The Great Money Binge: Spending Our Way to Socialism

by George Melloan Narrated by Johnny Heller

Overview

Prestigious newspaper editor George Melloan, who worked for the Wall Street Journal for more than half a century, is no stranger to the wild ups and downs of the American and world economies. Using detailed examples from the Crash of 1929 and from the Carter era, this brilliantly argued book explains how government intervention actually prevents the economy from recovering its natural balance. Unless lawmakers realize the true importance of using supply-side economics in our current crisis, warns Melloan, nothing will save us from a new era of disastrous inflation and widespread global depression.



Citing the importance of historical example, Melloan explains how the world of economics was completely changed in the 1930s under the influence of English economist John Maynard Keynes. His theories advocating government interventionist policies were wholeheartedly adopted as a response to the Great Depression and remained unquestioned until the "supply-side revolution" of 1980, after the stagflation of the 1970s showed the inherent weaknesses of neo-Keynesian economics. By employing what is sometimes called "Reaganomics," President Ronald Reagan and his economic advisers sparked a quarter century of unparalleled prosperity. Unfortunately, as Melloan demonstrates, government policy soon began to revert to Keynesian theories, even though they are widely misunderstood and misapplied.



Now, with the Crash of 2008, our new president and government appear committed to ignoring the lessons of the past. With multibillion-dollar "stimulus packages" becoming the norm, and a multitrillion-dollar national debt that will keep growing so long as present policies are continued, America can look forward to a very grim future indeed.



There is only one solution: we must return to our eroded supply-side principles. In the face of general misunderstanding, Melloan outlines a lucid and detailed explanation of exactly why we are currently sinking so rapidly, how this crisis compares to similar situations in the past, and exactly what must be done to return the United States to the economic vitality it enjoyed not so long ago.

Editorial Reviews

From the Publisher

"An excellent map for finding a way forward." ---The Wall Street Journal

JULY 2010 - AudioFile

A financial journalist uses historical examples to argue that government intervention in the U.S. economy does more harm than good. Citing all the depressions and downturns of the past 80 years, Melloan says that stoking the supply side (fewer regulations, lower taxes, less government spending) energizes consumers and business owners to move our economy forward. Libertarians and pro-business Republicans will revel in Melloan’s direct and sometimes-caustic writing, which narrator Johnny Heller delivers with relaxed authority. Heller’s consistent professionalism won’t keep Obama fans from wincing at some of the author’s conclusions, but Heller’s emotional balance helps make this book sound more like a rich economics lesson than a partisan diatribe. T.W. © AudioFile 2010, Portland, Maine

Product Details

BN ID:	2940170895434
Publisher:	Tantor Audio
Publication date:	12/21/2009
Edition description:	Unabridged

Read an Excerpt

Chapter 1

The Return of the Progressives

According to the progressive narrative, which is confirmed as authentic current history by the Beltway press, the crash of 2008 was a repeat of 1929, the result of an excess of greed on Wall Street. As the 1929 story goes, Wall Street went on a speculative bender, pumped up stock prices to a point where they could go no higher, and the market crashed. That touched off the Great Depression.

The narrative continues with how the Democratic Party produced a savior in Franklin Delano Roosevelt, who led the country out of the Depression through the extraordinary use of government power to create jobs. The latest chapter in the progressive narrative awards the FDR role to Barack Obama in today's unquiet times and assures the American people that he will lead them out of the current malaise, also through the extraordinary use of government power. Extraordinary in this instance refers to massive employment of the government's power to borrow and create money.

It would make a nice story if it were true. But it is mostly bunk. Wall Street didn't bust up the U.S. economy in 1930. The Dow Jones average had recovered most of its two-hundred-point "Crash" dive of October and November 1929 by April 1930. So Wall Street's wild high jinks born of the unparalleled 1920s prosperity didn't "cause" the Depression. That version has had much popular appeal presumably because it conforms to the biblical warnings of excess-cum-retribution. It has been told repeatedly because its antibusiness bias has neatly fitted the mind-set of progressive college professors, historians, and journalists over the decades.

