I am a great admirer of President-elect Barack Obama. He ran an intelligent campaign with elegance and equanimity. His historic victory marks an important milestone in our nation's history. He has renewed my conviction that the future belongs to those who believe in the beauty of their dreams. Intriguing and inspiring to many Americans, Obama will take office in January and will inherit from his successor two wars, a damaged international reputation and an economy on the brink of recession. It is my hope that Democratic majorities in Congress will not tempt Obama into becoming an ideological left-wing president. In approaching the economic crisis in particular, Obama must retain the centrist image he cultivated in his campaign rather than mount an attack on economic liberty and capitalism. However, Obama's recent proposal to extend federal aid to the automotive industry represents a troubling new direction.
Obama and Congressional Democrats recently asked President Bush to extend the $700 billion bailout fund to the automotive giant General Motors, which may not survive the year. However, a bailout for an industry in which our nation no longer has a comparative advantage would hurt our productive efficiency. Rather than wasting public funds in a failing industry, the government should invest in safety nets for the unemployed. While free trade does result in the failure of certain industries and the loss of jobs, those industries in a country that have a comparative advantage flourish and create new jobs. Ultimately, the consumer comes out as the winner and is able to purchase more affordable and reliable goods.
For many people, deregulation has become the prime suspect in the crime of the economic crash. Since the fall in 2008, governments across the world have been forced to step in to rescue banking systems and the markets. Financial firms have been forced to accept rescue and part-ownership by the state. In addition to partial nationalization, the price of this bailout will likely be stricter regulation of the financial industry. Obama has argued that increased government deregulation underlies the current credit crunch. However, the idea that markets have never been unregulated is a myth - just ask any organization that has ever had to deal with the Securities Exchange Commission (SEC).
Finance requires regulation ?- the financial sector has always been prone to crashes and bubbles. However, the failure of the financial industry cannot be blamed on deregulation alone. The mortgage market is, in fact, one of the most regulated financial sectors: controlled by two government-run agencies - Fannie Mae and Freddie Mac - and guided by congressional schemes to increase homeownership. Instead, the economic crisis has most likely stemmed from a loose monetary policy pursued by the Federal Reserve - which ignored the housing bubble and kept short term interests rates too low for too long.
Still, many are saying that capitalism and laissez-faire are finished. Signs point to a larger role for the state in the private sector. This direction, however, would be highly detrimental to society. Capitalism has benefited billions of people; regions of the world in which it is absent have suffered. The lowering of barriers to private entrepreneurship has given wealth and freedom to hundreds of millions of people who were stuck in poverty. Thus, the current crisis should instead be viewed as an opportunity to learn how to better manage capitalism, not to end it.
The prevention of banking crises by intervening with public capital to keep credit flowing is a paradoxical but pragmatic part of capitalism. Confidence and credit are needed to stave off recession and prevent a depression. However, a government bailout creates a large moral hazard - it represents a highly visible safety net, which encourages risky behavior and politicizes lending.
History has shown that the market always corrects itself. Liberalization and deregulation have given voters what they need most, particularly cheap loans. These loans drive financial innovation. Bankers and traders have thus always been one step ahead of regulators. Liberalization has contributed to growth by making it easier for families and businesses to obtain credit. And while it is certainly not the only reason behind the increased standards of living across the world, liberalization has been more beneficial than harmful. A more regulated world would be much less benign.
