“May your children live in interesting times.” That was an ancient curse, not a cheerful wish. Wars and revolutions are exciting stories. Peaceful, prudent prosperity is oh so dull. That’s the way macro-economics seemed to evolve between 1980 and 2005, both in America and more widely around the globe. How deceptive.

1) Inflation allegedly had been tamed at the cost of only two short back-to-back recessions in the 1980-81 period, when Gov. Paul Volcker ruled at the Federal Reserve.

2) This was followed by the salubrious Wall Street stock market bubble that Merlin the Magician, in the person of the wily Alan Greenspan, allowed to fester in its happy way.

“After all,” Dr. Greenspan remembered from his day in the Ayn Rand litter, “if prudent people invest in appreciating stocks or bonds, who are we to second-guess them by lowering permitted margin leveraging or by jacking up Fed interest rates?” Joseph Schumpeter’s innovations hopefully could be counted on to raise all ships.

The inevitable happened just when George Bush captured the presidency in 2000, and when Republican majorities reigned in both houses of Congress.

Bush’s “compassionate conservatism” translated into compassionate tax giveaways to the plutocrats, along with new deregulating of corporate accounting.

Cynics in Wall Street called it the new age of Harvey Pitt. Pitt was appointed to be chairman of the Securities Exchange Commission precisely because he had been legal counsel to the Big Four accounting firms.
Pitt’s first speech proclaimed the new day of a “kinder SEC.”

Loopholes
Lawyers, accountants and CEO’s caught Pitt’s innuendo: Reach for that dubious tax-avoidance loophole, and the IRS will not mind. Conceal losses and exaggerate profits by various off-balance-sheet devices that violate strict accounting rules legislated in the years before Bush.

Why rehash this somewhat old hat history? For one good reason.
Today’s global bankruptcies and macroeconomic quagmires trace directly to the financial engineering shenanigans that the Bush era officialdom both countenanced and encouraged. Young George Bush did not only make a mess of Mideast politics. In addition, the Bush-Rove version of plutocratic democracy accomplished the singular alchemy of converting a usual plain-vanilla boom-and-bust in housing into an old-fashioned, hard-to-manage, worldwide financial panic.

This time America was the Eve in Eden who tempted Swiss, German and U.K. bankers into eating the evil apple of non-transparency and unconscious gross over-leveraging.

Did Ayn Rand or libertarian Milton Friedman ever anticipate that Adam Smith’s marketplace Eden would come to the present disorder? Where were Bank of England Gov. Mervyn King and the heads of the European Central Bank and the Bank of Japan while the disasters were unfolding?
Just like the usual mediocre CEOs, world leaders never focused on the dangerous winds that were beginning to blow.

If today were 1929, the present financial epidemics would be the prelude to a prolonged worldwide depression. Fortunately, economic history has taught us a lot since then.

Central banks, as Walter Bagehot in the nineteenth century and Charles Kindleberger in the twentieth taught, are primarily the lenders of last resort. As Kipling would put it, “What do they know of money if only money they know?” When stocks and bonds are burning up or freezing down, preoccupation with inflation targeting, Gov. Bernanke’s initial mantra, is not nearly enough.

Whirlwind
Main Streets everywhere on the globe are waiting anxiously to see how governments cope with the whirlwind that excessive deregulation sowed: lost jobs; depleted saving nest eggs; high energy and raw material prices; negative capital gains on homes and diversified portfolios. Of course, some of these trace to one’s own sins of omissions and commissions. Some do arise from supply shocks: from interruptions in Mideast oil drilling, and from inflation of raw materials and foodstuff arising from new Chinese demands for better living standards. But more stem from the faulty social housekeepers who voters, rich and poor, elected to the highest offices in the land.

The old slogan, “It’s the economy, stupid,” finally penetrated into the White House. On schedule, with the speed of light, President George Bush, who had been taught better at Yale, seriously proposed making permanent the rash tax giveaways and deregulations that have brought on today’s economic scandals.

Discredited, radical-right supply-siders from President Reagan’s first-term circus came out of retirement to ask again for no taxes on the earnings of capital in favour of reliance for vital government services on flat taxes on wage earners.

When fear of risk stifles both investment and consumption spending, sensible and measured fiscal budgetary spending is the prescription to augment central banks’ lowering of interest rates.

What follies electorates perpetrate can be offset in future elections. However, it is a commonplace that today money buys votes legally. Therefore, realists will temper their optimism with guarded caution.

© 2008 Paul Samuelson. Distributed by Tribune Media Services, Inc.