How Economists Facilitated the Transition of Erstwhile “Market” Economies to Fascism
The Left calls Donald Trump a fascist invoking the memory of Hitler and Mussolini, to which Trump might reply: “they were losers; I’m no loser.” Fascism is in essence the political control of the private economy, historically justified by democratically elected leaders to defend against perceived or orchestrated external threats. Progressive war politicians from Presidents Wilson and FDR to Johnson and Obama and now candidate Clinton have pursued this same goal in the US as has the social democratic European Union.
At the recent meeting of the G20 leaders and central bankers political responsibility for and control over their respective economies was assumed, but their Alfred E. Newman “what, me worry” smiling faces belie the fragility of the current global economy. The political distortions to both the financial and real economy have arguably never been greater, to which politicians and their economist enablers prescribe more of the same mostly wasteful public spending financed by money printing, a cure reminiscent of medieval bloodletting.
Having never been of much use to business, economists mostly followed “Say’s Law” that supply creates its own demand (for academic economists). They got their first pervasive shot at political power when President Wilson – an academic who chafed at constitutional constraints – created the Federal Reserve which helped US bankers fund the Allies until he could mobilize a war economy, making the first WW “Great.” The unprecedented death and destruction of the Great War knocked the global economy off kilter and the massive international war debts made stabilization politically difficult. As the creditor and least damaged victor, the US economy boomed in the roaring ’20s, followed by a bust.
Purveyors of the “dismal science” had previously counseled that politicians had to own up to the cost of war until the private economy recovered. While the “arts” of manipulating the value of currency and public spending financed by coercive taxes and often uncollectable debt as well as coercive regulation were as old as politics and war itself, post WW I economists became noticeably less “dismal” and purportedly more “scientific,” believing that such “macroeconomic” interventions could be calibrated to “tame business cycles” in part by transferring or defaulting on war debts. This was complemented by “microeconomic science,” the recent objective of which has been to prove that individuals aren’t always perfectly rational (and by inference in need of paternalistic political protection and direction). Macroeconomists contend that this psychological defect is contagious, conjuring irrational mobs running on banks (or attending Trump rallies).
The recent memoir of US Federal Reserve Chairman Ben Bernanke The Courage to Act (2015) provides an explanation of how the global economy got into the current situation (although not the one he intends). Bernanke’s historical discussion begins with the early origins of the Fed; the experience of the 1920s demonstrating the efficacy of “monetary policy” under the control of the right individual. In his view, the wrong individual (Benjamin Strong’s successor) was fighting the last “war” (the recession of 1921) in 1929. Insufficient “liquidity” to stop “depositor panics” and woefully insufficient money printing combined with a woefully passive fiscal response by the Hoover and Roosevelt Administrations caused the recession to become the Great Depression.
Bernanke’s historical spin of private financial failures with political solutions had previously been thoroughly debunked by Calomiris and Haber, Fragile By Design: the Political Origins of Banking Crises and Scarce Credit (2014). The Founding Fathers constitutionally required sound money (backed by gold and silver) but also inadvertently unsound banking (by prohibiting national banks to prevent crony capitalism). Hence small undiversified local US banks were politically doomed to failure, causing rational depositors to get to the front of the “first come first served” insolvency payout queue. Bernanke nevertheless fast-forwards to the 2008 financial crisis, virtually ignoring the political origins of the prior sub-prime lending debacle and resulting housing construction boom and house price bubble. He more than anyone recognizes the impending catastrophe of biblical proportions that only he, fortuitously now Chairman of the Federal Reserve, could prevent.
The Great Depression 2.0 didn’t happen. One can dispute the efficacy of the $16 trillion taxpayer backed intervention by the Bernanke Fed to bail out the Wall Street banks, but not its totalitarian character. In a replay of the post WW I “beggar thy neighbor” policies, other central banks had little choice but to respond to the US central bank’s post recession lead of massive asset purchases and zero interest rates.
Private debt declined in the US – almost entirely due to defaults – but the amount of public debt held domestically and internationally ballooned after this credit bubble to unprecedented levels and countries are once again engaged in currency wars to break free from stagnation. Citizen Bernanke now advocates negative interest rates in the US. By raising the real cost of fixed rate contracts, deflation did hurt some debtors at the expense of creditors during the Great Depression, but creditors have been paying for that ever since.
If the current fragile state of the global financial system and economy represents successful management by politicians and “independent” central bankers, what is their definition of failure? Will war once again provide the political exit? That seems to be the answer of the political “establishment” during this US election cycle. The electorate is appropriately wary.
Author of Occupy Pennsylvania Avenue