Of the Federal Reserve and Dreams of Success

 

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It may be easy, but I think unfair, to fault the Governors of the Federal Reserve System.  Their task is more than they can handle, and yet they are required to do it.  More accurately, I should say that their tasks are more than they can handle, and yet they are required to do them.

When the Fed was created, more than a century ago, a big concern was that it would be dominated by the financiers of New York and the politicians of Washington.  Hence, rather than a central bank, it was born as a system of a dozen regional banks, with a limited focus, to offset the liquidity risk inherent in banking.

Over time the Fed has not stayed that way.  Today, the Federal Reserve is effectively the biggest bank in the world.  Financiers in New York have an outsized influence, but the influence of the politicians in Washington may be greater.  Otherwise, how could a federal republic tolerate a handful of people at a single agency having so much sway over the daily lives and future prosperity of the individuals, families, communities, and businesses in the 50 States of the Union?  Accountability to the elected cannot long be withheld.

A great problem has been that the elected do not refrain from giving the Fed more things to do.  Its one first task has lost its focus by becoming three.  By law, the members of the Board, joined by the presidents of the 12 Fed banks, are to conduct themselves “so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”

What if they cannot succeed?  Then we fault them for failures while still pretending that they can.  We hide the goal posts in fog.  What is “maximum employment”?  Can it be today’s 62% of the adult population when we began the 21^st Century at 67%?  What are “stable prices”?  Does “stable” mean that the price of food tomorrow will be the same price it is today, or is “stable” the Fed’s official goal that things will cost 2% more each year, so that my young son’s retirement will require nearly twice as much as mine does?  Then there is the third, often forgotten requirement, that interest rates be “moderate.”  For 10 years the Fed kept quiet about that legal mandate, keeping interest rates very close to zero, a huge transfer of wealth from savers to borrowers, Uncle Sam being the world’s biggest borrower.  Is it surprising that the federal government’s debt grew during those 10 years to $30 trillion and still swelling?

What is the Fed to do?  We cannot reproach its current team, because they cannot succeed.  No government agency, regardless of excellent economists and the best computers, can manage it all.  If you read the statements, they carefully admit, essentially, “we don’t know how to succeed, but the law says we have to do something, so we will try this and that and see how it goes.”

Meanwhile, it has not been going so well.  To paraphrase liberally from psychiatrist Anthony Daniels, we should not be so beguiled by the dreamy tasks we have placed on the Fed that we cannot bear to lighten the load merely because it is not working.  

Of Inflation and Borrowing

 

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Inflation is good for borrowers?  Really?  So some say.  The case goes like this:  when the borrower receives his loan for so much, he promises to pay it back with money that would buy so much, but after inflation the money he uses to repay the loan will buy less.  He repays with cheaper money.  The lender gets his money back, but it is worth less than it was when he lent it.  Hold that thought, because that is the weakness in the case.

This inflation “benefit” may work for borrowers who already have loans, with a fixed rate that they can handle.  For all others, however, inflation raises the costs of everything, including borrowing.  How long will lenders be willing to lose value in the loans they make?

Think of it this way.  Does inflation work for people who sell things?  Maybe for their current supply, but their new supply will cost them more, eating into what they earn and raising the cost of what they try to sell to the next potential buyer.  The same reality is true for people who “sell” money, which is what lenders do. 

As we buyers know, inflation does not work well for buyers.  We face ever higher prices for the same things.  The same is true for people who “buy” money, which is what borrowing is.

New borrowers will find interest rates, the price of borrowing, rising with inflation, too.  That could put borrowing out of reach for some, just as it does for buying a house, a car, or work tools.  Businesses that need to roll over their existing loans could find the new loan more expensive, maybe even too expensive.  People who want to refinance their mortgage may find the new rate makes that much less attractive.  Floating rates, like credit card rates, will rise, so the cost of the products charged to the card will not be the only higher costs that card users face.  In short, only some borrowers, a declining some, may benefit from inflation, and only for a time.

Today’s money rests on trust, whether we talk of paper money, coins, or financial accounts.  We sell our time, our goods, our services in exchange for money.  That money is a promise that we can use it in trade with someone else for something of comparable worth.  When we accept money in payment, we in turn are making a loan to someone who has already received our goods, or services, or time.  All we got was a promise, which we trust we can exchange with someone else.  Inflation undermines that trust.  We receive a $100 payment of money which because of inflation may soon buy only what $95 used to buy.

Even governments will face the challenge of higher costs.  Sure, they will be paying back existing government debt with devalued money, but their new borrowings will carry a higher price tag, as will the things that governments buy.  I was going to say, look in the mirror if you want to know who will pay that higher cost of government debt, but if you do, have your children looking with you.

Of More Money and Higher Prices

 

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We have a new occupant of the Oval Office.  I did not hear his inaugural address, uncertain who would forget it more quickly, myself or its deliverer.  Inaugural addresses are highly forgettable literature, Lincoln’s first and second addresses (the second especially) the only ones that anyone can seem to remember, and worthy they are as exceptions to the genre.

I have been remembering the mountains of money that the government has been spending that it does not have, wondering where it is coming from even more than where it is going.  It is hard to find anyone who can tell you much with certainty about either.  The current attention is more focused on plans to spend yet another two trillion dollars that the government does not have on things that are not very clearly explained.  This would be on top of the most recent trillion dollars approved by Congress drawn from an empty well to be spent watering many a hidden garden.

I can understand the first round or two of multi-trillion dollar government expenditures.  Since government caused the collapse of a strongly growing economy by shutting down commerce and locking up the population, a strong argument can be made that paying these victims is not exactly a bailout as it is compensation.  To quote Will Rogers, if Stupidity got us into this mess, then why can’t it get us out? 

A serious problem seems to be that once you get into the game of paying people more to stay at home than they can earn on the job, how do you bring the game to an end.  The plan of the new Oval Office occupant seems to be to go into extra innings but continue serving spiritous refreshments well past the seventh inning.  How will the people get home safely once the game is over?

The classic formula for inflation is to have too much money chasing too few goods and services.  The kindling for a roaring inflation would appear to be carefully set. The Treasury and the Federal Reserve have been dramatically expanding the money supply, with the Federal Reserve supporting the market for the government’s electronic debt (not much money is printed on paper anymore) by purchasing gobs of Treasury securities from banks, paying the banks with electronic credits on their accounts held at the Federal Reserve, which the banks cannot find much to do with.  At the same time, many governors continue to issue orders to suppress the supply of goods and services.  As Elon Musk reportedly said last year, if you don't make stuff, there is no stuff.

If this worry is well-founded, then why have we not yet seen any inflation, government spending surges and the Great Cessation having been Federal and State policies for nearly a year?  A very good question, the answer to which may be found in the savings rate.  While a lot of electronic money has been going into people’s bank accounts, people have been shy about spending it.  The personal savings rate jumped in 2020 from about 7% to nearly 35%.  Worried people hoard more than toilet paper.  And a lot of things that people might spend money on, such as travel, suddenly were not available.  I was surprised last year when our car insurance company sent us a rebate:  insurance losses were down because people were traveling less.

