Reno Hayek Symposium

Our thanks to Tom Cargill, Ph.D. for his excellent presentation at last evening’s Reno Hayek Dinner. His background is impressive indeed: Following his degree at Davis he conducted research and published a number of books and articles in economics with emphasis on financial and central banking issues. He has consulted with governmental agencies in the US, Japan and Korea and presented lectures in China, Hungry, Australia and Indonesia.

And he did bring that background to bear in last night’s discussion on our current financial crisis. This classic bubble build and bust began in 2001 and its effects are now and will continue to be upon us. While significant, it is not as bad as the Great Depression or Japan’s decade of deflation although both provide valuable lessons today which bailout oriented policy makers seem to ignore. With cheap liquidity flooding the market for too long a time and a government policy mandating loans to deadbeat borrowers, real estate prices outstripped fundamentals. With government assistance and off balance sheet securitizations the US exported the bubble to overseas investors so the explosion resounded beyond our shores. With the implied guarantee of our two GSEs the investments were viewed as risk free.

The explosion took effect and unlike past explosions the central banks acted quickly and concertedly with “a hair of the dog” remedy, easy money. Governments joined in with Keynesian fiscal “stimulus,” which really doesn’t have the advertised multiplier effect; that real effect is in fact negative. Governments also added “bailouts” as weapons in the war against its crisis. These were added without regard to moral hazard and we now have the vagary of “systemic risk” and companies that are “too big to fail!”

So the “government or market” causation question for our current financial problems, probably deserves the answer, both. But were it not for the government policies of Government Sponsored Entities, easy money, and home ownership by people unable to handle that ownership, the crisis would never have occurred. Crystal balling outcomes is indeed difficult but it seems to be a better bet that we will have inflation instead of deflation and that it will be  politically difficult for the central banks to tighten monetary policy and fiscal authorities to withdraw stimulus. The major deficits and unprecedented debt will be an effective drag on our future economy and new taxes, especially the VAT will most likely be needed to approach some sanity.

The proof of a good meeting is its interest and duration; last evening, no one wanted to leave and we ran a half hour over schedule! Our thanks to Professor Cargill for the excellent meeting.

Tom Motherway, tom@renohayek.com