RealClearMarkets.com, I began an e-mail exchange with a reader in the banking industry in Ohio. Bill Flax appreciated my constant rants about the weak dollar, harmful government intervention and other barriers to growth, and soon enough he began submitting columns on similar subjects.
For most writers it takes a while for them to build a presence, but so confident and so clear was Bill’s writing in favor of free markets, almost right away he developed a loyal and large following. Possessing powerful writing skills that remind this reader of Thomas Sowell and the late, great Henry Hazlitt, Flax hit home run after home run for RealClearMarkets.
Despite a full-time job, frequent opinion pieces, not to mention a wife and children, Bill found time to write what I think is an essential book, The Courage to Do Nothing. Flax’s excellent book is a moral defense of markets and freedom, and if read it will greatly strengthen the arguments made by existing free-market advocates, while possibly converting more than a few skeptics.
As the book’s title suggests, Flax believes that for the U.S. to remain a prosperous society, it’s essential that politicians and bureaucrats rein in their natural instinct to “do something.” As he makes plain right up front, “government fixes inevitably aggravate problems, but few politicians have the courage to do nothing in the face of a downturn.”
Given his basic thesis, Flax unsurprisingly fingers our Federal Reserve more than once as an entity always seeking to fix things to our detriment. Considering the tight credit markets that revealed themselves amid the financial crisis, Flax very articulately argues that the Fed’s actions meant to “loosen” credit in fact made a bad situation worse.
As he puts it, “Higher rates would have allowed capital to replenish while only those most desirous of borrowing would incur new debts.” So true, and what a shame that Chairman Bernanke didn’t leave the credit markets alone so that tight credit could weed out the bad economic concepts as a way of avoiding further capital destruction.
About Paul Krugman’s absurd suggestion that our post-crisis recession resulted “from a ‘savings glut’” that led to “constricted credit”, Flax asks “How can the problem of too little liquidity be caused by too much saving?” The ridiculous view that our problems stateside were the result of too much capital flowing our way has ensnared many “deep thinkers” who should know better, and Flax masterfully dismisses such silly commentary.
Of course when establishment economic types aren’t decrying tight credit on the way to suggested government fixes, they worry that individuals might be saving too much along the lines of Keynes’s “paradox of thrift.” But as Flax helpfully suggests, what’s good for the individual (saving) is also good for the economy, and as he points out, “By saving, the individual keeps resources in the economy and thus allows diminished capital to begin restoration.”
The above is important considering the Fed’s ongoing efforts to keep market rates of interest low. Flax reminds us that artificially low rates of interest necessarily punish the savers whose capital is so essential to an eventual resumption of production. What we see are the low rates achieved through Fed distortions, but what we don’t see as easily are the potential savers who choose to do the opposite thanks to central bankers wrecking their ability to achieve a market return as reward for delaying their consumption.
All of which brings us to the persistent devaluation of the dollars we earn by our monetary authorities. As Flax puts it, “inflation leaves our money, but confiscates its value.”
This is of course problematic because it is savings that help fund all future innovations and job creation. Flax reminds us that there must be incentives put in place in order to encourage individuals to first work very diligently, and then delay their gratification. Dollar devaluation tells society’s greatest benefactors that they’ll be penalized if they fail to scratch every itch, so it’s essential to return to stable money values in order to lure the savers back into the marketplace.
The devaluationists in our midst would no doubt argue that particularly right now with businesses struggling, it’s essential to create incentives among consumers to buy things, and as such, devaluation serves a very real economic purpose. Flax happily has an answer for the aforementioned fallacy.
Indeed, he very skillfully points out that “Demand doesn’t require stimulation.” More to the point, he notes that the desire to consume is our “very essence.” Properly skeptical of the absurd science that is “macroeconomics”, Flax’s economic model centers on the individual, and individuals are better off when they don’t consume with abandon. That society benefits from individual parsimony is a positive symptom of a virtue that Flax consistently elevates.