The roads are a bit more congested these days, and the economy is showing strong signs of trying to recover.  Even the savings rate is coming down, dropping to about 13% as 2020 approached its close.  More activity is good, but what is the Federal Reserve going to do if more people spend more savings faster than more goods and services are provided?  How will the Federal Reserve respond to another couple trillion dollars of deficit spending to stimulate an economy that is already on a recovery trajectory and families continue draining their savings?  They could allow interest rates to rise, to encourage people to keep some of their money in savings accounts that have paid less than a penny a year per dollar saved.  Recent Federal Reserve comments, though, declare that is not on the table.

In the late 1970s, when Jimmy Carter was president, economists invented the term “stagflation,” as inflation was high and the economy was in the doldrums.  Joe Biden was a relatively new Senator back then.  Maybe he will remember those days.  That economic pattern served no one well.

Of Good Banking and the New Year

 

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A year in retirement can give you perspective, particularly a year fraught with ample opportunity to do some good amidst challenge, risk, and danger of various flavors.  Such was the year behind us.  Does the year ahead offer any less?

Many such thoughts were brought to mind in a recent conversation with the chief financial officer of a community bank.  As you would guess, we discussed the outlook for banking.  I observed that the condition of the industry reminded me of the dot-com bust of 2000.  While the economy was in decline, hit a second time by the terrorist attacks of September 2001, the banking industry was thankfully in strong financial condition.  The dot-com bust had a securities market and Silicon Valley locus.

As in 2001, so also today, the banking industry is strongly capitalized, liquid with financial resources, well positioned to fund economic recovery.  Fortuitously, that position is matched by a host of potential customers, especially entrepreneurs eager to start up new businesses or expand ones that survived the government-led shutdowns.  Among those entrepreneurs are many people whose businesses closed not from bad business plans, but due to the Great Cessation of 2020.  That is to say, there are people who want to start new businesses who know how to run businesses, if government strictures will let them. 

Their problem is one of resources exhausted by trying to keep their businesses floating as the tide went out.  As the tide is coming back in, there is a ready supply of people who would like to have a go with a new boat.  Good bankers have always been in the business of finding and funding good risks. 

Banks grow as their customers and communities grow.  Good banking fosters and facilitates the generation, management, preservation, and application of wealth. 

Bad banking bleeds wealth, which is why failed banks should be allowed to fail, to end the drain on the economy and to make room for the productive work of good banks, new and old.  Good bankers do their work by insightful weighing of opportunities and risks, tailoring terms and conditions to such opportunities and risks.  Bad banking either mistakes opportunities, or it miscalculates or ignores risk, or both.  Which, by the way, is why governments should stay out of the business of banking (other than as prudential supervisors), as the history of government shows an atrocious record of missing opportunities and miscalculating risk, sometimes for the short-term benefit of government’s associates.

The other day I saw a happy video from the chief executive officer of a southwestern bank.  Her timely message was of gratitude to the bank’s customers for constant communication and support.  In return, she offered a reaffirmed invitation apropos to serving in a way tailored to customers’ financial needs.  Reach out to the bank, including its CEO, 24-7 for financial service.  In conclusion, she pledged the bank to “connect you with others in our community who can serve you best.”  Now, that is good banking.

Of Overreaching Concerns and Asset Allegation

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What is in a word?  That is an old question.  Often what is in the word may not be what the author intended.  The result can be humorous, and sometimes insightful.

Before retiring from the American Bankers Association, I became acquainted with a couple of examples where perhaps the wrong word presented an insightful meaning.  Listening to a seminar broadcast I heard the speaker explain the “overreaching concern” of his particular program.  Since the beginning of the Great Cessation and related lockdowns, I have heard many overreaching concerns expressed.  Perhaps we may learn from them.

On another occasion, in reference to money management, I became acquainted similarly by insightful accident with the term “asset allegation.”  I think that many a loan officer or bank examiner has had to come to terms with cases of asset allegation.

In 1775 the English playwright Richard Brinsley Sheridan introduced us to Mrs. Malaprop, who delightfully uses words in unintended ways, at least unintended by whoever created the words.  His play, “The Rivals,” is a classic of English comedy.  In one example, Mrs. Malaprop, trying to convince her niece to give up on a young man of interest, expresses the wish that Lydia, the niece, would “illiterate him” from her memory.  In recent days, I think that we have all come across efforts by some to “illiterate” events from our historical memory.  Much to her happiness, Lydia ignored the advice.

Mrs. Malaprop, quite displeased with Lydia’s response, cautions her niece not to “extirpate” herself from the matter, explaining to the young girl that Malaprop has “proof controvertible” for her case.  Again, in recent days many have indeed been called upon to “extirpate” themselves or their ideas, prodded by noisy voices supported by much “proof controvertible.”

In conversation, discussing what she considers proper education, Mrs. Malaprop recommends boarding school, where the student could obtain “a supercilious knowledge in accounts”.  I may admit that considering the CECL financial accounting rule, I have been tempted to wonder to what degree “a supercilious knowledge in accounts” might have had a role in its development.

I would also wonder, as I compare the variety of approaches across the globe to the current virus, whether some policymakers were subjected to Mrs. Malaprop’s advice that youth be “instructed in geometry” that they “might know something of the contagious countries”.

As a final reference, of many wonderful examples in the play, I would call upon Mrs. Malaprop’s advice that proper education of Lydia might lead the dear niece to “reprehend the true meaning of what she is saying.”  I have heard and read many things in recent days by many people and mused whether the time would arrive when these people would come to reprehend the true meaning of what they were saying. 

In my days of Civil War reenacting I became familiar with the Union song, “Grafted Into the Army.”  Composed by Henry Clay Work, it pretends to be written in the words of a widow, immigrant to the United States, lamenting her son Jimmy being “grafted” into the army.  Military jargon can be difficult enough for those not in the army, even more so for someone arrived in a new society.  Jimmy’s mother does express pride in her son “Dressed up in his unicorn.”  Intended to provide lighthearted moments in a dark time, the song also tells of the widow mother complaining at “the captain’s fore-quarters” about her son being too young.  Many sons were too young, and too many did not return.  Mixed in the mirth is the sad message that Jimmy’s “brothers fell / Way down in Alabarmy.”

An anecdote from dining at a restaurant:  I had occasion to visit the restroom.  The following instruction, printed in large letters, was displayed prominently over the sink:  Employees must wash hands.  I waited there some minutes, pondering the appearance lately of many strange requirements, but at last I gained the courage to break the rule and washed my hands myself.

Of the Federal Reserve and Taking from Savers

Ben Bernanke has a blog.  You can find it here, courtesy of the Brookings Institution.  Of course, what would the former Chairman of the Federal Reserve Board write about, other than decisions he made as Chairman, and why people who take issue with them are wrong?  One would expect no less, and reading the light he sheds on previous decisions—offered in Fedspspeak at the time that they were made—is surely the chief lure of Ben Bernanke’s blog.  Allowed to communicate in regular English, not worried about how Fed Watchers might construe or misconstrue everything he says and does not say, Ben is more able to speak his mind clearly.

