Democracy Reform

Sir Winston Churchill once said that democracy is the worst form of government except for all the rest. He is right. Its the best form of government but it also has its flaws. I think that its flaws endanger democracy and needs to be fixed. This blog is for like minded people who want to see democracy improved. I invite people to sumbit essays. I will publish even those I do not agree with so long as I find them interesting.

Sunday, April 05, 2009

Mark Steyn's take on the G20 meeting

Mark Steyn recently wrote an interesting article called, "Exporting their mistakes worldwide"

In it, he accused the G20 governments of not telling the people the truth in order to enhance their electorial prospects:

If government has a role in this crisis, it ought to be to reverse the combination of unaffordable social programs and deathbed demographics that make a restoration of real GDP growth all but impossible in many European nations. But that would involve telling the citizenry unpleasant truths, and Continental politicians who wish to remain electorally viable aren't willing to do that.

This is exactly what I have been trying to say in this blog. To win elections, you have to do stupid things to win votes. Right now, we are in dire need to create economic growth. But the governments are not coming up with pro-growth policies like lower taxes and curbing entitlement programs. Instead they are gunning for scapegoats - like taxing AIG's managers of their promised bonuses or firing GM's CEO. Or blaming everything on Wall Street's truly greedy executives. Obama has come up with a huge stimulus package which seems designed more to win votes than the stimulate the economy.

The cause of the crisis is very complex. But it started in the Clinton Administration with compelling banks to extend mortgage loans to people the banks are unwilling to lend to by toughening the Community Reinvestment Act. By repealing the Glas Steagal Act, commerical banks like Citigroup were allowed to get rid of these sub-prime mortgages by packaging them into Mortgaged Backed Securities (MBS) and selling them.

I am not saying that this is the only cause. There are other contributory causes including, the easy monetary policy of Alan Greenspan, the perverse financial incentives of Wall Street Bankers to take enormous risks, the failure of credit rating agencies and the complexity of new financial instruments which few seem to understand.

But it was the Community Reinvestment Act that started the housing bubble. Without forcing banks to lend money to uncreditworthy people, there won't be subprime loans. Without subprime loans, there won't be MBS. Without Congressional pressure on Fannie Mae and Freddie Mac to buy these MBS, the housing bubble would not have blown this big. The root cause is political. The votrepreneurs (in this case, the Democrats) wanted to win the votes of the lower income groups who could not get loans from banks to buy property.

Similarly, the welfare states set up in Europe resulted in high taxation, high unemployment and other ills. To create jobs, they have to free the market from these constraints as what Mark Steyn said. But the votrepreneurs are too worried about their own elections to take the necessary tough and painful measures. So the problem will fester till people lose confidence in the democratic system itself. Then the stage will be set for the re-emergence of the Strong Man in Europe - like what happened in the 1930s.


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