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The worst thing that can happen to an economist is for the politicians to come over to his side and actually implement his grand idea.
Milton Friedman, who died two years ago, 44 years after his book “Capitalism and Freedom” fathered the great free-market conservative movement, went to his rest in peace. He had seen the idea of unfettered financial markets and a monetarily based fiscal system come as close to perfect manifestation in the United States as any economic theory ever devised. Well, if you don't count the dictator Augusto Pinochet's Chile, where Friedmanism was installed as the government in 1973 under the management of Friedman disciples. General Pinochet died a few days after his hero.
This week, the men who did the task for Friedman in the United States, or at least some of them, had to sift through the rubble in a very public and self-conscious way and explain why it all turned out so badly. But actually President Bush and John McCain, who was an even more forceful advocate of Friedman economics, haven't been trying to explain it at all. From their public utterances you would never know that they ever believed that virtually all government regulation of the markets or of any business activity was bad.
In the past three weeks, both became fans of socializing a big part of capitalism — banking debt — and imposing a little discipline on the financial sector again.
It is too late for George W. Bush to try to explain why the theories didn't work out because no one has even casual curiosity about what is on his mind. For McCain, it is a terrible dilemma, for his presidential election hangs in the balance. Unfortunately, it is more than an inconvenience for everyone else, who must suffer the consequences when an economist's agreeable theories do not match disagreeable reality.
Just like Ronald Reagan and George W. Bush, McCain almost certainly never read a chapter of Friedman but embraced his popularized tenets — everyone thrives when the government lets private greed and initiative take their natural course, and all that really counts in an economy is a growing money supply. Only a few weeks ago, McCain was saying he always came down on the side of deregulating the markets.
Since the Republican Convention a month ago, McCain has switched icons. It's no longer Ronald Reagan but his mirror opposite, Theodore Roosevelt, the most liberal American president, the foe of trusts and the champion of regulation of the railroads, the stockyards, banking, food and drugs and an advocate of an estate tax (a.k.a. the death tax), a sharply graduated income tax and government-sponsored health care for all.
“I'm a Teddy Roosevelt Republican,” he told ABC's George Stephanopoulos. “I believe that government has to be part of the solution. ... Regulation and oversight has to be absolutely essential.”
Now he says he's been fighting all along for tough financial regulation but Barack Obama and the Democrats stymied him. His evidence is that in 2006 he sponsored a bill to toughen regulation of Fannie Mae and Freddie Mac, the government-sponsored mortgage companies. Democratic senators with ties to lobbyists for the companies stopped him, he said.
What really happened? Sen. Chuck Hagel, R-Neb., introduced the Federal Housing Enterprise Regulatory Reform Act of 2005. McCain wouldn't sign on but in 2006 when the Office of Federal Housing Enterprise Oversight dropped a bombshell — Fannie Mae and Freddie Mac officials were lying on financial reports to trigger bonuses for the executives and big profit reports were total illusions — McCain signed on as a sponsor of Hagel's bill and issued a statement. That was the extent of it. The bill died in the Republican-controlled Senate after the Banking Committee, led by Republican Richard Shelby, gave it a less-than-stellar report.
Democrats erased the Republican lead in the Senate in the 2006 elections and Hagel re-introduced his bill in 2007. McCain conspicuously left his name off the sponsors. Could it have been because Fannie and Freddie employees pumped money into his presidential campaign, his campaign staff was larded with lobbyists for the companies and one of his economic advisers was Aquiles Suarez, who had directed Fannie Mae's $47.5 million lobbying campaign from 2003 to 2006? McCain's campaign manager was still pocketing money from them last month.
Two weeks ago, the economic crisis in McCain's mind was not the result of deregulation — his chief adviser Phil Gramm's liberation of the investment bankers in the 1999 law that with McCain's help scrapped the Glass-Steagall Act and barred any government regulation of investment holding companies — but just the incompetence of the Bush administration. McCain blamed the collapse of the investment banking giants on former Congressman Christopher Cox, the head of the Securities and Exchange Commission and once an ally of his, and he demanded that Cox be fired.
Cox was a fellow free-market libertarian like McCain, but last week he admitted that deregulation, or “voluntary” regulation by the investment banks, had been a tragic mistake. It had led to the fall of investment banks like Lehman Brothers and Bear-Stearns. It might have led to the collapse of Goldman Sachs Group, the premier investment bank, but when Treasury Secretary Henry Paulson learned at a Sunday meeting on Wall Street that his old company had a $20 billion exposure if the insurance giant American International Group (AIG) went down he decided that government bailouts were the right course. McCain meekly changed his tune, too.
He's no Teddy Roosevelt, that's for sure.