The former Fed Head chose for his first blog post a vigorous defense of price controls on interest rates.  In the process Bernanke demonstrates the assumption that we are safe letting government economists control the economy—an assumption continually disproven by real-world experience. 

In fact, as a result of entrusting much of our economic freedom in the United States to government economists, we do not have a free market for interest rates, at least not short term rates, and we pay for that every day.  The Federal Reserve sets short term rates in this country, and so far the market has had zero success in moving rates from the near zero interest rate range that the Federal Reserve has decreed and maintained for some years.  Keep that in mind the next time you wonder why you earned $1.73 in interest on your savings account last year.

If you borrow money—when you can get a loan—then you might consider yourself lucky.  The biggest borrower of all, in the whole world, is the United States Government.  Uncle Sam must be feeling very lucky, because he is paying comparatively little on the $18 trillion of U.S. Government debt, increased by another half trillion dollars last year.

If you save money, though, especially for your retirement—and if you have to live off of those savings in retirement—you might not feel so fortunate.  By keeping interest rates lower than the market would set them, the Federal Reserve is daily transferring many billions of dollars from savers to the Federal Government.  And you thought that only the IRS takes your money.

Let me illustrate with an example.  For the last three months of 2014, all of the banks in the United States, all of them together, paid no more than $11 billion to people who had their money in banks.  Is that a lot of money?  It depends.  When that is the interest paid on nearly $12 trillion in deposits, the answer is, no, that is not very much money at all. 

Do not blame the banks, though.  They are in the saving and lending business, too. Try as they might, with the Federal Reserve controlling interest rates, banks could not pay any more interest to depositors.  If a bank did, it would have more money than it could lend as people shifted their deposits where they could get a better return.  To pay interest on deposits, banks cannot get much more interest from the loans they make than the Federal Reserve price controls allow, and many relatively good loans present more repayment risk (banks do need to be paid back) than those low interest rates would cover.  Low interest earned means low interest paid. 

All the banks in the nation have a little over $15 trillion in loans and other assets, on which they earned last year about the same amount as they did five years ago, when they had $2 trillion less in loans and other assets.  In an environment of low interest rates, banks have to concentrate their lending on the safest borrowers. 

That is how the low interest rates controlled by the Federal Reserve are oppressing the economy.  When savers and lenders can only get a few cents on a hundred dollars lent, they place their money with the very safest of borrowers, since they cannot afford to take any losses.  Someone who has a really good idea—which like all good ideas may or may not succeed the first time—has trouble getting the money to give his idea a go and hire people to help him try. 

Ben Bernanke claims that the Federal Reserve’s near zero interest rate policy—called ZIRP—has been stimulating the economy.  If so, where is the stimulation?  Why has the recovery been so weak?  There has been stimulus, but it has gone primarily to support Federal Government spending and to pay down the debt of the largest and healthiest businesses that can trade in their higher cost loans for the Federal Reserve’s lending bargains.  The biggest increases in bank loans have been in Treasury debt and deposits at the Federal Reserve.

Ben Bernanke, in his blog, reminds me of the story of the lawyer representing a client charged with stealing a car and returning it damaged.  The lawyer says, first, that his client never had the car; second, that he returned it in perfect condition; and, third, that it was already irreparably damaged when his client took it. 

Bernanke begins by explaining that the Federal Reserve does not set interest rates, or that at most its ability to do so is only “transitory and limited.”  He pleads that the Fed can only affect short term rates “in the short run.”  He does not explain how seven years of ZIRP can be considered the short run.  Then he progresses in his blog to describe how the Federal Reserve “influences” interest rates and then how the “Fed’s actions determine” interest rates.  His argument, after denying that the Fed can set rates, is that the economy has been so weak that the Fed has had to lower interest rates for the nation’s own good.  Bernanke next argues that the economy has remained so troubled (he does not say, despite ZIRP) that the Federal Reserve has had no choice but to continue with ZIRP, concluding that it is the economy after all the forces the Fed to do what it does.  Do not blame the Fed Governors, they had no choice but to continue doing what they cannot do because it has not done any good so far.  I think you need to have a Ph.D. in economics to make such an argument.

We cannot do it, we did what we had to do, and since it has not helped we cannot stop.  I wonder how he reacted to those kind of explanations from his teenagers.  Any responsible parent would reply, no, you cannot have the car, give me back the keys.

Of Unbanked and “Underbanked”

Speaking of banks, as I did on this page a short time ago, there are those who are concerned that too many people in the United States are “unbanked” or “underbanked.”  By the former they seem to mean those who do not use any banking services, particularly who do not have any bank accounts.  By the latter, they mean those who obtain some banking services from businesses that are not banks.  The very existence of the terms, and the way that they are used by those who use them, implies that being “unbanked” or “underbanked” is a bad thing.

I will here disclose that I have worked for banks for nearly 10 years and for all I know may continue to do so for some time into the future.  Whatever bias or color to my views that this condition provides I will nevertheless try to comment from a fair and factual point of view.

My first point, therefore, is that I am not prepared to assert that absolutely everyone should have a bank account.  I can easily envision the value of a bank account for most if not all people, but I concede that they should be allowed to choose for themselves and that it would be terribly wrong to force people into banks.  I acknowledge that there are some alternative providers of financial services who seem to please their customers, and I do not deny that banks can benefit from good competition.  Banks have a long history of drawing upon the ideas and innovations of non-banks, just as non-banks have been eager to try their hand at successful new products and services that banks have pioneered.  Bank customers have benefited the most from that process, as the variety and value of financial products have expanded, and the United States has led the world in the discovery of new and useful financial services.

Having said that, the nation cannot do well without a strong, vibrant, and prosperous banking industry.  Our nation and people grow as we save financial resources and invest them in improvements for the future, whether new homes, new factories, or new ideas of how to do and make things better, faster, and cheaper.  That is a major part of what banks do and are all about. 

Moreover, there are a lot of things we do and a lot of places we go because we know that our ability to pay and get paid—to exchange things we value less for things that we value more (the reason we buy and sell things and use money to do it)—is secure, reliable, accurate, and relatively quick.  That is our payments system, and banks created it and are at the center of it.

Americans also like the idea of becoming wealthier and expect to do so.  If that seems a commonplace to you, recognize that it is not so in all parts of the world, where getting by from day to day is about the most to which people can aspire, for whom poverty is a way of life that they expect to bequeath to their children.  To the extent that this miserable condition is becoming less the case in much of the world, that more people are beginning to believe that they can build and improve their wellbeing for themselves and their posterity, this new-found hope for accumulating wealth is attributable to the dispersion of principles of freedom and prosperity that Americans take for granted but which are new to much of the world.  The global adoption of many American principles of prosperity has been a major contribution of the New World to the Old World and to all mankind.