As some excellent economic historians have effectively demonstrated in a recent outpouring of scholarly revisionism, government policies caused the Depression. The primary blame lies with the Republican Party (progressives will at least agree to that). Herbert Hoover and Congress — seeing the crisis as an opportunity, if that sounds familiar — raised taxes and tariffs. The Federal Reserve, a government bank, did its bit by tightening money at exactly the wrong time. The recovery from the Crash — a downturn that was no more dramatic than some on Wall Street before and since — was beginning in spring 1930. But that rebound was aborted by the sudden slowdown in U.S. foreign trade brought about by the radical Smoot-Hawley tariff bill and by the higher taxes Hoover and Congress imposed on Americans. The economy went into a downward spiral that did not bottom out until 1933.

Hoover, carrying only six states, was deservedly trounced by FDR in 1932. Roosevelt ran on a conservative platform, promising to abandon "protective" tariffs, cut federal spending, balance the budget, maintain a sound dollar, and restore order in the banking system, which was plagued by bank failures and runs on banks, caused in the main by the inept management of the young Federal Reserve System that had simply starved the banks for cash. The Fed had been founded only sixteen years before the Crash, after eighty years in which the United States had had no central bank, thanks to the abolition of the second Bank of the United States by Andrew Jackson. Somehow economic growth and technological development survived the absence.

Once in office, FDR did indeed relieve the bank problem. Exercising arbitrary powers, which presaged much that would come later, he ordered closure of the nation's banks for a week. Demonstrating the political skill that would keep him in office for over twelve years until his death, he artfully called the shutdown a "bank holiday." In his first "fireside chat" with an anxious nation he explained that the banks would be inspected by an army of bank examiners during the "holiday," and only those that were sound would be allowed to reopen. He also established the Federal Deposit Insurance Corp. (FDIC) to insure deposits with premiums paid by the banks. It was a rather naked exercise of presidential power, but it worked. Americans took their money out of the mattresses and put it back into the banks. The economy began a feeble recovery.

Had Roosevelt stopped there with his use of federal muscle and fulfilled his other campaign promises, the recovery would have gained steam. But he soon fell under the spell of his progressive advisers, and having once used government power to good effect, he couldn't resist the temptation to extend his control over the economy and in the process waged a war of words against private business from the White House. His policies put a chill on new private investment and retarded the recovery that was struggling to be born. He nonetheless won reelection handily in 1936, thanks in part to heavy support from organized labor. After that came "the second New Deal" with more federal meddling resulting in an economic relapse that would prolong the Depression, for all practical purposes, until mobilization for World War II. Winning the war sowed the seeds for a genuine economic recovery, but that recovery did not get under way until a few years after the war ended, thanks to the New Deal legacy.

This record is cited not to totally destroy the frequent claims that FDR was a "great" president. That's a purely subjective judgment. He was both hated and worshipped by many Americans in his day. Hardly anyone was neutral in his view of FDR, and many of those attitudes still exist over six decades later. There is no denying that he had remarkable political skills that served the country well, for a short time at least, in regaining its balance from the buffeting the economy suffered from the magisterial meddling of Herbert Hoover. His wartime leadership was also inspiring, although his deals with the Russians as an old and sick man stained his record when it was learned that he had effectively sold out Eastern Europe to Josef Stalin at the Yalta Conference in 1944.

These are but a few historical vignettes. But I recite them here to give some perspective to the legend being manufactured by modern progressives on behalf of their 1930s ancestors to justify the massive economic intervention by Barack Obama and a Democratic Congress. They have argued that we are in another economic crisis, and they have taken measures that threaten to abort yet another natural, cyclical economic recovery that began to show signs of life in spring 2009 with a cautious recovery of the stock market and signs that the home price decline was bottoming out in some markets. The new progressives, like their New Deal forerunners of the 1930s, have put forth drastic and incredibly costly measures to expand government power over key industries: autos, energy, health care, education, and particularly banking. Just as in the 1930s, government interventions, both existing and proposed, have diminished the business confidence needed to restore investment and economic growth. These measures have drawn heavy criticism from prominent economists. The Obama administration is building up trillions of dollars of debt obligations that threaten to cripple the ability of the U.S. economy to function, not just in the distant future but in the near term.

Harking back to the false narrative of 1929, the progressive story of our own times blames their longtime bogeymen, business and Wall Street, for the untoward events of 2008. In this version, a "greedy" Wall Street peddled toxic securities to unsuspecting investors and when the investors learned what trash they were holding, the securities market locked up and stocks crashed, touching off a recession. This story is partly true, but it leaves out a rather crucial element, the key role the U.S. government and the Democratic Party played in creating the crisis and has since played in using it to justify totally irresponsible expenditures of taxpayer money, which of course further expands the future risks and obligations for taxpayers that will result from the government's unprecedented need to borrow.

