G-20 Summit: Be Wary of Big Government

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This threatened the profitability of multinational firms, a creature of a more efficient global environment. Economists and others started talking about global imbalances, needed corrections, and realignments.

The rise of China and India in particular offered enormous potential and contributed to global GDP growth, to be sure. But we are only now uncovering how much of that growth was real and how much was a boom on the back of massive systemic inefficiencies.

These government distortions began 30 years ago when the U.S. government started to tell banks which people they should lend money to, so that all could share in the American dream of home ownership. The two government-sponsored enterprises, Fannie Mae (FNM) and Freddie Mac (FRE), readily built up vast portfolios of bad mortgages, and the much maligned greedy investment bankers merely took those assets and securitized them. To the extent that these parties were at fault, they were at fault for not understanding that the implicit government guarantee that Fannie and Freddie would not be allowed to fail was itself an enormous distortion, undercutting the value they ascribed to the assets in the first place.

Without the creation of the entire asset class in the first place, a minor problem would not have morphed into a huge problem. Whenever private companies are asked to perform public functions for some social good whose benefit is not clearly defined, alarm bells should ring. Many of the greatest problems that have plagued humanity have not been caused by bad people actively seeking to do harm (with the exception, of course, of dictators like Hitler), but rather by well-meaning people seeking to do good. Karl Marx, after all, had the best of intentions. When we add the activities of ratings agencies and changes in accounting rules halfway through the game, we see yet more government distortions that played a pivotal role in the crisis.

Government as Regulator

Meanwhile in China, where growth was also fueled through inefficiency and government distortions, banks were carrying vast amounts of nonperforming loans. Somewhat scarily, the full consequences of this problem have not yet played out.

To all those busily writing the epithet to the era of Reagan and Thatcher, these events merely reinforce the notion that government's role in the economy should be limited to the protection of property rights. Certainly when parties are destroying property, or value, government has an obligation to step in, and this does mean some regulation. Even the most ideologically pure free marketer doesn't argue for absolutely no regulation; after all, we need competition laws, for instance, to ensure that the market is truly free and competitive. And we need governments to protect both tangible and intangible property rights.

That is the key to what regulation should be: It should always strive to be the most pro-competitive and welfare-enhancing possible, where potential costs are carefully weighed against the alleged benefits as regulation is crafted. After the Enron debacle, the costs of Sarbanes-Oxley regulation were not carefully weighed against the alleged benefits. We are now reaping some of the consequences of Sarbanes-Oxley, notably the mark-to-market accounting system, but also in a chilling of innovation whose effects haven't yet been entirely felt.

The true danger to the world is not the excesses of a few bankers who foolishly gorged themselves on a carcass that was already rotten. The true danger is the anticompetitive public-sector restraints that poisoned the economic system to start with. This danger manifests itself today in many guises—protectionism, industrial policy, and national champions to name a few. It occurs when government thinks it knows better than the independent economic actions of billions of individuals.

Competition Is the Remedy

We do have the antidote to the poison that threatens to destroy us: the single most powerful economic force known to man, the force of competition. We can choose now to liberate that force, to allow free competition to determine the winner, a process that led to the 60 or so years of unprecedented economic growth after the first Bretton Woods agreement. Or we can listen to the siren voices saying that it is competition that got us into this mess, and a little less competition and a little more steering of outcomes by government will get us out of it.

These voices have sung to us before, after the first modern period of globalization in the 1890s, during the 1920s with the Smoot-Hawley tariff, during the Russian Revolution (and countless other revolutions around the world that have taken power from individuals and given it to the collective), and after World War II in the waves of nationalization that led to the paralysis of once proud economies in Europe.

As we approach a revision of the global financial and trade architecture, will historians of the future write that this was the moment when we chose the wrong road with disastrous consequences for decades to come?

Singham is a partner in the economic regulation practice of the global law firm of Squire, Sanders & Dempsey