Now get ready for the bold but true statement:  you cannot get there and stay there without banks and the services that banks provide.  Banks gather wealth, safeguard wealth, allow it to be used efficiently, and apply it to building the future.  That is why governments pay so much attention to banks, and also why it is so harmful when governments try to capture banks and channel their services to the personal gain of themselves and their cronies.  That is also why misguided bank regulations are harmful—even if in subtle but powerful ways—to the nation and its people.

Which brings us back to the agenda of the “unbanked” and the “underbanked.”  In the United States, chief causes for people remaining “unbanked” are regulations that make banking more difficult and services more expensive; cultural barriers for people who come from societies where personal banking is either unknown or where the experience has been one of banks used by local governments to harvest wealth from people to enrich the governing elites and their cronies (much of Latin America, for example); and people who for whatever reason just do not prefer to use banks.  The first cause regulators can solve but have largely been resistant to solving; the second can be overcome by time and experience and is showing signs of that; and the third cause is no more of a problem than people who prefer to rent rather than own their home, to eat eggs without grits, or who do not like the New York Yankees.  I do not have to understand the personal preference to acknowledge it.

The concept of “underbanked” (that government needs to help banks figure out how to serve people who may get some banking services outside of banks) I fear may be a political device to harness American banks to serve the cronies of the “underbanked” advocates.  We have already seen this game with the Community Reinvestment Act (CRA) regulations, adopted ostensibly to ensure that banks lend to their local communities (as if bankers, unlike other businessmen, need government regulation to notice business opportunities right under their own nose).  In practice, CRA has been used to coerce banks into providing loans and even grants to and through poverty advocacy agencies that tend to prosper more than the people whom they claim to be helping.  The folks who fret about the “underbanked” have marvelous formulas and plans for other people’s money to solve problems about which the people to be helped seem little concerned.  I have never heard of any truly “underbanked” people themselves calling for the firm hand of government to get them into the banking system; if they want banking services, they just go and get them. 

I have the haunting suspicion that the “underbanked” advocates would if they could use banks the same way found in the abandoned societies of the “unbanked,” where banking services came through the hands of people who knew better than others and always made sure to get their cut for their benevolence.  That is not really banking, and that is symptomatic of why people flee those lands.  The wealth creation of such captive banks seems to be for someone else.  If it happens in America, where will the people go?

Of Banks and Over Taxed Regulators

Banks, who needs them?  A quick question and a quick answer:  a thriving, prospering banking system is essential for a thriving, prospering modern economy.  Banks bring together the resources of savers and the needs of borrowers, particularly borrowers who seek funds to establish or expand businesses or families and individuals who use occasional borrowing to smooth out their income (good banking principles penalize people who would borrow in order to live beyond their means, but more on that at another time). 

Banks also created and maintain the payments system, the means by which money is transferred quickly and accurately throughout the nation and even internationally.  Bank services include as well a variety of wealth management tools by which individuals, families, businesses, and governments can store, grow, and make best use of their financial wealth. 

Without banks, almost none of these services would be available.  Many non-banks provide bank-like services, but they all come to find the need to rest their own services at some point on a bank.

Banking in the United States has grown with the nation, from very simple institutions in the eighteenth and early nineteenth centuries, to a wide variety of bank types, charters, and business models, as diverse as the financial demands of the customers of the largest and most diverse economy in the world.  I once presented at a meeting in Chicago a list of about two-dozen different types of banks in the United States.  We have national banks, state chartered banks, small community banks, larger regional banks, and very large banks with extensive national and international business products and services.  All of these operate and compete together, with a body of customers behind each one who think that their bank offers the best available choice of services that they want.  No other nation in the world has a banking industry like ours.

The recent recession and financial panic—and the inevitable politicizing of finance that came in its wake—have thrown much into confusion and imposed upon sound and prudent bank supervision harmful ideas born of reckless sloganeering and hubristic financial engineering.  The complexity of banking—no more complex than information technology, communications systems, or modern manufacturing—has been superseded by even more complex bank regulation. 

The rules governing banking are too much and too many to function reasonably.  They have become more than the very human people in the multitude of bank regulatory agencies can manage.  The disciplining role of markets and the valuable service of banker judgment have in large measure been replaced by bureaucratic procedures and the judgments of government officials.  These officials have had little if any practical experience making loans, taking deposits and putting them to work, building financial wealth, or otherwise providing products to customers.  Government officials cannot run businesses.  Now, their government jobs have become so demanding and complex, that they will not be able to do their own jobs, either.  Too much has been placed upon them.

Those most harmed by all of this are bank customers.  For the moment, bank profits are up, but that is because their losses are down as they recover from the recession, not because services to customers are expanding.  As a result of government interest rate policies, depositors earn almost nothing on the money that they place in banks.  The expanding oversight involvement of bank regulators makes it dangerous for banks to offer new services to customers; the risk of breaking any of thousands of pages of regulations has become too great.  It takes almost half an hour to open a new bank account, something that used to take minutes.  Fewer credit-worthy borrowers today qualify for mortgages than just a year ago, before new regulations went into effect.  The number of banks has been declining in recent years, dropping at the rate of nearly one for every business day, week in and week out.  Only one new bank has been opened since 2010.  We have fewer banks today than the nation had in 1893.  A stagnant industry is less able to evolve to meet changing customer needs and preferences.

For the good of all of us who rely upon banking services, and for the sanity of financial regulators, we need to return to the principles of good banking.  We need to restore a system of supervision that is measured, not by how much banker judgment it takes over, but by how it adds value to the ability of banks to serve customers.  Government agencies—and the laws that they administer—that are derived from a founding document that begins with the words, “We the People,” should do nothing less, and nothing more.

On another day I would like to share some thoughts about how banks are being goaded to become their own enemies.

Of Demagogues and Big Problems

One of the common tricks of demagogues, as cheap as it is common, is to denounce in high dander something for being “Big,”—“bad” because it is “Big.” Some of the recent targets have been Big Banks, Big Pharma (the drug companies), Big Oil, Big Insurance, and Big Business in general.  The target is apparently chosen for its relation to the prescription that the demagogue already has in mind.  Invariably the prescription involves granting more power to the demagogue, sometimes ceded from the freedoms of the targeted Big, but not infrequently taken from the liberty of the people who are somehow harmed by the Big, who are to be somehow made better by being less free.

Obamacare is one example, Big Insurance, Big Pharma, and Big Medicine all denounced to some degree in the effort to generate popular support to pass the legislation.  In the end, as more and more people are recognizing, it is individual choice that has been lost, personal freedoms to choose doctors, medical plans, and available treatments (along with substantial sums of money) that have been taken, passed on to big bureaucracies identified by the demagogues.

