On Friday, more “unexpected” news came out regarding the economy. Or perhaps a more accurate description would be unexpected for those who have hitched their economic wagons to the Obama administration’s Keynesian economic star. For Americans astute enough to see the tremendous wishful thinking behind the claims of “green shoots” of recovery, “Recovery Summer,” or the president’s April pronouncement that we are “turning a corner,” the so-called economic recovery has been little more than a media-abetted myth. Are there lessons to be learned? Two come immediately to mind. One, free-market capitalism can only be distorted for so long. Two, human nature is fundamentally misunderstood by progressive ideologues.
Why is free-market capitalism the most effective economic system in the world? Because it is the best manager of mankind’s baser instincts. Those instincts are greed and fear. All the economic statistics used to explain the current malaise are certainly not irrelevant, but they are merely symptoms of the underlying disease. The underlying disease is progressive ideology which, while well-intentioned, has distorted the proper relationship between greed and fear necessary for free markets to function properly.
What caused the economic meltdown of 2008? Again, we can go back to specific causes, of which the bipartisan effort to put unqualified people into mortgages they ultimately couldn’t afford goes to the top of the list. But it is worth remembering a phrase coined by Former Federal Reserve Chairman Alan Greenspan. The phrase was “irrational exuberance,” which he uttered as part of a speech entitled “The Challenge of Central Banking in a Democratic Society,” given before the American Enterprise Institute at the Washington Hilton Hotel in 1996. “But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?” Greenspan asked his audience. “We as central bankers need not be concerned if a collapsing financial asset bubble does not threaten to impair the real economy, its production, jobs and price stability.”
Twelve years later, the collapsing financial asset bubble known as real estate has threatened every aspect of the “real economy.” It is something for which Greenspan deserves a substantial portion of the blame, chiefly for maintaining the low-interest, easy money policy that fueled the housing boom. Yet what is irrational exuberance as measured by the aforementioned human instincts?
Quite simply, it is the removal of fear from the fear/greed equation.
Despite the beating the concept has taken since Gordon Gekko, the lead character in Oliver Stone’s Wall Street who uttered the immortal phrase, “greed is good,” Gekko was, in fact, spot on. Greed is good. Men who dream of amassing huge fortunes — and create millions of jobs in the process — have been the primary drivers of economies since the dawn of the Industrial Revolution. The manifestation of greed has given the world an unprecedented standard of living, longer lives, and continuing technological advances.
Yet up until recently, greed had been tempered by fear. Fear of failure, fear of bankruptcy, and fear of prosecution if one’s greed exceeded the rule of law. That is not to say greed and fear have always been in constant equilibrium. We all have our good days and bad days, and that disequilibrium is biologically hard-wired into the species. Business cycles can be thought of in economic terms, but they can also be analyzed with respect to human emotion: when people are feeling more greedy than fearful, the economy booms. When they are more fearful than greedy, it swoons.
Most Americans by now are quite familiar with the phrase “too big to fail.” Too big to fail was/is a government-sponsored effort to remove fear from the equation of free-market capitalism. The massive amount of irresponsible lending in which most of our financial institutions engaged would have been next to impossible without the tacit understanding that failure would be underwritten by the government.
And that’s precisely what happened — and continues to happen. Success has been privatized, as banks and corporations sitting on trillions of dollars in uninvested cash can attest. Failure has been socialized, as trillions of dollars in government bailouts paid for by taxpayers are equally evident.
Given this reality, one would think that the effort to re-establish a reasonable ratio between greed and fear would be a high priority in Washington, D.C. Unfortunately, this is not the case. In fact, the Obama administration is distorting the ratio even more. On fear side, it is excoriating “fat cats,” even as it burdens business with a lethal cocktail of ObamaCare, an overly burdensome FinReg bill, one of the highest corporate tax rates in the world, and the currency-debasing fiasco known as QE2.
On the greed side, it is “stimulating” preferred constituencies, most notably public sector unions, and other government entities who can do little in the way of lifting us out of our current dilemma. It is picking “winners” and “losers” for special, crony-capitalist considerations, most notably granting waivers from the same healthcare bill it promised was a panacea for all, as well as suing jet-maker Boeing for daring to open shop in a right-to-work state. It is promoting moral hazard in various ways as well, most notably in the form of three years of unemployment insurance and a twelve month reprieve from paying one’s mortgage under certain qualifications.
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