March 27, 2009 [LINK / comment]
Is the era of free markets over?
Well, so it would appear. Thirteen years and two months after President Bill Clinton declared in his State of the Union speech that "The era of big government is over," Treasury Secretary Tim Geithner has confirmed not only that big government is back, but that this country's very identity as a (relative) free-market haven is coming to an end. As reported in the Washington Post:
The Obama administration's plan, described by several sources, would extend federal regulation for the first time to all trading in financial derivatives and to companies including large hedge funds and major insurers such as American International Group. The administration also will seek to impose uniform standards on all large financial firms, including banks, an unprecedented step that would place significant limits on the scope and risk of their activities.
In essence, the plan is a rebuke of raw capitalism and a reassertion that regulation is critical to the healthy function of financial markets and the steady flow of money to borrowers.
There is no question that some regulatory reform and reinvigoration is necessary to clean up the financial mess; this is not a question of pure laissez-faire economics vs. statism. But the enormous scope of the proposed changes implies that government experts are better suited than market mechanisms for the purpose of keeping the economy in balance. Coupled with the huge increase in federal government spending for just about every program anyone could imagine, it clearly represents a fundamental ideological shift in Washington, turning back the clock to the days before the Reagan administration.
In Europe, meanwhile, there is growing antipathy to U.S. policies under Obama, who has been pressuring Europeans to follow his lead in major "pump-priming" spending, à la Keynes. Czech Prime Minister Mirek Topolanek, who is currently serving as president of the EU, called Obama's economic stimulus package and bank bailouts "a road to hell." He noted that the "buy America" provisions of the stimulus package will lead to more "protectionist" trade policies. See Washington Post.
For what it's worth, if the objective is to mitigate the free-wheeling, "irrationally exuberant" ways of Wall Street, I think it would be much better to place a small tax on securities transactions. That would discourage the frenetic high-volume, thin-margin strategy employed by the notorious "day traders," and would be better than subjecting the industry to more government oversight and paperwork. The failure of federal regulators to prevent last year's collapse was a failure of leadership, both in the White House and on Capitol Hill, not a failure of the institutions themselves. Bureaucrats who tried to alert their superiors to misdoings were either ignored or told to shut up, and adding new layers of bureaucracy is not going to change the culture of corruption in Washington and Wall Street that brought about our current woes. You can't fix human problems with procedural contrivances.
On the broader question of what President Obama's real intentions are with respect to the U.S. economy, he could raise investor confidence by making it clear that he will refrain from imposing confiscatory rates of taxation to pay for his sweeping agenda of "change." Uncertainty about future government policies is one of the main reasons why investors are maintaining a high degree of liquidity right now. Everybody on Wall Street is in "wait and see" mode.