They say “all politics is local.” But economic decisions impact the whole economy and reverberate internationally. That is why politicians’ meddling with the economy creates so many disasters.
The time horizon of politics seldom reaches beyond the next election. But, in economics, when an oil company invests in oil explorations today, the oil they eventually find and process may not make its way to market and earn a profit until it is sold as gasoline a decade from now.
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In short, the focus of politicians is extremely limited in both space and time — and all the repercussions that lie beyond those limits carry little, if any, weight in political decisions.
At one time, many state banking laws forbade a bank from having multiple branches. The goal was limited and local — namely, to prevent big, nationally known banks from setting up branches that many locally owned banks could not successfully compete against.
But, limited and local as such state banking laws were, their impact was both national and catastrophic, when thousands of American banks failed during the Great Depression of the 1930s. The vast majority of the banks that failed were in states that had laws against branch banking.
Why? Because, when there is a single bank in a single place, the fate of both its depositors and its borrowers depends on what happens there. If it is a wheat-growing region, a drop in the price of wheat means people deposit less money in the bank at the same time when more borrowers are unable to repay their loans.
Banks caught in that kind of crossfire went under on a scale that shrank the total amount of credit in the country and helped plunge the national economy into depression. In Canada, where banks were free to have branches all across the country, not one bank failed during the same years when thousands of American banks failed — and Canada did not yet have deposit insurance until 1967.
A Canadian bank with branches in all sorts of places across the country — with all sorts of different industry, commerce, and agriculture — had their risks spread, instead of being concentrated, as in the United States. Problems in a place where one branch was located would not collapse the whole bank.
Our own more recent housing boom and bust began when local politicians in various places began severely restricting the building of houses, in the name of “open space,” “smart growth,” or whatever other political slogans were in vogue.
As housing prices skyrocketed in such places as coastal California, both renters and home buyers in these particular places often had to pay half their monthly income just to put a roof over their heads. This in turn led to Washington politicians declaring a need for nationwide laws and policies to create “affordable housing,” even though people in most of the country were paying a lower share of their income for housing than in previous years.
This political crusade for “affordable housing” was at the heart of laws, regulations, and even threats from the Department of Justice, against mortgage lenders who failed to lend to as many low-income and minority borrowers as the politicians wanted them to.
Regardless of the additional problems that occurred as these mortgages were bought by Fannie Mae and Freddie Mac, or were later bundled into securities sold by Wall Street, the fundamental problem was that many people simply stopped making their mortgage payments — as was perfectly predictable when lending standards were forced down by the government.
The politicians and bureaucrats who forced lenders to lower their standards had limited goals in mind — namely affordable housing and more minority home ownership. But the repercussions when the housing markets collapsed spread all across the American economy and led to financial crises overseas, where financial securities based on American mortgages were widely sold.
All politics may be local, but the repercussions reach around the world, and even extend to generations yet unborn, who will be left to cope with the national debts resulting from this debacle.
Quick fixes for the economy now are unlikely to get investors to make job-creating investments, which depend on long-term factors ignored by politicians who are focused on the 2012 elections.
Even with the "no branches" laws, the collapse of a given bank didn't take down the entire financial system. It doesn't seem as though any changes to laws have been made that would prevent that, and now we have to be concerned about foreign banks as well.
The automobile and suburban sprawl have done more to promote prosperity and liberation for the average American than probably anything (the washing machine and refrigerator are up there too). Misery loves company, oh how the urban planners and green authoritarians would love to reel us all back in to urban poverty and have us all under their thumb.
Banks fail because of the fractional reserve system, which is a fraud. A legitimate bank would only lend the shareholders' money, and charge depositers a fee for storing theirs.
Banks. The person holding the money always seek ways to get more than what contracted. Early bankers (blacksmiths) use to shave-off pieces of gold and/or silver from the depositors coffer to keep for themselves. Stealing, in other words.
The depositors entered into contracts that rendered them slaves to bankers. Today, the people are given 40yrs option mortgages. Bankers are salespersons. They sell low-monthly payments at a very high cost. Thanks to politicians now the massive can live in slave-hood for a home while they appreciate high returns by keeping their jobs. Wickedness.
First, I want to agree with Dr. Sowell's basic observation. Short-term decisions may have long-term unintended consequences. However, this does not give us any unambiguous guidance about policy.
There are a couple of problems with this anti-stimulus argument by Dr. Sowell.
(1) It has been shown that graduating into a recession causes people to suffer an income loss in the longer term over the course of their careers. Even after the recession is over, those who graduate into a recession will be worse off than similarly situated individuals who did not have the same misfortune. If our short-term policy choice is inaction, that can and will have long-term consequences as well.
(2) When people are unemployed, they are not paying taxes. This, combined with the need to support such people through unemployment insurance and other benefits, greatly increases our deficits. Inaction on the economy may result in as big or bigger increases in the deficit than taking action.
Overall, while I agree with Dr. Sowell's basic principle that short-term decisions can have long-term consequences, unfortunately that principle does not resolve the best course of action going forward.
Inaction in the face of the worst economic crisis since the Great Depression is a short-term decision with long-term consequences too. That the policy choice is inaction rather than action does not change that.
"All human situations have their inconveniences. We feel those of the present but neither see nor feel those of the future; and hence we often make troublesome changes without amendment, and frequently for the worse."
Today's politicians are uncannily unaware of the implications of their actions. The dreadful consequence is we, the people, pay the price of their stupidity. They, meanwhile, profit handsomely for constantly being wrong.
