"Power tends to corrupt, and absolute power corrupts absolutely." Lord Acton

Risky Business: Keynes, Moral Hazard, and the Economic Crisis

Acton’s Sam Gregg on Public Discourse:

At the level of government policy, a prominent instance of moral hazard was what some call the “Greenspan doctrine” of 2002. This involved the U.S. Federal Reserve stating that, while it was powerless to prevent the emergence of asset bubbles (such as the dot-com and housing booms), the Federal Reserve would do everything that it could to soften the effects of an imploding bubble. This included providing investors with the option of selling their depreciated assets to the Federal Reserve at a time of crisis. Not surprisingly, the result was a surge in excessive risk-taking by investors confident that, if everything did not proceed as planned, they could recoup their losses at someone else’s expense. In his recent book, Fixing Global Finance (2008), the financial journalist Martin Wolf underlines “the distortions introduced by government guarantees to risk-taking.” These, he writes, “create an overwhelming incentive to privatize gains and socialize losses.”

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No More Bretton Woods

Acton’s Sam Gregg on Public Discourse:

On November 15th, leaders of the world’s largest economies will gather in Washington, D.C., to discuss the ongoing international financial crisis. Figures such as Britain’s Prime Minister Gordon Brown view the summit as an opportunity to reform international financial structures and perhaps create new ones. He and others have spoken of a “new Bretton Woods”—the 1944 international meeting that sought to design an international financial structure for a post-war world.

Today, relatively little is left of the original Bretton Woods. Many of its provisions concerning exchange rates and currencies, for instance, were gradually abandoned. Bretton Woods’ most prominent institutional legacies are the IMF and the World Bank. For different reasons, neither is especially liked by developed or developing countries. In recent years, both have struggled to define their missions. The World Bank has additionally been dogged by allegations of ignoring or even facilitating corruption in developing nations, not to mention criticisms that, more than most bureaucracies, the primary objective of many of its staff seems to be institutional self-preservation.

The contemporary financial crisis has demonstrated, however, that the basic impulse for Bretton Woods-like solutions to international economic problems is alive and well. Some national leaders, for instance, have echoed (probably unconsciously) John Maynard Keynes’s call at Bretton Woods for a “world central bank”. More generally, there is a strong push, especially from Western European governments, for the creation of more intergovernmental planning and bargaining mechanisms as the means to impose a new international regulatory order upon national banking and financial systems.

But is this ‘top-down’ approach really the best way to address the financial crisis over the long term? One prominent twentieth-century figure who would have vehemently disagreed was the German economist Wilhelm Röpke (1899-1966).

Read the article at Public Discourse.

Commercial Society reviewed on University Bookman

The University Bookman, a publication of the Russell Kirk Center, reviews Dr. Samuel Gregg’s The Commercial Society: Foundations and Challenges in a Global Age in its Fall 2007 issue. Actually, the Bookman reviewed it twice.

Reviewer Robert Heineman, a professor of political science at Alfred University in New York, described the book as an “exceptionally well written volume” that should be read by anyone concerned about human freedom and progress.

Heineman has this to say about Gregg’s discussion of democracy in the book:

As he so aptly notes, in a democracy, a majority is considered authoritative; whereas, this is definitely not the case in commercial enterprises. Moreover, in democratic politics, the ability to exercise self-restraint is far more difficult than it is in the business world. Interests are continually importuning their representatives for more largesse or other benefits, usually at the expense of commercial enterprises. The trend, then, is inherently toward bigger, more restrictive government, perhaps even arbitrary government. As Gregg shows, Wilhelm Roepke argued persuasively that the expanded welfare state contains disincentives for the kind of behavior—self-discipline, hard work, saving—that is important to commercial activity.

Thomas E. Woods Jr., author of The Church and the Market: A Catholic Defense of the Free Economy, had this to say about The Commercial Society:

Thankfully for Gregg he has no plans to run for political office, for his chapter on democracy would surely be waved menacingly before the public at every opportunity. As with the rest of his arguments he has much more to say than we can properly analyze here, but he follows F. A. Hayek, who once noted that “unlimited democracy is bound to become egalitarian.” “Democracy,” Gregg writes, “tends to encourage a fixation with creating total equality because it requires everyone to relate to each other through the medium of democratic equality and encourages us first to ignore and then to dislike and seek to reduce all the differences that tend to contradict this equality, particularly wealth disparities.” (H. L. Mencken was more biting: government, he said, is “a broker in pillage, and every election is sort of an advance auction sale of stolen goods.”)

Gregg, director of research at Acton, also contributed an article to the current issue of the Bookman. In “Tocqueville as Économiste,” Gregg looks at a new work by French scholars Jean-Louis Benoît and Éric Keslassy who have collected some of the economic writings of Alexis de Tocqueville, the great commentator on American democracy. In the review, he writes:

Tocqueville’s writings about how to address poverty quickly reveal him to be no radical libertarian. The state, he always believed, had responsibilities in this area. At the same time, Tocqueville was deeply conscious of the limited effectiveness of state action in this area, not to mention the unintended consequences of many interventionist policies about which economists are skilled at reminding those who see state action as the universal elixir to all social problems.

The Commercial Society is available for online purchase from the Acton Institute Book Shoppe.