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Isaac Newton discovered that every action requires a reaction in the world of physics. In politics it is similar, even in our later times. A well intentioned legislation may have its intended effect, but it may also have unexpected and unwanted side effects that are more injurious than the new benefit. Wise legislators therefore are careful to at least balance the controls.

Our current financial crisis is a case in point. Controls on the banking system, beginning with Nixon were gradually eliminated through the Clinton Administration. What little was left, Bush totally ignored. Such was his misguided faith that a free market system is the be all and end all of economics.

How did this happen? The rational posed by the actors was to quote Adam Smith. We in the electorate, if we checked at all, found the quotes accurate.

However, something was neglected. Adam Smith also advocated sufficient governmental controls to prevent human nature from corrupting the system. This is typical political behavior. But shame on the economists for not pointing out this most serious of omissions. A half century passed by without significant criticism in the press.

Smith identified four primary functions of government:
  • Provide for the nation's defense.
  • Protect property and liberty to do all these things.
  • Provide public education.
  • Provide for transportation to facilitate commerce.

And to do all these things "in the highest degree advantageous to a great society ..." This is not how politicians operate. Smith's "Wealth of Nations" specifically discusses banking, currency and interest rates. He argued that government controls must be sufficient to protect the public from the avarice of men. Selective quotations led us to believe Smith was an ardent conservative boosting unfettered freedom in markets of all types. Yet a read of his book leads one to believe Smith was actually left of the current crop of Democrats. Ironic? To say the least! And also deceitful.

This brings up some simple arithmetic.

With balance sheets teetering on the edge of bankruptcy, how can any bank make any loans to: entrepreneurs, or businesses in recession times, where there is the slightest risk?

Yet if we are ever to recover from recession teetering on the bring of depression, how can they not--in the public interest?

Is it not logical to fix the balance sheets as part of a national economic recovery act?

Yet that is not a primary purpose of the bill just passed. Things may have to get a lot worse before this Congress and Administration find the courage to set petty politics aside and recapitalize the industry.

That is the first step.

Step two would implement controls that will alert us to problems with adequate means to turn around and punish bad actors.

Step three is to downsize the behemoths to the point where an individual bankruptcy, should it happen, will not endanger an entire society.

Step four should cap salaries and bonuses of top bank managers.

Step five should apply that great given in true entrepreneurship: Make top managers and boards personally liable for any losses within their control.

Interest rates would recover their legitimacy and be a more effective tool for keeping the economy on an even keel. One can envision Adam Smith looking on with approval.

You might argue that a system like this would dampen creativity and the entrepreneurial spirit. Our response to that is to ask:

What is the basic purpose of our banking system? Is it not to provide safety, discipline, and stability to the intermediary form of capital, the other two forms of capital being human and items of substance?

Of course this is serious stuff. But how do we, as an economic unit, differ from the titanic heading for an ice berg twenty times its size?

Would not all these controls allow us to sleep better at night?

Mr Obama inherited a mess of unprecedented proportion: dangerously-high national debt and world-wide economic down turn--on top of two unfinished wars that are likely to be un-winnable in conventional terms. The way out must employ unprecedented creativity. He is not alone, Congress is there to help not hinder. If Congress is responsible for initiating legislation, then shame on Nancy Pelosi and Harry Reid for allowing pork into the barrel. If the president is supposed to provide direction, then we must say, the national recovery bill does not live up to his brave words. Nor does it come close.

Something is badly amiss in Washington. Most other policies are right on, but if the economy continues to sink, what else matters? One thing amiss is a Congress that can only smell pork. Another thing amiss is a president who needs to maintain his image and rein in special interests, pork in other words, and get on with finding and leading the way out of this mess. Of course he deserves some time, as anyone would. The problem is, there may not be much--if any. And the problem is global.

A third problem is that we have not heard anything of substance from the other side of the aisle either.

For further reading, check out The Private Abuse of the Public Interest. by Brown and Jacobs.


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