Contrary to Too Big to Fail

The following quote is from John Tamny in Real Clear Markets. Dr. Thurow, who is quoted, spent a day with one of my senior year undergraduate macroeconomics classes and I have been a 'fan' of his ever since.

MIT economist Lester Thurow once observed that, “One man’s security [protection] is another man’s lack of opportunity.” Thurow’s words take on greater relevance today given the seeming reluctance on the part of Treasury secretary Tim Geithner and other administration officials to let banks pay back the protective loans foisted upon them through TARP....

...within capitalist economies new substitutes regularly reveal themselves such that industries as we define them regularly take new shapes. Schumpeter was writing about the retail sector, but as he observed, “the competition that matters arises not from additional shops of the same type, but from the department store, the chain store, the mail-order house and the supermarket which are bound to destroy those pyramids sooner or later.”

Indeed, Blockbuster Video was not crushed by a like competitor along the lines of Movie Gallery, but instead by Netflix. When we consider finance, for years retailer Wal-Mart has been panting to get into banking only to be thwarted by many of the same banks presently on life support. Quicken began as a company peddling personal finance software, and ETrade low-cost stock trades, but now both are very much in the loan business. Most in the U.S. think of British retailer Tesco as a retail behemoth, but its lending arm is growing by leaps and bounds.

Looked at from the perspective of banks, it’s quite simply not true that finance would have dried up had one or many big U.S. banks failed. Instead, and as Thurow made clear, their failure would have created an opportunity for substitutes to fill in where their predecessors failed. So while it’s seemingly settled “logic” on both sides of the political aisle that we must empower to an even greater degree the very regulators who proved so unequal to the crises before us, and that occurred on their watch, it seems the better answer is less regulation so that well-run companies inside and outside the financial sector can do what gasping banks could not.

Thurow concluded long ago that “demands for protection” arise due to the abandonment of “belief in the virtues of a competitive, unplanned economy.” His words describe today’s economic environment very well, and as long our federal minders keep offering us false security, the alleged economic recovery will be stillborn thanks to a bipartisan lurch away from the very competitive economic principles that made us so prosperous to begin with.

The above passage perhaps applies even more aptly to the automotive sector as great substitutes currently exist without lingering union problems nor closed plant locations with environmental clean-up legacies. And these substitutes have US plants employing large numbers of US workers. Consumers have already proven the demand for Mercedes from Alabama, BMW's from SC and Honda's and Toyota's from the mid-west. It also troubles me that the US Government is giving financial support to the "big three" (of which two of the three should have filed for bankruptcy already) and not support to the domestic producers with 'foreign' ownership. Is that fair, I ask rhetorically? Did not the Honda Prius represent what the US government wants US citizens to drive?

No doubt the huge support of labor unions for the Democrat party has influenced the decisions of the executive and legislative branches. Perhaps what is too big to fail is political support not certain formerly private companies.

Gitmo, Bagram and Obama

President Obama, contrary to the vocal left, is beginning to deal with the real world. Cheney has called for a declassification of memos detailing what was derived from the treatment (not torture) of a few people who have admitted and been proud of 9-11. According to Cheney (see here) other attacks were prevented due to the information. Bill McGurn in today's WSJ:

In an impassioned 2006 speech on the Senate floor on the right to habeas corpus, Mr. Obama declared, "I do not want to hear that this is a new world and we face a new kind of enemy." During the campaign, his language implied that all we needed to settle the detainee issue once and for all was to shut down Gitmo.

As president, he is finding out that this very much is a new world, that we do face a new enemy, and that the problems posed by Guantanamo have less to do with the place than the people we detain there.

Put simply, the U.S. needs the ability to detain people we know to be dangerous without the evidence that might stand up in a federal criminal court. Because we can't say when this war will end, moreover, we also need to be able to detain them indefinitely. This is what makes the war on terror different, and why our policies will never fit neatly into a legal approach that is either purely criminal or purely military.

The good news is that Mr. Obama is smart enough to know that the relative obscurity of Bagram, not to mention the approval he has received on Guantanamo, enables him to do the right thing here without, as Mr. Greenwald notes, worrying too much that he will be called to account for a substantive about-face.

The bad news is that we seem to have reached the point where our best hope for sensible war policy now depends largely on presidential cynicism.

Thoughts on My Return

I have been away from posting for about four weeks but now I am re-energized and ready to go again. I had to travel and I dealt with some family health issues - I still managed to read even more than usual and I had a great deal of time to think which surprisingly none of us seem to take the time to do anymore as we should.

I think getting away gave me me time to calm down from the rhetoric we hear and read so much of everyday and to get a better grip on the drivers behind the opinions, false statements and deluded lies so frequent in our discourse. I am also incredibly amused at how we "modern" Americans like to believe that past Americans, particularly our Founding Fathers (and Mothers, no pun intended) as well as our past Presidents and legendary political leaders, were more civil and less prone to mistakes and blunders than we are today. That certainly is not the case. I am also amused at all the issues over which we are said today to be in a "constitutional crisis" when the constitutional crisises of the past were much more serious and absolute threats to the Constitution and the Bill of Rights than anything we see today.

One real Constitutional crisis of our early days was the passage of the Alien Friends Act and the Sedition Act which resulted in the deportation or arrest of journalists, leaders of political parties and even members of Congress. From the excellent book "Union 1812: The Americans Who Fought the Second War of Independence" by A. J. Langguth (not on the web):

To Madison and Jefferson, the [Sedition] act was clearly designed to silence the press and intimidate Republican leaders through the elections of 1798 and 1800.

Prominent examples of arrests under the act included John Daly Burk, a Republican editor of the New York Time Price and Congressman Matthew Lyon (R - Vermont). Here is A.J. Langguth again:

Lyon had accused [President] Adams of avarice and a lust for power and adulation. During the [U.S. House] debate, he further outraged Federalists by spitting in the face of an opponent. Lyon was convicted of sedition, fined one thousand dollars, and sentenced to serve four months in an unheated jail cell usually occupied by runaway slaves.

[See note below.]

Other egregious examples of a real Constitutional crisis in our history would have to include Lincoln's treatment of the Constitution during the Civil War (which I think was justified) especially the suspension of habeas corpus as President Lincoln pleased and Roosevelt's internment policies of Japanese Americans during World War II.

Wonder what our current press geniuses would think about those days? Wire tapping a foreign originated telephone call under FISA might not seem such a big deal compared the past reality of going to jail for writing bad things about the President.

Special thanks to those who missed me.

***************
Note: A $1000 fine in 1800 using a basis of the unskilled wage rate calculates to be in today's dollars approximately $266,300.