The New Despotism

The British Labour government which followed the end of WWII, after some period of dormancy, has taken life in these United States. F.A. Hayek warned in The Road To Serfdom that those six years of socialist government in England would provide only despair. He explained that the attempts at economic planning would lead to a new form of despotism, "A despotism exercised perhaps by a conscientious and honest bureaucracy for what they sincerely believe is for the good of the country...but it is nevertheless an arbitrary government..... In deciding the relative importance of the different ends, the planner also decides the relative importance of the different groups and persons." The socialist government, "must of necessity take sides, impose its valuations on people and instead of assisting them in the advancement of their own ends, choose the ends for them."

We praised Paulson but just hours after that writing he and Bernanke came to the aid of the world’s largest insurer. We are told that the failure of AIG could have brought the financial world to its knees and perhaps all of us with it. This stretch is based on AIG’s being on the hook for $441 billion of "credit default swaps" - contracts to reimburse holders of mortgage-backed and other debt securities if that paper goes bad, a relatively new invention of Wall St, something in which AIG took a fling. That is, AIG got in trouble through poor management and risk taking in the provision of default insurance on securities it turns out it did not understand. As taxpayers all we get out of this deal is that we are now in the insurance business. Well, ok, the government drove a hard bargain; if AIG rebounds the taxpayer could make a killing, but, that is neither here nor there. Why the ad hoc decision, why take sides with AIG and abandon Lehman, why protect AIG employees and toss others out in the street? Because AIG sold more swaps to more banks and investment companies than Lehman did. Again thanks to the government’s arbitrary decision the banks and others which actually held these sweet-pea securities are now off the hook.

The Fed invoked a loophole which allows it to lend (rescue) non banks under "unusual and exigent" circumstances. The Fed apparently has the authority to rescue a pizza parlor if things get touchy in that industry. Decisions are being made ad hoc after firms find themselves in hot water. Certainly we have witnessed the undermining of the free market system - arbitrary swings of human judgment not grounded on any set of principles; there is no adherence to a rule of law. We have no rule of law then we have no democracy. "Nothing distinguishes more clearly conditions in a free country from those in a country under arbitrary government than the observance in the former of the great principles know as the Rule of Law," Hayek explains. "Stripped of all technicalities this means that all its actions are bound by rules fixed and announced beforehand - rules which make it possible to foresee with fair certainty how the authority will use its coercive powers...to plan one’s individual affairs on the basis of this knowledge."

Robert Craven