The 2008 slump was not caused by Wall Street "greed." It was caused by the combination of irresponsible federal monetary policy and government intervention in the mortgage credit markets that spawned greed — on Main Street as well as Wall Street — and turned it into folly. As in 1930, the problems in the securities markets were compounded by further clumsy federal interventions undertaken by the Bush administration and the Federal Reserve. Mr. Obama and his Treasury secretary, Timothy Geithner, have attempted a rescue, but so far the rescue attempts look more like something Dudley Do-Right would be guilty of rather than the skilled work of the Lone Ranger. The outcome could be something similar to what happened in the 1930s, or worse, according to forecasts by some very respectable economists.

History seldom repeats itself. Just after the September 2008 crash, Wall Street Journal editorial writer Brian Carney interviewed ninety-three-year-old Anna Schwartz, who forty-five years earlier had coauthored with the late Milton Friedman the famous A Monetary History of the United States, 1867-1960. Over her long career as a monetary economist she has proved to be no fan of bank bailouts, instead arguing that banks should be allowed to fail as a means of discouraging reckless lending. She told Mr. Carney that Fed chairman Ben Bernanke and Treasury secretary Henry Paulson were fighting the last war (meaning the one in 1929) when they flooded the economy with liquidity after the 2008 collapse.

Later events have proved that policymakers should have paid more heed to the wisdom of a woman who had spent seventy years studying and writing about monetary policy. Bernanke and Paulson were reacting to the long-standing and valid criticism of the 1930 Fed for not supplying enough liquidity to the banks in that crucial year. There was justification to be found for that criticism in the aforementioned bank runs and failures of 1930. But in 2008, the problem wasn't a shortage of liquidity in the financial system. It was a sudden and broad loss of confidence in the face value of the mortgage-backed securities the banks were holding in vast amounts. Essentially, the problem was a shortage of information about just how much damage the slump in housing prices had done to the income stream from mortgages that supported the trillions of dollars in mortgage-backed securities held by investors around the world. Or, in the parlance that developed, how "toxic" were they?

Perhaps the mystery resulted from the fact that the authorities didn't want to know, and certainly didn't want the public to know, just how profligate two government-sponsored mortgage giants, the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), had been over the course of a decade. These two government-created "private" companies had issued trillions of dollars of mortgage-backed securities and were heavily responsible for that portion of those securities that was backed by unsound "subprime" mortgages that were going into default as housing prices fell in 2007 and 2008.

The government had a moral — though not a legal — obligation to make good on the dodgy Fannie and Freddie paper because it had been issued by two companies that were believed by the market, for good reasons, to have federal backing, despite official disclaimers. But there were ways for the government to do that without refinancing and seizing control over a major part of the financial services industry with many billions more of newly created money.

For one thing, the Fed could have suspended the 2007 Financial Accounting Standards Board "mark-to-market" rule that forced even banks that had a positive cash flow to mark down the value of their suspect assets and thereby unnecessarily make themselves technically insolvent. The Bush White House opposed lifting this pernicious accounting rule that had grown out of the Enron political hysteria of 2001-2 and the resulting intrusion of federal law into corporate accounting. One further mystery was why the Treasury and Federal Reserve didn't insist that Fannie and Freddie identify exactly what percentages of the mortgages in the pools backing their securities were nonperforming so that the securities could be marked down accordingly and sold. That might have helped unfreeze the market in them. Even as late as March 2009, when the housing market was showing signs of bottoming out, there was still no clear idea of what trillions of dollars in mortgage-backed securities, the majority issued by Fannie and Freddie, were worth.

What happened instead in fall 2008 was that Bush White House aides started hypothesizing another 1929 and worked themselves into a panic. Just as Herbert Hoover started pulling powerful governmental levers after the 1929 Crash, so did the Bush White House. Another parallel with 1929 was that in both cases, the postcrash panic opened the door for the return of progressives with even more elaborate ideas for ways to employ government power. They even proudly proclaimed that they were bringing back the 1930s New Deal, ignoring the mounting body of evidence provided in recent books by, among others, Amity Shlaes (The Forgotten Man) and Burton Folsom (New Deal or Raw Deal?), that the New Deal prolonged the Depression.

Reminders of the 1930s correctly suggest that the current malaise is more serious than the one that in 1980 provided the opening for the supply-side revolution. But in all three cases the trouble resulted from some very large mistakes on the part of the federal government.

