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Authors: Dick Armey

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Speaking truth to power was important, Adams knew, but nothing beat the power of grassroots activism. In the early 1750s Adams began recruiting activists to the cause of liberty, targeting men in taverns and workers in the shipyards and on the streets of Boston. His tactics often involved antitax protests under the Liberty Tree, a large elm across from Boylston Market. Tax collectors were hung in effigy and Crown-appointed governors mocked, belittled, and verbally abused. The Sons of Liberty organized boycotts of British goods and monopolistic practices that were de facto taxes on the colonists. Adams packed town hall meetings at Faneuil Hall, filling the room with patriots so that Tory voices were overwhelmed. Every oppressive new policy handed down by King George and the House of Commons was used to build the ranks of the Sons of Liberty. Taxes imposed by the Stamp Act of 1765, trade duties created by the Townshend Acts—each was an excuse to rally new recruits to the cause of American independence.

The most famous act of Whig defiance against the Crown—the Boston Tea Party—is now viewed as a tipping point in the battle for American independence. It had a profound impact on public opinion among the uncommitted population. It was not a spontaneous looting by angry tea drinkers but an operation carefully choreographed by Samuel Adams and the Sons of Liberty. When a Parliament-granted monopoly to the East India Trading Company dramatically drove up the price of tea in the colonies, Adams saw an opportunity to channel outrage into action. The “Mohawks” who emptied British tea into Boston Harbor on December 16, 1773, were his activists disguised by Indian war paint to protect their identities from Tory spies. Because property was not destroyed (other than the tea) and the ships' crews not harmed, the Boston Tea Party gave the Sons of Liberty broader public acceptance in the colonies.

The British response to the antics of the Sons of Liberty inevitably helped galvanize public opposition to British control. A series of political blunders coupled with the Port Act and the British blockade of Boston Harbor in 1774 ultimately led to the gathering of the first Continental Congress at Carpenters' Hall in Philadelphia.

The grassroots pressure organized by Adams was not reserved for King George and British bureaucrats exclusively. Adams also targeted Tory loyalists and “half-patriots” in the Congress. On one occasion, Pennsylvania delegate Joseph Galloway threatened to derail momentum
4
for American independence with a last-minute proposal to settle disputes with Great Britain. Despite the well-articulated arguments of Patrick Henry and other patriots inside Congress, Galloway gained support among Tory and middle ground interests defending the status quo. Instead of arguing with his peers in the Congress, Delegate Samuel Adams organized outside, in the streets of Philadelphia.

In his classic account of the people and events that led to America's birth, A. J. Langguth wrote that the “crowds around Carpenters' Hall soon heard
5
that a faction led by Joseph Galloway was bent on selling out their liberties. Galloway headed a powerful Quaker bloc, and yet he began to fear being attacked by a mob in his own home precincts.” He backed down, knowing that Adams had organized his grassroots opposition. “He eats little
6
,” complained the Pennsylvania delegate of Adams, “drinks little, sleeps little, thinks much, and is most decisive and indefatigable in the pursuit of his objects.”

Poor Samuel Adams. He was a pious man who resented the drinking and carousing of the privileged elite in favor with the British Crown in Boston. Today he is the mascot for a beer company. He was a tireless champion of individual liberty who dedicated his life to the battle for American independence. Today his tactics have been hijacked by leftist radicals hell-bent on tearing down the institutions that make our nation special. How did we lose our cultural heritage of grassroots activism to the big-government crowd? Isn't it about time we took it back?

L
OOK
O
UT
B
ELOW

T
O BE SURE, THE
brave men who authored and signed the Declaration were a unique blessing—smart, dedicated souls who define the word
patriot
. They put their principles first, and they put their lives on the line for the very idea of America. The final line of the Declaration pledging all to the cause, “our Lives, our Fortunes and our sacred Honor” was not empty rhetoric. The consequences of failure were dire and the signers knew that the ink on that parchment represented high treason against the British government, an act punishable by death. As the Declaration of Independence was sent to the printers for publication and distribution, signer Benjamin Harrison reportedly told one of his colleagues: “I shall have great advantage
7
over you, Mr. Gerry, when we are all hung for what we are now doing. From the size and weight of my body I shall die in a few minutes, but from the lightness of your body you will dance in the air an hour or two before you are dead.” These patriots were willing to risk everything to overthrow tyranny and establish a free and independent nation based on the sovereign rights of the individual. Many suffered greatly for their legacy.

