The True Gold Standard (Second Edition)
Who caused the financial collapse? Just about everyone.
To appreciate this landmark work it is necessary to know a bit about the author’s background.
John Allison is not only a banker-entrepreneur; he is also a recognized intellectual leader of American business. Moreover, Allison’s financial expertise is a product of his personal biography: In a mere two decades, he built BB&T (Branch Banking & Trust Co.), a comparatively small Southern bank of $4.5 billion in assets, into a $152-billion financial enterprise, making it one of America’s largest and most profitable banks. But unlike many overpaid, underperforming CEOs, Allison focused his leader-manager skills—at modest compensation—on behalf of his employees, customers, and shareholders.
Briefly stated, Allison’s core principles begin with an unapologetic dedication to customer-oriented banking and carefully managed risk-taking as sound and effective means to long-term profitability and high returns on capital. BB&T deploys an uncommon means to sustain the bank’s dedicated corporate culture: continuous, serious, systemic employee education aimed at the formation of leaders, executives, and well-trained employees at every level. A core goal of every employee must be to focus on making every client profitable and successful on a risk-adjusted financial basis—that is, through conservative banking. False financial products were neither fabricated nor widely distributed during the bubble years (such products having been an important cause of the financial crisis). Monthly employee readings in philosophy and economics are mobilized to reinforce the core principles.
At the center of this banking philosophy is the development of the full potential of each employee, and each client, of the bank: This strategy, Allison argues, is the optimum path to shareholder, customer, and employee enrichment. Many firms pretend to such a strategy; Allison earned a national reputation because he actually carried it out, and successfully, in a banking system engaged during the bubble years in a “race to the bottom.”
In a free-market society, it is hard to exaggerate the importance of such a corporate culture. And in business, the individual conscience, dedicated to long-term rational self-interest, is the indispensable condition of a minimally regulated free market. It is striking that Allison’s strategy was vindicated by good returns on capital; it is equally striking that BB&T’s corporate culture was proven right in the financial crisis and Great Recession, as BB&T experienced not a single quarterly loss during the financial earthquake of 2007-2009.
It is necessary to know all this in order to understand the importance of The Financial Crisis and the Free Market Cure. As the head of a major American bank, Allison was witness to the decisions of government, Federal Reserve leaders, and banking CEOs that led to a huge speculative bubble and the collapse of the financial system, including Fannie Mae, Freddie Mac, virtually the entire cartel of big banks and brokers, and major companies. Allison guides us, with a gimlet eye, through taxpayer-subsidized bailouts of these wards of the state, focusing on a reckless, insolvent, privileged financial oligarchy—subsidized by a feckless Fed, a dilatory Treasury, and a politicized FDIC. The coercive power of the federal government, and the moral hazard of excessive regulation, is dissected and debunked.
Bill Clinton, who rode a recession into office and left the scene just before another one began, knows something about the blame game. Addressing the Democratic convention on Wednesday night, he made a full-throated effort to defend the Obama presidency by putting it in the context of past Republican failure.
“They want to go back to the same old policies that got us into trouble in the first place,” he warned, listing tax cuts, financial deregulation, defense spending, and domestic budget cuts as examples. Clinton’s argument was an inch deep, but it recalled the fact that the economic catastrophe that primed Obama’s 2008 victory and has dogged his incumbency remains a liability to Republicans four years later.
If Clinton and his party believe that tax cuts can cause a financial crisis, that’s a new line of attack. If they believe that financial deregulation did it, they have never made a comprehensive case for exactly how. If it was too much spending on defense rather than entitlements, then they should review the boom of the 1980s. The Democrats have never really made a coherent argument of how the GOP caused such misery—they only pointed the finger. Meanwhile, Republicans act as if life began in January 2009.
There remains one explanation that has escaped both sides’ scrutiny because they share culpability for it. Beginning in 2001, easy money from the Federal Reserve flooded the markets with cheap credit, creating asset bubbles and finally tipping the American financial system on its side. This was a period of legitimate economic success (52 consecutive months of job growth under President George W. Bush) mixed with fake wealth attached to real estate and financial assets. No Republican is eager to wade into that story, while no Democrat wants to admit that their current strategy is reminiscent of it: Lean on the Fed to juice the economy.
Reliance on a loose-money Fed did not end well for the presidents who attempted it (Nixon, Carter, both Bushes), while Reagan and Clinton, by contrast, saw the fruits of a strong dollar. But even those relatively successful monetary policy records showed signs of dysfunction beneath the surface. Reagan was fortunate the rest of the world was eager to finance the deficit spending he failed to curb. For Clinton, the tech bubble collapse snowballed into a recession, but only on his way out the door.
What are the chances that President Barack Obama and his Treasury secretary, Timothy Geithner, will ever have anything meaningful to say about monetary policy—beyond continuing to try to coax Federal Reserve chairman Ben Bernanke to print ever more dollars to buy up ever more U.S. government debt? About the same as the interest rate you are receiving on your savings: zero.
That’s why it matters so much for the future of the United States—indeed, the future of the global economy—that Paul Ryan is now on the Republican ticket. Because it’s not just the fiscal fiasco, caused by political cowardice and dithering, that has put our nation on a path to eventual bankruptcy. It’s also the loss of a monetary compass. The value of the dollar has been so compromised through loose Fed policies that it no longer functions as a trustworthy money unit. Instead of providing a reliable tool for measuring what something is worth, or for deciding whether to consume now or save for the future, the dollar has become yet another policy instrument of government.