Demagogues on left and right and even in the middle resort to this device of denouncing Big Bad, because it resonates with many people who do not consider themselves “Big” anything.  We all can feel intimidated by something in our lives and experiences bigger than ourselves, making us all potentially susceptible to the demagogue’s pandering.  It is also a favorite device of demagogues, because it does not require much thought or creativity to make the anti-Big speech.  It seems almost required that the demagogue at some point refer to the Big Target as “Goliath” and modestly identify himself or herself with “David.”  That tired jape is now getting to be about 3,000 years old, but demagogues think that their audiences just cannot get enough of it.

To be sure, there are some cases where being big is a good thing and some things that can be too big to be good.  It all has to do with why they are big and perhaps how they got that way.  Big savings are usually good.  The Grand Canyon is big and magnificent, and I would say that the Empire State Building is, too, at least as I behold it.  On the other hand, big debts are to be avoided, big pits can be dangerous, and the L Tower in Toronto is an eyesore in my estimation (though I will acknowledge that others could be fond of it). 

Government can be too big or too small, depending on what it does with our rights and freedoms.  There are governments too small to promote and protect freedom, while there are many—most—that are too big, and ever increasing at the expense of individual rights, freedoms, and opportunities.  That includes governments that are big enough to help their cronies become bigger by robbing the competition and the public.  Businesses that are big because of government favor would be better for everyone if they lost the government favor and let competition, efficiency, and customer choices determine how big they should be. 

Some are just big because they grew that way.  Is Microsoft or Apple too big?  I do not know, and neither do you.  Exposed to the full discipline of the free market they will be the right size, and so will their competitors.  What is the right size for banks in the United States?  I do not know, and again neither do you nor does anyone else.  The more that they are exposed to market forces, the sooner we will get the best answer, which I expect will be along the lines of “many sizes and shapes” in order to match the many sizes and shapes and needs of businesses, families, and individuals who rely on banks for financial services.  Free competition in open markets has the power to right size commercial enterprises.    

A word of caution.  Part of the success of the war on Big consists in making the listeners feel small and helpless—unless rescued and led by the fearless demagogue.  Besides belittling most people, the demagogue’s device diverts attention from the fact that just about everyone is part of something Big, a Big that may eventually be the demagogue’s next target.  Maybe your church will one day be considered too “Big.”  Or maybe the industry in which you happen to work will become a “Big” target, the town or region where you live, your race or your ethnic group, your savings and investments, the cars or trucks that you drive, your appetite, your use of water, the size of the lot of your house, the wealth of your nation.  All of these, and many others, have already been used by demagogues in their Big harangues.  The demagogue’s insatiable appetite for power never has enough targets.  He or she is always looking for more.

Sometimes there is a kernel of something genuinely amiss in the demagogue’s Big complaint.  Often, when you boil down the genuine substance of any of the complaints to the hard facts, it is hard to discover what is the Big Deal—at least in the problem.  The Big Deal is to be found in the solution, which is what the demagogue is really after.  Were the Popes in Rome really controlling the lives and governments of England in the time of Henry VIII?  No, but the solution of confiscating Catholic Church properties and awarding them to the King’s cronies was a very Big Deal.  The Nazi demagogues in Germany played the same game with their own people, the German Jews, and with their property and possessions. 

The demagogue’s solutions, resting upon emotion and panic, seldom solve anything and often lead to more problems.  The Climate Wars—one year the coming ice age, the next year global warming, today just climate “change”—is an example we have all seen unfold, inflicting untold billions of dollars of costs while enriching favored cronies, but which in even the most enthusiastic promises of the demagogues will do little to affect the climate in reality in our lifetimes.

The next time you hear a public figure fume about something being Big, carefully inquire into and focus upon what he or she is after.  You may be a target just Big enough.

Of Minorities and Society

The saddest chapters of history chronicle the breakdown of human society.  Rights are abused, the innocent—if innocence is allowed to exist—are trampled.  Poverty, hatred, violence, and uncontrolled human passion prevail.  Destruction and degradation, physical and moral, replace human progress.

All society, except that of master to slave, relies upon an element of free association.  Societies may have more or less elements of coercion as well, but it is the element of free association that allows the society to continue, that motivates its members to acquiesce in or even encourage the society’s continuation.  Free, voluntary association is what gives a society its legitimacy.  Without it, there is no society, just a group of people ruled by one coterie of thugs or another. 

Cooperation in society cannot be taken for granted.  When it is, when free cooperation, instead of being nurtured and encouraged, is replaced by coercive rules and compulsion, particularly rules and compulsion designed to benefit some at the expense of others, society declines, people interact more by will of others than by their own volition.  With time either the situation is redressed or the society disintegrates, often to be conquered from the outside when its internal strength has turned to weakness.

In its latter years imperial China was prey to numerous foreign incursions because its society was a mighty empty shell, old traditions surrounding an empire of competing warlords.  Ancient Greece, which twice when united proved too much for the Persian empire, became relatively easy prey to the Romans after the ties of Greek society had become tired and weak.  Rome, in its turn, after a thousand years, was enormously wealthy but mightily weak in the internal strength to repel the roaming barbarians, vibrant societies powerful in their own internal cohesion.  Much of Africa, Asia, and Latin America today remains mired in poverty from the inability of relatively young countries to develop cooperative societies that encourage the generation of wealth and its application to promote prosperity for the present and for the future.

With cooperation at the core of successful society, one would think that democracies must be the most successful.  History records otherwise.  There are no historical examples of a successful democracy, at least not one that lasted for long enough to matter.  Like a match set to paper, democracies flare up brightly into power and glory but all too soon die away to ashes. 

The problem with democracies has been that all too quickly the majority in the democracy learns that it can become wealthy by robbing the minority, under camouflage of statutes and government.  That only lasts until either the minority successfully rebels, becomes a majority in its turn, or the wealth of the minority is exhausted.  In reaction, the majority may seek to preserve its advantages by yielding to a dictator—a “mouth” for the majority—to govern in the name of the majority to discern and express its will.  Few of these dictators have resisted the temptation to wear the mask of the majority to govern for the benefit of themselves and their cronies.  That has been the case for every communist government, without exception.   

 

But, is it not right and just for the majority to prevail?  Perhaps, but to prevail over what?  Everything?  Consider:  if majority rule is applied to deprive the minority of life, liberty, and the pursuit of happiness, why should the minority cooperate?  All that such society offers them is slavery, unrequited labor and service to fill another’s belly and pockets.  In a pure democracy, there is no check on majority avarice, no refuge for the minority.  The majority must always have its way.

Republics, however, are built upon a foundation of minority rights.  Republican governments are granted only limited powers, exercised by representatives of the people, within boundaries beyond which the government may not go.  A written constitution serves to enshrine and strengthen those rights against violation by the majority.  The system gives a stake to all—not just the current rulers—in the continuation and strengthening of the society.  No democracy, hereditary monarchy, or dictatorship can provide that.

In a nation as great and diverse as the United States everyone is part of a minority.  Whether we consider age, ethnic background, religion, geography, culture, profession, or a multitude of other distinctions, we are a host of minorities.  We can only come together and remain as a nation, strong and vibrant, if we are confident of protection in our minority rights, for protecting minority rights in America means protecting everyone’s rights.  That is why the Founders proposed and the nation embraced a Republic formed on a federal structure of divided and limited government.