These were the legislative entrepreneurs, the insiders, elected officials who must drive the process from within the legislative body. Without them, nothing happens. But it is equally fair to say that this defining act of courage by the founders would not have been possible without the men in the streets, the activists under the Liberty Tree, or the “Mohawks” who courageously scored one of the first public relations home runs in American history.

So don't go chasing that political unicorn of perfect leadership: good government based on the best arguments, implemented by selfless servants who miraculously leave their interests at the door when they enter public service. The founders knew that this was not possible, and that individuals given the monopolistic power of the state would inevitably sacrifice good government for more government power. More power, that is, unless kept in check. The best way to limit the natural self-interest of public officials and the influence of deep-pocketed interest groups is to restrain government and limit the incentives to manipulate tax, spending, and regulatory decisions.

B
Y THE
P
EOPLE, FOR THE
P
EOPLE

W
E ACCEPT THE
T
EA
Party brand because Santelli, perhaps unintentionally, reintroduced freedom-loving Americans to their roots and a fundamental tenet of our nation's fabric. “Tea Party” was a perfect moniker for the citizen rebellion that was brewing, and Santelli showed up at just the right time with a call to action that was remarkably suited to the cultural sentiments of a budding grassroots community.

America was founded by visionaries with great, entrepreneurial ideas: the primacy of the individual over the collective, a republican government constitutionally constrained within specific, narrow limits, and freedom of enterprise. Every small-government fiscal conservative knows and loves these ideals. But America was also founded, literally, on the revolutionary principle of citizen participation, citizen activism, and the primacy of the governed over the government. That's the Tea Party ethos. You find this referenced throughout the writings of the founders, and they are some of the best quotes from our history. Thomas Jefferson, in his correspondence with James Madison, wrote that “the people are the only sure reliance
8
for the preservation of our Liberty.” None other than George Washington, in his first inaugural address in 1789, reflected an appreciation for the importance of citizen participation and vigilance in defense of liberty that was at the heart of the American experiment. “The preservation of the sacred fire of liberty
9
, and the destiny of the Republican model of Government,” he said, “are justly considered as deeply, perhaps as finally staked, on the experiment entrusted to the hands of the American people.”

In other words, Washington believed our newly minted government was dependent on the people to function properly. When did we all forget this part of the deal? When did we ever decide that the American citizenry could leave public policy to public policy experts, or, heaven forbid, to those astride the levers of power inside the federal government?

The Founding Fathers understood this. After thirteen years of struggle and a successful war for independence, they set out to write the rules of a new nation, a nation conceived in liberty. The Constitution delineated severe limits on government power, created checks and balances within the system to help maintain those limits, and outlined the rights of individuals that could not be infringed upon by the government. Instead of the government granting rights to the people, the Founding Fathers reversed the equation and had the people granting specific powers to the government to function in a few areas while allowing the people to exercise their unalienable rights.

Winston Churchill would later say
10
that the American Constitution was the most profound act of political genius in the history of the world. It's hard not to view our nation's founding as a political miracle, but the Sons of Liberty knew better. It was the passionate participation of Americans committed to liberty and willing to show up in its defense that made the theory of individual freedom a political reality. While the founders did everything they could in the Constitution to establish a government that would preserve the rights of individuals, they were painfully aware that those freedoms would be protected only through the constant vigilance of the Sons of Liberty in succeeding generations. In other words, they understood that policy decisions are not driven by the best arguments, the best book, or a perfectly argued forty-page white paper. Policy decisions are driven by the people who show up, and the impact those voices have on the incentives of elected officials at the margin. Or as Samuel Adams put it, “It does not require a majority to prevail
11
, but rather an irate, tireless minority, keen to set brush fires in people's minds.”

The straw that broke the back
1
for a lot of
[
the people who marched on 9/12
]
was the statement from Bush where he said he had “abandoned free market principles to save the free market system” and then the actions that followed. Most had great concerns about the growth of government but had been too busy earning a living to pay much attention. TARP woke us up.

—J
ANET
M
ARLEY
, K
ILGORE
, T
EXAS

T
O FIT THEIR INACCURATE
narrative of the Tea Party movement as sore-loser partisans opposed to President Obama's agenda, many in the media suggest the Democrats' stimulus bill was the spark that lit this grass fire of protest.

They're wrong. The government expansion during President George W. Bush's reign provided the fuel. And it was his Wall Street bailout that ignited the firestorm we see today.

