Niskanen predicts that government intervention will prove to be “selective and temporary,” not “a long-term trend.”

Here's another Socialism Unbound post from Bloomberg. I don't see government intervention as the problem. The idea that the Democratic Party could stomach an enormous intrusion of the government into our lives is bogus. I, being a good Burkean, fear social unrest and revulsion with the whole political culture, leading to God knows what:

"By Simon Kennedy, Matthew Benjamin and Rich Miller

Dec. 22 (Bloomberg) -- What’s good for General Motors may not ultimately be best for the global economy.( DO TELL )

The Bush administration’s $13.4 billion rescue of GM and Chrysler is a fitting finish to a year in which governments around the world expanded their role in the economy and markets after three decades of retreat.( WHAT WAS THE S & L CRISIS? A SKIRMISH? HOW ABOUT MILITARY SPENDING? AND THE LOSS OF INDIVIDUAL RIGHTS IN THE LAST EIGHT YEARS? THAT CAN EFFECT THE ECONOMY. HOW ABOUT BUSH'S SPENDING AND THE DEBT AND DEFICIT OVER THE LAST YEARS? NO EFFECT ON THE ECONOMY? )

The intervention comes at what may prove to be a steep price. Future investment may be allocated less efficiently as risk-averse politicians make business decisions( AS COMPARED TO WHAT? COWERING BUSINESSMEN AND BANKERS? ). Whenever banks decide to lend again, they are likely to find new capital requirements that will curb how freely they can do it( IF GOVERNMENT GUARANTEED. THEY CAN ALWAYS CUT THEMSELVES LOOSE ). Interest rates may be pushed up by government borrowing to finance trillions of dollars of bailouts( TRUE. I APPROVE ).

“We’re seeing a more statist world economy( WE'RE SEEING A SHIFT IN POWER IN THE WELFARE STATE SO FAR. NOTHING MORE ),” says Ken Rogoff, former chief economist at the International Monetary Fund and now a professor at Harvard University in Cambridge, Massachusetts. “That’s not good for growth in the longer run( THAT DEPENDS. DO YOU INCLUDE CRISES LIKE THIS ONE AS THE PRICE THAT YOU HAVE TO PAY? IF SO, LET'S DO THE MATH, AND NOT ASSUME ANYTHING ).”

It’s not good for stocks either, says Paola Sapienza, associate professor of finance at Northwestern University’s Kellogg School of Management. Slower economic growth means lower profits( HOW PROFOUND ). Shares might also be hurt by investor uncertainty about the scope and timing of government intervention in the corporate sector( THAT'S WHAT CAUSED THIS CRISIS. AN APPLICATION OF BAGEHOT'S PRINCIPLES SHOULD CLEAR THAT UP ).

“If the rules of the game are changing, people are reluctant to invest in the stock market( TRUE. SO PUT IN BAGEHOT'S PRINCIPLES, AND STOP FOOLING AROUND LIKE THE BUSH ADMINISTRATION. ),” Sapienza says.

Record Lows

The bond market will also be affected as it is forced to absorb ever bigger increases in government debt. While yields on Treasury securities touched record lows last week, they eventually “will go up significantly and dramatically” under pressure from added supply( I'M A BIT WORRIED ABOUT THIS ), says E. Craig Coats, co-head of fixed income at Keefe, Bruyette & Woods Inc. in New York.

The increase in the government’s role in the economy has been breathtaking( PLEASE COMPARE IT WITH THE FRAUD AND STUPIDITY IN THE PRIVATE SECTOR ). The U.S. looks set to rack up a budget deficit of at least $1 trillion this fiscal year, while the Federal Reserve has already increased its balance sheet by $1.4 trillion since last December. By way of comparison, U.S. gross domestic product last year was $13.8 trillion.

Winding back the intervention may not be easy( OTHER ACTIONS, LIKE NATIONALIZATION, WOULD HAVE MADE IT EASIER ), says Sapienza, who has studied the effect of government ownership on bank lending.

