After the Bailout

Many conservatives are skeptical about the bank bailout last fall. All that money thrown at Wall Street fat cats and what do we have to show for it, we grumble.

It is annoying, but the simple fact is that the government cannot let the credit system collapse. Period. And anyway, the banks are not really true private sector institutions. They are GSEs like Fannie and Freddie, only not quite as government-sponsored. Only a little bit pregnant.

No doubt, as Donald Lambro writes, the money expended in the bank bailout in purchase of toxic assets, in preferred shares and so forth, will come back to the government and reduce the deficit. (That will create a new problem, as solons decide they want to spend it rather than save it.)

No, the bigger problem is the way the government has learned to use the credit system to subsidize its favorites and to imagine that it can ease the business cycle. In Britain, Labour Prime Minister Gordon Brown used to boast that he had abolished “Tory boom and bust.” Now they are ramming his boast down his throat weekly at Prime Minister’s Questions.

Let’s stipulate that the government can do something to ease the business cycle. The question is: how much is enough? And when should it be done and when should the government just get out of the way? Obviously the credit operations of Fannie and Freddie are egregious errors, worse than a crime, a blunder. But we obviously need the government to print money and issue lots of debt when it has a war to fight.

The fact is that the way that the government “helps” in a down cycle is by the resort to inflation. That’s what happened in the Great Depression. That’s what happened in the inflationary/recessionary Seventies. And that’s what happened when Alan Greenspan brought interest rates down in 2001-2003. The key to these interventions is to know when to stop. And the record shows that the government doesn’t know when to stop. That’s why it took $20 to buy an ounce of gold in 1900 and now it takes $800. Today’s dollar will buy the same amount of gold as 2 1/2 cents in 1900.

But why worry? Government bonds are yielding 3 percent right now. From the government’s point of view, it doesn’t matter what it does to the value of the dollar as long as it can sell its bonds on the world market.

Well, it may not matter to the government and all the folks who got to eat lunch in the Capitol Rotunda on January 20. But it matters a lot to the rest of us. Debauching the currency is a crime. It is a crime upon the ordinary people that put their hard earned savings in bank accounts and fixed income securities.

But will we mend our ways after staring into the abyss last fall? Don’t bet your nestegg on it.