A Bear Market for Liberty?

As I was reminded by a random commenter on a recent blog post, there is no shortage of people in this country with irrational and absurd notions as to how our society and its economy "ought" to be structured. And as a rule of thumb, I try not to pay them much heed. One of the greatest things about this great country of ours is that everybody has the constitutional right to say whatever they please, without fear of legal retribution. But the unspoken corollary to that freedom is that no one is obligated to listen, thank God.

However, when influential people with irrational and absurd notions of how our economy "ought" to be structured have certain powerful congressmen nodding in agreement, I tend to sit up and take note. And such is the case right now. Lost in all the sound and fury over the looming election and the plunging economy is a proposal -- currently winning some powerful converts on Capitol Hill -- that would fundamentally alter the way most Americans save and invest for their retirement years.

Economist Teresa Ghilarducci of the New School for Social Research has lately been promoting a plan to scrap the current system of allowing workers to shelter a portion of their income from taxes by investing it in a 401(k) or company-sponsored pension plan, and replace it with a government-run system in which all workers must participate by contributing at least 5 percent of their paycheck. In return, they'd receive an annual tax credit of $600, and a "guaranteed" return on their retirement savings of 3 percent, adjusted for inflation. Are we having fun yet?

The rationale for this not-so-subtle abrogation of personal freedom and choice is multifaceted, and deserving of at least a little consideration. First and foremost, such a plan would end the "subsidy" that 401(k) and pension plan contributions receive by virtue of their tax-exempt status. Ms. Ghilarducci -- who apparently cannot sleep at night knowing that somewhere, someone is not paying taxes on some of their income -- claims that this tax exemption costs the federal government $80 billion in lost revenue each year. (Just for context, this figure represents about 2.5 percent of the current federal budget.)

But more important than the added tax revenue, the Ghilarducci plan would "guarantee" an after-inflation return of 3 percent on workers' accounts, to guard against plummets in the stock market, such as the current one that's got so many workers nervous about their pensions and 401(k)'s these days. In a comment that deserves serious consideration for "Most Fatuous Statement of the Century," Ghilarducci notes that, "These last three weeks people are learning their 401(k) plans can go down." Who knew!

So, rather than allowing workers to choose whether and to what degree to participate in a company-sponsored retirement plan, and in the case of 401(k)'s, to choose what type and risk-level of assets to invest in, Teresa Ghilarducci would like to make that choice for you. Or rather, she'd like to abolish choice and turn your retirement fate over to the Social Security Administration. To make good on that guaranteed 3 percent return her plan promises, the government would invest workers' money in the only asset that can plausibly guarantee any level of return: government bonds!

So what sets this particular know-it-all economist apart from all the other self-proclaimed geniuses who would like to be running our lives? Well, in this case, a federal audience. George Miller of California and Jim McDermott of Washington, both Democrats in the House of Representatives, invited Ms. Ghilarducci to pitch her plan to their respective committees, and apparently they both like what they heard. McDermott's press secretary said the idea "Certainly is intriguing." No legislation is pending, but with both houses of Congress and the presidency all but certain to be in Democratic hands this January, there's really no need to rush.

And just think of it! Hundreds of millions of workers becoming more dependent on the federal government for their basic quality of life! Trillions of dollars currently locked up in pensions and 401(k)'s that will suddenly become available to finance the trillion-dollar annual deficits the government is expected to run starting next year! What isn't there for a big-government liberal to love?

To be sure, the last couple of months have served as a wake-up call to anyone who thought that investing in the stock market is a can't-miss proposition. Unfortunately, this is leading quite a few people to the very worst conclusion; namely, that the unavoidable risk that comes with any aspect of human existence serves as a justification to banish risk by government fiat, and that personal responsibility is trumped by promises of security.

"What people want from their pensions is guaranteed income for life,"Ghilarducci says. Actually, there is no end to what people probably want. As my favorite high school teacher taught me long ago, economics is the study of allocating finite resources among infinite desires. Unfortunately, modern liberalism has degenerated into the business of denying the former by pandering to the latter.



Post script: I employed a 401(k) calculator to determine whether a 25-year-old worker with zero savings and an income of $50,000 per year would be better off with a guaranteed return of 3 percent above inflation or the average stock market return of 7 percent above inflation, aided by the standard 50 percent match that most companies offer on employees' first 6 percent of income. The score after 35 years: $859,086.47 for the 401(k) and $286,927.89 for Ms. Ghilarducci.

