05 Feb 2010

Two Cheers for the Wall Street Journal

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Whenever I see a particularly anti-capitalist Wall Street Journal op ed or editorial I complain, since “they ought to know better.” So I should give positive reinforcement when they get it right. Thursday’s paper contained two op eds that surprised me in how much they differed from the typical debates.

First was Michael Barone’s piece titled “A Short History of American Populism.” The cartoon accompanying the article featured a wistful Barack Obama looking at a bust of Andrew Jackson. I looked at the bio and saw Barone was a fellow at AEI. The title, cartoon, and bio all together made me think, “Oh great, let me guess, this guy’s gonna complain about Obama taking on the banks, and then say Andrew Jackson exhibited the same hostility to commerce when he shut down the central bank.”

But no, I was dead wrong. Barone’s point was that Obama’s populust rhetoric is not like the righteous Jacksonian movement:

So it is with populism. Ask anyone reasonably well versed in American history to name our most populist-minded president, and you’ll likely hear the name of Andrew Jackson. He was the son of Scots-Irish immigrants, raised on the frontier, and he ran the first democratic (and Democratic) campaign. A gang of Jackson’s roughneck supporters, so the legend goes, rushed to the White House after his inauguration and tore the place apart.

But Jackson was not a “spread the wealth” populist. On the contrary, he opposed the American System of John Quincy Adams and Henry Clay to have the government build roads and canals and other public works. He killed the central bank and paid off the national debt.

Jackson argued that government interference in the economy would inevitably favor the well-entrenched and well-connected. It would take money away from the little people and give it to the elites.

That view seems to be shared today in what I have called the Jacksonian belt, the broad swath of America settled by the Scots-Irish from the Appalachian chains in Virginia southwest to Texas. The Obama administration argues that Democratic big government and health-care programs will help the little guys. Jacksonians today, as in the 1830s, don’t agree.

Jackson’s arguments were not ill-founded. The Republican Party that fought and won the Civil War sponsored aid for railroads and favored corporations—and got caught up in messy scandals.

Then below Barone’s piece we have Andy Kessler’s call for Bernanke to eliminate fractional reserve banking! An excerpt:

To sum up, the Fed creates a monetary base and the banks can create $10 for every $1 of monetary base. Wall Street firms created $20 for every Fed $1. In other words, the Fed only seeds the market. Beyond crude instruments like interest-rate policy, it has little control over how much actual money supply exists. In good times banks lend too much. And in bad times, such as today, they don’t create enough money because they lend too little.

Perhaps the lesson Mr. Bernanke drew from 2008-09 is not that we need more regulation but that financial firms should not be allowed to generate money out of thin air to write soon-to-be-bad loans. To seal his legacy, it is fractional reserve banking that he can rein in. Limit leverage and you take away the hot air from these bubbles.

Free marketers blanch at the idea of more regulation. But banking isn’t a normal market. Banks create money when it did not previously exist. We’ve built a regulatory structure around this sleight-of-hand and each time are astonished that banks still fail. I doubt we will ever get to no leverage, a dollar loan backed by a dollar of capital, but I think Mr. Bernanke could be headed in that direction. One potential target is a 5 to 1 leverage limit—he could increase reserve requirements by 1% per year until it hits 20% by 2020. With credit dear, perhaps banks will do a better job of deciding what is a “sure thing.”

Don’t get me wrong, it’s not as if these were articles by Tom DiLorenzo and Tom Woods. But c’mon, that’s not too shabby.

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