Human nature, however fickle, is unchanged over the long pull. Harsh lessons learned, especially economic lessons, are short lived. Over time, these lessons have to be relearned over and over.
Our system of capitalism, lauded for its “freedom,” includes freedom of individuals to take risks by which to profit, along with risk of losing money. More serious than individual risk to make or lose money is risk of irresponsible actions by those charged with functioning of our national economy, namely private financial institutions — large banks and Wall Street money managers — and public institutions — the Fed, the Congress, and the President and executive branch agencies.
Harsh economic lessons were learned during the Great Depression of the 1930s. Freedom associated with unfettered capitalism, including unregulated banks and soaring financial markets, created the “roaring twenties.” Unregulated stock markets and the financial bubble burst with the “Great Crash” of 1929, closely followed by failure of many unregulated banks. While there were other factors during the Great Depression, including the Hawley-Smoot tariffs that limited international trade, and counterproductive actions by the Fed, the Great Depression was the consequence of unregulated capitalism run amok. With collapse of the financial system, scores of banks were unable to return savings deposits of hard working citizens.
While FDR’s New Deal is still criticized by some conservatives as “leading us down the road to Socialism,” it should be obvious to even the most conservative of conservatives that without banks that can be trusted with savings deposits, capitalism as we know it could not function. Thus was born the Federal Deposit Insurance Corporation (FDIC). The guaranteed safety of bank deposits is a bed rock of functioning capitalism. With the exception of an occasional deranged critic insisting that doing away with the FDIC would give banks the “incentive to be responsible,” no one with a positive IQ would suggest doing away with federally guaranteed deposit insurance.
Bank regulations such as the Glass-Stegall Act increased regulation of the financial system. Programs such as Social Security were constructive measures that strengthened capitalism. FDR’s New Deal programs along with post WWII prosperity ushered in the “golden age of capitalism,” through the 1950s to about the 1980s. With general prosperity, and those growing up during prosperity believing it is natural, it was inevitable that old lessons would be forgotten. With prosperity taken for granted, financial regulation came to be seen as “constraining freedom.”
Ronald Reagan famously, and irresponsibly, insisted that “I’m from the government and I’m here to help” were the nine most frightening words in the English language. Even Bill Clinton later insisted that “The era of big government is over.” Wall Street banks insisted on more freedom to take risks. The Glass-Stegall Act was ended. President George W. Bush stated the goal of everybody being able to own a house. However admirable that goal, it’s not so admirable, or realistic, when accompanied by irresponsible mortgage lending, a major factor in bringing on the Great Recession of 2008-09.
So who needs “big government?” It’s ostensibly not needed — until it’s needed. Along with President Obama’s stimulus and rescue of the American auto industry, the Dodd-Frank bill that increased capital requirements of banks was a legislative product of that era. Even as that legislation was of sound origin, it was resisted by Wall Street interests. However, many observers now insist that it is because of Dodd-Frank that banks have emerged from the current pandemic in a strong position.
Public utilities are another entity subject to government regulation — with some rare exceptions. I give you Texas and some shocked consumers receiving monthly utility bills of thousands of dollars. Some apologetic proponents of deregulation still insist that “with its low utility bills, deregulation actually worked very well — until that unforeseen record cold spell.”
That kind of sheer idiocy is like some sap insisting that he was money ahead by not insuring his house — until that unforeseen fire burned it down. That’s why we purchase insurance — a certain expense incurred to mitigate consequences of a worst case scenario. That’s why we have regulation of utilities, however imperfect, to mitigate results of a worst case scenario like the recent fiasco in Texas.
These economic lessons are so often hard-learned. Some individuals never learn them. It is uncharacteristic for young people to think ahead to a secure retirement. Key factors are time, the mathematics of compounding, and living below one’s means.
Even the professional who earns a six figure income and spends it all, even borrowing to enhance life style, will never achieve financial security. It’s not what one takes in, but what one manages to save and invest for the long pull. That sounds like a boring “eat your spinach” approach, for which we penurious Swiss boys sometimes take some heat, or at least some good-natured ribbing. That Swiss frugality is misunderstood; it’s not about depriving oneself of the finer things in life. It’s about managing your resources so you can enjoy the finer things in life, which most of us can do while living below our means. Warren Buffet, one of the world’s richest men, is the prototype of this; he still lives in a modest house in Omaha.
A minuscule number of people win a big pot in the lottery. Many of those winners who have never handled money and earned it the hard way soon lose it all, ending up miserable.
A few highly paid professional athletes make more money in a year than ordinary people make in a decade, or even a lifetime. Those who are savvy enough to know what they don’t know, and realize that their professional careers are short, hire professionals to manage their money.
Individuals making bad decisions hurt mainly themselves and their families. Wall Street banks and public policy makers making bad decisions threaten the entire economy. Conservative political philosophy that emphasizes deregulation is vastly different from, and inconsistent with, a conservative financial philosophy that emphasizes rules and regulations designed to protect the system from collapse.
Economic lessons learned and forgotten have to be relearned again.
— John Waelti of Monroe, a retired professor of economics, can be reached at jjwaelti1@tds.net. His column appears Saturdays in the Monroe Times.
