Nate Stano over at The Michigan Review writes an article with a good lesson: live within your means, and don’t expect for the government to magically come to the rescue in hard times. But the path that he takes to arrive at this conclusion is ponderous:

“My argument here is…First, we must realize that this government intervention in the economy doesn’t help any of us in the long run. If we have a system where a bad investment pays the same as a good one, what’s the point of trying to find a good investment? As long as the Fed is unwilling to let banks lose obscene amounts of money, they will continue to make bad investments, and we will simply find ourselves in this position again.”

But isn’t the lack of government intervention a massive contributor to this economic crisis in the first place? We’ve had our Hooveresque laissez-faire policies throughout the Bush era and now we’re in a deep economic crisis.

Stano even points to these problems himself:

“As young people spend beyond their means, investment banks buy up our debt as “securities.” While you can spend like this for a while, eventually you must, as they say, “pay the piper.” As more people defaulted on loans, banks’ asset columns went from black to red.”

So when banks were giving out loans like candy regardless of the credit level of those borrowing, should we have had some regulations on the packaging and distribution of these loans? Of course. Stano again:

“Now, as the Federal Reserve is…lowering interest rates in an attempt to spur spending. This brings us full circle, to ask: wasn’t it our spending that got us in trouble in the first place?”

Now to a large extent he’s right. We should not have such reckless spending and borrowing in the past. But for a vibrant economy, however, we do need consumer confidence, and that is what the lower interest rates can sort of accomplish. to turn his own argument on his head though, aren’t the very laissez-faire policies you’ve been advocating for fixing the economy the very policies that led us here in the first place? His argument is that if we let banks do this, eventually they will learn their lesson and cease to make these loans due to massive economic failure. My argument is that if we allow government regulation, we will force them to cease the loans, except in my case we avoid that massive economic failure part. Because when banks go down, this isn’t just a crisis of a sector, this is a crisis involving everyone that uses this sector. So unless you’ve never opened a bank account, chances are you’d want some sort of assurance that your money is still worth something. So government intervention can and does do very good things, but of course not always.

The argument somehow further extends to the assertion that the Fed rewards banks by paying off bad investments in the same fashion as if they were good ones. Did you not see the acquired price of Bear Stearns? $2 a share? Hardly anyone would call this a good investment, in fact we would probably call this wholesale liquidation. But he does point to a good fact that the Fed itself shouldn’t just be doling out loans and floating capital like crazy as well. This is silly. If we are to back up hedge funds, investment capital firms, etc. with capital the same way we back up banks, shouldn’t they be held to the same regulatory standards? Of course.

So the overall assertion is that we have to spend within our means. Well that’s a great truism, and everyone should follow this lesson. But in this world, our individual financial security is directly tied to our collective financial security. So the lesson should also be, while we should of course watch out for ourselves, we cannot be oblivious to the world around us. Even if we have perfect credit, the reckless spending of others could trigger an economic collapse that affects us all. It’s a shame that until now our policy has just been for institutions to police themselves, but just like our collective tax dollars should in theory be used to bail out the individual (like that economic stimulus package they pulled together), our collective tax dollars do serve a greater good (albeit a choice that should never have to be made) in bailing out institutions as well. Of course if we would just regulate their actions in the first place, his article and my entry may not have had to be written.