In that context, what are we to make of the current direction of American society?  Are we preserving the Republic?  Does our society feel like it is coming together?  Recent public opinion polls find that more than 60% of Americans believe the nation to be going in the wrong direction.  In another poll, a mere 22% believe that the current government rules with the consent of the governed. 

What is the national political leadership doing about this?  We have a President who aggressively pursues a variety of programs that have in common the taking of wealth from one minority segment of the nation to reward others.  These wealth transfers are lionized for the undenied purpose of political and electoral advantage for the President and his supporters. 

You will recognize the pattern.  A crisis is discovered by the President, and an industry or group is demonized in public speeches and echoed in the establishment media as causing the problem and/or standing in the way of its solution.  A plan is announced that involves confiscations from the demonized industry or group to fund benefices bestowed on Administration favorites.

Consider a few examples of many.  Global warming is hailed as an imminent crisis with disastrous consequences; the coal, oil, and gas industries are identified as the foes of progress; and a variety of taxes and other restrictive policies are proposed, together with planned subsidies for businesses and companies favored by the White House.  Banks are declared to be the nefarious forces behind the recent recession, new laws and regulations are applied that confiscate billions of dollars from the industry, much of which is then channeled to hedge funds and other political allies of the administration.  Some millions of people are discovered to be without health insurance, doctors and the health insurance industry—among others—are fingered as being at the root of the problem, so a major overhaul of the entire structure of the health system is enacted that favors some at the expense of others.  Administration cronies receive lucrative contracts to develop and administer the new system.  There are many other examples, large and small, in education, welfare, housing, transportation, law enforcement, and many other government programs.

Is there any wonder that there is gridlock in the national government, when policy after policy is aimed at transferring wealth from some to reward others?  Where is the room for cooperation and compromise, when the issue is how much of your family’s wealth is to be taken and given to someone else?  The Roman Republic fell into gridlock after decades of appeals to mass acclaim for schemes of popular distribution of public plunder.  It ended in the triumph of the Caesars, and later their eventual fall to the barbarians.  It is perilous to abuse social comity. 

President Obama has announced the transfer of wealth to be the chief focus for the remaining three years of his administration.  Can our society weather that?

Of Limited Freedom and Limited Government

I live and work near the belly of the beast, and I can report that these days he is not happy.  His belly is rumbling.  He has eaten more than he can digest.  Watch out, he may throw up.  He is already belching.

The federal government is not working, we know and see.  Not only is it not working as was intended when it was created by the States, it is not working as designed and over designed in subsequent years.  The federal government cannot manage the national parks, the welfare system is breaking down, the national transportation infrastructure takes in more money and yet the signs of dysfunction and decay on roads, rails, and bridges are increasingly apparent.  Banks are regulated with thousands of rules while the banking industry continues to shrink:  we have fewer banks today than we did in 1891, and their share of the financial markets has been dwindling for decades.  So much of what the federal government touches turns to rust and ruin.

Yet the federal government keeps reaching out for more, undeterred by its failures.  The Environmental Protection Agency aggressively imposes restrictions on the air we exhale, the Food and Drug Administration announces plans to control the fat in our foods, the new Bureau of Consumer Financial Protection has decided what kind of mortgages lenders can make and what kind of people can get them (acknowledging that many who qualify today will be outside the boundaries of federal standards in 2014).

You can augment this brief sampling of a longer list from your own experiences.  This is nothing new, other than perhaps in frequency and intensity.  If there is a virtue in Obamacare it may be that its unworkability and its increasingly universal hurt are demonstrating broadly what many have been feeling individually.

Demonstrating the hurt is not the same as redressing it.  The beast, however ill, will not cheerfully surrender its prey.  During the debate over ratification of the Constitution, one commenter, writing in the Philadelphia newspaper Independent Gazetteer (October 12, 1787), observed, “People once possessed of power are always loth to part with it”, and then warned that the Feds could not be counted on, by their own volition, to do “any thing which shall derogate from their own authority and importance . . . or give back to the people any part of those privileges which they have once parted with”.  If that was predictable in 1787, it is painfully apparent today.  Perhaps the clearest example is how the Washington power elites have exempted themselves and their cronies from the application of Obamacare while continuing to inflict it on the rest.

And yet, Obamacare is the hurt that keeps on hurting.  People will not get over it or get used to it.  Its pain and suffering will be felt again and again with each new illness, every new tax, as its strictures reduce availability, affordability, and quality of wellbeing.  Wave after wave of new harm will come, astonishing its supporters and augmenting the ranks of its victims until it is addressed.

Americans, much like other people, will put up with much before they are roused to action.  Unlike for many other people, our Constitution gives us avenues for action.  The Constitution embodies the concept of continual redress within the rule of law to make appeal to extremities outside of the rule of law unnecessary and unthinkable, so long as the principles of the Constitution retain their vitality. 

The core principle of the Constitution is limited government, designed to protect the growth and expansion of human freedom.  Increasingly, for about a century, the “progressives” in Washington have turned public affairs on their heads.  Human freedom has been the focus of limitation, while government enjoyed constant growth and expansion.  The end seems approaching, either of the ability of government to manage what it has taken on, or perhaps (and hopefully) when the holders of power can no longer convince enough people that it is all for their own good.  Limitation on government may return in vogue as promises of government solutions to feed the beast ring ever more hollow.

The Philadelphia writer of 1787, whom I cited above, was a critic of the Constitution, because he believed it impossible that the power gathered in by the federal government could be wrested from its hands.  I remain hopeful that it still can be.  Nothing else will work.

Of the Constitution and the States

It must be the least employed part of the Constitution.  In fact, “never used” may be a better description.  I am not sure but that it may be the one part of the Constitution not only never used but never really tried.

I draw your attention to Article V, which offers procedures for amending the Constitution.  Article V has been successfully invoked 27 times--25 or 26 times if you reconcile the count for the fact that the Twenty-first Amendment repealed the Eighteenth Amendment, the prohibition of intoxicating liquors.

So why do I refer to Article V if it has been used on more than two dozen occasions?  I have in mind an important but neglected part of Article V.  Article V provides two methods for amending the Constitution.  Only one method has been used.  We might call that the Washington Method, since it relies upon the Federal Government to propose amendments and send them to the States.  The other, unused method I would call the State Method, as it relies upon the State legislatures to initiate the amendment process.