One notable who’d be a severe critic of our monetary situation today is Thomas Jefferson. In his Notes on the Establishment of a Money Unit and of a Coinage for the United States, written in 1784, Jefferson focused on the need to protect the integrity of the American dollar. A dependable currency would not only unite the former colonies and facilitate commerce throughout the fledgling nation, it would also facilitate individual endeavor and economic opportunity. For the first time, for example, Jefferson argued, a nation’s monetary standard would be based on the decimal system so that business calculations would be simple, honest, and straightforward.
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A new political science is needed for a world altogether new. But that is what we hardly dream of: placed in the middle of a rapid river, we obstinately fix our eyes on some debris that we still perceive on the bank, while the current takes us away and takes us backward toward the abyss.
—Alexis de Tocqueville, Democracy in America
After the most serious financial crisis of our lifetime, after frantic bank bailouts and a massive government stimulus, after unprecedented deficits and extraordinary quantitative easing, we find ourselves in 2012 in a political-economic world altogether new. We need new policies to respond to our novel situation, policies reflecting fresh thinking based on firm principles. But this is precisely what our current presidential campaigns hardly dream of. And so, finding themselves in the middle of a rapid river, they obstinately fix their eyes on some debris they perceive on the bank, while the current takes all of us away and backward toward the abyss.
We expected no more from Barack Obama. We still hope for better from Mitt Romney. Perhaps Romney will start to take Matthew Continetti’s excellent advice in the editorial above, and decide to “talk straight to the American people about the manifold challenges facing the country and how he would fix them.” Perhaps he’ll address the worry “that the Republicans may not have changed after four years’ exile from the White House.” Or perhaps not. If not, we’ll just have to hope that candidate Romney knows what he’s doing in running a cautious and vague campaign; that he’ll win; and that President Romney, once elected, will adopt the bold remedies and imaginative policies the country needs.
Many presidents, after all, have done far more in office than would have been suggested by their campaigns. Franklin Roosevelt ran a reasonably conventional and cautious campaign in 1932. But as president, he transformed our fiscal, monetary, and regulatory policies, and altered fundamentally the size and scope of the federal government.
Could Romney turn out to be a modern-day FDR? Let’s hope so. This presidential campaign may not feature big-time ideas, but the next president had better be a big-time reformer. We have banks too big to fail and a welfare state too big to succeed. We have unsustainable public debt and unsustainable behavior by parts of the private sector. We have too much dependency on government and too much disparity in private wealth and power. We lack enforceable rules to constrain government spending and the government’s printing of money, and we have far too many regulations that limit freedom and hamper entrepreneurship in seemingly minor but cumulatively crippling ways. We have too much crony capitalism and too little democratic capitalism, too much legalism and too little rule of law.
And yet most of our politicians traffic in slogans rather than judgment, and many of our economic thinkers indulge in the conceit of economics as a pseudo-science rather than engaging in serious thought about political economy. Still, the wisdom of thinkers from Adam Smith to Joseph Schumpeter to Friedrich Hayek, and of statesmen from Alexander Hamilton to Ludwig Erhard to Jacques Rueff, remains available to us. And there are those who draw on those traditions and try to think anew (see, for instance, the articles by Irwin Stelzer and Lewis Lehrman in this issue). Indeed, look around conservative journals and you’ll find vigorous discussion of the political economy of democratic capitalism, spirited debate about how to foster economic opportunity and growth, and thoughtful consideration of the challenge of strengthening the institutions of a free society and a self-governing polity.
Mitt Romney has articulated the choice we will make in November. We can choose President Obama and a European future—i.e., high unemployment, demographic winter, big government commanding over 50 percent of future output, a welfare state engineered and manipulated by the Washington bureaucracy, the end of American leadership, and, ultimately, national insolvency. Or we can embark once again on the road to rapid economic expansion, through pro-growth tax reform, smaller government, a balanced budget, and sound money. What we need, Romney argues, is an entrepreneurial economy based on the free price mechanism, free markets, free and fair international trade. For Romney the goal of rapid economic growth is full employment, a strong national defense, and a rising American standard of living. These policies are necessary. But are they sufficient?
Romney’s analysis emphasizes the character of presidential leadership, the need for hands-on White House direction of national economic policy. Workable economic policies require not only the right goals but also a strong president capable of leading Congress and the nation in a new direction—away from Obama’s backward-looking statism, and forward to pro-growth tax policies, budgetary equilibrium, and sound monetary policies. Regulations must be radically simplified. The tax code must be comprehensively reformed—with a larger base, fewer loopholes, and lower rates.
In his 2010 book Seeds of Destruction, Glenn Hubbard, a top economic adviser to Romney, summarizes the entrepreneurial spirit underlying Romney’s approach. “First and foremost, it will mean putting unemployed Americans back to work. Second, it will mean stabilizing the housing market and housing prices. Third, it will mean increasing the productivity of the American worker and making U.S. industry more competitive in international markets so that wage and economic growth can once again boost purchasing power. Fourth, it will mean reducing America’s dependence on increasingly expensive oil. Finally, it will mean creating a strong and stable dollar so that our import bill remains manageable.”
On this last point, Romney has criticized the Greenspan-Bernanke Fed—the ultimate cause of the stock market bubble of the 1990s and the subsequent crash and recession (2000-2002); the ultimate cause also of the real estate bubble, its collapse, and the Great Recession (2007-2009). Romney argues in almost every economic speech that Obama’s stimulus policies are poorly planned and ineffective, and that Obama has been AWOL on major legislation, defaulting to a pork barrel Democratic congressional majority on economic and health care policy in 2009-2010, when he had a majority in both the Senate and the House.
In private and public comments, Romney and Hubbard have suggested that hyper-expansive Fed policy and quantitative easing—repressing interest rates to zero—is a reckless monetary approach that in the past has led to bouts of inflation, followed by deflation and recession.
I embrace much of this analysis and many of Romney’s proposals. His program is necessary, but it may not be sufficient.