Alex J. Pollock, resident fellow at the American Enterprise Institute and frequent contributor to this page, is the most elegant writer on the mortgage business we have. A reader of his book Boom & Bust: Financial Cycles and Human Prosperity (AEI Press) will be delighted to find quotations from Genesis, Aesop, poet Edna St. Vincent Millay, financial analyst Walter Bagehot, the historian Paterculus, philosophers Kierkegaard and Santayana, and populists Will Rogers and Yogi Berra among its observations.
And he is a delightful companion to have while revisiting booms and busts as far back as the South Sea Bubble of 1720, which ensnared Sir Isaac Newton and caused the famous scientist to write: “I can calculate the motions of the heavenly bodies, but not the madness of people.”
Pollock’s thesis here is that booms and busts are inevitable results of “the madness of people” and are an indelible, if not enjoyable, part of markets’ progress. Further, though the market busts can be temporarily deep and damaging, they are part of a cycle that has led humankind ever on to increasing prosperity.
He is witty on the failure of economics, “the dismal science,” to predict booms and busts, including this quote: “Economic forecasting was invented to make astrology look respectable.”
Readers of his op-ed pieces here will not be surprised that Pollock takes a dim view of (but doesn’t totally proscribe) government intervention to help smooth out the inevitable booms and busts of a frisky (pun intended) free market, and is scathing on the role of Freddie Mac and Fannie Mae as a colossal hole in the federal balance sheet. The Fed is taken to task for its blunders across the ages, as well.
Pollock’s analysis may devalue government intervention too robustly, however. The Fed, after blundering on too-low interest rates and too little attention to subprime mortgages, acted bravely to stave off a potential worldwide financial disaster. The Glass-Steagall Act wisely separated the banking and securities industries, and its repeal helped accelerate the bust exponentially. (Similarly, deregulation of the savings industry exacerbated the thrift debacle.)
It is probably true as Pollock writes that government intervention is inevitable in all busts. He should therefore graciously acknowledge that it is as much a part of his engine of human prosperity as are the free market dynamics that he loves. This way he can avoid an imbalance that might run him afoul of his own observation that “it is the professional duty of bankers and debt investors to be skeptical, not optimistic.”