Pulling out of the mess will be a lot harder this time than it was in 1983, especially with no future Ronald Reagan in sight on today's political landscape to champion individual rights to freedom from government seizure of private property and interference with private contracts. It will be harder also because it is now the progressives of the Democratic Party's left wing who claim the mantle of revolution, and there hasn't been sufficient time for their radical prescriptions to be discredited, other than by an initial stock market slump. The consequences can only be guessed at on the basis of the unhappy experiences of other countries that have tried them.

In their triumph the progressives have created a legend that supply-side economics failed the nation. But they offer very little proof of that or, for that matter, any indication that they understand what supply-side economics was all about.

George W. Bush's 2003 supply-side tax reform is cited as one source of the excesses that led to the crash. But the credit bubble that burst with such dire consequences in 2008 had nothing to do with that or any other recognizable example of supply-side economics. No true supply-sider, least of all Bob Mundell, has ever argued in favor of the kind of easy money policies that fueled the credit explosion. Those policies came from Washington and Wall Street and are, in effect, a reversion to the kind of economics those two power centers love best, Keynesianism. That kind of thinking was discredited in the economic malaise of the late 1970s, but it keeps coming back like the recurring flare-ups of fever in a patient sick with malaria. It is back again, in the extreme, with the return to power of the progressives.

The overwhelming progressive victory in the national election of 2008 suggested that voters had believed the claims of Barack Obama and congressional Democrats, along with their cheerleaders in the press, that the supply-side economic policies put into practice by Ronald Reagan had failed. What a remarkable claim that was! Three presidents had occupied the Oval Office since Ronald Reagan stepped down in January 1989. Thousands of economic policy decisions had been made by George H. W. Bush, Bill Clinton, and George W. Bush. Congress had cranked out the usual annual spate of new laws and resolutions. It was something of a tribute to Reaganomics to argue that it was so enduring that it was still the reigning economic philosophy of the federal government nearly twenty years after Mr. Reagan left office. If it had been, the Federal Reserve would not have fallen off a cliff in 2003 and financed credit excesses that led to a later crash. The Bush administration would have taken stronger steps to stop the great deception being perpetrated by Fannie and Freddie, which should have been under more effective federal control.

Even so, the nearly twenty-five years of economic growth the United States and the world enjoyed with little interruption between the beginning of 1983 and the end of 2007 cannot be wished away even by the most ardent partisans of the Left. That bright era began with a newly stabilized dollar, the final abolition of the mindless price controls of the 1970s, and the full implementation of the supply-side Kemp-Roth tax reform. During those years, expansion of trade and international finance brought the annual growth rate of the global economy to highs of nearly 5 percent three times. That's a phenomenal rate of global growth when you consider that U.S. growth, from a smaller base, has averaged only 3 percent in the more than a century that has seen it become the colossus that exists today. The rapid global growth occurred despite the drag from all the countries that remained stagnant under authoritarian or socialist rule. In China and India, millions of people were able to lift themselves out of poverty as a result of more liberal government policies that encouraged foreign and domestic investment and greater integration, through greater openness to trade and finance, with the industrial world.

In the United States there was an unprecedented improvement in living standards. Even the credit bubble, despite the massive distortions it fostered, had its bright side. Borrowing put some Americans head over heels in debt, but on balance it allowed many families to improve living standards through the prudent use of credit. Middle-class communities were spruced up as houses and commercial buildings got new paint jobs and repairs as a result of the financing that was available. Shopping centers, sports stadiums, and other signs of affluence burgeoned. Public infrastructure, roads, airports, and the like, were on balance improved, all the current complaints about needed public works notwithstanding. Efforts to preserve those gains are an important source of energy for economic recovery as home owners strive to maintain their living standards. But that will only happen in the absence of revolutionary excesses as the progressives set about to remake the economy in ways that suit their dreams of a utopia run by the best and brightest (meaning themselves).

Voter attitudes toward economic policy are part of a broader context that encompasses attitudes toward government itself. In a Journal editorial I once likened government to a "white giant," a star that keeps expanding until it consumes all the available fuel and then collapses. All organizations, public or private, have a natural tendency to expand, but only governmental organizations can exercise police power to enlarge their claims on economic resources. The U.S. government currently is expanding by consuming the capital and earnings of the productive private sector. The government is racking up huge debts to gain control over private corporations its own malfeasant policies forced into insolvency.

