The Power of Ideas

The Law of Unintended and Unanticipated Consequences

Our Government does not handle dissent or opposition very well.  The Bush Administration has refined this to a science.  But the Congressional hearings on the Paulson bailout package hammer home the point, and should raise a red flag as high and as poignantly as the flag the Marines hoisted at Iwo Jima.

We are facing the gravest economic crisis in generations.  Warren Buffett’s description of this as an “Economic Pearl Harbor” probably understates this by multiples.  In magnitude it is probably more like the tsunami that destroyed the Pacific a few years ago; maybe something far worse.  And yet, facing a cataclysm, our legislature has hastily arranged a party for two.  We have heard from Hank Paulson and Ben Bernanke, the crafters and proponents of the bailout ackage.  Their message, boldly stated, is do this or else.  They state they have considered alternatives.  In their opinion, this is the best alternative.  Unfortunately, no one else has been asked to testify, opine and answer questions about this plan or other alternatives.  The media really does not help.  They parade on people who are part of the marketing team; often people with a vested interest in the outcome.

Quick passage of this package may feel good.  But the rush to judgment and the unwillingness to consider alternatives means that the analysis has probably been relatively simple, relatively linear.  It means they have probably missed a lot or ignored a lot.  That carries big risks.

First of all, the plan focuses on saving financial institutions by taking assets off of their balance sheets.  How long will it take to get the program up and running?  More importantly, how long will it take before these institutions start lending again?  As I read the plan, it will be a while.  This economy needs financial intermediaries to extend credit for growth to occur.  While we wait, what happens to the economy, to employment, to consumption?  In addition, even if banks can start lending again, it is not clear that borrowers will want the money.  Japan experienced this problem.

How about other risks?  We are printing money.  What does this mean for our currency?  For inflation?  The Government’s financial condition is deteriorating at a staggering rate.  This could pose significant risk to growth trajectories for a generation.  Further, the current financial crisis is not the only major problem that we are facing.  The cost of this bailout may limit our ability to address other problems.  As is well known, the Social Security/Medicare/Medicaid System is in trouble.  Now, there is talk that the FDIC is in a $400 billion bind.  The PBGC, guarantor of many pension plans, is deeply in debt.  As became apparent last year when a bridge collapsed in Minnesota, we have under-invested in plant and equipment for a generation.  At the time, Senator Dodd estimated the rebuilding cost to be $1 trillion to $2 trillion.  Can we afford this?  The longer we delay, the higher the cost. 

In many ways, this country has been under-investing in technology.  Energy is a great example.  Often, Government is a necessary participant.  Without investment, we become less competitive, less productive.  In general, the private sector needs capital to grow and thrive.  The Government’s demand for money may crowd out the private sector.  At the very least, it will make the cost of money more expensive for years to come.  This has negative effects on growth, income, prices, deficits.  Private savings become more vulnerable.  The real value of assets will rise far more slowly.

In essence, by focusing our resources on the financial crisis, we are focusing our resources on all of these problems, and probably many others.  Unfortunately we are not focusing our attention.  We ought to consider this now.  If not, the Law of Unanticipated Consequences will surely apply. Unfortunately, so will the Law of Unintended Consequences.  Let us hope, that it does not bring Murphy’ Law into play.


October 15, 2008 - Posted by | Economics, Finance, General Interest, Markets, Politics

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