THE BEAR'S LAIR Wanted: Iconoclasts
By Martin Hutchinson
The publicity and vituperation around the book tour of a middling former
governor of Alaska seems to have nothing to do with Sarah Palin's politics,
which judging from her term in office are unexceptional and only center-right.
The heat derives from her style, which is that of an iconoclast outsider, and
from the establishment's fear that iconoclasm may be the wave of the future.
Economically, their fears may be justified, whatever Palin's future career
plans.
Historically, iconoclasm was an 8th-century Byzantine movement in opposition to
the religious icons central to Orthodox worship. By smashing icons, the
iconoclasts hoped to restore the purity of the church and focus religious
belief on the spiritual - they appear
to have had similar impulses to those that later inspired Martin Luther to
revolt against the decadent Medici papacy. Their opponents, the "iconodules",
did not just love images, they were regarded as enslaved to them.
In the economic arena, there would seem to be a good case for iconoclasm. The
bipartisan support in the United States for the financial bailout in late 2008
and the lack of action thereafter has left the institutional structure frozen,
even a year after the event. Citigroup, AIG, Fannie Mae and Freddie Mac are
still in existence, and no plans have been made for their closure or breakup.
Wall Street, in the form of Goldman Sachs, is making record profits and will
pay even more outrageous bonuses than in the boom year of 2007, yet much of its
activity is pure rent-seeking, with no beneficial effect on the outside
economy.
The US mortgage market is even more hopelessly compromised than it was a year
ago, with the combination of the home-buyer tax credit and the Federal Housing
Administration's lax requirements for only a 3% down-payment producing a new
US$1 trillion pile of mortgages that appear to be toxic.
Other damaging policies that were improvised during the crisis are also still
in place and show no signs of being reversed. Interest rates are still close to
zero; indeed bank "window dressing" was reported on Friday to have driven
interest rates on short-term Treasury bills to below zero. The monetary base
was doubled in late 2008, a sharper increase than ever before in the history of
the Federal Reserve, yet there is no sign of its decline, while the banking
system's excess reserves pile up at over $1.2 trillion.
On the fiscal side, the 2009 budget deficit was $1.4 trillion and the 2010
deficit promises to be still larger. President Barack Obama has vowed to reduce
the deficit, but it has become clear that for this administration the mantra
should be "Watch what we do not what we say". In practice, he remains fully
committed to a health-care "reform" proposal that increases both the costs and
the budget deficit, by around $1 trillion over the 2011-2020 period.
As I have discussed previously, continued worship of these icons, whether in
the form of the bankrupt financial institutions, the zero-interest-rate
policies, or the trillion-dollar deficits, will drive the US economy into a
renewed downturn that will achieve new records both in terms of pain and
difficulty of exit. Yet the leading iconodules - Fed chairman Ben Bernanke,
Treasury Secretary Timothy Geithner and Obama himself continue their worship,
and the congressional opposition to them seems content only to vary the forms
of ceremony, without producing serious proposals that would break the major
icons or even chip them.
Like the 8th-century Byzantine church, the nexus of Washington and Wall Street
has grown corrupt and its corruption has come to exert increasing costs on
society as a whole. Wall Street has become excessively concentrated, trading
dominated and rent-seeking, while its rewards, like those of the overblown
Byzantine hierarchy, have become completely out of proportion to the
increasingly impoverished lives led by the rest of the population.
Goldman Sachs chairman Lloyd Blankfein claims that his organization is "doing
God's work"; St John of Damascus, the leading iconodule would doubtless have
claimed the same on behalf of the Byzantine Church. In Washington, after eight
years in which the ideology that had been sold to the voters in 2000 was
replaced with something quite different, there's a new clerisy even more
enthusiastic to expand the power of government without very much regard as to
whether that expansion is either cost effective or helpful to the population as
a whole.
In such an atmosphere, with official unemployment above 10% and rising, and US
living standards descending inexorably towards those of the Third World, it is
not surprising that the public beyond the Washington Beltway is in an
iconoclastic mood.
Its iconoclasm is rational, economically speaking. The tight oligopoly of Wall
Street is profiting excessively from its 2008 bailout by taxpayers, with the
payments to Goldman Sachs and others on the AIG credit default swaps coming to
seem increasingly misguided and possibly corrupt, given Goldman Sachs's close
connection with the then Treasury secretary Hank Paulson, who disbursed
taxpayers' money in such an unproductive manner.