A charming niece of mine in Indiana, Sally Perkins, has been active in the Democratic Party for years, including a stint as state vice chairman. She has more than once berated me for not having more good things to say about the Democrats. If that is so, my reason has nothing to do with all the good people, including some other members of my family, who count themselves as Democrats. It has to do with my impression, perhaps not totally accurate, that the Democrats are, to a greater extent than the Republicans, the party of government. And I have always thought that a free, law-abiding people have a patriotic duty to be wary of excessive expansion of government power.

Republicans can claim higher ground in this regard only in a relative sense, and sometimes not even then. What transpired under a Republican administration, albeit with a Democratic Congress, in the second half of 2008 will discredit Republican claims to be for small government for years to come, just as the apostasy of Herbert Hoover stained his party for decades. As my old friend and colleague David Brooks quipped on Meet the Press after the 2008 election, the incoming Democrats "can't nationalize the banks, because the Republicans have already done that." Given all the bailouts with strings attached, his joke was not entirely unserious. But nonetheless, it seems prudent to be more wary about the threat of power grabs when Democrats are in office than when Republicans hold the reins, and the current proposals of the now-in-power progressive wing of the Democratic Party is heightening that fear. At least the Republican Party claims that it is dedicated in principle to resisting the natural expansionary tendencies of the federal bureaucracy.

Be that as it may, voters in 2008 responded to Barack Obama's promise of "change," and why wouldn't they after having endured a dizzying whirl of asset inflation followed by a bust? The Bush Republicans got one part of the successful Mundell supply-side formula right, with their 2003 tax reforms that maintained a reasonable level of taxation on the marginal earnings of the nation's most productive citizens (even though those same citizens were being forced to shoulder an ever-larger share of the total tax burden). But they got the other half badly wrong. They failed to protect the soundness of the U.S. dollar. They and the country's citizens have now paid dearly for that failure.

Barack Obama's ascent to the White House was one of the most spectacular political feats the United States has seen. He came out of nowhere, with no record of having managed so much as a hot dog stand, and with a very thin resume as a U.S. senator. He has impressive political skills, although not the sure mastery of FDR. During the campaign he was long on soaring and inspiring rhetoric, tapping the great compassion American voters have for the weak and poor, but not very specific on what changes he had in mind other than the usual list of free-lunch promises that adorn all political campaigns. Instead of picking entirely new faces for his cabinet and top advisers — which admittedly would have been a formidable task for someone as inexperienced as Mr. Obama — he turned to such old hands as Paul Volcker, Larry Summers, Rahm Emanuel, Hillary Clinton, albeit old hands with differing attitudes and capabilities. But he also brought on board a cadre of progressives who would have a powerful influence within his administration.

As the Obama program unfolded, with plans for further nationalization of health care and proposals to micromanage and "green" the vital energy industry, public unease mounted. It soon became clear that progressives really were intent on drastically altering the American system of government. The credit boom excesses had put many businesses, particularly in the housing market, in bad odor with the voters, just as the banking traumas of the Hoover years had done in 1933. Thanks in part to superficial reporting in the major news media, Americans had very little understanding that government itself had been the true engineer of such things as the 2007 oil price spike and the subprime mortgage debacle, the one through dollar mismanagement and the other through "affordable housing" policies dictated by Congress, enforced rigorously by the Clinton administration, and continued into the Bush years.

Peter Lewin, an economist at the University of Texas management school in Dallas, posted an analysis of the housing debacle on the website of "The Freeman," on April 1, 2009:

The housing crisis is the result of a systematic, hardheaded social policy aimed at increasing the number of homeowners in America. Using the politically charged notion that minorities were suffering from discrimination in the mortgage industry (a notion that has been discredited; see, for example, Stan Liebowitz, "A Study that Deserves No Credit," Wall Street Journal, September 1, 1993), some Democratic politicians made it their mission to rewrite the standards for mortgage approvals and ensure they became the reigning procedures for the industry. In this they were assisted by the quasi-government mortgage-packaging institutions, Fannie Mae, Freddie Mac, and Ginnie Mae. The result was a massive expansion of the production of new houses, an increase in housing prices, and an increase in the proportion of Americans owning their own homes.

The credit boom, financed by the Fed, sent house prices upward and encouraged the creation of mortgage-backed securities (MBS) and speculation in housing. Professor Lewin noted that with mortgage money so freely available, speculators could buy houses and "flip" them at a profit in the rising market. And when the inevitable price slump came, speculators who suddenly found themselves owing more than the houses were worth simply walked away. They defaulted on their mortgages and left it up to the lender to decide what do with the property.