Article V is short.  Here is the text in full:

The Congress, whenever two thirds of both Houses shall deem it necessary, shall propose Amendments to this Constitution, or, on the Application of the Legislatures of two thirds of the several States, shall call a Convention for proposing Amendments, which, in either Case, shall be valid to all Intents and Purposes, as Part of this Constitution, when ratified by the Legislatures of three fourths of the several States, or by Conventions in three fourths thereof, as the one or the other Mode of Ratification may be proposed by the Congress; Provided that no Amendment which may be made prior to the Year One thousand eight hundred and eight shall in any Manner affect the first and fourth Clauses in the Ninth Section of the first Article; and that no State, without its Consent, shall be deprived of its equal Suffrage in the Senate. (Emphasis added)

Constitutions are foundational documents and so should not be changed any more often than you would consider changing the foundation of your house.  Change the foundation and a lot of other things change, too, and if you are not careful you can weaken the whole structure.  But the Founders of the nation knew that they were not omniscient and that the need for adjustments or even corrections to the basic plan of the government would surely become obvious over time. 

For example, the original process for counting electoral votes for President and Vice President almost put Aaron Burr in the White House instead of Thomas Jefferson in 1800.  Jefferson was the candidate for President, Burr the running mate, and both received the same number of electoral votes, but the electoral college ballot under the Constitution did not distinguish between President and Vice President.  The two were tied, and Aaron Burr got the notion that maybe he should be President instead of Jefferson.  The House of Representatives had to sort it out.  Afterwards, this flaw in the Constitution was corrected by the Twelfth Amendment.

The first ten amendments, the Bill of Rights, were made almost immediately and were demanded by several states as essential conditions for their ratification of the Constitution itself.  We could very appropriately consider those ten amendments as part of the original Constitution since it would not likely have been ratified without their promised addition.  In that view, the Constitution has subsequently been amended little more than a dozen times in over two centuries.

It is also worth noting that Congress has proposed amendments that the States have subsequently and appropriately turned down.  One such proposed amendment that never got past the States was approved by Congress in 1861, denying Congress the power to interfere with slavery.  The Constitution does not, however, limit the power of the States to only considering amendments that come out of Washington.  It provides to the States the power to initiate amendments of their own.

Mark Levin, in his recent book, The Liberty Amendments, argues that it is important for the States to exercise that authority.  He offers some suggestions for amendments that the States might consider, designed to restore the balance between Washington and the States that the Founders envisioned when creating our federal system.

It is a sign of how distorted things have become that using the word “federal” today almost always leads one to think of the government inWashington.  Yet our federal system was designed specifically to preserve State authority and limit the power of the national government.  Levin argues that those limits have been dangerously eroded, especially over the last century. 

Consider the many aspects of our daily lives that are determined one way or another by Washington laws and regulations rather than by the States whose representatives are closer to the people whom they govern.  The list would include the fixtures in our bathrooms, the design of our cars, the food offered to children in school lunch rooms, the subjects that they are taught, the products and services offered by banks, and now the healthcare that we can receive.

A major consequence of the problem is that the power appetite of Washington has taken on more than it can handle and is seriously threatening the health of the nation.  Regardless of which parties are in power or whether power is divided, Washington is becoming increasingly dysfunctional.  But the professional politicians in Washington will not let go of the power that they have taken from the States, even as they sink under the weight. 

 

What has tied Washington up in knots this fall?  It is conflict over Obamacare.  Would that even be a problem if healthcare were left to the States to regulate?  Congress is having trouble passing a farm bill because of apparently unbridgeable differences over food stamps.  Would Washington be stuck in the mud—and at the same time affecting all the rest of the nation—if farm and nutrition policies remained in State hands?  At the same time, many States are facing major budget problems coming to grips with paying for programs forced on them by the national government.

The State Method for amending the Constitution was put into the Constitution specifically for the time when the national government was the problem and would be incapable of solving its own problems.  Surely that time has come.  Washington has gotten tied up in a Gordian knot of its own devising.  The wise Founders of the nation apparently knew that things could come to this.  It is time for the States to exercise their constitutional power to cut the knot.

Of Claiming Good and Doing Bad

A very good book was published this month.  Ostensibly, it is about our economy and the recession.  It is actually about much more.  It is the first book about the current American economy written by a philosopher, and it is perhaps the best book I have read yet about all the recent unpleasantness.  Some might say that the economic trouble still continues, more like a long, slow convalescence from a serious illness than a healthy recovery.  For many whose financial condition stagnates, for those who have replaced a full-time job with one or two part-time jobs, for graduates who have a degree in hand but no work in the field for which they have trained, and especially for the millions who remain out of work, talk of an economic turnaround can seem like a mockery.

For those and others, Infiltrated, by Jay W. Richards, can help make some sense of what hit us.  The book does not suggest that there was a massive conspiracy to drive our nation into economic turmoil.  It explains how turmoil came nevertheless as national policymakers followed the prescriptions of people who claimed to be doing good but tried to cheat the laws of economics and markets to impose what they might call “benevolence” on the rest of us. 

It was their idea that in order to help more people own homes lenders should ignore such things as ability to repay a mortgage, strong history of employment and steady income, and having some equity in the value of the house so there would not be an incentive to walk away if prices dropped.  They also agitated for the government to expand its guaranties for mortgages to people with poor credit histories and loans where lenders cut corners.  And they badgered builders to keep building more houses. 

Their plans horribly miscarried, and yet those people have even more control over us and our economy today and are more able and determined to try again.  The recession, rather than educating and deterring them, has made them bolder.

I am reminded of what the late Louis Rukeyser, the very popular host of the PBS program Wall Street Week, wrote in the 1990s:

            Washington has been taken over by an impregnable mob of short-sighted, power-hungry megaclowns.

They try their worst to micromanage every detail of the economy, but succeed only in whipping the markets back and forth, up and down in spastic patterns.  They despise the gentler forces of a free market, which would moderate swings far more predictably.

(Louis Rukeyser, 1993 advertisement for his financial newsletter)

The people to whom I refer and whom Richards exposes in his book do not like the markets.  They trust themselves more and think that you should trust them, too.  They seriously do believe themselves smarter than the markets, and that is the problem.  No one, other than God, is smarter than the markets.  A large part of economic history, the tragic part, is a chronicle of the disasters caused when a small coterie of people are able to enforce their wishes and preferences on the rest of us in contravention of economic reality.  It never works. 

That was the story of the Great Depression, and it was entirely the story of communism, where whole societies were based upon the now well-proven fallacy that any group of people, no matter how smart or well intentioned, can gather sufficient data and know and understand enough to run a national economy.  It is just far too complicated, with billions of economic decisions being made by millions of people all day and all night long.  The markets make it all work, because the markets are the sum combined total of all of those economic actions and decisions interacting with each other.  No human five-year plan for economic control has escaped failure.

What is worse, as well intentioned as such people may start out, all too often, as Richards’ book exposes, their efforts not only fail to do what they set out to do, they fail to stay virtuous and instead  become enlisted in the service of private gain at the expense of the rest of us.  The Soviet system might have worked pretty well for the party owners of the dachas along the Black Sea but only by impoverishing the workers their leaders claimed to be serving.