Airbrushing a Crisis

"Who controls the past controls the future; who controls the present controls the past."
~Eric Blair, aka George Orwell

I don't believe I'm going out on a limb in saying that there are at present a number of troubling and unsettling currents permeating the media and the national consciousness in general. Read any newspaper, watch any news program, or talk to anybody even remotely abreast of current events, and you're likely to encounter a competing host of negative sentiments: unease, or perhaps outright fear, over the state of our teetering economy and still-falling stock markets; apprehension about the upcoming presidential election and what the outcome will mean for all of us; and in general, a certain dread as to what the immediate and distant future will bring to a country that already believes itself to be on the wrong track. And marching in lockstep with the advancing malaise comes a growing interest in blame: blame for our present woes, and the parties who deserve it.

Liberal politicians and influential opinion-shapers didn't have to look very far for the villain responsible for failing banks and plunging 401(k) portfolios. Free-market capitalism has been caught red-handed, they announce;all those misguided theories about deregulated markets and laissez-faire economics have delivered us unto the brink of disaster and now deserve the intellectual equivalent of euthanasia. Harold Meyerson of the Washington Post makes the case for the prosecution with as much self-assured rectitude as the most zealous Marxist: "What exactly do economic conservatives believe now that their god is dead? What's become of the glories of privatized Social Security? Of the merits of 401(k)s vs. defined-benefit pensions?"

His prose might border on the florid, but Meyerson is representative of the entire political Left, which has already delivered a guilty verdict in the case against capitalism. Wealthy Wall Street hucksters, the popular narrative runs, spent years trafficking in shoddy mortgage-backed investments they either didn't understood, or understood to be junk, eager only to cash in before the bottom fell out. And now, with the Dow Jones Industrial Average down a tidy 6,000 points or so since last year, the bottom has well and truly fallen out. The agreed-upon catalyst in this version of the story -- the recent collapse of the housing market -- was all that was required to bring the whole shaky edifice down.

It all makes for compelling op-ed pieces, and it almost certainly guarantees that the liberal intelligentsia's political champion will ascend to the presidency this fall, but something is missing. Lost in all the recriminations over who's to blame and the ominous rumbles about nationalizing banks is a question that isn't being asked. Why exactly did the housing market, which had been red-hot for so many years, start to crater recently? And why were there so many of these so-called "toxic" mortgage-backed securities for Wall Street vandals to dabble in? The answer calls the popular narrative vilifying capitalism into question, and might spread the blame around a bit more evenly.

In 1999, long before anyone had heard of "collateralized debt obligations" or "asset-backed securities" or any of the other wreckage that litters today's financial landscape, The New York Times printed a brief article that today sounds stunning, and even chilling, in its prediction of things to come. It's short, it's comprehensible, and I implore anyone interested in understanding today's crisis to read it.

The upshot: that government-backed Fannie Mae and Freddie Mac deliberately steered billions of dollars in mortgage financing to risky borrowers, with potentially ruinous implications: "In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's." And one Peter Wallison, of the unabashedly free-market American Enterprise Institute, anticipated the consequences with remarkably acuity: ''From the perspective of many people, including me, this is another thrift industry growing up around us ... If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.'' Nine years later, Fannie and Freddie failed, the government had to bail them out, and taxpayers are left with the bill.

I offer this quick trip back in time not as a categorical refutation of the charges that unchecked, capitalist greed is at the root of all our troubles, but simply as a reason to stop and think. Anyone who tries to sell you a quick and easy explanation of an economic recession or a financial crisis, with well-defined villains and heroes, is offering a false bill of goods. Times such as these call for honest historical inquiry into the roots of the problem, not political witch trials seeking scapegoats. A decade ago, at least a few prescient observers saw the seeds of today's crisis taking root, and they discerned the unmistakable influence of government at work in the sewing. Consider this the next time you hear some demagogue of the Left try to take ownership of the past while doling out damnation in the present.

Turn On, Tune In, Bail Out

I started this blog principally because I figured it would allow me to pontificate on a wide range of subjects, unfettered by any sort of self-avowed focus or specialty. But now I'm worried that it's rapidly devolving into a simple vehicle for defaming Thomas Friedman of The New York Times opinion page. I swear, when I started out, I had a broader, more diverse mission in mind. But the man leaves me little choice.

Writing in today's Times, Friedman does an absolutely brilliant job of distilling all the myth, posturing and outright stupidity swirling around the ongoing financial crisis into one compact, easy-to-read trope on the need for a massive government bailout of Wall Street. By all means, read his argument in its entirety. But here's all you really need to hear:

"I’ve been frightened for my country only a few times in my life: In 1962, when, even as a boy of 9, I followed the tension of the Cuban missile crisis; in 1963, with the assassination of J.F.K.; on Sept. 11, 2001; and on Monday, when the House Republicans brought down the bipartisan rescue package.

