Near the end of nearly every bear market and banking crisis in modern times typically comes what might be called the "scapegoat phase" — a grueling, seemingly endless, multi-month period of further bearishness due not so much to worsening, underlying fundamentals, but to business-bashing, populism, demagoguery, Congressional show trials, and legislative-regulatory uncertainty. In this rather ugly phase, public attention is deflected away from the real perpetrators and toward those who either didn't cause the crisis or are its victims. This sheltering of the guilty is achieved by blaming and punishing the innocent. We're now going through just such a phase – all ginned up, due to the election.
Consider just some of the bearish injustices we've seen lately. American taxpayers, 95% of whom pay their debts on time, have been forced to finance more than $1-trillion to bail out the fraction of those people and firms that are deadbeats, whether on Main Street or Wall Street. We've seen protections (and $200-billion of taxpayer funds) afforded to Fannie Mae and Freddie Mac, those corrupt, mismanaged and insolvent quasi-state mortgage entities that now control 60% of the U.S. residential mortgage market. We've watched healthy banks with minimal exposure to the sub-prime loan debacle compelled to take "equity injections" from the U.S. Treasury and, in turn, forced to freeze their dividend levels and restrict the compensation of their top performers, thereby curbing incentives to continue performing well. We've witnessed politicians like Sen. Christopher Dodd (D-CT) and Rep. Barney Frank (D-MA) getting away scot-free, while raking in millions of dollars in campaign funds, as heads of powerful committees that enacted the very laws which authorized the bureaucrats to perpetrate this credit-housing mess in the first place.
Worst of all, we've seen ex-Fed Chairman Alan Greenspan claiming recently, before a Congressional committee dominated by anti-capitalist Democrats, that the real culprit is the ideology of free-market capitalism — as if that's the system he endorses or the one we've actually experienced in America in recent decades. The left is absolutely gleeful to hear Greenspan's lies. They must hope, of course, that no one recalls that it was Greenspan who directed the U.S. central bank for eighteen years and in doing so vastly underperformed the period when the Fed was guided by a simple gold standard. Greenspan is no free-marketer – and the lefties know it. Central banking based on fiat paper money is nothing but central planning applied to money and banking; in practical terms, it has failed miserably, just as government central planning has always failed generally. Greenspan was a central planner, not an advocate (or implementer) of free-market capitalism; he has no business blaming our financial troubles on "self-interest," "capitalism" or "deregulation." His accusations are typical of the scapegoat phase, as he deflects attention from his own culpability.
Of course, Greenspan merely joins his Republican cohorts as the main culprits in this whole mess. The GOP has been in charge of U.S. public policy for six of the past eight years; they alone were the ones who made possible the latest push for socialist finance in America. It was GOP Congressman Spencer Bachus (R-AL), not House Speaker Nancy Pelosi (D-CA) or Senate Leader Harry Reid (D-NV), who insisted that the bailout package include what have become mandatory government "equity stakes" in the banks. The Bush Republicans came to Washington as social conservatives, and not at all paradoxically, will be leaving it as conservative socialists. Theirs has been a faith-based government.
These GOP traitors to capitalism have aped the Social Democrat playbook: if it moves, tax it; if it keeps moving, regulate it; if it stops moving, subsidize it; and if it dies, nationalize it. After eight years of this, no wonder the GOP faithful are disillusioned. In the current campaign the GOP warns voters to be very afraid of those potentially big-taxing, big-spending, control freaks and socialists now lurking in the Obama camp – i.e., to be afraid of what the GOP has actually been doing already to the electorate.
Whether it's an innocent bank or an innocent system, like capitalism, the blame today is wholly misplaced. No two sectors of the U.S. economy are more manipulated by government, via subsidies and regulations, than housing and banking. What does the "F" stand for in all the entities embroiled in this mess – in "Fannie Mae," "Freddie Mac," the "Fed," FHA, the FDIC, etc.? In all cases the "F" stands for federal – which means the federal government – more particularly, the federal government of the United States. All these "Fs" deserve a grade of "F." This is without question a failure of government, not of free markets or capitalism. But instead of attributing housing and banking troubles to government, the anti-capitalists – and even those in the GOP who should know better – are attributing them to whatever vestiges of freedom still remain in each sector. Both candidates today decry the allegedly evil "greed" of Wall Street and so-called "laissez-faire" policies of Bush et al.
This recurring pattern — the "scapegoat phase" of bearish markets — has been visible for decades in the U.S., because the main culprit in our economic-financial crises has been the government.[1] First, government manipulates markets (via subsidies and regulations) until they become dysfunctional; next, the government blames market-makers for the losses and pain resulting from hamstrung markets; finally, instead of repealing the initial manipulations, government launches inquisitions, imposes fines, threatens litigation and enacts still more laws, subsidies and regulations, further roiling markets.
In the last (scapegoat) phase of this process, government essentially adds insult to injury. This phase is necessarily bearish because, however successful the real perpetrators may be in evading blame or protecting their incumbency, rational market-makers know all too well who's really to blame, that to scapegoat is to punish the innocent and evade true reform, and that more of the same old poisons (government manipulations) cannot possibly revive markets already suffering from prior poisonings.
[1] Richard M. Salsman, "Bankers as Scapegoats for Government-Created Banking Crises in U.S. History," Chapter Four in Lawrence H. White, editor, The Crisis in American Banking (New York University Press, 1993), pp. 81-118.
