Strange Brew

by Steven M. Cohen  •  Mar 6, 2008 at 7:08 am

http://www.buyselljump.com/2008/03/strange-brew

Combining an election season with an economic crisis is a recipe for some really bad ideas. It's no comfort that these wacky suggestions come from both sides of the political aisle and even from important policy-makers who ought to know better.

It only means that no one, whether candidate or even central banker, holds a monopoly on foolishness.

A few of these proposed "fixes" deserve some comment. While it is difficult to choose among such a plethora of awful notions, we can begin with just a few, to be followed by more in later rantings. So, in no particular order:

Hillary's screed against free trade has picked up in volume lately, principally as an appeal, albeit a successful one, to Ohio voters who believe that the evils of Nafta are to blame for their misfortunes rather than the anti-growth, anti-business, and pro-tax policies of their own home-grown politicians.

A President Hillary would "freeze" trade policy, presumably as a first step towards either backing out of Nafta or renegotiating it. This is of course code language that means she would actually seek to freeze out our free-trading partners in an effort to turn back the clock to a happier time when the U.S. faced far less foreign competition.

Just close your eyes, she suggests to voters, and the global economy will just go away. Ohioans loved it!

Barak Obama is much more upfront than Hillary. He doesn't try to nuance any sort of freeze language, but comes right out and says he would renegotiate Nafta. This renegotiation suggests a disavowal of Nafta, or at least its material provisions, with the objective of rendering it null and void.

Obama raises the spectre of laid-off workers competing with their own teenagers for burger-flipping jobs, some of the most xenophobic imagery that our politics has seen in years. This Nafta is one ugly treaty, according to the Purveyor of Hope. Amazing that it was endorsed by a Democratic president--none other than Bill Clinton himself, perhaps the First Husband-in- waiting.

So it seems that the Democratic economic platform--regardless of who wins the nomination--consists of Hoover-era policies of raising taxes and adopting an anti-trade posture (shades of Smoot-Hawley) during a period of economic turmoil. The last time around it was the perfect prescription for the Depression.

Oh, and let's not leave out the aforementioned central banker who should know better. Ben Bernanke took some time off from inflating us out of recession to urge banks to simply write off a portion of the principal on hundreds of thousands of mortgages. Poof--no more problem!

That's right. Instead of allowing the lenders to work out arrangements with individual borrowers, a process that is already taking place on a large scale, government policy would advocate a one-size-fits-all approach. Of course the effect would be to transfer real value from the lender (part of the principal) to the borrower (the amount of the reduction).

Democrats like Barney Frank salivated at the prospect of churning out legislation on the subject. Never mind that mortgages are private contracts between lenders and borrowers, not ordinarily the subject of government-mandated restructuring.

In light of the fact that it's actually an expropriation of private property (the part of the loan that goes up in federally-mandated smoke), it's the equivalent of applying the policy of eminent domain to the world of lending. It's just what bankers need to hear during a liquidity crisis.

This redistribution of private property pursuant to government fiat used to be called socialism.

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