Unregulated markets are the optimal engine of economic growth. So said conservative ideology in the 1920s. Then came wildly speculative margin-buying schemes, the crash of 1929, bank runs and the Great Depression. The Securities and Exchange Commission, FDIC and other agencies were instituted to enforce some reasonable parameters. Unprecedented growth ensued for 40 years.
OPEC took control of energy prices in the 1970s. Inflation and economic stagnation resulted. Improved car mileage and the funding of alternative energy sources were begun. In the 1980s conservatives took office. The Fed used strong monetary policy to get inflation under control. But deregulation of business and finance, tax cuts for the wealthy and ignoring antitrust were the real solutions, said their ideology. Some dregegulation, as in air travel and telecommunications, seemed to work well. Growth returned, but almost all of its benefits went to the wealthiest Americans. The deficit ballooned to record levels. Junk bond operators cost investors hundreds of billions. Corporate raiders destroyed millions of jobs. Merger mania eliminated much competitition. The Savings and Loan meltdown, caused largely by risky speculation in junk bonds, resulted in the failure of 2,000 financial institutions and necessitated FDIC bailouts in excess of $80 billion.
After a period of propserity in the 1990s characterized by tremendous job creation, low inflation, widespread growth in income and even a budget surplus, conservatism returned in the 2000s. The business and financial communities rejoiced as once again, deregulation and tax cuts weighted toward the wealthy became the order of the day. And once again, deficits mushroomed, the standard of living for the rich went up while everyone else's went down, and major financial institutions headed over the cliff due to arcane and unregulated financial instruments, this time connected to subprime loans and the new and largely unregulated mortgage resale market.
Bear Stearns and Indymac bank have crashed. Fannie Mae and Freddie Mac, the twin behemoth mortgage guarantors for over $5 trillion in home loans, totter. They are too big and too important to the economy to be allowed to fail. The Treasury Department and Fed Chairman Ben Bernanke made clear that mega billions would be made available to keep them afloat if necessary. Hundreds more institutions are similarly imperiled. It cost the Fed $30 billion to hot-potato Bear Stearns off to J.P. Morgan. The FDIC will make good the depositors' losses at Indymac, but it has only $53 billion on hand if more banks fall. Another $168 billion was printed out of thin air in tax rebates to stave off the deepening recession which the President again today denied exists.
The Labor Department reports the real inflation rate for the past twelve months including energy and food is 9.2% The real unemployment rate calculated the old, more realistic way is 9%. The S&P 500 New York Stock Exchange index is actually down 10.2% from where it stood on January 20, 2001, or down nearly 30% in constant dollars. These performances are good for neither consumers, workers nor investors.
Thus we see that time and again the blanket "deregulate everything" ideology has led to the adoption of reckless schemes that before long result in the necessity for government intervention and regulation after calamity has ocurred. What could have been prevented by an ounce of prevention then takes many pounds of cure. It would be a good thing if the voting public, and indeed, even the business and financial communities, would learn from prior mistakes. Too much indiscriminate regulation is undeniably bad. But so is too little, as the record so clearly illustrates. Would that we had a consensus for a pragmatic approach rather than an ideological one on the issue. Once the pain gets bad enough and a new administration takes office one can expect the receptivity of congress, the administration and the public to return to a more common-sense reality-based perspective.
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