"But this moment is the scariest of all for me because the previous three were all driven by real or potential attacks on the U.S. system by outsiders. This time, we are doing it to ourselves. This time, it’s our own failure to regulate our own financial system and to legislate the proper remedy that is doing us in."

In recent weeks, I've heard much foolishness and scare-mongering spouted about the current credit freeze-up and the concomitant panic on Wall Street, but for sheer idiocy, Mr. Friedman takes the cake. In what appears to be utter seriousness, he announces that the Cuban missile crisis, the JFK assassination and September 11 all pale in comparison to the recent convulsions in the financial sector. Just as a quick history refresher, he is talking about, respectively, the closest we ever came to full-scale war with a nuclear super-power, the public murder of the leader of the free world, and an unprecedented terrorist attack that killed 3,000 people and changed our way of life.

In case you were seeking anecdotal evidence of this country's staggering intellectual decline, look no further. That a man who could say something so patently stupid is paid to write a weekly column for the most prestigious newspaper in the country speaks volumes. But I wasn't looking for proof of what I already know, that Thomas Friedman is a boob. I read his column regularly, out of a certain morbid fascination, so he can no longer surprise me. I highlight his piece only because it provides such an excellent example of everything wrong with the popular analysis of the "crisis" on Wall Street, and with the solution to that crisis being championed by a political elite that claims to know what's best for the economy.

For the sake of context, here's the condensed version of how we supposedly came to the brink of this financial Waterloo, and the remedy we're told we must enact: Over the past several years, various banks and other financial institutions invested huge amounts of money in new-fangled assets consisting of many home mortgages "bundled" together. They turned out to be a risky investment, but because the government failed to regulate the buying and selling of these assets, an investment bubble was permitted to grow, and when the housing market started going south a couple years ago, the bubble burst. So now we must allow the government to spend $700 billion buying up those risky investments so banks will regain the confidence to start lending again. If we fail to do this, we risk a complete halt to lending, which will send the economy into a deep recession.

But some people aren't convinced of the veracity of this narrative, as evidenced by the House of Representatives' vote against the bailout this past Monday, which evoked shrieks from Thomas Friedman's ilk, accusing the House Republicans that voted against the bill of betraying the country in its time of great need (but not the House Democrats who voted against, curiously). Dissenting Republicans said, in effect, that they simply cannot spend this massive sum of public money on a bailout for a financial industry that did so much to bring on its own destruction, and that government has no authority to influence the economy on this scale. Two days later, I'm still waiting to hear a cogent, rational refutation of this argument.

Instead, all I hear is grand-standing and more fear-mongering from backers of the bailout, who scream ever louder that failing to act will bring about a second Great Depression. For evidence, they point to Monday's collapse in the stock market, which immediately followed the no-vote in the House. How's that for specious reasoning? "We promised markets that we'd fix this mess for them, and then we didn't fix it, and the markets dropped! That's why we have to fix the mess!"

This is the best example yet of what economists call "moral hazard," the notion that if you provide individuals or companies with the incentive to behave badly, they will do so. By announcing that the government can and will fix this huge mess, banks and other firms can shunt all responsibility onto the government. Rather than absorb losses, declare bankruptcy or sell out to solvent institutions, they can simply wait around for the government to cure their financial problems. With a blank check in the offing, none of them will resume normal lending until that check clears, and so the self-fulfilling prophecy of a crisis comes to fruition.

Such counter-productive incentives have motivated every stage of this ongoing situation, from the creation of two government-backed entities, Fannie Mae and Freddie Mac -- designed to encourage loans to many people who shouldn't have qualified for them -- to the absurdly low interest rates the Federal Reserve fostered after the last recession to encourage more lending than was healthy, to previous government bailouts of individual firms, which sent the message that if you incur big losses, the feds will take the hit for you. To make a long story short: If you encourage individuals and companies to borrow and lend more money than they have, you will eventually provoke a lending crisis.

But as Thomas Friedman makes abundantly clear, the past doesn't matter. Don't ask how we got to this situation in the first place; don't ask whether a really big bailout will succeed where smaller ones simply made the situation worse; and don't question the assumption that the present problem is always the worst problem ever. Simply yell your nostrums louder, and keep scaring people with doomsday predictions until you get your way.

As every high school civics student knows, it's illegal to yell "Fire!" in a crowded theater. But there are no such restrictions on doing it from the editorial pages of an august newspaper.