories is the Panic of 1907. It has some similarity to the current situation, because in 1907 there were some runs on the banks and the credit markets froze up. J. P. Morgan, the quasi central banker, invited all the major bankers in New York to his library, locked the doors, and said he wouldn’t let anyone out until they had raised the funds to end the credit crunch. It worked.
Secretary Paulson and chairman Bernanke should do the same and not depend on Congress. They should invite all the major bankers to a meeting in New York, and raise capital to solve the liquidity crunch. They might invite Warren Buffett and Alan Greenspan to help out. Meltzer suggests the Treasury might help in lending funds if necessary: “If they’re going to do something, then what they ought to do is make loans, which the financial institutions have to repay with interest. And if you think — that’s an idea which the Chileans have used in a bigger crisis than this for them in 1982, and it worked for them.” But it should not nationalize banks and mortgage companies, and get involved in the commercial banking business.
History is holding its breath. In the next couple of days, we will witness one of the greatest tests of American will, whether we will stand for economic freedom or doom ourselves to a new form of tyranny.