Wednesday, August 25, 2010

Regime Uncertainty

Pratt and I have blogged about regime uncertainty before.

Robert Higgs writing on stated
Between 1935 and 1940, this matter attained prime importance. So many businessmen and investors lost confidence in their ability to forecast the future property-rights regime that few were willing to venture their money in long-term investments. They constantly sought clarification of the government’s designs, but President Roosevelt merely continued to rage against “economic royalists” and to blame a “strike of capital” for the economy’s ongoing troubles, including the depression of 1937-38, which played havoc with the general public’s confidence in the New Deal. Treasury Secretary Henry Morgenthau tried repeatedly to persuade the president to make a public statement that would reassure investors, and as the president continued to reject his entreaty, Morgenthau became so frustrated that in a 1937 cabinet meeting, he blurted out to his boss: “What business wants to know is: are we headed toward Socialism or are we going to continue on a capitalist basis?” (qtd. in Higgs, Neither Liberty Nor Safety, p. 114). Astonishingly, Jim Farley and even Henry Wallace backed up Morgenthau’s insistence that the president spell out what sort of economic system the administration sought to foster.

I do not know that the regime uncertainty that an increasing number of commentators and others have perceived recently is comparable to that of the latter 1930s — by now there’s not much real capitalism left for the government to destroy, in any event. However, it is clear that the government’s frantic actions of the past several months have created a situation in which investors have little confidence about the character of future property rights in the United States. The takeovers of Fannie, Freddie, and AIG, the massive interventions into finanancial markets, the huge bailouts of banks and other financial institutions, mixed with letting Lehman Brothers go down and resisting a bailout for the Big Three auto manufacturers (so far, at least) — all these actions, and others, imply that a rational investor would do well to attach a huge risk premium to any money he puts into investments even for the intermediate term, not to mention the long term.

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