About TARP and the disastrous bailouts of banks that should have been left to die, Flax happily doesn’t go the conventional route in suggesting that Lehman Brothers’ bankruptcy was the driver of the financial crisis. Instead, he argues that the mistake occurred months before when the counterparties of Bear Stearns were needlessly bailed out, and this error “skewered market forces and severed any link between incentives and risk management.”
As Flax observes, “Lehman played a game of chicken assuming it could race to the cliff’s edge and still be rescued by Washington.” Considering the “frozen” markets that revealed themselves after Lehman filed, Flax notes that investors had played chicken too, thus a panic that should never have been.
Regarding Bank of America’s forced marriage with Merrill Lynch, Flax points out that to save Merrill, Treasury Secretary Henry Paulson wrecked a bank. There Flax notes how very odd it was that Paulson would save an investment bank, despite it being Washington’s job (wrongly in my view, and doubtless Flax’s) to protect deposit-taking institutions. Flax asks why Paulson and Ben Bernanke aren’t in jail, and he has a point.
Best of all, Flax reminds the reader that the bank bailouts hardly saved the banks. Instead, for having accepted the false security that is government aid, they’re now wards of the state, working for political masters who don’t care about profits. Considering the subsequent bailout of Chrysler that led to its senior creditors being wiped out, Flax is not surprised that the big money center banks didn’t blink an eye. Indeed, how could they after they’d already accepted bailout funds?
And for those who continue to delude themselves with the false notion that U.S. banks acted wildly thanks to deregulation of the sector, Flax points out that from 1980 to 2007, spending on bank regulation tripled. No fan of regulation given his happy and constant elevation of capital, Flax reminds the reader that businesses “waste precious, finite resources complying with red tape.” That the overly burdensome regulations didn’t avert problems in the banking sector makes this all the more offensive.
Flax is very critical of our ex-President George W. Bush, and not surprisingly President Obama doesn’t come off well either. A strict constitutionalist, Flax notes that George Washington could have been king, but resisted temptation for the good of the nation. Flax writes that Obama has acted less honorably.
About Obama’s past work as a “community organizer”, Flax is not impressed, though he cleverly reminds readers that “there are certainly positive examples of productive community-organizers.” And who are they? Flax says they’re capitalists, and points to Henry Ford’s assembly line as one example.
Regarding Obama’s ongoing drive to make healthcare an inalienable right, Flax asks how could it be? As he so insightfully points out, healthcare as we know it “didn’t even exist until very recently and still doesn’t for much of the world.” Universal healthcare happily takes a beating in Flax’s book, and then throughout he makes plain that the imposition of “positive rights” are our enslavement as the productive are more and more forced to foot the bill to the alleged benefit of others.
Considering Obama’s $787 stimulus bill, Flax channels Fredric Bastiat and Hazlitt in acknowledging that the spending surely created near-term work for individuals. He then points out that the jobs created are what’s visible, but it’s what’s not visible – as in the workers idled and the brilliant concepts that never get off the ground – thanks to Washington destroying what is always scarce capital.
And in a book full of excellent insights, Flax perhaps does his best work in the area of recessions. Rather than phenomena for politicians and bureaucrats to steer us around, Flax writes that “Recessions are how the market shifts economic resources from overinvested sectors no longer meeting society’s needs into fresh, new sectors ready to fulfill the desires of a new paradigm.”
Recessions signal economies on the mend, so for politicians to arrogantly attempt to blunt their impact is for Washington to perpetuate the failed concepts that cause downturns to begin with. As Flax so brilliantly points out, “The Great Depression was the first downturn where Washington took significant action and thus it was the first time we did not quickly recover.” Amen.
As with all books, there are definitely some areas of disagreement. Flax is a deeply religious man, and while that didn’t bother this reader, the suggestion that evolution isn’t real and that societies lacking religion are liable to failure didn’t convince. Evolution strikes me as very real, and as evidenced by how many strongly religious countries are economic failures, the correlation between faith and success didn’t work.
