The OccupyDon’tPage Buy Lie 3 By Michelle Morin

Principled Ideas from the Centennial Institute Publisher, William L. Armstrong Volume 4, Number 3 • March 2012 Editor, John Andrews

AMERICA THRIVES “dotcom” companies rose giddily over several years to spectacular heights, only to go bust in equally spectacular ON FREE MARKETS, fashion, and a recession followed. In the bursting of the CRISES AND ALL “Dotcom Bubble,” the technology stock index lost nearly By Alex Pollock two-thirds of its value. Almost a decade later, it still trades at only half its bubble peak. Most people know virtually no financial history, so when we have So, the United States, in succeeding decades, had first the a financial crisis, it seems like it has equity bubble and bust of the 1990s and then the housing never happened before. But it has, bubble and bust of the 2000s. Japan, in the 1980s, had a again and again. As Paul Volcker, simultaneous equity and housing bubble and bust. former chairman of the Federal Ups and Downs Reserve, remarked: “About every Bubbles are the unsustainable increase in the price of some ten years, we have the biggest asset (houses, most recently) that people end up buying crisis in 50 years.” because they believe the price will continue to rise. So, The latest “never before” is indeed, it does—for some time, perhaps several years, the financial panic of 2007–09, with its Travails shouldn’t strengthening the belief. massive losses still reverberating through But when accompanied by large increases the economy. Yet that crisis, on closer surprise us. in borrowing, bubbles are unfailingly examination, displays the classic patterns followed by crises, in which borrowers default, lending of recurring credit cycles. In the bubble that preceded firms collapse, and the asset prices rapidly fall. the panic, housing prices and mortgage borrowing rose to unsustainable heights and then crashed back to earth. Now let’s look further back in the lessons of financial history. Guess the date of these words: “The [banking] Millions of mortgage borrowers ended up owing more on failures for the current year have been numerous, many their homes than the properties were worth. The housing having been characterized by gross mismanagement and wealth that people thought they had fell by about $7 trillion. some by criminality....The unfavorable conditions were Defaults on mortgages soared. greatly aggravated by the collapse of unwise speculation in Premature Obituary real estate.” As the crisis deepened and spread beyond the housing This stern verdict could have been written in 2009 sector, a serious recession ensued. The stock market lost or 2010, for the banking failures of these years were more than half its value. Famous banks failed or had to be indeed numerous and aggravated by unwise real estate acquired by competitors able to absorb their losses. speculation. In fact, it was penned by the Comptroller of Governments in the United States and many other countries the Currency—the regulator of national banks—in 1891. scrambled to design huge bailouts. Some journalists In 1912, soon-to-be-president Woodrow Wilson said, deluded themselves into thinking they were witnessing the “Waiting to be solved...lurks the great question of banking “death of capitalism.” Alex Pollock became an American Enterprise Institute Fellow in 2004 after It was so dramatic that people might be forgiven for 35 years in banking, most recently as head of the Federal Home Loan Bank of Chicago. He holds degrees from Williams, Princeton, and the University of believing it was unique. But in historical perspective, we Chicago. This