No More Recessions
No Easy Credit for Speculators
Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation.
John Maynar Keynes
Government must issue currency and regulate credit in support of economic freedom. Adam Smith proposed that this money should be a simple medium of exchange, and kept away from the speculators, “prodigals and projectors” as he called them. In the 2007-2010 recession, tens of millions of jobs have been lost, and the living conditions of wage-earning families have been severely damaged by extreme violations of this free-market theory.
The government’s mistake began in 1974 with the Employees Retirement Insurance Act (ERISA) when they did not direct the trillions of dollars of mandated pension savings towards the job-growth economy. Lacking regulation, money tends to speculative ventures that have the appearance of quicker gain. This government failure resulted in funding the dot-com bubble, and then the real estate and credit bubbles.
The function of bankers is to move savings into investment in the job-growth economy with prudent loans, but most bankers joined the government in ignoring the distinction between investment in economic growth or speculation. Instead of starving the speculators most bankers fed the frenzy while neglecting to reflect increasing risk in the cost and supply of credit, or the adequacy of their reserves. These, along with transaction and capital gains taxes, are the tools to prevent recessions.
Early in the 20th century, British economist Alfred Marshall pointed out that “the evils of reckless trading are always apt to spread far beyond the persons immediately concerned.” Marshall suggested that the solution was to prevent the speculation fever in the first place.
Alexander Hamilton, the first Secretary of the Treasury, gave easy-credit privileges to the establishment in exchange for their participation and financial support. When Jefferson became president, he promised to “bring this powerful enemy to a perfect subordination,” but Jefferson did not know how to reform Hamilton’s structure.
The next president, James Madison, allowed greater dominance by finance capitalists because the bankrupt government needed their help to fund the War of 1812. After the war, pent-up demand accelerated economic growth that then surged into asset inflation of stocks and real estate. This first “business cycle” climaxed and crashed in the first recession caused by speculators gambling with borrowed money. During the Panic of 1818, a half-million workers lost their jobs, and thousands were jailed for debts of less than $20.
The battle went on between the few protecting their privilege of leveraged speculation versus those angry over the repetitive damage done to ordinary people. The first Populist president, Andrew Jackson, won a battle by vetoing the National Bank, but he lost the war when the State banks he favored provided easy credit for speculators and caused the recession of 1837. Easy credit caused recessions again in 1857, 1873, and 1893. In 1913, the Federal Reserve Board was founded, but it reflected the priorities of Wall Street, with a mission to fight price inflation that erodes the wealth of the few but not asset inflation in stocks and real estate that causes recessions and damages the many.
Many who favor a collectivist type of centrally planned government were quick to identify the Crash of ’29 and the following Great Depression as evidence of fatal flaws in capitalism. The flaw was, instead, a failure of government and banks to limit easy credit for speculation during the 1920s, followed by further government blunders: raising taxes to 63% retroactively, shrinking the money supply over 30% in two years, and legislating protectionist tariffs. The government did not use available tools to restrain the business cycle, and then banks used the same tools after the crash to repair the relationship between bad loans and reserves, and they even cut credit for good companies.
Finance capitalism has always dominated the system but never to the extent of the last quarter century. Pension funding added as much as $100 billion a year for investment, but Wall Street lobbying resulted in it benefiting the money- handlers. Wage-earner capitalists have sat passively by while Wall Street charged exorbitant fees for investing in bubbles that eventually caused the unnecessary recession. Wage earners, in effect, have funded much of the devastation of their own retirement accounts.
The reforms now under way in Congress will only put the Wall Street Humpty-Dumpty back together again, but will not address fighting asset inflation to prevent future recessions. Citizens must demand this reform!