by SANDY IKEDA
When Alan Greenspan blamed deregulation for the Crash of 2008 many libertarians scrambled to denounce the former Fed chairman as a hypocrite or nuts or both. And in defense of the free market, some invoked “the dynamics of interventionism,” the popular interpretation of which is that the expansion of government control generates negative unintended consequences that tend in turn to provoke further government controls.
For what it’s worth, lately I’ve realized that these responses are probably wrong: What we’re going through right now is at least partly the result of deregulation – or to use my preferred clunky term “disintervention” – and less the result of the expansion of intervention. So how does that not make me a hypocrite or nuts or both?
Back in 1997 I published a book called The Dynamics of the Mixed Economy (pardon the self-promotion but it’s currently ranked 1,676,180th at Amazon.com), and in 2005 what is essentially a précis of that book came out in Advances in Austrian Economics called “The dynamics of interventionism.” I tried to integrate the implications of F.A. Hayek’s concept of “the knowledge problem” and Israel M. Kirzner’s “entrepreneurially competitive market process” into Ludwig von Mises’s “critique of interventionism.” One of the pattern predictions that I derive (it’s in Chapter 7 if anyone’s interested) is that really existing mixed economies will tend forever to cycle back-and-forth along the politico-economic spectrum.
(Bob Higgs, author of Crisis and Leviathan among other important books, has adopted my cycle concept. His own version can be found in the same volume in which my “Dynamics of interventionism” article appears.)
Banking and finance since 1980 seem to have been in the “dis-interventionist” rather than the expansionary phase of the interventionist dynamic.
In general if the public choosers decide, in the face of a systemic crisis, to disintervene, it has to be sweeping and radical to be effective. Half-hearted or piecemeal measures that leave significant sectors of the system still controlled will generate bottlenecks in the sectors where disintervention has gone further because that’s where entrepreneurial energies flow, and the resulting shortages, sharply rising prices, mal-investments, et al. will tend to frustrate the intentions of the supporters of disintervention.
So the more piecemeal and the less radical the disintervention, the more bottlenecks and disappointment that will arise. But these outcomes can cut both ways – public choosers can respond either by disintervening further or by turning to government. I think the strong empirical tendency in these circumstances is for public choosers to choose interventionism, for after years of internalizing the interventionist ideology they will have a proclivity to respond to the problems of partial de-control by returning to their comfort zone and re-intervening.
I think that’s what we’ve been experiencing in the present case – not the dynamics of intervention in the expansionary sense, but the dynamics of disintervention. Although the banking reforms of 1980 notably phased out the prohibitions on interest-bearing demand deposits, bank mergers, and branch banking – and Glass-Steagall was repealed in 1999 – it left in place a powerful Federal Reserve, as well as Fannie Mae and Freddie Mac, which enabled a series of presidents and congresses to apply political pressure to promote sub-prime and other kinds of risky lending beginning at least since 1992. (The role that the Fed, Fannie, Freddie and other GSEs played in the resulting housing bubble are well known by now, but here’s a guest blog I did for “Market Urbanism” recently, that gives a timeline.)
For me this helps to place in its proper context such things as the policy change in 1997 that cut the capital-gains tax to 0% on the sale of most primary homes, which is often given as a factor that contributed to the bubble. I think that’s right, even though I regard tax increases as interventions and tax reductions as disinterventions. In other words, this was just another piecemeal disintervention that interacted with the remaining interventionist institutions and policies in such a way that it probably caused more harm than good. One of the lessons of the dynamics of disintervention is that, if you’re going to free-up markets in small steps instead of making radical and sweeping changes, timing and sequencing become extremely critical. Indeed, successful piecemeal disintervention of heavily regulated sectors may be beyond abilities of even the most well-intentioned public choosers.
Anyway, we’ve seen the interventionist response by the Fed and the current Treasury, Congress, and President. Does anyone doubt that the in-coming one-party government will only hurry us along that road? Still, I think there’s time to get ready for the next systemic crisis when it comes.