When Italy nationalized banks in 1933, “the architects who designed the system envisaged it as temporary,” she says. “It was in place until the end of the 1990s.”( THAT WAS ITALY ) More recently, the Japanese government injected capital into banks to get them to lend to big corporations, keeping alive( BAGEHOT'S PRINCIPLES WOULD WEED THEM OUT LOVE ) “the zombie companies that economists talk about,” she says.

Investors ‘Gambling’

Already, investors trying to decide where to put their money are “gambling very much on what they think the government will do, not what they think about the company,” Sapienza says. “That’s why there’s so much volatility.”( TRUE. AND? )

GM shares plunged as much as 37 percent Dec. 12 after the U.S. Senate failed to pass an emergency loan plan( CAN YOU SAY IMPLICIT AND EXPLICIT GOVERNMENT GUARANTEES TO INTERVENE IN CASE OF A FINANCIAL CRISIS. THAT'S WHY THE BIG THREE ARE ASKING. THAT'S OUR SYSTEM. ). The shares recovered after George W. Bush said his administration would consider funding a rescue with money already set aside for bank bailouts, then shot up 23 percent on Dec. 19 when he announced the emergency loans( THAT'S BECAUSE THE GOVERNMENT INTERVENED. DO THESE INVESTORS SOUND LIKE CATO SCHOLARS OR REASON EDITORS? ).

The auto-industry lifeline is just the latest in an extraordinary year of market interventions that have redefined capitalism( PLEASE. WE HAVE OUR OWN VERSION OF THE WELFARE STATE. IT'S A HYBRID ). The U.S. government previously seized control of mortgage lenders Fannie Mae and Freddie Mac and insurer American International Group Inc. and took stakes in the nation’s largest banks.

‘Necessary Evil’

Government activism has become a “necessary evil”( ON THE CONTRARY, IT'S THE UNDERPINNING OF THE SYSTEM. EVIL WOULD BE DEALING WITH THIS MESS ON YOUR OWN ) to help pull the global economy out of recession, says Marco Annunziata, chief economist at UniCredit MIB in London. Even Bush, who ran for the U.S. presidency espousing smaller government, agrees. He told a CNN interviewer last week he has “abandoned free-market principles to save the free-market system.”( BUSH! HE EPITOMIZES THE CRONY WELFARE STATE. HE COULDN'T FIND A FREE MARKET EVEN IF HE SAT ON IT)

Policy makers elsewhere extended their reach, too. The U.K. nationalized mortgage lenders Northern Rock Plc and Bradford & Bingley Plc. French President Nicolas Sarkozy created a 6 billion-euro ($8.7 billion) fund to invest in “strategic” firms. And the European Commission last week relaxed rules on state aid to businesses.

It isn’t inevitable that bigger government will hamstring free enterprise, says William Niskanen, chairman emeritus of the Cato Institute, a Washington research group that generally favors free markets over government solutions. Niskanen predicts that government intervention will prove to be “selective and temporary,” not “a long-term trend.”( THANK GOD THERE'S ONE SANE MAN IN THE ROOM )

Shy Away From Lending

Still, greater government involvement will make businesses less likely to deploy( I'VE BANNED THE USE OF THIS TERM ) capital in ways that spur growth and profits, says Eric Chaney, chief economist at AXA SA in Paris and a former official at the French finance ministry. Carmakers may be slower to innovate or cut costs, and financiers may shy away from lending to entrepreneurs.( MOTHER MAY I? AND THEY MIGHT NOT )

“It’s the job of companies, not governments, to take risk and accept the consequences,” Chaney says. “There is no incentive for governments to take risk, so they won’t.”( WHAT ARE WARS? )

The history of public aid to automakers highlights the threat, says Stuart Pearson, an analyst at Credit Suisse Group in London.( WE GET IT )

While the U.S. rescue of Chrysler in 1979 gave then-Chief Executive Officer Lee Iacocca time to streamline the company and restore profitability, it also sustained an outsized U.S. auto industry, leading to its current woes( THERE WERE PLENTY OF IDIOTIC DECISIONS IN THE INTERVENING YEARS ), Pearson says. The 1975 bailout of British Leyland Motor Corp. ended up costing U.K. taxpayers 11 billion pounds ($16.8 billion) and failed to keep successor MG Rover Group Ltd. from sinking into bankruptcy two decades later.