is from a lecture at Colorado Christian University on Dec. 16, should not be surprised by these travails. We don’t even 2011, discussing his book Boom and Bust (AEI Press, 2010). have to look very far back for another bubble. Centennial Institute sponsors research, events, and publications to enhance Only ten years before, as the potential of the Internet public understanding of the most important issues facing our state and nation. By proclaiming Truth, we aim to foster faith, family, and freedom, teach citizen- became widely realized, the stock market prices of ship, and renew the spirit of 1776. Finance Corporation—observed, “Strewn all over was the wreckage of the banks which had become entangled in the financing of real estate promotions and had died of exposure to optimism.” It is the professional duty of bankers and debt investors to be skeptical, not optimistic, but this seems to be forgotten in each financial cycle. As economist Abram Piatt Andrew wrote in 1908: “The American panic of 1907...gave the lie directly to those who in recent years have contended that we should never again witness the experiences like those remarkable years 1837, 1857, 1873, and 1893.” All of these were years of financial crises. Never Say Never Financial crises keep happening. The economic historian Charles Kindleberger, surveying three centuries of financial history, concluded that there has been a crisis about every ten years—the same estimate quoted earlier from Paul Volcker. In his book Manias, Panics, and Crashes, written with Robert Aliber, Kindleberger identified no fewer than 30 major financial crises in various countries between 1720 and 1990. More recently, the International Monetary Fund identified 88 banking crises in numerous countries around the world during the last four decades. Of course, crises often occur in multiple countries at the same time. In their delightfully titled 2009 book, This Time Is Different: Eight Centuries of reform.” A century later, it still seems to be lurking, and Financial Folly, Carmen Reinhart and Kenneth Rogoff banking reform is once again widely debated. report 250 defaults by governments on their debt since 1800. Their compilation of banking crises in countries In 1914, the Comptroller of the Currency, now full of ranging from Albania to Zimbabwe is 45 pages long. optimism, wrote that with the creation of the Federal Reserve System, “financial or commercial My own banking career began during the “credit crunch” crises seem to be mathematically Another decade, of 1969. This was followed in 1970 by impossible.” the bankruptcy of the giant Penn Central another crisis. railroad—a “systemically important” In 1922, at the beginning of the 1920s railroad—which triggered panic in the boom, then–Secretary of Commerce Herbert Hoover commercial paper market, which, in turn, was bailed out launched the government’s “Own Your Own Home” by the Federal Reserve. The Penn Central railroad was then campaign, which, among other things, encouraged nationalized. mortgage loans. Mortgage debt greatly expanded in the 1920s. In 1927, the Congress significantly liberalized the In 1974 and 1975, a massive real estate bust occurred. terms on which national banks could make real estate loans, About two-thirds of bank loans to real estate investment encouraging them to make more. The result? By 1932, trusts—the enthusiasm of the day—were nonperforming Jesse Jones—who later became the formidable head of (that is, borrowers could not make their loan payments). the Depression-era bailout operation, the Reconstruction The Senate Banking Committee held hearings on what

