September 30, 2008

The Authority Vacuum

Had an interesting discussion with Ham o' Bone. He's full-metal jacket against the bailout and challenged the underlying assumption I was working from: that in times of economic crisis we listen to the Fed.

In this crisis it seems no one in a leadership position is perceived as a source of legit authority, no one above politics. Is that actually worse than the financial crisis itself?

George W. Bush is not trusted, with good reason, by conservatives or liberals. To the burgeoning list of his bad hires we can add Secretary Paulson.

The Democrats have been likewise abysmal, with Pelosi almost beautifully incompetent, such that she could inspire a primer titled "How Not to Lead".

So who do you trust here? Well, ideally you go to the Federal Reserve. Their role is supposed to be above politics. Our whole society is predicated on specialization, which is a good part of the reason for our wealth and relative lack of poverty. Specialization means we don't all have to be economists when making these sorts of calls. We don't have to become intimately acquainted with AIG's portfolio.

The function of the Fed is to tamper with free markets, adjusting interest rates and money supply in order to smooth out the natural market, which tends toward wild swings in part due to the tendency of humans to make irrational decisions ruled by emotion when information is lacking. It is to our benefit that a steady hand come in to smooth out irrational episodes. And I think the Fed has been reasonably good at it, especially in my adult lifetime.

So my view of the bailout was immediately colored by the fact that Bernanke said it was necessary. Was that trust misplaced? Perhaps. Even Federal Reserve chiefs follow Keynes or Hayek, meaning their authority is derived. But my assumption was that, in a crisis, Americans would trust the credibility of the Federal Reserve. They most certainly did not.

To paraphrase the old "All in the Family" song: "Mister, we could use a man like Alan Greenspan again".

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