Professor Lewin goes on to say that attempts to solve this problem by pumping out liquidity to the financial sector and creating a "stimulus" program won't work but will in fact make things worse by creating the illusion that the distortions in the housing industry can be preserved. "We have a choice: pay now or pay later."

Lewin challenged Obama's huge spending outlays to avoid another Great Depression by saying conditions are nowhere near as bad as they were then. Because the public is wary of spending, the massive expansion of the money supply by the Fed to finance the government's huge debts is not fueling excess demand. "The time will come, however, in the not-too-distant future when this excess liquidity will inevitably result in general price inflation and all the negative side effects that this always brings," wrote Professor Lewin.

Professor Lewin also wrote that the "logic of basic economics and history" make it doubtful that the Obama "stimulus" package and the large-scale government bailouts will have any beneficial effect. They merely postpone the resource allocations necessary for economic recovery, he argued, and most likely they will make the recovery more difficult.

John McCain, whose hero was that original anti-big business progressive, Theodore Roosevelt, tried to run in 2008 as a center-right progressive, snarling at Wall Street "greed" when the market crashed and betraying his own superficial sense of how it all had happened. It does little good to rail at stock traders. They make their living by being opportunistic, with time horizons of just a few seconds as news flashes across their Market Watch screens. If this is called "greed," it should be kept in mind that it is ever-present in the bourses of the world and therefore doesn't explain why things go well sometimes, and at other times go badly wrong.

It's better to look for answers in the changes in the public policy environment that influences market behavior. Easy money is a public policy that always brings an explosion of "greed." The crucial question is always what policies of government serve to stir the greed that lies dormant in almost every human breast outside of convents and monasteries. The McCain response was inept. It actually fed the guilt the voters, encouraged by his opponent and the press, were assigning to the political party that had chosen him as its candidate. Voters decided to vote for the real thing, the progressives in the liberal wing of the Democratic Party with their long history of attacking business "greed."

After the election the progressives descended on Washington, their backpacks filled with ways to expand the power of government and limit the prerogatives of private business. That marvelous fairy tale about man-made "global warming" was their argument for a government takeover of both the energy and transportation industries. John Podesta, whose Center for American Progress is the premier think tank for progressive thought, was named by Mr. Obama to head his transition team, and he made the most of it by recommending fellow progressives for departments dealing with energy, environment, and other areas where the new administration had big plans for "change."

Progressive pipe dreams like "renewable energy" were put back on the federal agenda. The Democrats quickly forgot that even though they won big in 2008 it was not because the Democratic Congress of 2007-8 under Speaker Nancy Pelosi and Senate Majority Leader Harry Reid was getting raves from the public. Congress had an approval rating of only 12 percent in the weeks before the election. What the heck, they won anyway, so on with the show!

Professor Lewin's fears about an outbreak of inflation that could abort economic recovery were echoed at a March 30, 2009, economics seminar at the New York Council on Foreign Relations that discussed parallels with the Great Depression. John H. Cochrane, a professor of finance at the University of Chicago Booth School of Business, took note of the claim by Fed chairman Ben Bernanke that if inflation becomes a threat, the Fed will head it off by mopping up the money it has created. Said Mr. Cochrane:

There's nothing technically hard about unwinding these Fed positions fast. And the markets you need to operate in to do that — are there and working. But, it's going to take political courage, or some kind of consensus — the kind of courage that Paul Volcker showed in the 1980s when he adopted policies that brought the 1970s inflation to an end. That same kind of courage and independence is going to be called for in a few years. I don't think it's an argument against the policy that's being followed, and I hope, when the crunch comes, we'll do the right thing, but it's a concern that everyone who's watching these policies has, and we'll see.

Professor Cochrane raised an issue that I had written about in an article in The Wall Street Journal, the fact that so much of U.S. outstanding Treasury debt is in the hands of overseas creditors, who themselves are not in great shape. China alone holds over $700 billion in Treasuries, and a slackening of the U.S. appetite for goods imported from China could diminish China's ability to acquire more dollar debt. Moreover, the Chinese began talking in early 2009 about the need for some other currency, perhaps issued by the International Monetary Fund, to substitute for the dollar in international foreign currency reserves and trade. The United Nations Secretariat in its usual helpful way seconded the idea that the dollar should be demoted.