CENTENNIAL REVIEW is published monthly by the Centennial Institute at Colorado Christian University. The authors’ views are not necessarily those of CCU. Designer, Danielle Hull. Illustrator, Benjamin Hummel. Subscriptions free upon request. Write to: Centennial Institute, 8787 W. Alameda Ave., Lakewood, CO 80226. Call 800.44.FAITH. Or visit us online at www.CentennialCCU.org.

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Centennial Review, March 2012 ▪ 2 then-chairman William Proxmire called the “inordinate risk to the banking system.” Indeed, had banks been forced to Voices of CCU write down their loans (that is, formally account for those DON’T BUY THE OCCUPY LIE loans’ reduced value) to what they could be sold for in By Michelle Morin the debt market at that point, the entire banking system probably would have become insolvent. Editor: The economic turmoil chronicled by Alex Pollock has fueled Less than a decade later, the series of crises that marked a new wave of protest against capitalism. A Centennial Institute the 1980s began with the default of Mexico on its foreign debate on Jan. 30 explored whether the Occupy movement or the debt in 1982, which spread to a global crisis in loans to Tea Party best represents America in 2012. Debater Michelle developing countries. Morin, an activist mom from Colorado Springs, began this way: Mistakes Repeated “We’re told we must choose between The 1980s also included the collapse of the highly left and right,” said Ronald Reagan in regulated savings and loan industry (financial institutions 1964, “but I suggest there is no such that specialize in home mortgage loans), which had a thing as a left or right. There is only an taxpayer bailout costing about $150 billion. up or down. — Then came another terrific commercial real estate bust, and “Up to man’s age-old dream the the failure of more than 1,400 highly regulated commercial maximum of individual freedom — banks in the decade, not to mention the government consistent with order or down to the ant heap of bailout of the Farm Credit System. Adding together the totalitarianism. U.S. commercial banks and the savings and loans, more “Regardless of their sincerity, their humanitarian motives, than 2,200 failed between 1982 and 1992. those who would sacrifice freedom for security have Citibank—a huge and famous bank then as now—was embarked on this downward path.” in deep trouble, and it was not alone. The headline The Tea Party movement reflects this insight from “Banks Entering Era of Painful Change—More Bailouts, Reagan and the original intent of America’s founders. It Bankruptcies, Layoffs Likely,” seemingly taken from 2009, represents those virtues that motivate America upward. was published in July 1991. That same month, a Wall Street Occupy Wall Street (OWS), in contrast, with its radical author penned this remarkable line: “Lenders are unlikely ends and militant means, represents a destructive force to repeat their past mistakes.” But, of course, they did and pulling our country downward towards that heap of generated the next crisis. totalitarianism. Pharaoh’s Dream The Tea Party is about individuals. OWS is about the In an even longer view, the basic idea of cycles appears in masses, and transferring power from the individual to the the book of Genesis, chapter 41. This is Pharaoh’s dream so-called “99 percent.” of the seven fat cows and the seven lean cows, which The Tea Party is about self-reliance and personal Joseph rightly interprets as seven good years followed by responsibility. OWS is about dependence on others and seven bad years. The lesson, spanning more than three claims on government. millennia, is twofold: The Tea Party defends and understands the benefits of Financial cycles inevitably accompany economic life. ◆ free markets. OWS despises and seeks to crush capitalism. ◆ But so does the continued upward progress of living standards and national wealth in a market economy. The Tea Party arises from a spirited people who reject the advance of despotism. OWS fosters a sense of victimization to justify invading the property and civil rights of others. If the Occupy movement were to win, America’s founding principles would lose. When the Tea Party movement wins, with civility and within the constitutional rule of law, Centennial America’s founding principles will Institute win. ■ Colorado Christian University

Centennial Review, March 2012 ▪ 3 Centennial Review Centennial Institute March 2012 Colorado Christian University 8787 W. Alameda Ave. America Thrives Lakewood, CO 80226 on Free Markets, Crises and All Return Service Requested By Alex Pollock Despite short memories to the contrary, the U.S. economy averages a crisis every decade or so. It weathers them with ever-higher living standards, thanks to the resilience of our free institutions.

Notwithstanding numerous financial crises, Americans ‘Natural Progress of Opulence’ today live better than their parents, far better than their The trend in the graph of constant purchasing power of grandparents, and vastly better than their more distant U.S. gross domestic product per capita since 1900 is quite ancestors. People live longer, are healthier, eat better, are clear. However, the energy of innovation is also disruptive. better educated, work in less dangerous and arduous jobs, Over time, the economic well-being of average people more easily afford basic necessities, and have more choices keeps increasing in a most remarkable way, but we also and wider horizons. have cycles and crises. The long-term trend is the good We cycle around As Warren Buffett, the news. a rising trend. best-known investor of In a celebrated phrase from his great 1776 book, The Wealth our time, wrote about of Nations, Adam Smith called this trend of increasing the most recent crisis: “Never forget that our country has economic well-being “the natural progress of opulence.” faced far worse travails in the past. In the 20th century Can we have the wonderful trend without the cycles? No, alone, we dealt with two great wars...a dozen or so panics we can’t. ■ and recessions; virulent inflation which led to a 21.5% prime rate in 1980; and the Great Depression of the 1930s....In the face of these obstacles—and many others—the real standard of living for Americans improved nearly seven- fold during the 1900s.” In other words, on average over time, the trend is for greater and greater overall economic well-being. While bubbles and crises continue, we cycle around a rising trend. This is because free markets release the energy of enterprise, entrepreneurship, application of new knowledge, and investment in new and better products and ways of producing them.

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