You have a friend. He is a parent. He obviously loves his kids. It is equally clear that he firmly believes his children can do no wrong. It looks to you as though serious problems are soon to arise. You say nothing because you know that your friend will not listen to anyone who might suggest that his children could have problems. Time passes and some of his kids have gotten into very serious trouble. Your friend minimizes the problems that are popping up. It is only when they have reached a crisis stage that he steps in. You must face the fact that your friend is a bad parent.
Your country has leaders who love their country. Listening to them it is clear that they firmly believe that businesses can do no wrong. It looks to you and others as though serious problems are soon to arise. You know that your leaders will not listen to anyone who might suggest that businesses (that are, after all, managed by rational intelligent people whose fortunes and reputations are at stake) could have problems. Time passes and some businesses have gotten into very serious trouble. You and others see your leaders minimizing these problems. It is only when they have reached a crisis stage that they step in. You must face the fact that your leaders are inept.
My point is that bad governance is much like bad parenting and good governance is much like good parenting. As a thoughtful parent you assume that your children will behave. At the same time you nonetheless carefully monitor their behavior and stand ready to step in sooner rather than later when difficulties arise. Business people are fond of saying that all that they want from government is to be left alone, much like many teenagers might wish their parents did not treat them like they were still children. But just like the supposedly adult teenager runs to Mom and Dad once they have run out of money or are stranded along the road because they forgot, yet again, to buy gas; businesses rush to government for help when crises emerge.
It isn't wrong that a parent helps in times of crisis. What is wrong is a parent refusing to recognize that the problems they must deal with would not be nearly as great and that both they and their kids would be happier and better off if they had simply kept a closer eye on what was going on. What is wrong is the refusal to recognize that one's children do need to be watched and do need to be disciplined. It isn't government stepping in to help in times of crisis that is the problem. It is the refusal of those in power to recognize that the problems they must deal with would not be nearly as great and that we would all be happier and better off if they had simply kept a closer eye on what was going on that is the problem. It is the refusal to recognize that business, especially financial concerns, need to be watched and need to be disciplined that it the problem. Unfortunately, the business community is populated by mature and intelligent people who collectively act like children. Bizarre and ill-conceived ideas like bond insurance (credit default swaps) or making relatively riskier investments in an increasingly competitve environment with wholely inadequate reserves have a way as sounding as sensible as tearing down the highway at 100 mph in your Mom's car or racking $200 in text messages on your cell phone does to all too many teenagers.
Following, among others, the late Arizona Senator, Barry Goldwater, conservatives are fond of saying the government that governs least is the one that governs best (although religious conservative tellingly leave out the second part of what Senator McCain's mentor quickly added to this: " and stays out of the imposible task of legislating morality")* what would you think of someone who told you that they firmly felt that the parent who parents least is the parent who parents best? The odds are quite high that the only intelligent thoughtful human being who would say such a thing would be a teenager. As an economist, I can explain in detail how, under the right circumstances, free and unfettered markets can yield better results than those produced by well meaning but inept government intervention. What is too often overlooked is just how idealized the right circumstances are. Especially relevant in the financial sphere is the need for the uncertainty we face to be only uncertain in the sense of rolling a six or getting heads. The great sin economists have committed is therefore a sin of omisson. We have failed to draw attention to that fact that in practice the uncertainty we face is of a mch more profound nature. By not emphasizing this, and the potential it creates for episodes like this past week, we become family counselors describing how children can theoretically grow and prosper without parents doing much more than paying the bills and keeping the car filled with gas. The kids (i.e. businesses) love us and everyone else, justifiably thinks we're awfully far off base.
Children need parental regulation just like markets need regulation. Government is a necessary evil but least does not mean zero. Nor does it necessarily mean, and this is a key thing to remember, that the oversight required is small. Just as in families there are parents who are too actively involved in their children's affairs, who are too ready to step in the second that problems arise or who are too domineering or just plain foolish there are examples of government intervention, regulation, and management of economic affairs that exhibit such traits too. Like good parenting, good governance is difficult. But simply because there is such a tremendous potential to fail does not in the slightest give us an excuse not to try.
When Sentor Obama this week pointed to the current crisis as providing the final verdict on the validity of the economic philosophy that has driven the economic policy (the philosophy that business can do no wrong and that the fundamentals are to be assumed sound until it is apparent to almost everyone else that they are not) of the current administration for the last eight years he was right. And when Sentor Obama says that Senator McCain is obviously not to blame in any meaningful way for the current crisis ( in humbler times, Senator McCain has freely noted that economic and financial policy is not his forte) he is of course correct. Most importantly, when Senator Obama notes that what is the root of our current difficulties is the economic philosophy that Senator McCain (at least until November 4th) claims to subscribe to, he was right as well.
On Thursday , Senator McCain has made a statement that was quite revealing. While viewing the damage left by flooding this summer in Cedar Rapids, Iowa he remarked that this is where he sees government playing a role, to step in, in the wake of disaster, to help people pick up the pieces. Viewing this as the sole role of government, to step in after disasters have occured begs the question about what government might do to minimize the likelihood of disasters in the first place. In the case of this summer's floods in Iowa, one might counter that floods are an act of God. However the significant loss of wetlands; to farming, to business development, and to new home construction over the years has led to a significant increase in the frequency and the severity of flooding in the midwest (see Postel, 2008). Just as the neglect of the more difficult to monitor and seemingly antibusiness prevention of the loss of wetlands might help control the severity and therefore the cost of floods when they do occur "needless government meddling" in financial markets (perhaps some time after Warren Buffet in 2002/2003 told us all that derivatives were financial WMDs and it was apparent that no one was really listening) might have helped control the severity and therefore the cost of this week's financial crisis.
*Government that governs least is a somewhat loose paraphrase of Thomas Paine's "Government, even in its best state, is but a necessary evil; in its worst state, an intolerable one."
