A Brilliant, Mixed-up Mess of a Book

October 8, 2009 10:59 AM by Jeffrey Tucker (Archive)

Peter S. Goodman, New York Times financial reporter, writes a heck of a narrative about the crazy, zany, wild-eyed years of America's economic bubble, which, to his mind, stretch over a 25-year period. The book is Past Due: The End of Easy Money and the Renewal of the American Economy (Times Books, 2009), and what a great eye he has for the telling anecdote, a talent that befits his day job. He fully documents what he calls the make-believe economic structure of American finance that was exposed when the bubble popped.

No general statement passes without a specific case in point, and somehow he manages to know more about his case studies than I know about my own cousins: their past, education, first job, aspirations in life, bank accounts, salaries, circumstances behind hirings and firings, their paramours, and much more. He must have the kind of personality that people open up to. He achieves that sense of omniscience you get from the writings of fantastic reporters.

We naturally expect any book by a reporter, even a good one, to be thin on theoretical detail, but this trait is especially dangerous when writing about economic ups and downs. After all, unless we get cause and effect right--and this doesn't come through interviews and observations--our suggested policy conclusions might end up the reverse of what should be.

Let's say that we don't fully understand the relationship between overeating and obesity, but rather only have some vague sense that the condition is related to eating in some way; we might end up counseling fewer diets.

This is, strangely, what our author ends up doing.

He rightly nails it concerning the sheer phoniness of the prosperity of the last decade or more. He compares the economic landscape of the last decade or more to Never-Never Land. His amazing stream of anecdotes constitute another chapter in the Extraordinary Popular Delusions and the Madness of Crowds. He also has a glimpse of the culprit here: easy money.

So far, so good. The back story of the first boom is that Greenspan "dropped interest rates three times in the fall of 1998 in a bid to spur the economy" (p. 41). After 9/11, the Fed "opened the credit taps wider still" and "low interest rates were directed at easing credit to make more money change hands" (p. 83).

Then there's the role of China which "kept sending larger sums of money, enabling the Fed to keep interest rates low. The resulting cheap credit enabled banks to lend money aggressively, which sent housing prices up. That brought speculators into the market and enticed developers to finance a wave of construction that made the economy hum." (p. 110).

Goodman further understands that this is not just a policy problem. It is an institutional problem that dates way back. See if you don't think he sounds like an old-fashioned gold bug here:

Until the 1970s, the value of a dollar was clearly determined: it was tied to gold. A dollar bill was an explicit promise from the U.S. government that it would, in theory anyway, hand over a defined quantity of gold in exchange for that piece of paper. When President Nixon broke with that standard in 1971, he ushered in an extraordinary expansion of credit. the government began creating dollars out of thin air, without reserving any additional gold against them. That made money abundant.... It also generated crippling inflation -- rising prices for goods -- as more dollars chased the same number of goods, a problem that required several years of painfully high interest rates to snuff out. Above all, it shifted the value of a dollar from something tied to a tangible commodity with intrinsic value to something that floated with the degree of confidence that the United States would be able to honor its debts. (p. 84-85).

These are passages that Ron Paul could have written! So it is clear that at some level Goodman really does get it. And there is more evidence that the writer has his head on straight. "The bubble was the production of years of government policies that aimed to make it easier for more Americans to own houses." (p. 115). This had a profound effect on banking practices: "In the olden days of American finance, none of this would have made any sense. Why would a bank knowingly lend money to people without jobs or income?" (p. 118)

Even when the author gets to the Bush and Obama stimulus attempts, he nails the monetary angle. "the Fed gave banks credit for holding hundreds of billions of dollars they did not really have to restore their balance sheets and encourage them to lend anew...." (p. 204).

Or does he get it? There is another figure on his shoulder, a tiny big-government devil, that gets the best of him, and he suddenly turns into an anti-capitalist fanatic who blames the market itself for all problems. The way he does this is by constantly asserting, contrary to all reality, that laissez-faire theory was the prevailing practice of economics.

"In the decades leading up to the current financial crisis, the champions of the omniscient market enjoyed near-total control of the policy levers, rolling back the regulatory encroachment of government in many commercial realms." (p. 35).

It would be silly to refute such a claim, since there isn't a single piece of evidence in favor of it. Whatever measure of government size and scope you use (taxes collected, Fed Register pages, government spending, mandates on business) you will see the exact opposite of what he says.

But to him, the market of this period is "unfettered" (p. 34). It was a "wild, antiregulatory climate" (p. 37). The market became "an almost mystical source of wealth" (p. 36). The housing bubble "stemmed from the nation's continued reverence for unsupervised markets which allowed financial institutions to pour near-limitless quantities of money into home loads largely clear of government oversight." (p. 115).

What is striking about Goodman, and this applies to many in his social and professional orbit, is that he never really considers that perhaps what he is saying is not true. The period of the 1980s and 1990s saw no cutbacks in government intervention, but rather just the reverse, and it is precisely the advance of intervention that led to the current crisis. What he and others are doing here is confusing a political ethos born of political rhetoric with the actual reality on the ground. Just because Reagan and the Bushes blabbed about markets and free enterprise doesn't mean that they enacted actual policies that favored markets and cut back government controls. The critical reality of American political life is that the language of government expansion and government shrinkage is used as political rallying propaganda, like changing the fabric on the sofa rather than the sofa itself.

And this fact is easily discoverable by looking at budget tables and tax tables and regulatory tables - the actual data of real-life politics. I can recall giving a speech to a group in the late eighties and stating very clearly the following: "Ronald Reagan has vastly expanded government spending, domestic and foreign." I looked at the faces of the people listening and I saw skepticism and doubt, like I had just claimed that little elves were right now braiding their hair dos. So I brought out budget tables to illustrate the point. I showed them that these are official figures.

Even then, they didn't believe it. I tried several other tactics to get them to understand, and finally I discerned a shift but it wasn't toward embracing what was true; instead the shift amounted to a mental one, as if people were saying to themselves: "this information contradicts the geography of the political ethos that is essential for my understanding of how the world works, and therefore I must reject it as irrelevant."

Goodman too has decided to embrace the ethos rather than the reality. What is particularly frustrating is how he seems to identify the policy of loose money with the idea of free markets, as if laissez-faire and sound money have nothing to do with each other. He does this with a familiar trick: pointing out that Greenspan is a follower of Ayn Rand, and therefore everything he did in his tenure can be blamed on her and her cause. Why is it so difficult to imagine that perhaps Greenspan sold out the cause of sound money, about which he had written so eloquently, while in power as the head of the central bank?

In any case, this remarkable book, a thrilling documentary history of how an entire nation went bonkers while addicted to loose credit, is fundamentally marred by this conflation of easy money with free markets. In fact, of course, easy money is not part of the free market system but rather represents a form of financial socialism. This point is about far more than language or rhetoric. It hits the core theoretical area we must consider for the future: do we want more or less government as a means to get the economy back on track?

And so in the last chapters Goodman fully tips his hand, or opens his heart, so to speak. His prescription for what ails us is just about as lame as it comes: we need not only a "significantly larger rescue package" (p. 232) but also a public-private partnership that heavily invests in the industries of the future, which are biotechnology and renewable fuels. This is where the dots stop connecting and the entire book blows up into nonsense. How is building more windmills and recycling plants going to address the problem of easy money unleashed by Nixon in 1972? How is the discovery of more life-saving cures for obscure diseases going to address that moral hazards associated with limitless credit expansion made possible by floods of paper money?

The author doesn't even ask these questions, much less answer them. The bottom line here is that there is no fixing the macroeconomic structure without addressing the money problem.