Saturday, September 10, 2011

The Restoration of Confidence

The restoration of confidence—based on just plain common sense—requires a clear diagnosis of what went wrong, a plan to implement corrections, and then a disciplined working of the plan. What doesn’t work is treating symptoms. And letting nature solve the problem is, in effect, to abdicate.

In our present situation the causes of our crisis are (1) failure to regulate the financial system so that a mortgage bubble could arise; (2) globalization which drained jobs from the domestic economy while flooding it with cheap goods; and (3) fighting expensive wars overseas while cutting the taxes that should have paid for them. Have I left out something basic? I don’t think so. There are all kinds of bad theories behind the wrong-headed decisions, but that’s another story. The worst of these is giving market forces free rein in the belief that they will invariably produce optimal results. Markets must be regulated—much as farmland must be cultivated to yield crops. Nature will not do it left to its own devices.

If we heard this diagnosis from the highest levels—and necessary changes proposed to correct the wrongs as soon as ever practicable—confidence would then return because all of these things are self-evident, common sense, and the public would immediately sense some comfort.

The solutions are very drastic regulation of the finance sector. This would include limiting speculation, prohibiting computer trading and all kinds of derivatives markets, mandating high reserve retentions in every kind of banking and insurance, including investment banking. The solutions are protecting domestic employment by consistently and rationally-framed tariffs. By “rationally-framed” I mean that goods or services imported from overseas should cost, after the tariff, the same as those manufactured or provided domestically. We need to raise taxes, and such tariffs would help. The solutions are to increase taxes so that what government spends it also pays for by current levels of taxation.

Now, having spelled it out, I’ve also made the difficulties clearly visible. Is such a program possible? Functionally? Yes. Will it take time? Yes. Will it be difficult? Yes. Will it mean withdrawing from various international compacts? To be sure. What it would require is vast public support—because it would be painful, here and there—but largely for the financially swollen fifth quintile of the population only.

Until I hear something like this articulated forthrightly by some credible segment of our leadership, the crisis of confidence will not be solved. It might eventually seep away as nature takes its course. But in the aftermath a much larger percentage of the population will have sunk beneath what we are still happily calling the middle class.

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