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Conservatives, due to their ideology, do occasionally stumble upon half truths. Conservative opposition to the current proposed bailout is one of those examples. There are others as well-such as conservative criticisms of the "bailouts" on the part of the IMF of the developing world, or of Mexico by the U.S. in 1994. But their diagnosis and solution is based on an understanding of a world "in which we happen not to live" (to borrow Keynes' phraseology)and their proposals, if enacted, will be disastrous.

There are I would argue three different ways to resolve the current crisis. Way one, Paulson's way is crony capitalism and that way, at least in its totality, appears to have now been rejected. The other two ways are "Liquidate, liquidate, liquidate", (the advice of Herbert Hoover's Treasury Secretary) Andrew Mellon following the 1929 crash and the onset of the Great Depression. It is also the advice of right wing Austrian Economists.

The third way is the way of Keynes-which might be the ultimate direction of the Democratic proposal.

To understand what conservatives want, we have to very briefly go back to theories of the Great Depression. Austrian economist, Murray Rothbard argued that the causes of the Great Depression originated in overexpansion of the economy, caused by  monetary policy that was too loose. In other words, Rothbard believed that interest rates were too low in the 1920's, credit was too easy, inflation too high, Investment in physical capital was too high and that all this fed an inflationary boom. While other right wing economists such as Milton Friedman made a bow to policy pragmatism by advocating expansionary monetary policy during a depression. Rothbard was firmly in the ideological liquidationist school.

The "leave it alone liquidationists" of today-ranging from Conservative lawmakers to right wing pundits such as Pat Buchanon have not quite agreed on the cure (Buchanon favors some form of bailout). But they are more or less united in what they see as "the cause". As Buchanon put it tonight on Maddow, and as I have heard others say elsewhere, the cause is being attributed to bad borrowing on the part of low income and minority homeowners. What they see as the "overexpansion" of home ownership is tied in their minds to the "too easy" monetary policy of the 2000's (pop quiz-how high do you think the unemployment rate should have been in the past eight years?). Fannie and Freddie thus get the blame as government entities (despite the fact they were completely private corporations-though they had a government charter) for providing liquidity to the housing market through their purchases of mortgages.

The "real conservatives", while distrustful innately of the FED and the Treasury, are in essence holding out for a strategy that leads to less regulation, less lender of last resort power for the FED, higher interest rates, harder money and thus more "market discipline". It's the same critique and the same opposition to IMF "bailouts" they have made for decades.

In contrastJohn Maynard Keynes' position on the Great Depression was that the rate of economic expansion in the late 1920's in the U.S. was just about right. If only we could get the economy on that level of expansion and hold it there Keynes argued, we might eventually satisfy all of our reasonable economic needs. In contrast to the later-and inaccurate-interpretation of Keynes peddled by the synthesizers such as Paul Samuelson-Keynes was not a critic of expansionary monetary policy in the Great Depression. Friedman's argument for more open market purchases is in fact contradictory of his view of monetarism but fully consistent with Keynes' view of monetary matters. Keynes' argument was that monetary policy would need to be supplemented with fiscal policy. In the late 1970's, Paul Volcker, a disciple of Friedman, took the opposite stance of Bernanke today in response to stagflation (rising inflation and rising unemployment) and created two back to back recessions, resulting in 10.8% unemployment. Think of that next time someone says that "loose monetary policy" is too blame for all our ills today. Had monetary policy been significantly tighter, we would already be at the depths of a deep, dank recession. Bernanke may think he is following Friedman, but actually, he is channeling Keynes to some degree-which is a good thing. Bernanke is only partially right: there are no real monetarists at the FED-only those who cling bitterly to Keynes in a crisis without realizing it.

Keynes' view of the Great Depression was later extended by Hyman Minsky. Minsky agrees, in part, with Rothbard that the Great Depression was a result of imbalances in the system-but those imbalances in Minsky's view were the result of a lack of supervision-not a result of the FED promoting economic growth. Minsky's views were later expanded upon, in what in my estimation is perhaps the best, most comprehensive work on the Great Depression by Charles Kindleberger. The problems of the 1929 crash and the structural imbalances in the global economy were, in Kindleberger's views aggravated by the lack of an international lender of last resort and not a consequence of too much economic growth.

What we take from Keynes, Minsky and Kindleberger-and what the right hates-is the view that good public policy is not just about getting fiscal and monetary policy right (important as that is). It is also critically about building effective public institutions that can supervise and oversee financial markets as a means of reigning in the excesses and coming to the rescue in a crisis.

And this, in my estimation, goes to the heart of what we should be arguing about. Obama's plan, and that of Chris Dodd, may stop short of what we might want as a part of a complete agenda. But they do several important things. They incorporate oversight and accountability. They do not blame the homeowner-they blame Wall Street for the crisis. The problem has not been bad low income borrowers-it has been predatory lenders and speculative borrowers who sought to flip houses.

The conservatives in Congress have presented themselves as obstructionists. Dodd and Pelosi, while not perfect, have presented a workable, constructive frame for policy. It's time to start asking conservatives what neighborhoods they think should be demolished, what people should be thrown out of their homes, and which half way prosperous neighborhoods based on homeownership should be converted into rental property. And this latter point of course begs the question-someone must own the property and pay for it. Or perhaps we can just liquidate, liquidate and live in the streets.

Originally posted to Citizen Rat on Mon Sep 22, 2008 at 08:08 PM PDT.

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