Crisis Management

One of the more confusing aspects of the great economic meltdown of
2008-09—even more confusing than collateralized debt obligations—has
been the tortured logic of the blame game: the frantic effort, on the
part of politicians and pundits, to demonize Wall Street, exonerate
reckless government policies and restore the big-government ideals of
John Maynard Keynes and the New Deal. George Melloan is having none of
it—and, to judge by the Massachusetts poll result on Tuesday, neither
are many voters. In "The Great Money Binge," Mr. Melloan warns against
the statist prescriptions of the Obama administration and argues for
our remembering the limited-government ideas that brought us so much
prosperity for so long.

About reviving American economic growth, Mr. Melloan asks: "Can we
do it again?" His answer is an emphatic "yes," but only if we go back
to the tried-and-true supply-side policies that drove the phenomenal
growth of the 1980s. Mr. Melloan, who retired in 2006 after a 54-year
writing and editing career at The Wall Street Journal, was a key member
of the Journal’s editorial-page staff in the Ford-Carter era, when it
spotted, and promoted, the work of economists such as Arthur Laffer and
Robert Mundell, a future Nobel Prize winner.

Messrs. Laffer and Mundell argued that an economy will grow when it
encourages investment in the entrepreneurial, job-producing "supply
side" of economic activity—as opposed to Keynes’s emphasis on pumping
up "aggregate demand" with government spending. Thus they pushed for
reduced capital-gains and income taxes in order to encourage private
investment. As Mr. Melloan writes: "The achievement of the
supply-siders in the 1970s and 1980s was the revival of classical
economic principles that had been proven out over centuries but had
been submerged in a neo-Keynesian cant that was a cover for
old-fashioned statism."

Now, with the American economy coming
out of a crisis and the near-term chances for growth seemingly slim,
Mr. Melloan makes the case for returning to these principles rather
than embracing the current trend toward exponentially increased deficit
spending, not to mention government rescues that amount to the state
ownership of private businesses. "History cannot be rerun like a VCR
tape," he says (or, one might add, like a DVD). Nevertheless,
"individual enterprise, the sanctity of contracts, [and] the protection
of private property" are still bedrock values for most Americans, who
don’t like what they see going on in Washington, and "the American
political system constantly springs surprises."

Mr. Melloan writes that "seeing the
problem clearly will be the first step" toward restoring the economy,
and "The Great Money Binge" greatly assists with this task by laying
out the real reasons for a crisis that has been wrongly blamed on free
markets. Mr. Melloan notes that the housing bubble was turbo-charged by
Fannie Mae and Freddie Mac, government-sponsored enterprises that—by
buying, bundling and reselling housing debt—gave banks a ready market
for reckless loans. Fannie and Freddie operated with an implicit
government subsidy that became explicit when they went into
conservatorship in September 2008, leaving taxpayers on the hook for
billions of dollars. Relatedly, the Community Reinvestment Act, hugely
expanded by the Clinton administration in the 1990s, encouraged banks
to make loans to less-than-creditworthy borrowers.

that the Bush era was a time of Hayekian government restraint. As Mr.
Melloan reminds us, the accounting mandates of the Sarbanes-Oxley Act,
rushed through after Enron and WorldCom imploded in 2002, stifled
entrepreneurial dynamism by increasing the costs of initial public
offerings. And government spending grew steadily during the Bush years,
not least with the passage of the Medicare prescription-drug

Meanwhile, in New York, Attorney
General Eliot Spitzer regulated by indictment, bringing suits (or
threatening to do so) against corporations and brokerage firms. Mr.
Melloan argues that Mr. Spitzer’s crusade against American
International Group—involving charges now dropped or yet to be
proved—made the 2008 crisis worse, by forcing out longtime CEO Maurice
"Hank" Greenberg. AIG ended up insuring a lot of the mortgage
securities and, when the housing bubble burst, was faced with sudden
collateral calls. "With Greenberg gone," Mr. Melloan writes, AIG "had
lost a firm hand at the controls, which may have made a difference in
its appetite for risk."

Mr. Melloan also fingers the mark-to-market accounting rules
promulgated by the Financial Accounting Standards Board in 2007. They
added gasoline to the fire of the crisis, he says, by requiring
companies to adjust their books every time an asset changed value. The
result was often paper losses that had a cascading effect, forcing
companies to sell assets that they had intended to hold and thereby
lowering prices further. "Since uncertainty had locked up the market
for [mortgage-backed securities], the mark-to-market rule exacerbated
the problem. How do you mark something to market if there is no market?"

Alas, the lessons of the financial crisis are still to be been
learned. Mr. Melloan notes that President Obama’s economic team favors
ever more government intervention in the economy, disrupting market
efficiency and politicizing private decisions. On health care, he
points out that current problems are the result of flawed government,
an out-of-control legal system for malpractice suits and policies that
encourage third-party payment. Mr. Melloan is also critical of the
costly schemes, such as cap and trade, aimed at combating the
exaggerated menace of "climate change."

It is anyone’s guess whether, as
political winds shift toward the center, the Democratic Party will
shift with them, scaling down its statist ambitions and grandiose
schemes for remaking the American economy. For members of either party,
"The Great Money Binge" is an excellent map for finding a way forward.