Liberalism, from Front to Back

There’s nothing worse for the private sector than poorly-executed liberal economic policy. Before us, the most recent example: the tea party’s obsession with limiting U.S. public spending, despite the country’s status as one of the few Western countries than can continue accumulating debt (it’s an unfair world…), has brought U.S. public debt to historic lows. U.S. Treasury bonds have reached their lowest yields since at least 1941, the very year in which Standard & Poor’s began rating public debt.

These Treasury bonds are, now, equivalent to gold: The country’s economy is far too big to fail. Paradoxically, with its fiscal fundamentalism, the tea party has made it cheaper than ever for Washington to accumulate further debt, having aggravated doubts about the performance of the private sector and driven investors to purchase Treasury bonds.

The most recent example, I wrote? Well, no. There are others. German policy in the face of the euro crisis (Sarkozy, face-to-face with Merkel, is little more than a yes-man) can be summed up in one word: No. No to eurobonds. No to bailouts of stricken countries. No to increased public spending in countries, like Germany, that can afford it (again, such an unfair world …). No to an increased budget for the European Central Bank (ECB). No, no and no, with the result that, some months later, Germany will have to say yes, yes and yes. Berlin has to pay — or give guarantees of future payment, or both — to rescue those countries in crisis. And the ECB has to create new credit facilities. In other words, today’s inaction, on the part of governments and regulators, will only oblige them to undertake more extreme action in the future.

There are a multitude of examples. The financial liberalization of Clinton and Bush is responsible in large part for the current U.S. crisis. But this is nothing new: The liberalization of the “savings and loans” (and what a misnomer!) in the U.S. by Reagan brought on a chilling banking crisis during the administration of Bush Senior, a crisis which had to be defrayed by the American taxpayer. In the end, strict regulation of mortgage loans was introduced in the states that suffered the most during this previous crisis, like Texas. If Republican candidate Rick Perry thinks his state has not suffered as badly in the current crisis as others, it is in good measure (surprise, surprise!) because of strong Texan housing market regulation.

The liberalization of the land market in Spain in 1998, along with absolutely no reaction from the Spanish government when crisis broke out the same year, is one of the causes of our current crisis. Yavlinski’s 500-Day Plan to transform a planned economy into a market economy in Russia wound up delivering the country into the hands of a oligarchy connected to the state. The Washington Consensus for Latin America served only to deliver more power to the International Monetary Fund — an institution formed by governments — in that region.

By all means liberalize, but liberalize well. Otherwise, we’re like the boy with his finger in the dyke: plugging holes and waiting for the next crisis.