Help, Obstruction

“Government help has only been an obstruction to getting the car industry into a more economic shape,” Pearson says.

Back in 1953, when the industry was booming, GM Chief Executive Officer Charles Wilson famously observed: “For years I thought what was good for our country was good for General Motors and vice versa.” If the automakers’ importance has declined, so -- until recently -- had the government’s.

Just a dozen years ago, U.S. President Bill Clinton declared that “the era of big government is over( HE WAS CORRECT. HE MEANT A CERTAIN IDEAL OF THE GOVERNMENT INTERVENING EVERYWHERE ).” Sarkozy won election last year promising a “rupture” from France’s history of heavy regulation; these days, the French president has changed his tune. “Laissez-faire( WHAT'S THAT? COME ON ), it is finished,” he declared last month.

Role of Government

Until recently, “investors could, broadly speaking, ignore the role of the government when thinking about markets” says Alex Patelis, chief international economist at Merrill Lynch & Co. in London. “This period is over.”( ABSOLUTE ROT. DIDN'T YOU JUST PROVE THAT INVESTORS WERE BANKING ON A BAILOUT FOR THE BIG THREE? WHAT WAS THE REACTION TO LEHMAN? )

Regulation is back in style as policy makers seek to avoid a repeat of the financial crisis. Leaders from the Group of 20 nations are crafting a plan to require banks to maintain higher capital levels and disclose more about their holdings.( MAYBE THEY WON'T MAKE A PIG'S BREAKFAST OF IT THIS TIME )

That likely means a lower “speed limit for growth( POSSIBLY WITHOUT WRECKS ),” as banks have less cash available to lend and invest, says Mohamed el-Erian, co-chief executive at Pacific Investment Management Co., the Newport Beach, California-based manager of the world’s biggest bond fund.

“There will be less lubrication( DON'T USE THAT TERM ) in the form of credit creation,” he says.

Bailouts and economic-stimulus plans are also running up government borrowing. Economists at JPMorgan Chase & Co. estimate( THEY COULDN'T ESTMATE MY ANGER ) the budget deficits of developed economies will more than double next year to 6.3 percent of gross domestic product.

Higher Taxes

Bigger deficits, while necessary now, could spell trouble down the road if they lead to higher borrowing costs or prompt consumers to save more now on the assumption that bigger shortfalls will mean higher taxes later( RICARDIAN EQUIVALENCE ).

“We’ll end a financial crisis with a fiscal crisis,” says Vito Tanzi, former director of fiscal affairs at the IMF. “We’ll get out with very large public debt and very large public spending. That, for sure, will slow down the rate of growth for the next 10 years or so( PREDICTION GOOD WITHIN A CENTURY ).”

While bigger government is the unavoidable result of dealing with the turmoil, “it makes all of us economists uncomfortable seeing the government doing all these extraordinary things( THAT's ACTUALLY A GOOD SIGN ),” says Barry Eichengreen, an economics professor at the University of California at Berkeley.

On the other hand, he says, “I would feel even more uncomfortable if they weren’t doing them( JOIN THE CLUB ).”

Niskanen made the most sense. I simply say that the real threat would be social, and, as of now, we're far away from that.

"We are watching a bonfire of the old orthodoxies as well as of the vanities."

Here's another "Government grows in a crisis" column by Philip Stephens in the FT:

"We are watching a bonfire of the old orthodoxies as well as of the vanities. This week Barack Obama promised to spend hundreds of billions of taxpayers’ dollars to prop up the sinking US economy. Gordon Brown’s British government announced it would soak the rich to pay for an economic rescue package.

