Government never seems to learn

I was reading the newspaper regarding the county commissioners receiving a full-time benefits package, the mayor in Peachtree City wanting more deficit budgeting and the arrogance of local government leaders looking at proposing another Special Purpose Local Option Sales Tax (a.k.a. “significant tax increase”) when they cannot justify the West Fayetteville Bypass they are building now.

By their actions, you would think we are in the midst of an economic boom, instead of the current bust. And we will pay for their inability to forecast and prepare in the coming years.

I read all of the in-depth coverage on our nation’s economic crisis, and anguish over how we never learn from our mistakes. The worst part is the government usually works as the catalyst for many an economic bust by not providing the necessary restraint when events get overheated.

The Panic of 1819 — our first bout of economic free-fall — began with state-chartered banks. In that day, those state banks were allowed to issue their own paper bank notes, and the notes were covered by gold and silver (specie) held within the banks.

Unfortunately, problems arose following a post-War of 1812 development binge, resulting in a market-based overload with banks all too willing to lend far beyond their means. And the worst happened: the British cotton market went bust and our economy collapsed.

There was a run on all of the banks for their limited gold and silver supplies, and paper bank notes, with no backing of specie, became worthless. Credit had been extended to people who could not repay their loans; thus, state banks began foreclosing on property.

Even the state banks were being wiped out when the Second Bank of the United States began calling in the loans it made to the state institutions, demanding specie the banks could not provide.

Merchants and manufacturers were disintegrating. In Philadelphia alone, three-quarters of the workforce lost their jobs. Likewise, New York City had 13,000 paupers wandering the city’s streets.

The Second Bank of the United States was heavily invested in property development in what was then the western United States.

The bank owned, for example, title to half of all property in Cincinnati, foreclosing those mortgages and selling-off land at half its value so as to gain more specie.

People began to complain about the administration of the government. The state governments countered with debtor relief bailout laws even though the U.S. Constitution prohibited impairing the obligation of contracts (Article I, Section 10). The states found ways around the Constitution, and managed to keep lenders from collecting their debts. Some state laws forced lenders to be paid in worthless paper bank notes. The banks, of course, stopped issuing credit.

Non-banking corporations were also troubled and could not repay investors, affording the governments the capacity to take them over. Is this sounding familiar?

Apparently, no one in the Treasury Department or the Federal Reserve studied the Panic of 1819.

It’s truly amazing that even with the miraculous advances in technology, law and economics since 1819, how similar that crisis is to our current catastrophe.

Both show wild speculation in real estate, collapse of real estate markets, excessive borrowing and leveraging, banks failing, large banks stopping issuing credit, prices falling because people have no money, broad economic turmoil and government control of corporations.

Sure, 1819 was a long time ago, but do you remember a hedge fund named Long-Term Capital Management? They suffered crippling losses in the aftermath of the 1998 Russian financial crisis. The fund was founded by some of Wall Street’s top traders and they became outlandish financiers gorging on derivatives and risk, running billions of dollars into the red, losing more than more than $4 billion in less than four months.

The more extensive problem was that Long-Term Capital Management’s debt was interwoven throughout Wall Street. The New York Federal Reserve was able to stop the bleeding by convincing private financiers to cough up a $3.6 billion bailout for the sinking firm.

At the time, investment firms said they had seen the light and resisted calls for federal regulations prohibiting such risky behavior. According to Roger Lowenstein, author of “When Genius Failed: The Rise and Fall of Long-Term Capital Management,” “[Fed Chairman Alan] Greenspan’s answer was, ‘We want more derivatives ... the market can regulate derivatives better than people in Washington.’”

Jim Rickards, who was Long-Term’s general counsel, states, “Not only did we not learn the lessons of Long-Term Capital Management, we did the opposite. It was a very clear warning that was ignored” (politico.com, July 2009).

We have a right to be disgusted when our government officials at every level act as though their current financial difficulties just suddenly fell from the sky. Since 1819, each major economic bust has had similar characteristics. So this begs the question as to why the government fails to act in a reasonable manner, not attempting to predict and avert such catastrophes.

The truth is it’s easier to do nothing and enjoy the boom periods while they last. The people who stand to enrich themselves the most, pressure the government (both parties) to look the other way, saving the black eye for the taxpayers when things unravel.

Let’s now consider the latest warning on uncontrollable federal budget deficits from Morgan Stanley’s chief economist, Richard Berner. He has declared that “America’s long-awaited fiscal train wreck is now under way.”

“Worse, barring aggressive policy actions, deficits and debt will rise even more sharply thereafter as entitlement spending accelerates relative to GDP. Keeping entitlement promises would require unsustainable borrowing, taxes or both, severely testing the credibility of our policies and hurting our long-term ability to finance investment and sustain growth,” Berner adds. “And soaring debt will force up real interest rates, reducing capital and productivity and boosting debt service.”

“Not only will those factors steadily lower our standard of living, but they will imperil economic and financial stability,” (Morgan Stanley’s online 2009 Global Economic Forum).

Berner’s comments make perfect sense to me, so why isn’t the federal government taking evasive action, and why aren’t our local governments taking the serious steps necessary to prepare, instead of milling another SPLOST and creating deficit budgets?

[Steve Brown is the former mayor of Peachtree City. He can be reached at stevebrownptc@ureach.com.]