Flax writes that “I value liberty more than prosperity.” I do too, but if liberty is valued, then it should extend to those who prefer marijuana (and any other mood-altering substance) over beer, and homosexuality over heterosexuality. That I blanch at the site of two men kissing in no way makes me desirous of limiting their rights to do so, and for that matter, marry.
Much as Flax wouldn’t want the government trampling on his ability to practice his faith, it seems that he could be more willing to decry behavior offensive to him, all the while acknowledging that it’s the right of individuals to live as they wish. If the government can tell people what they can and can’t do with their bodies, it can also theoretically tell them what their faith should be.
Flax writes that in today’s world, “To say you’re a capitalist is only acceptable if the statement carries an addendum advocating ‘social justice’ or some equivalent. Really? I live in Washington, D.C., a city heaving with capitalism’s skeptics, yet I proudly wear my capitalism on my sleeve without reservation. No doubt some on the left are offensive and out to limit free speech, but this seems overdone.
Flax laments an educational system that is increasingly liberal left, and to him this shift has redefined what it is to be conservative to the latter’s detriment. I just don’t buy it.
With each generation more and more Americans are for good or bad taking their education to the university level, but as national elections continue to reveal in living color, we’re a center-right nation. No doubt it’s true that most in academia are on the left, but to me this is a good sign for capitalists not wasting their talents on a profession (education) that is increasingly being exposed as not very valuable. And as evidenced once again by elections, whatever they’re teaching on campus, it’s apparent that most aren’t listening.
Flax is troubled by “debt-driven lifestyles” prevalent in the U.S., but by virtue of their ability to take on debt, it must be that some other dollar holder is saving. These things balance.
Furthermore, individuals in Zimbabwe don’t have a lot of debt precisely because there’s very little productivity there. Debt tends to rise with individual productivity, but Flax argues that Americans have spent more than they’re produced for too long. If so, just who are these creditors out there willing to offer loans for nothing? I want one.
Throughout the book he decries the allegedly low savings rate in the U.S., but this merely speaks to what a worthless measure our savings rate is. Flax is an Adam Smith devotee, and as Smith made plain, there’s no wealth without savings, and Americans by any rational measure are extremely wealthy; meaning they’re great savers.
Turning to the housing boom, Flax pins it on low interest rates, or what he terms “easy credit.” The problem there is that empirical evidence shows that at least since 1976, housing in the U.S. has done best when interest rates rose over 200 basis points, and the least well when rates fell over 200 basis points.
Furthermore, to suggest that low rates constitute “easy credit” is for Flax to contradict his excellent point that artificially low rates drive away creditors. The weak dollar’s massive, unsung role in the housing boom remains unspoken of.
Considering the Internet boom that preceded the one for housing, Flax goes modern Austrian School on readers and ties it to “easy money” also. The problem there is that the Internet’s greatest, most frothy years coincided with a very strong – arguably deflationary – dollar that crushed all manner of commodities. Does anyone remember $10 oil in 1998?
Despite these and other disagreements, they should in no way keep the interested reader from buying what is a very important book. Indeed, the core message within is brilliant, and in articulately making the case for a non-interventionist stance from government, Flax helpfully explains how governmental activism has created a worsening scenario in which “Every day fewer workers pull the wagon and more people ride in the back.”
So very true, and if Thomas Sowell fans want to know who his logical heir is, it says here that they might purchase Flax’s first of hopefully many books. He’s done some amazing work, and The Courage To Do Nothing is something I’ll refer back to with great regularity for as long as I’m writing about economics.
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About John Tamny:
Mr. Tamny is a senior economic advisor to Toreador Research & Trading, columnist for Forbes and editor of RealClearMarkets.com. Mr. Tamny frequently writes about the securities markets, along with tax, trade and monetary policy issues that impact those markets for a variety of publications including the Wall Street Journal, National Review and the Washington Times. He’s also a frequent guest on CNBC’s Kudlow & Co. along with the Fox Business Channe