The End of Limited Government

The era of limited government is ending in a crash. We subjected those limited government theories to the market test and, like President Hoover’s theories, they failed.

The idea that we can limit government and depend on markets alone to allocate resources and income in a just and efficient manner led us to a world of multiple economic crises. The word depression is back in the economist’s vocabulary.

From President Reagan to the present, the free-market ideology was tried and simply did not work. The most telling example of resulting wasteful injustice is the crisis in our banking system. Banks are failing and people are losing their homes and savings because of the deregulation where government did not do its job.

Banks are not like other corporations in a private enterprise economy. They have the power and privilege of creating money and lending it to people. But that requires them to be trustworthy and prudent, something we cannot trust them to be by themselves.

To ensure their honesty, a whole alphabet soup of agencies regulated how much capital banks had to have in reserve, to whom they could lend, at what interest rate, under what conditions, and who they could own and who could own them.

The Glass-Steagall Act that regulated banking was part of the New Deal’s first 100 days. That Act was designed to see that the excesses of the 1920s were not repeated and to ensure that what is happening now would not occur. "Glass-Steagall," it was said, "protected bankers against themselves."

The change, the application of limited government to our banking system, began with the Depository Institutions Deregulation Act of 1980. That act unraveled many of the restrictions on risky lending. It let banks own and be owned by other financial institutions. It limited and weakened oversight by federal agencies.

The act also repealed the regulation of interest rates and over rode all state and local usury laws. Those high interest rates you are paying on credit cards and those escalating fees were, for the most part, illegal before deregulation.

Almost immediately we began the first of a series of banking crises that continue to this day. That crisis was met with more deregulation.

Then the Economic Recovery Act of 1981 encouraged savings and loans to invest in commercial real estate and high-risk loans to developers, casinos, and ski resorts and in complicated financial instruments about which they knew nothing. That, of course, quickly brought on the much larger savings-and-loan crisis.

The next disastrous step in banking deregulation was the Gramm-Leach-Bliley Act of 1999 which finally gave the banking industry what they really wanted -- repeal of Glass-Steagall. Now banks could be investment houses and tell you to buy when they are selling.

We can spread the blame for our multiple crises to include negligent borrowers, greedy bankers, oil speculators or the economic growth of China and India. But repeal of Glass-Steagall enabled all of this high-risk, herd mentality where the money people move together into rising markets and create the bubbles.

Alan Greenspan, then Chairman of the Fed, could have stopped those born-to-be-foreclosed mortgages from being rated AAA and sold all over the world. In the face of irrational exuberance, he relied on "rational" markets and limited government intervention as the system ran wild.

Ben Bernanke, the new Chairman of the Fed, is stretching the rules to patch things up. He is already way outside the limited government parameters, and even what the law authorizes him to do, promising money to anybody he thinks might someday be too big to fail.

The bail outs will go to the Bear Stearns of this world. The money our us Congress is considering for the little guy will be too little, too late. Working people cannot afford to buy a bail out. The financial services and real estate industries can and did. They have already given $250 million to federal candidates in the 2007-08 election cycle.

Over the past decade Fannie Mae and Freddie Mac, already promised a bail out, contributed $200 million to campaigns and lobbying. So much for the discipline of free markets!

We gave the laissez-faire theories of Milton Friedman and Ronald Reagan their chance. We got the least government that money can buy. It has cost us trillions and bought us nothing.

Now, let's get back to governing and hope we can still avoid what The New York Times called "a financial conflagration of historic and devastating proportions." That polysyllabic mouthful is their euphemism for a depression.