My Letter to National Review Magazine

Thursday, October 08, 2009

Re: “Pop Economics” by Kevin D. Williamson

Dear Sirs:

In “Pop Economics” (Oct 19, 2009 Edition) Kevin D. Williamson exposes as a lie the government’s self-serving rationale for further financial regulation—that greedy, overpaid, and irresponsible executives caused it all. Although he does not attempt to provide a complete and systematic explanation for the mess in which we find ourselves, Mr. Williamson and his colleague Stephen Spruiell like the moral hazard argument advanced by Jeffrey Friedman of the University of Texas that “Basel rules encouraged banks to load up” on assets that carried more risk than initially perceived.

Regulations account for some of the problem, to be sure, but the real, underlying cause was bank credit expansion not supported by real savings. Earlier in his essay Mr. Williamson made the perceptive observation that the bankers “all made similar bad decisions at the same time.” In his classic mid 1960’s book "America’s Great Depression", Murray N. Rothbard called what seemed to be inexplicably poor decision-making by America’s elite bankers as a “Cluster of Errors”. Mr. Williamson asks the same question as Rothbard and comes to the same conclusion—“they thought they were making good investments on behalf of their shareholders…” But what led them down the garden path? What can explain the suspension of Say’s Law--that markets tend toward equilibrium? These errors should have been self-correcting; poor investors lose their own and their clients money and are trusted no more.

Mr. Rothbard’s explanation, backed by meticulous statistical analysis grounded in Austrian School economic theory, is that inherent, fatal flaws in the not-two-decade old central banking system (the Fed), unleashed the boom/bust business cycle. Unfortunately, nothing has changed since 1929. The Fed still causes the speculative boom. And, although the malinvestment eventually reveals itself, government still tries to short circuit the bust and reflate the bubble. Hoover-FDR have been reincarnated in Bush-Obama.

The solution is obvious—take monetary control out of the hands of government and place it back into the hands of the market. In other words, end the Fed and return to whatever private money is accepted by market participants. Without a doubt, the market would return to the gold standard.

Patrick Barron
West Chester, PA