I don’t usually pay much attention to Sarah Palin; if she’s the future of conservatism, the future is bleak. Still, I can’t help but comment on a few things she said in a speech today to an Asian investor conference. Here are some highlights, with my emphasis and thoughts added.
On the financial crisis:
We got into this mess because of government interference in the first place. The mortgage crisis that led to the collapse of the financial market, it was rooted in a good-natured, but wrongheaded, desire to increase home ownership among those who couldn’t yet afford to own a home. In so many cases, politicians on the right and the left, they wanted to take credit for an increase in home ownership among those with lower incomes. But the rules of the marketplace are not adaptable to the mere whims of politicians.
Lack of government wasn’t the problem. Government policies were the problem. The marketplace didn’t fail. It became exactly as common sense would expect it to. The government ordered the loosening of lending standards. The Federal Reserve kept interest rates low. The government forced lending institutions to give loans to people who, as I say, couldn’t afford them. Speculators spotted new investment vehicles, jumped on board and rating agencies underestimated risks.
(AP Photo/CLSA Asia-Pacific Markets, Jeff Topping)
First, one has to note that Palin’s last “cause” is an investor-driven cause: good old-fashioned market speculation. Second, I think it’s an overstatement to say that the government “forced lending institutions to give loans.” Presumably, Palin’s talking about the Community Reinvestment Act. (At least, I hope she is, otherwise that statement makes no sense.) Even so, although the CRA might have encouraged the atmosphere of “loose lending,” it certainly didn’t create it. Banks were lending like crazy not to satisfy any CRA obligations, but because they saw increasing home prices as an excellent opportunity to make some easy cash. Oddly, deregulation might have done more to precipitate loose lending standards than the CRA did, as state consumer protection laws were preempted by federal (softened) standards. Third, and finally, although I agree that the Fed’s “easy money” policy during the Greenspan years encouraged the asset bubble that created this crisis, bankers aren’t forced to lend that money (particularly to risky lendees).
On Milton Friedman:
Now even Milton Friedman, he recognized that the free market is truly free when there is a level playing field for all participants, and good financial regulations aim to provide the transparency that we need to ensure the level playing field does exist, but we need not, we need to make sure that this regulatory reform that we’re talking about is aimed at the problems on Wall Street and won’t attack Main Street.
Look, I’m a pretty big Milton Friedman fan myself. (I’m rereading Free to Choose right now, actually.) But I still don’t have any idea what Palin is talking about here.
On the Federal Reserve:
How can we discuss reform without addressing the government policies at the root of the problems? The root of the collapse? And how can we think that setting up the Fed as the monitor of systemic risk in the financial sector will result in meaningful reform? The words “fox” and “hen house” come to mind. The Fed’s decisions helped create the bubble. Look at the root cause of most asset bubbles, and you’ll see the Fed somewhere in the background.
Has Sarah been reading our blog? Look, I agree that the Fed is not my favorite choice for systemic risk regulator. Nevertheless, I think it’s intellectually disingenuous to say that the Fed is the “root cause of most asset bubbles.” I can’t figure out how Fed policy would have caused the dot-com bubble, the East Asian financial crisis, or the tulip mania of 1637. (Ok, I kid, I kid.) But seriously, can someone nudge Sarah and mention to her that the Federal Reserve didn’t play any role in creating the stock bubble that led to the Great Depression? (NB: I admit that the Fed’s subsequent monetary response–contracting the money supply–made the Depression much worse.)
On deficit spending:
Ronald Reagan, he was faced with an even worse recession, and he showed us how to get out of here.
If you want real job growth, you cut taxes! And you reduce marginal tax rates on all Americans. Cut payroll taxes, eliminate capital gain taxes and slay the death tax, once and for all. Get federal spending under control, and then you step back and you watch the U.S. economy roar back to life.
I’m a bit confused here. Palin’s clearly anti-deficit spending, suggesting she’s not really a Keynesian. But she can’t possibly be a monetarist, because guess who controls monetary policy? That’s right . . . “the root of the problem,” the Fed.
-Michael
