What is the grade that you would give the
United States for responding to the boom and
bust today?
The answer is definitely a failing grade.
Have we fixed the problems that created this
boom and bust?
Sadly, no we have not.
We still have a central bank that controls
interest rates and which controls the monetary
system.
We still have a political class that is involved
in manipulating the systems through the central
bank for its own end, such as gaining reelection
or making people feel good rather than angry
with their rulers and governors.
We also have a financial services sector,
which is connected to the political class
and which is being bailed out by the political
class.
This has created a serious problem of moral
hazard.
Imagine you are playing a poker game and you
confidently believe—and are right in believing—that
if you lose a whole lot of money on it, somebody
is going to reimburse you.
What are you going to do?
You’re going to behave recklessly.
You will bet extravagantly and excessively
on weak hands.
By analogy this is exactly what the banking
system did, and we have not removed the underlying
institutions and practices that led them to
do this.
They are still like that poker player who
thinks that he can be bailed out if he makes
rash or foolish decisions.
What this means is that another boom and bust
of this kind is likely in the future, unless
we change the way the monetary system works.
What is the grade that you would give the
United States for responding to the boom and
bust today?
The answer is definitely a failing grade.
If you look at the response of the United
States to the financial crisis and compare
it to that of other countries, it doesn’t
come out very well from the American perspective.
The United States has done one thing, which
almost everyone has done which is bad, and
that is to bail out mistaken and insolvent
financial institutions.
It’s not alone in that.
So that’s a case where everyone, if you
like, gets a failing grade.
However, at the same time, it has also failed
to deal with the increasingly acute problem
of the state of the nation’s finances.
The United States currently has a budget deficit
of over a trillion dollars.
This is simply staggering in terms of the
amounts and numbers that are involved.
A trillion dollars: one dollar bills, stacked
side-by-side, would stretch all the way from
New York to San Francisco and back to Salt
Lake City.
That’s the kind of numbers we’re talking
about here.
Every other country in the world, notably
the European Union countries, have been making
major cutbacks and retrenchments in public
spending.
The United States, by contrast, has been simply
borrowing as though there’s no tomorrow
and is looking to boost public spending rather
than reduce it.
Why is that a bad move, and why does that
mean they get a failing grade?
Because it means all this spending—this
public spending—is going to crowd out private
spending.
There isn’t a money tree somewhere in the
gardens of the U.S. Treasury Department where
that money comes from.
So to the extent that money is being spent
by the government, it has to be either raised
through taxes or borrowed from private people
with wealth.
And that means that it can’t be used for
something else.
And in fact, just as in the 1930s, the most
likely effect is to prolong economic failing
adjustment, rather than having it brought
to a rapid close.