In between times, the Bush administration all but nationalised Citigroup, the world’s largest bank. For good measure it threw another, yes another, $800bn into the effort to thaw US credit markets. Everywhere you look, Keynes’s demand management is replacing Adam Smith’s invisible hand; printing money, a mortal sin under the fracturing Washington consensus, is the new prudence.

Something big is happening. What started out as a series of pragmatic ad hoc responses by governments and central banks is moving the boundary between state and market. Politicians are now overlaying expediency with ideology. Government is no longer a term of abuse.

Things could move still faster in the months ahead. With their myriad rescue schemes and loan guarantees, the US and British governments have nationalised their respective banking systems in all but name. The banks pretend they are still answerable to their shareholders, but it is a charade. They survive only with the explicit financial guarantee of the state."

Truly speaking, this system of explicit guarantees of government intervention in the case of a financial crisis WAS OUR SYSTEM, and IS OUR SYSTEM. How can it possibly come as a shock to anyone any more? And enough about the ideological pieties, which get chucked out at the first supplication for government largess. Who believed them? Not me.

"Still, the markets remain frozen, starving business of the oxygen of credit. Unless things change soon, the politicians will have little choice but to take direct control, and quite possibly, ownership, of the banks. Nationalisation could be the first act of an Obama presidency. That at least would put some substance into all those loose analogies with FDR.

Either way, the simple fact that public ownership is viewed as a serious option – and Mervyn King, the governor of the Bank of England, said as much this week – tells you how far we have travelled from the liberal orthodoxies of recent decades. What was hailed as the new financial capitalism is making way for old-fashioned state direction. The politicians, meanwhile, are reclaiming some of the language of that earlier age. Higher taxes on the wealthy are no longer taboo; regulation has been rehabilitated; markets can fail.

It seems only yesterday that the onward march of the Anglo-American model of liberal capitalism – small government, fiscal prudence, deregulation, flexible and open markets – set the shape and tempo of the global economy. Some European governments fought a long rearguard action against what one of my French friends calls the hyper-capitalism of the “Anglo-Saxons”. But to a greater or lesser degree all made their accommodations."

Hold on. FDR wasn't a Marxist or Socialist. Let's not get carried away.

"In the US and Britain, the centre-left learned it could win elections only by accepting the Reagan-Thatcher settlement. Bill Clinton, a Democrat, wrote the requiem for big government.

In Britain, Tony Blair, aided and abetted by Mr Brown, built New Labour’s electoral success on the promise that it was as much a friend of individual aspiration as of social justice. As proof, it promised never to raise the top rate of income tax from the 40 per cent set by the Thatcher government in the 1980s. As for markets, there was no one more scornful than Mr Brown of the continental European model of a more regulated social market capitalism.

That was then. This week Mr Brown said he intended to raise the top tax rate to 45 per cent. This would be the new dividing line with David Cameron’s opposition Conservatives. The measure will raise only a fraction of the revenues needed to staunch the haemorrhaging of the nation’s public finances. What matters is the political symbolism: for Mr Brown, fairness now trumps aspiration."

Do you remember the S & L Crisis? Who took care of that? Earl Browder and Norman Thomas?

"Until quite recently, it was possible to say that rescuing the financial system was calculated to save rather than sink liberal capitalism. As after past recessions, the system would survive the shock more or less intact.

To a degree the assumption still holds true. I have yet to see a politician climbing on to a soapbox to proclaim the ideological case for nationalising the banks. Mr Obama has promised a Rooseveltian strategy to rebuild America’s infrastructure, but he is careful to talk about active as opposed to big government.

The leading members of Mr Obama’s economic team were among the most enthusiastic apostles of liberal markets during the Clinton presidency. Main street America did not vote to throw out the capitalist baby with the bankers’ bathwater.