Said Professor Cochrane: "Our danger now is a run on Treasury debt. It's not just can the Fed soak this stuff back up again, but can it soak this enormous amount of debt back up again when people don't want either money or Treasury bills or anything labeled 'U.S. Government.' The danger is not 1932; the danger is Argentina, a massive run from Treasury debt. And then monetary policy will not be able to do anything. You can fool around with interest rates all you want. When people don't want Treasury bills or money you're stuck."

Professor Cochrane, like Anna Schwartz, feared that Fed chairman Bernanke had been too focused on the past failure of the Fed, in 1930, a debacle that Bernanke the scholar has studied and written about himself in great detail. Says Cochran: "Bernanke has said no large bank or financial institution will fail. We're in the business of an astonishing bailout and credit guarantee, unimagined by the Great Depression. Things are much different than they were in the Great Depression. Now credit markets are much more important than banks, and I think credit markets are the essential problem. We didn't have asset-backed securities back then. That's what's collapsed. Bank lending really has not collapsed....

"The system is much more resilient than it was because of deregulation. Back in the Great Depression you couldn't have branches. You couldn't have interstate banking. If the Bailey Savings and Loan goes under, there is no way that J. P. Morgan, financed by an equity infusion from the sovereign wealth fund of Kuwait, can come in and take over and start lending. You're just stuck. Well, we're not in that situation anymore. There's a great danger of confusing banks for the banking system, and now we have a more competitive banking system. If A vanishes, B can come in and take its place. The problem really is no one wants to lend. Banks are piling up reserves."

Peter Schiff, president of investment strategy firm Euro Pacific Capital, Inc., and a frequent contributor to financial publications, blogged on March 27 about the coolness toward the dollar and the Obama administration in international financial circles:

The tremors began in Beijing, where an essay from the governor of the People's Bank of China seemed to favor the creation of an IMF currency to replace the U.S. dollar as the world's reserve. In Europe, the rotating president of the European Union, outgoing Czech Prime Minister Mirek Topolanek, characterized America's plan to combat the widening global recession as the "road to hell."...

As a result of these clearly voiced frustrations, the U.S. dollar suffered a drubbing.... Given the size and scope of the remedies that the Obama Administration is cajoling the world to adopt, it is likely that the unease will grow until many countries emerge in open revolt to America's plans.... Washington is telling us that our problems result from a lack of consumer spending. Therefore, the solution is for government spending to pick up the slack. However, if Americans are too broke to spend, then how can our government spend for us? The only money they have is taken from us through taxation. To postpone immediate tax hikes (adding interest for good measure), Washington plans to borrow more from abroad. However, if our foreign creditors refuse to pony up, much of the money will simply be printed instead.

As Mr. Schiff points out, printing money and inflating the currency is a form of taxation. "Rather than robbing citizens of their money, government robs their money of its purchasing power." He argued that if government policies discourage producers, as Washington now seems intent on doing, printing money will only mean that prices will go up. "The only way to buy more is to produce more. It is production that creates purchasing power, not the printing press!"

Monetary economist Judy Shelton, writing in The Wall Street Journal, also raised the inflation issue. She wrote that the Obama administration should "be asked to provide assurances it won't compromise the integrity of our money as it strives to implement its $3.9 trillion budget and simultaneously reduce the deficit. We cannot balance the budget by resorting to the dodge of inflation. Fiscal honesty demands a meaningful measure of value, an honest dollar."

But on March 30, when the Obama budget and its revolutionary plans had been made public and the government was still heavily engaged in the bailout and "stimulus" business, a noted economist had a gloomy prognosis for the future. Speaking at an all-day seminar laid on by the New York Council on Foreign Relations, 2004 Nobelist Edward C. Prescott of Arizona State had this to say about the economic outlook: "I do predict the U.S. will lose a decade of growth. Why? Marginal tax rates will be increased. Productivity-depressing policies will be adopted in this country."

Interestingly enough, no one in the room, including moderator Robert Rubin, Clinton's Treasury secretary and more recently a board member of Citigroup, was inclined to argue with this assessment. The mood of the gathering, which consisted mostly of economists, private sector bankers, and business commentators, was subdued. The seminar had been convened to draw lessons from the Great Depression and the New Deal. Dr. Prescott's conclusion was that we don't want to repeat the 1930s, but even only seventy days into the Obama administration we were facing something similar. Copyright © 2009 by George Melloan

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