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DAVID KRUSE

By Staff | Jan 16, 2010

Half of Americans think that the government is doing too much and the other half thinks the government should be doing more to solve the problems of the day.

No doubt that government became much more pervasive in the financial affairs of the country, but has done so because the private sector failed and threatened to tank the economy prompting intervention.

The government didn’t set the fire. The public animosity that appears to exist toward the Federal government seems to believe that it did.

One could argue that it could have done more towards fire prevention, but that is exactly the kind of government intervention that anti-government ideologues don’t like. They don’t want regulation, yet they don’t want the government cleaning up the mess that deregulation caused.

It was that de-regulation coupled with accommodating monetary policy that produced the housing bubble that resulted in the sub-prime mortgage fiasco.

Theodore Roosevelt believed in government policing business and finances. He believed that the human nature of greed and personal self-interest needed to be buffered by a government working on the behalf of the people.

The specter of a colossal global economic collapse doesn’t appear to impress many ideologues who oppose all government intervention despite the destruction caused.

They appear to underestimate the difficulty of putting Humpty Dumpty back together if allowed to smash in a complete fall.

The U.S. Treasury and the Fed make great backstops for criticism. Systemic risk occurs when the losses resulting from the greed of leaders of finance and excesses of failed speculation fall upon the general public.

Banks were de-regulated so that they could invest in mortgage securities and what did they do? They financed a huge speculative bubble, betting depositors’ money on securities that if profitable, paid them enormous bonuses.

If given another opportunity, will banks do better? Not a chance. The names and speculation will evolve, but they will make the same mistakes over and over because they can. If only they suffered from the financial fallout they create, few would care, but they wouldn’t take the whole system down injuring innocent bystanders with the collateral damage of the boom and bust cycle they fuel.

In other words, unregulated capitalization doesn’t work. Those critical of the government screwing up everything should take note that the economic calamity produced today came about from massive losses from excesses in the private sector.

Government involvement is necessary because of failures of the private sector. The result can be one of two things. Government makes it better or government makes it worse.

Ideologues that oppose regulation and government involvement in fire prevention also opposed sending the government’s fire truck to put out the fires despite the threat of them engulfing the economy in an inferno.

The economic recovery of 2009 was the best recovery $2 trillion in a myriad of government incentives and bailouts could buy. Dissected into all its many parts, many bailouts were wasteful, ineffective and rewarded fiscal irresponsibility.

Yet without the government intervention, we would have surely suffered a global economic collapse that would have made the “Great Depression” look like child’s play.

The alternative was a global meltdown and economic, political and social chaos. The government intervention may have only delayed the inevitable.

The story isn’t over yet. There will be plenty of opportunity for financial calamity to befall us. The debt accumulated is gargantuan. The liquidity infused by the Fed into the financial system is enormous and the risk as Congress tackles the re-regulation of the financial system looms threatening. Harvard economist Kenneth Rogoff, an expert on financial crisis noted the concern, “Even if the government withdraws, business will expect bailouts in the next crisis, and that will inspire another round of cavalier risk-taking. If we don’t re-regulate the banking system properly, we’ll either get very slow growth from over-regulation, or another financial crisis in just 10 to 15 years.”

Today, while most Americans are split over whether government is doing too much or too little, there is a consensus that the country is on the wrong track. Government is not replacing the private sector despite the crisis intervention and I don’t believe the government will supplant the private sector in the future.

However, without government intervention now, the private sector was incapable of sustaining itself without the support. The private sector ran the economy off the tracks but no one wants to see the government run the railroad.

The private sector fiasco was of such colossal size and scale the government rescue had to be of comparable size in order to be effective. Many vent misplaced anger at the government, but, too, much government didn’t cause the accident, unless you blame the government for dereliction of duty policing capitalism.

President Obama has been handed the most complicated set of weighing problems ever thrust upon a U.S. chief executive. Ideology won’t solve any of the problems faced.

It just makes solutions more difficult.

2009 ended much better than most thought possible earlier in the year. 2010 will be an unpredictable year.

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

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