Even as he tosses overboard the emblems of New Labour, Mr Brown, too, is wary of suggesting that government should take more control over the lives of ordinary voters. After a spate of bad headlines, Downing Street now insists that higher taxes for the wealthy are an “extraordinary measure for extraordinary times”.

The caution is understandable. Voters want security against wild-west capitalism. They do not want to be smothered by the state."

He's losing me.

"For all that, the boundaries have moved. Busts always provoke a backlash. More often than not, all is forgotten in the subsequent upswing. But this time it is more than a bad hangover. The consequences of the crash of 2008 will be felt well beyond the eventual recovery."

He's found me again. That's basically my position as well.

"For one thing, the banks are going to be under state administration, if not ownership, for a very long time. The old capitalism (and by that I mean the variety that until this year we called the “new” capitalism) was predicated on a financial system that created an endless supply of cheap credit. It will take more than a cyclical upturn before politicians again allow banks to manufacture money on such an epic scale.

That will demand deep structural adjustments in economies kept afloat on the sea of credit. The US, Britain and the other boom-to-bust economies will find the world no longer willing to finance their domestic housing and borrowing booms. Voters, meanwhile, will absorb the message that it is no longer a self-evident truth that ever more liberal markets deliver painless prosperity.

The risk is that the recalibration will go too far: that innovators and entrepreneurs will be put in the stocks with investment bankers; and that fettered markers at home will be accompanied by protectionism abroad. Lest we forget, for all its manifest flaws, a liberal trading system has delivered hundreds of millions of people from abject poverty."

Basic agreement again.

"The market has lost its magic, but we do not know whether Mr Obama can properly rehabilitate government. So the shape of a new settlement is far from clear. What is certain is that things cannot be as they were."

I'm not so sure about that. As Karr said, "plus ça change, plus c'est la même chose".

Brilliant! Crises Lead To Goverment Intervention! Hold The Presses!

Also on Reason, Katherine Mangu-Ward quotes Alan Reynolds:

"The enduring legacy of the Crash of ’87 is that it provided a convenient excuse for a variety of possible increases in government authority, which may yet cause serious economic trouble. The crash has been used to denigrate a prolonged economic expansion during the Reagan years, to support calls for new taxes, and to argue for increased regulation of financial markets."

Brilliant! I've been saying this from the beginning of this crisis.

That's why we need some minimal government regulation. We need to keep these crises from occurring if we want to avoid massive government regulation.

Give me a real world plan!

As for creditors being made solvent by the bailout, why should they? Didn't they make stupid business decisions as well?

At what point do we stop blaming government and hold these businesses responsible? Did someone put a gun to the head of these businessmen?

Also, if these bailouts are such a great deal, why is the government having to get involved?

What's with libertarians justifying poor business decisions?

Crises Call Forth Regulation

From Reason comes the following post by Katherine Mangu-Ward entitled "It Is Quite a Punt". Here's the conclusion:

"But as that other noble Brit, Douglas Adams, would remind us: Don't Panic. It seems as if the world is ending, and it may be. But keep your cool, because everything is going according to plan.

As a former Goldman Sachs executive, Paulson understands that the unravelling of Lehman is not a sign, per se, that free markets are failing. Quite the reverse. They work best when driving out weak and inefficient operators. Creation and destruction are part of the game. Nobody said that capitalism was devised to provide soft landings for hopeless losers. Sending a message that all sinners will be saved only encourages reckless behaviour."

Here's my response:

"Don the libertarian Democrat | September 15, 2008, 10:30pm | #I'm sorry, but that's wishful thinking. Allowing crises like the current one to occur is the one way to make sure of regulations being passed which are much too onerous. It's better to have fewer regulations that work, than allowing meltdowns that bring forth an avalanche of government regulations, which will take quite some time to get rid of when instituted."

Here's a clear difference between libertarian Democrats and libertarians. It is in such crises as the current one that government often gets a lot of it's power.

It is much better to have some minimal but effective government regulation than allowing crises which will call forth a torrent of regulation, much of it quite awful.