The Market Corrects Itself
Adam Smith Was Right
Leave it to political economist Thomas Sowell to provide perspective and a dollop of simplicity to the tangled web that is the current state of the American economy. If anything, Mr. Sowell, in a recent column, reminds us that whenever Washington takes it upon itself to resolve problems, particularly economic ones, precedents are set and special-interest demands for like treatment multiply.
In this particular instance — intervention in the housing industry crisis — the implicit danger is that when steps are taken to minimize risk, the potential for reward, the linchpin of capitalism, is ultimately compromised. Government cannot always be expected to save people from themselves — and their capricious financial decisions.
Still, the urge to make things right is an irresistible one for politicians and their appointees, particularly in an election year. Hence, the gadarene rush for government to do the work of markets. But here's the rub: As The Wall Street Journal observed editorially Tuesday, the market, in the spirit and tradition of its everlasting guiding light, the 18th-century Scottish economist Adam Smith, had already begun to self-correct, sans government regulation.
The last few weeks, the Journal reported, have witnessed a gradual return to more conservative principles, as "the decade's great experiment in direct, unmediated lending is undergoing an Adam Smith cleansing ... In his wisdom, the Professor from Glasgow is now moving more of those direct-lending assets back on bank balance sheets where there is a capital safety net to write off the losses without busting the entire financial system."
Now, does this exercise in self-realization render a 218-page remediation plan advanced Monday by Treasury Secretary Henry Paulson superfluous? Not necessarily. Like the spirit of Dr. Smith, Mr. Paulson assumes the role of "untangler." His plan to overhaul regulation of the nation's financial system seeks not only to simplify, consolidate, and correct, but also to untie the knots of a regulatory approach increasingly incapable of adapting to the challenges posed by a technologically intricate market economy. In this sense, the plan is commendable.
But, in saying this, we offer a caveat, courtesy of The Journal: "Today's credit panic isn't some ‘crisis of capitalism' that needs a vast new layer of regulation. We are living through the aftermath of a societal credit mania fueled by excessive money creation. The regulators are as much to blame as the regulated, and Adam Smith is providing more punishment and reform than Washington ever will." Opinion mania