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Tocqueville as Prophet

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“The American Republic will endure until the day Congress discovers that it can bribe the public with the public’s money.”
Alexis De Tocqueville, Democracy in America (1835)

Last week the economic central planners at the Federal Open Market Committee (FOMC) of the Federal Reserve Bank issued a statement tempering their previously optimistic forecast for recovery from the “Great Recession”. In its statement, the Ben Bernanke-led FOMC indicated that the weakening recovery has made it necessary for the Fed to keep interest rates at “exceptionally low levels…for an extended period”. Additionally, the FOMC stated it will change course. Instead of shrinking its historic $2 trillion balance sheet, the Fed will reinvest money from maturing mortgage bonds to buy up more assets (notably government treasury bonds). All of this will be done in an effort further to stimulate the markets to recovery.

No one doubts that something needs to be done to reverse the downward spiral that our economy is once again taking. After all, consumer confidence is down, factory orders are down, the real unemployment rate which takes into account discouraged and underemployed workers is still north of 16 percent, Food stamp usage has skyrocketed to a record high of 40.2 million recipients, and Bank repossessions and foreclosures are still a massive problem. No, nobody doubts that something needs to be done, but that something should not be more of the same that got us into this mess in the first place and is keeping us in it in the second.

Now, I would not question the intelligence of anybody on the FOMC. Bernanke and his comrades are smart folks. They all have fancy degrees and have spent years on Wall Street and/or in the government cutting their teeth becoming seasoned economists and financiers. They certainly are not wet behind the ears as is said in the business. So then if it is’nt mental ability maybe it’s motives that drive the FOMC members to pursue what appear to the reasonable layman as an insane policy. Let’s analyze the situation further by looking at historical examples.

Faced with double digit inflation and an unemployment rate of 11-12 percent in the early 1980’s, then Fed chairman Paul Volcker did exactly the opposite of what our current Fed commander has done. He raised money market rates to 19 percent. It was painful at first, but in the long run the policy broke the decade-long grip that stagflation had on our economy and ushered in a decade of solid economic growth.

Then we can point to Japan’s horrible experience with quantitative easing in the 1990’s as another example for objecting to the FOMC’s lamebrain policy. Japan’s financial meltdown in the early 1990’s, like ours this time, was caused by government-induced easy money and real estate speculation. Once the bubble popped, the Japanese powers-that-be pursued a policy of massive fiscal stimuli, propping-up of insolvent banks, and discriminatory credit allowances. Sound familiar? All in all, in the decade of the 1990s, Japan passed 10 fiscal stimulus packages worth more than 100 trillion yen. Instead of curing its economic ills the spendthrift policy led to what is now known as the Lost Decade in Japan. In fact, many economists claim Japan has still not recovered.

Of course, Bernanke will make up excuses why the same policy he is pursuing for the U.S. didn’t work for Japan but will work for us. Actually, all he really has to do is reference noted Keynesian economist Paul Krugman who says both Japan in the 1990s and the U.S. today simply did not/have not spent enough to stimulate their respective economies. Unfortunately for Bernanke at least two of his underlings don’t buy the argument. In March of 2009 Timothy Kehoe, Edward Prescott of the Minneapolis Fed and a team of 24 economists from around the world published a report indicating that it is the “overreaction” by government which “prolongs” and “deepens” economic downturns. In fact, if you look at the three crises in the last 100 years where government has overreacted the most (the Great Depression, Japan’s Lost Decade, and our current crisis), you find they are also the longest lasting. This is a fact that seems to solidify Kehoe and Prescott’s conclusion.

Lastly, the U.S. government has tried quantitative easing and Keynesian economics to solve our most recent troubles for close to 3 years now. When the “Great Recession” began in December 2008 the national debt was a little over $9 trillion. As I write this article, our debt is more than $13.3 trillion, and this doesn’t count the trillions of dollars in easy credit doled out by the Fed to induce banks to lend again. The longevity and size of the effort can only make one wonder about the motives of the FOMC to pursue more of the same. Could it be that we are missing some information only available to the Fed? Or could it be that Tocqueville was correct when he prophesized that Congress would discover that it can bribe the public with the public’s money. We are talking about the Federal Reserve, but who chartered the Fed and refuses to audit its books?  Congress. What’s unknown, given our current circumstances, is how much longer our republic can endure?

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About Kenn Jacobine

  • Baronius

    Oh, come on, Kenn! One sentence about Tocqueville? I know you like to talk about the Fed, but one sentence? It was the title of your article. And Tocqueville’s interesting! And Fed policy isn’t what Tocqueville was talking about.

  • Yipeeeeee! BC’s back! : )

  • Kenn,

    There is another reason we have a central government. If all power was left within the states, then the common good of the nation as a whole would suffer.

    “When the Constitution was adopted in 1789, the Founding Fathers recognized that no government could function if it relied entirely on other governments for its resources, thus the Federal Government was granted the authority to raise taxes. The Constitution endowed the Congress with the power to “…lay and collect taxes, duties, imposts, and excises, pay the Debts and provide for the common Defense and general Welfare of the United States.” Source

    🙂 I’ll have to go research your Tocqueville.

  • “All those who seek to destroy the liberties of a democratic nation ought to know that war is the surest and shortest means to accomplish it.” -Alexis de Tocqueville

  • Just one more quote

    “I cannot help fearing that men may reach a point where they look on every new theory as a danger, every innovation as a toilsome trouble, every social advance as a first step toward revolution, and that they may absolutely refuse to move at all.”
    -Alexis de Tocqueville

    This sounds like the opposition to, green renewable energy, to me!

    : )Yes, this guy’s a prophet.

  • Kenn Jacobine

    You are absolutely right. It has been estimated that if we brought all the troops home and stopped empire building we could save $1 trillion a year. In the meantime China just became the 2nd largest economy in the world. Welfare to the Military Industrial Complex has to stop, but any president who tries will probably lose his life – i.e. John Kennedy.

  • some things are best left unsaid…

    You agree with me in #3

  • Kenn Jacobine

    I agree with #3 but we probably disagree as to what Congress can spend the taxes on. I believe it can only spend the taxes on powers given it in Article 1 Section 8 and other parts (necessary clause) of the Constitution where specific powers are delegated to Congress

  • Well Kenn, you better write something that we don’t agree on… 🙂

  • Summer Said

    Pure genius. I totally concur with what you espouse. Alexis De Toqueville, a 24 year old French aristocrat not only predicted everything that would come to be in America, he was summarily correct. When I read Democracy in America while in college, I realized, knowing it is generally required reading for any pre-law student, hence most if not all politicians have read it, whilst no one paid heed, that we as a country were and have been on a downward spiral. That and President Eisenhowers exit speech, makes my blood run cold. Systematically, our politicians, Congress, the Fed, and forgive the expression, the rest of the n’er do wells, are hell bent on the US’s demise. It is up to the populace to enact change. Unfortunately, change occurs rather slowly. Not until the collective conscious is on the same page will we see it happen. Once a body is in motion, it tends to stay in motion. God knows, by then I could be long gone or at least have moved out of the country.
    Bravo Kenn.