The alternative, of course, is that the United States goes down the old European path of government domination of markets and the economy. But the moment the United States becomes a bailout nation, that is the moment our economy and country head irrevocably down the road of decline. However, Paulson set down a marker and said, "No we won't." As difficult as the next days may be, the primacy of economic freedom has been given a boost, while the economic future of the United States looks brighter. Paulson's decision was both momentous and transformative.
Obama is on the campaign trail predictably charging that a lack of regulations during the Bush era is responsible for the current mess. But he's misreading history. As George Mason economist Tyler Cowen wrote in The New York Times, one of the problems with the U.S. financial system is not a lack of regulation, but a lack of smart and effective regulation.
During the Bush years, financial regulations increased exponentially, beginning with the misbegotten Sarbanes-Oxley act. That put accountants and lawyers in the driver's seat rather than entrepreneurs. And it turns out that neither the Fed, the FDIC, the comptroller of the currency, nor the SEC properly supervised high-risk leveraged borrowings and the capital-adequacy ratios necessary to safeguard against losses. Accounting standards need reform, especially the notion of fair value. Economist David Malpass wants to throw out mark-to-market altogether. He has a good point.
Then there's Congress, led by Democrats in the last two years and Republicans before that, that mandated substandard lending to low-income groups. And as the high-risk loans mounted, this very same Congress -- under the gun of political contributions -- continued to promote the excesses of lenders, including Fannie Mae and Freddie Mac.
There are many more issues wound up in all this. But one thing's for sure. Keeping tax rates low, holding back cheap-money inflation, strengthening the dollar and building a more effective regulatory structure that does not stifle free enterprise is what will promote long-run economic prosperity. For optimists like myself, the plunge in oil and gas pump prices is already producing a sizable tax-cut effect, planting the seeds of recovery for mortgage-holding consumers and everyone else.
It's easy to be overly pessimistic right now. But that negativism is not written in stone. Paulson talks about a housing and financial recovery in terms of months, not years. And I think he's right. But his courageous action to put a stop to bailout fever will do as much as anything to move the nation toward recovery.