The following is an edited excerpt from William Robson’s recent presentation to the Manning Networking Conference and Exhibition in Ottawa.
I want to emphasize three themes — transparency and accountability, taking the long view and fair distribution of benefits and burdens — that could have protected us going into the current economic downturn.
How did we get here? Suppose you were the U.S. Congress. You want to help low-income people get houses. You could simply subsidize their down payments. But that would be budgetary spending. You’d have to borrow or raise taxes to cover it. And it would be visible: Troublemakers would be likelier to ask if the spending was working. So, you subsidize borrowing. And to prevent that showing up in the budget, you do it off balance sheet: government-backed enterprises that promote mortgage backed securities.
Now, being Congress, you have also made rules about community reinvestment — rules that force banks to make low-quality loans. Good thing there is a market for mortgage backed securities, so banks can package their dodgy loans with better ones and sell them to somebody else. And that somebody else can slice and dice the mid-quality stuff to create synthetic, apparently investment-grade securities.
If the credit rating agencies begin to make noises about the low quality of some of these things, you could pass a law that threatens them with charges of anti-competitive behaviour if they downgrade — which actually happened in 2006. So the borrowing and lending continued until people were way over their heads.
That is a story of violation of principle number one: There is no transparency and accountability.
So the inevitable happens. Over-extended borrowers can’t pay and synthetic securities are worth less. But no one knows how much less. Banks and other institutions are hurt. But no one knows how badly. Big players need cash. But no one knows how much. An old-fashioned bank panic threatens.
Now, if a banking panic threatens, you have to take the long view. Which brings us to violation number two: no long view. A very major financial institution, Lehman Brothers, was allowed to fail. That triggered a banking panic. And the panic isn’t over. Depending on how the state-backed bank bailouts are handled in Washington and elsewhere, this thing could yet get worse.
I apologize to anyone in the room whose long view does not include state-backed bank bailouts. I understand that reservation on one level, but in a banking crisis, core financial institutions are special. The problem now, though, is we have this queue — automakers, cities, etc. — and it’s getting longer. Everybody wants bailouts. A sort of Stone-Age Keynesianism is in style.
Too few people actually read Keynes. He was a lot smarter than many of his followers. As when he said: “Practical men … are usually the slaves to some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler from a few years back.”
How true. Deficits are all the rage. But it’s not because academic economists suddenly decided that huge borrowing is any more likely now then it ever was to spur the economy. It’s because people are hurting. They’ve lost income, they’ve lost houses, they’ve lost savings and they want to be made whole again. I get that. We all do.
But it’s no good asking Ottawa to help people by robbing the future taxpayer. That violates principle number three. People of different stripes have different views about fairness, but no notion of fairness can accommodate this rush for handouts.
One of the clearest takes on this came in January from two guys who have violated just about every conservative principle there is: Larry Flynt, the publisher of Hustler, and Joe Francis, a maker of hardcore pornographic DVDs.
They demanded a $5-billion bailout for the U.S. porn industry. They wrote to their Congressmen and explained why porn stimulus would help depressed Americans. Francis said in an interview: “The government is handing out money. They’re moving toward a nationalized economy, and Larry and I felt we might as well be a part of it.” He was tongue in cheek — but it sounded serious. Why not? Sauce for the goose, sauce for the gander. This is a song anyone can sing.
Transparency and accountability, determination to take the long view and fair distribution of burdens. Neglect of those principles helped bring the crisis about and threaten to prolong it. Honouring them better can help us get out of it faster and stronger.
William B. P. Robson is President and CEO of Toronto’s C.D. Howe Institute.