AIG and Citigroup remain in business, with even AIG Financial Products, the
cause of much of 2008's pain, still in operation. Fannie Mae and Freddie Mac
remain dispensing their guarantees to the housing market, noticed by the media
only at the end of each quarter as they tote up their losses and demand further
billions of the taxpayers' money.
The economically damaging subsidies to home purchases, diverting as they do
scarce US capital towards yet more unproductive housing, have just been
extended both in time, for a further six months, and in scope, to existing
homeowners. The economic recovery, such as it is, appears to producing almost
no jobs but only an ever-widening spiral in commodity prices, affecting the
costs of everything the public consumes and eroding the value of its meager
savings.
It's not surprising given the new public taste for iconoclasm that the
iconodules of both political parties have reacted with fear and alarm to Palin,
who is no ideologue but through her background and style represents the
strongest possible iconoclastic sentiment, opposed to Wall Street, Washington
and all their doings. Her own political future is uncertain, as is her
capability to take advantage of the new movement. But if she plays her hand
cleverly, combining iconoclasm with political centrism, attracting good
advisors while maintaining her anti-Washington following, her chances of a
major political future at a national level would appear good.
With or without Ms Palin, the iconoclast movement has substantial momentum. The
current political-economic system is simply unsustainable; no economy can
afford to pay for four giant zombie financial institutions, two substantial
military adventures, a zombie-driven housing market, an exploding healthcare
bill and Goldman Sachs partners' lifestyle aspirations.
While the iconodules remain in charge, US economic performance will consist of
anemic growth punctuated by deep, grinding recessions, with new and small
business starved of capital, which is instead sucked inexorably into the triple
money pits of housing, the federal and state budget deficits and the
investment-banking trading fraternity. In such circumstances, mere reform at
the edges will not be enough; icons will have to be broken to liberate the US
economy from its excessive costs and allow new private sector growth sectors to
emerge.
An icon-smashing president is probably likely to arrive before an icon-smashing
Congress, given the electoral advantages to congressional incumbency. The US
economy must thus probably suffer at least another three years with the icons
in place. Even a sharp 2010 congressional change would probably produce only
legislative gridlock, although a belated conversion to iconoclasm by the Obama
administration might produce change sooner.
By 2013, the case for iconoclasm will be obvious to all. The current period of
low interest rates and bubble creation will have met its inevitable sticky end,
and the economic costs of unproductive icons will be fully apparent. The
economy will be locked in an inflationary version of 1990s Japan, in which
necessary reforms have not been taken and the detritus of old problems clogs up
the streams of capital formation. At the same time, the costs of healthcare
reform will be looming close, and the tax increases necessary to move even
partially towards balancing the federal budget will be hurting both taxpayers
and the economy.
It will thus have become obvious that the housing market needs to be restored
to a fully private market state, in which government subsidies are confined to
the truly indigent. Zombie banks must be closed down, while the beneficiaries
of "too big to fail" must be forced to slim down and divest operations until
they are of a size where failure is conceivable.
Commercial banks will simply become regional entities, whose failure would
damage a regional economy but not the entire financial system. The trading
behemoths will be broken into several competitors, whose market share will be
too small for them to profit from "insider information" about market flows - a
modest transactions tax will also reduce trading's dominance. Home mortgages
will once again be granted locally, with derivatives and securitization
technology used only to prevent cost squeezes in high-growth areas.
The obvious cost reductions in healthcare, eliminating the current system's
cross-subsidizations, will be legislated to reduce the sector's oppressive cost
growth. Public expenditure generally will be put on a strict diet, with
expansionist foreign policy ended, both in its belligerent and its globalist
forms. Finally, monetary policy will set interest rates at a level that rewards
savers properly and prevents bubbles.
Iconodule vested interests will oppose such a program with all their strength.
But in the end, the iconoclasts will win - the United States cannot
economically afford for them to lose.
Martin Hutchinson is the author of Great Conservatives (Academica
Press, 2005) - details can be found at www.greatconservatives.com.
(Republished with permission from PrudentBear.com.
Copyright 2005-09 David W Tice & Associates.)
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