Do not let yourself be put off that Richards is a philosopher.  His book is remarkably readable, one that you can take with you to the beach and actually enjoy, and feel that you have learned something—a lot—in the reading.  Richards mixes real life narrative with hard facts and good research, unified by sound reasoning to expose a nasty and growing problem in American government today.  The problem is a big part of why government is expanding and becoming more intrusive in all aspects of our lives, including our financial affairs, education, healthcare, energy use, the products we buy, the food we eat, and the entertainment we enjoy, and even the breath we exhale. 

That is to say that the story told by Jay Richards, in Infiltrated, is actually a longer story, a story that began long before the recession, and continues afterward, a story that is bigger than his book.  The recent economic events and their painful aftermath illuminate Richards’ core message, the human wreckage caused when some people are able to harness the coercive force of government to impose their personal notions of “benevolence” on the rest of us. 

Roger Kimball, writing in 2011 in The New Criterion, warned that such efforts are “intoxicating, addictive, expensive, and ultimately ruinous.” (Roger Kimball, “Liberty versus benevolence,” The New Criterion, February 2011, p.6)  Richards offers several well-described examples, well illustrating the truth of Kimball’s observations. 

A valuable lesson for policymakers and for the people they would govern:  the more discretion you give to government, the more you create the opportunity for abuse of that discretion for private gain.  Europe in the 18th century was lousy with the practice.  Our forebears sought to escape it and fought a revolution to get out of its grip.  The men who threw the tea into Boston Harbor were acting in protest of the partnership between the British Crown and the British East India Company. 

Beware the public-private partnerships.  Jay Richards explains how some public-private mortgage partnerships went bad, very bad, for the partners and for all of us caught in the dust and debris of their collapse.  I am reminded of the warning by former Congressman Dick Armey, that when you enter into a partnership with the devil, you are always the junior partner.

I conclude with the words of New York City Democrat Congressman Bourke Cockran, delivered 110 years ago:

That Government only is good, that Government only is great, that Government only is just, which has neither favorites nor victims.

(W. Bourke Cockran, speech given before the National Liberal Club of England, London, July 15, 1903, in W. Bourke Cockran, In the Name of Liberty, p.190)

Our government should be that government.

Of Washington and the Life of the Nation

Washington, D.C., is a strange place.  I speak from experience.  My whole working career has been in Washington.  In many meetings with people visiting Washington I have explained to them that Washington is not America.  Few have been surprised by the remark.  In many visits away from Washington (and in connection with my work I accept nearly every invitation to leave town and be among those whose lives too many in Washington try to run) I am ever and powerfully reminded how different the rest of America is from Washington.  I have not been surprised.  Kansas City is much closer to America than Washington ever was or will be. 

In support of the point I offer a few painful examples.  I see one each day that I drive into the city.  Looking at the cars around me I note that very few are more than a few years old.  At the same time I am impressed by how many of the cars are foreign luxury models.  It is typical, when paused at a stop light, to notice that many of the surrounding cars are BMWs, Mercedes, Lexus, Acuras, Audis, and not an insignificant number of Jaguars, high end Range Rovers, and Porsches.  I also see a lot more Prius cars and other hybrids.  This is not to say that there is anything inherently wrong with driving any of these or any other late model high-priced cars.  I merely note it as very different from what I see when paused at a typical traffic light in other cities and towns in America.

As an aside, I am grateful to the people who buy and drive a Prius or other model of hybrid, because they subsidize my purchase of gasoline.  Their cars do use less gasoline (though not enough less to compensate their owners for paying so much more for their cars), leaving more for people like me who drive regular gasoline-consuming vehicles.  That reduction in gasoline demand helps reduce the price. 

The Prius drivers might be offended were I to tell them, however, that I am entirely unimpressed by their conspicuous token of environmental sensitivity. Their purchase and operation of a Prius, after all, is very likely more harmful to the environment than is my more conventional automobile.  First of all, they pay $10,000 or more extra to buy their hybrid, and if the price system works at all efficiently that means that making a Prius or other hybrid consumes far more in resources than making a conventional car.  Second, the hybrid car fans and their coteries in the D.C. area have convinced the masters of the highway networks to create special less-traveled commuter lanes that the hybrid drivers are permitted to use, meaning that they reduce the efficiency of the highway infrastructure.  So, to the Prius drivers of the world I say, thanks for the subsidy, but save your enviro lectures for when you are looking in the mirror.

The automobiles of the nation’s capital region are a sign of an even more painful reality of how Washington is different from the rest of America.  It is also the wealthiest part of the nation, by far.  On April 25, 2013, Forbes magazine published an article about the richest counties in the United States in terms of average income (Tom Van Riper, “America’s Richest Counties”).  Six of the ten richest counties are in the Washington, D.C. region, including the top two and one more out of the top five.  While recession lingers in the rest of the nation, Washington and its suburbs are doing rather well, with unemployment down to 5.5%, well below the national average.

I will also say that I am not opposed to wealth and wealthy people.  I wish all of the world to be wealthier and rejoice that it is far wealthier today than people of just a few generations ago could have dreamed.  But we could all live so much better still.  I ache that the policies of governments around the world stifle economic growth and development and hold so many of their people down in poverty.  The poor nations of the world are not poor because their people are less talented and intelligent than others, but because their governments are so oppressive and have been for generations.

Therein lies my beef with the wealth of Washington and its environs and the key to its estrangement from America.  That wealth is hard to explain from the perspective of value added to the rest of the nation.  Washington is basically a one-company town.  Unlike other one-company towns, however, it produces little that adds enough value to the lives of others that would allow it to prosper in open competition in free markets.  The product of Washington instead is forced upon the rest of the nation, whose productive income is confiscated to keep the Washington wealth-eating machine going. 

Try to name an economic product or activity that is not somehow subject to special handling by or permission from someone in Washington or controlled from Washington.  After the Dodd-Frank Act, for example, all financial activities have become more subject to direction by Washington bureaucrats than ever before.  Today, a bank has to pay more attention to its regulators than it does to its customers.  Who gets the best attention out of that arrangement?  The same is true for energy producers, communications firms, health care providers, and you can continue the list.  All that special handling comes with a toll, payable in taxes, or borrowed from the financial markets, or layered upon private incentive and individual initiative.  Today in Washington the most convincing argument for new rules and laws is to announce that something is “unregulated.”  When you regulate liberty, how much liberty survives?  How much of America survives? 

Next year, 2014, will mark the 200^th anniversary of the burning of Washington by the British in the War of 1812.  The curious thing about the burning of Washington was that it did not make a lick of difference.  The rest of the nation went on about its business, little harmed or even affected.  The same was true during the Revolutionary War when the British occupied Philadelphia.  Rather than end the war it did nothing to bring the British victory.  In America the nation was not run by its government, and in fact government was mostly irrelevant to the daily life of the people.  That was very different from European experience, where nations were so dominated by their rulers that capturing the capital was tantamount to beheading the country.

Washington is strange to America.  That can be tolerable, but only if it is smaller and less significant.  Let the real nation draw its life from the people and live where they live their lives without direction from their rulers.  Let us have a Washington whose disappearance would not mean much to the rest of the nation.