Marc Carlisle: Can a capitalist economy not right itself?
February 20, 2008
Economics is rightly called the dismal science. As a predictor of the future, an economist will admit that economics is of little value. Part of the difficulty is that there are too many variables and the key variables, the decisions made by individuals and by groups of individuals are neither rational nor predictable. If an economist were a heart surgeon, his understanding of the heart would amount to red stuff goes in, red stuff comes out, and while our economist/surgeon may think he knows why the rhythm of the heart sometimes increases or skips a beat, he cant be sure until after the autopsy.Like any good doctor, however, economists radiate confidence since knowledge is power, and since both deal in minutiae and arcanae only dimly understood by their patients, their pronouncements are rarely challenged or can even be questioned by the rest of us. Few even know the various measures of money supply, but only an economist would insist he understands their significance, and only a Ph.D would worry that its not the changes that matter, its the rate of change in the rate of change, the second derivative, that tells us anything. The nations chief economist, Dr. Paul Bernanke, the chairman of the Federal Reserve, like his predecessor Alan Greenspan, is certainly a master of second derivatives. When Mr. Greenspan retired, I wrote at the time that the President had to choose a successor who was an economist, and not someone who was his buddy (such as Ms. Miers for the Supreme Court) or who had political savvy and connections but no technical skill (the new head of CU). I got what I wanted in Mr. Bernanke, but now I realize my error.Ironically, in an economic world plagued by lack of information and unpredictable players, the prevailing theory is a model of simplicity. Unlike medicine, where some training is required to do anything, anyone can be a player in the game of capitalism. The governing equation is simple: the greater the effort, the greater the return, but great returns carry great risk, including total failure. A lack of training can be an advantage, since the players havent been told what cant be done, or how it should be done. A lack of training can be costly as well; instead of learning from the mistakes of the pasts, every generation tends to repeat them. Capitalists are like football players, young, ready to prove themselves, but by their 30s, theyre gone. Bill Gates is rich, but he stopped playing fulltime at 29, and Warren Buffett and George Blanda are very much the exceptions. Thirty years ago, the way to make big returns was real estate, using easy money from savings and loans anxious for those big returns. Inevitably, the rate of change in the rate of growth of real estate sales declined, then turned negative. The capitalists and the S&Ls, young men recently baptized in success, faced losses. Unlike football players, coached and trained as a team, the players on the field of capitalism are a mob. Unfamiliar with playing defense, the capitalists could not contain those losses and they and their depositors faced total failure. However, rather than let capitalism run its course, the head of the Federal Reserve, Paul Volcker, an economist and not a capitalist, one who had been worrying about those second derivatives and who feared the economic dislocation of S&L failure, forced a government bailout. The cost of failure, instead of being borne by capitalists, was borne by the taxpayer.Today, the head economist Mr. Bernanke is toting up another bill for you and me. Instead of raising interest rates to fight inflation, hes lowered them to save the capitalists at the money center banks, this generations S&Ls, who saw only the returns but not the risks in subprime loans for real estate. Bernanke, like Volcker, will not let the penalties for failure at capitalism fall on the rugged individualists at the banks. Instead, there will be another bailout led by the economists, abetted by a President and a Congress anxious to avoid recession, and paid for by you and me.I asked for an economist at the Fed and I got one. Damn.Marc Carlisle writes a Thursday column. He can be reached at email@example.com.