28 Feb It’s Not as Bad as You Think
My ongoing series reviewing the major books written on the economic crisis of 2008 has hit an important stride. Some pivotal books on the subject have been released, or are nearing release, and I think more of the mechanical causes of the crisis are finally being discussed. Former Treasury Secretary, Hank Paulson, has written On the Brink, and I will have the book completed and reviewed in the next day or two. Michael Lewis, the most highly acclaimed writer to address this topic so far, releases his work this week (and expectations are high, at least for this reviewer). But the subject of my review today, Brian Wesbury’s It’s Not as Bad as You Think: Why Capitalism Trumps Fear and the Economy Will Thrive also belongs in the list of the truly important books to come out on the subject. This book is deeply ideological, has already proven to be prescient beyond belief, and most significantly, contains a larger perspective on the future of our economy that many other books have not concerned themselves with at all.
Wesbury is an important voice in the national conversation about the economic crisis of 2008. Unlike media talking heads, op-ed pundits, politicians, and most self-identified “authors”, Wesbury actually runs money, which means he has skin in this game as it pertains to identifying what took place in 2008 and where things will go from here. That is not to say that the cadre of authors who have written about the crisis thus far are less credible; it is just to say that there are more impactful consequences for Wesbury if he gets something wrong than there is for most authors.
The book’s underlying theses are: (1) The government, not the free market, deserves the lion’s share of the blame for the crisis of 2008; (2) The free market, not the government, will play the major role in the economic rebound we are going to experience; and (3) It is a shame people on the right and the left do not better understand and apply both points #1 and #2.
My study of the 2008 crisis led me to agree with thesis #1 some time ago. At this point it is an incontestable conclusion for anyone doing more than a superficial glance at the events that led up to the crisis. Wesbury, though, takes a different approach than other conservative authors. Thomas Sowell rightly blames Uncle Sam for the insidious use of national housing policy to carve a social agenda. John Taylor, William Fleckenstein, Thomas Woods, and others have gone after different aspects of easy monetary policy for its role in the debacle (and all with complete legitimacy to their case). But what Wesbury focuses on more particularly (though he also joins Sowell in his harsh critique of the national housing policy which foolishly intoxicated Republican and Democratic leadership in our country the past couple of decades) is the utter disaster that was “mark-to-market” accounting.
The role that mark-to-market (MTM) accounting requirements played in exasperating the crisis of 2008 is a somewhat technical subject, but it is not as complicated as it sometimes sound. Neither Wesbury nor this reviewer are claiming that accounting requirements were at the root of the initial problem. What Wesbury does persuasively is demonstrate that what was a classic recessionary bubble burst turned into an utter financial crisis because of an accounting requirement that served no good purpose whatsoever. Defenders of the system make valid points in warning against some of the alternatives to MTM accounting, but Wesbury disects them one by one and the end result is a compelling case for what Steve Forbes began preaching before this crisis began: Forcing a company to value an asset based on what it is worth to a low-ball buyer instead of what it is legitimately worth to the holder of it is ludicrous. Fully-performing mortgage-backed securities without a single default in the portfolio were being marked down to 70 cents on the dollar (or worse), creating a snowball effect in financial institutions’ needs for regulatory capital, and ultimately leading to the massive injections of capital that we now know as TARP. Wesbury does not, to my knowledge, actually suggest that no insolvencies were going to come out of this bubble burst without MTM accounting (and if he does, he would simply be wrong). His major contention, though, is that much of the systemic financial panic, and particularly the “trickle-out” effect of companies that actually had ample capital reserves and positive cash flow, was caused by requirements that forced them to move assets onto their balance sheet at distressed prices that never came close to matching reality. His example of a house two miles away from a fire being forced to be marked down to what someone would pay for it right then and there is extremely helpful. What could have been (and should have been) a painful (but not unprecedented) exercise in creative destruction (firms who made irreparable financial decisions being shed at the chopping block) morphed into a global credit crisis of write-downs and panic equity raises. Inadequate capital existed, but the death of the system was hardly a foregone conclusion until MTM accounting reared its ugly head. Wesbury blames much of the problem on the post-Enron culture we created wherein accountants, afraid of being executed ala Arthur Anderson, were held criminally liable for outcomes, but with no responsibility in the results (in other words, they did not impact the business activities at all, but did have criminal liability for the accounting of the activities). Financial institutions playing cute with their financial messes was and is a big problem, but MTM was an over-reach of massive proportions. Wesbury’s chapters on this subject are worth the price of the book.
The overall point of the book goes far beyond what I have chosen to highlight above. He laments the pessimism of those who believe that economic growth is determined merely by consumption. He demonstrates empirically that in a full century of government policies that could best be defined as “all over the map”, 80 out of 100 years (and 45 of the last 50) contained real economic growth. As he puts it, capitalism trumps policy. Some of the most ardent proponents of capitalism have forgotten this, or do not know what it means. Wesbury is highly critical of the present administration’s attempts to reignite unionization efforts, to spend the national treasury into oblivion, and to nationalize the auto industry, banking system, health care industry, and even emissions of carbon into the environment. Wesbury does not argue that the agenda of the present administration is benign; he argues, rather, that the vast majority of it is going to fail, and that even where it is successful in doing harm, the harm will not be fatal. He argues from the clear weight of history that free markets and technological innovations have overcome burdensome government policy since the beginning of the industrial revolution. Wesbury is a faith-based, supply-side economist, which means he is innately an optimist. And there is no even decent economic mind who is not, first and foremost, an optimist. I will not explain all this in a brief book review, but it is a foundational reality that Wesbury understands.
A reading of Wesbury’s 200-page book will give you a much fuller understanding of what caused the crisis of 2008. It will decimate the left’s claim that the crisis proves the inadequacy of the free market system. It will give you much more color as to what really transpired, and what is likely to transpire in the decades to come. Like Wesbury, I am excited to live in the era I live in. I sure wish Uncle Sam would get out of the way to make this an even more enjoyable experience. But regardless, Wesbury knows that the history of free-market capitalism is a huge testimony to its ability to improve the quality of life for those who live in it. The taking down of this system did not take place when the leverage/credit/housing bubble of 2008 burst. And the taking down of this system will not take place under the brief reign of a Euro-radical President either.