As the Democratic Congress led by Speaker Nancy Pelosi and Senate majority leader Harry Reid pushed through the Republican administration's bill crafted by former Goldman Sachs chief executive and then treasury secretary Hank Paulson, our predicament became crystal clear: we the people had lost control of our government. It was now the political class versus the American taxpayers.

Some thought they were voting to change this situation with the election of Barack Obama. Many who did are now disappointed that not only has he failed to bring such change, but he has doubled down on the bad policies of the Bush administration in favor of the political class—the political equivalent of pouring gasoline on a brush fire.

Many of us knew instinctually the bailout was wrong. We understood that in order for capitalism to work we need to be able to not only keep the potential gains from the risks we take but also accept the losses that may come. With profit comes the potential of loss. Many of us had a neighbor or heard about someone who had been living too high on the hog for too long and were wondering why we were now supposed to pay for it. And something just didn't seem right about the elected branch of government ceding so much money and power to an unelected bureaucrat.

We got it—our instincts were right. Unfortunately, many of the 535 people we sent to Congress didn't seem to get it. And they certainly haven't accepted their responsibility for creating the problem. As the spark that started what is now a historic movement, it is worth further examining just how bad a policy decision the bailout was, the economics behind the crisis, and some of the players who made it clear that the entrenched political class was one of the primary problems.

BOOM AND BUST

Y
OU DON'T HAVE TO
look far to find the primary causes of the great financial panic of 2008. The origins of the housing bubble, the glut of dodgy mortgage-backed securities, the insolvency of the biggest players in the investment banking industry, and the stock market collapse that led to the creation of the Troubled Asset Relief Program and the Wall Street bailout of October 3, 2008, were all caused by bad government policy. These mistakes, some dating back a generation, created an inflationary bubble, severe economic misallocations, and a generalized “cluster of errors”—something economics tells us only happens as a result of government-created distortions. It was a tragic tale of systemic government failure. It was a morality play about the undue political influence by certain financial institutions on Congress and a reciprocal undue influence by key committee chairmen on key financial institutions.

One key culprit in this government-instigated debacle was the expansion of money and credit by the Federal Reserve system. Political pressure on the federal government's central bank to keep the money flowing is standard operating procedure in the nation's capital. Political jawboning for easy money knows no partisan divide. After the September 11 terrorist attacks, the Fed pursued an aggressive policy of money and credit expansion, eventually lowering its target rate from above 6 percent to 1 percent
2
.

“Too many dollars were churned out
3
, year after year, for the economy to absorb; more credit was created than could be fruitfully utilized,” said economist Judy Shelton. “Some of it went into subprime mortgages, yes, but the monetary excess that fueled the most threatening ‘systemic risk' bubble went into highly speculative financial derivatives that rode atop packaged, mortgage-backed securities until they dropped from exhaustion.”

These mistakes were not inevitable, of course. And they were not unforeseen by sound economic thinking. The financial meltdown displayed all the characteristics of a classic government boom-and-bust business cycle generated by easy money and credit first described by Ludwig von Mises in the first half of the twentieth century. Mises was one of the leading proponents of the Austrian school of economics and had focused a substantial amount of his studies on business cycle theory.

Mises himself knew something about the personal costs associated with sticking to principle. A respected classical liberal scholar
4
teaching in Vienna, Austria, he fled the rising tide of Nazi influence only to be largely ignored by leftist academia upon his arrival in the United States in 1940.

Loose monetary policy, according to Mises, corrupted the standard of value, distorted relative prices, and encouraged systemic malinvestments. The mania of easy money and credit generated errors in economic calculations and investment decisions. “True,” said Mises, “governments can reduce the rate of interest in the short run. They can issue additional paper money. They can open the way to credit expansion by the banks. They can thus create an artificial boom and the appearance of prosperity. But such a boom is bound to collapse
5
soon or late and to bring about a depression.”

The inevitable correction may be painful, but attempts by government to inject new money into the economy to repair the real economic pain caused by the boom-bust cycle leads to more sustained pain, inflation, and economic stagnation.

Andy Laperriere, a financial markets analyst, raised these very concerns in the
Wall Street Journal
on March 21, 2007, a full year and a half before the crisis reached a boiling point. “Federal Reserve officials and most economists believe the problems in the subprime mortgage market will remain relatively contained,” he stated, “but there is compelling evidence that the failure of subprime loans may be the start of a painful unwinding of a housing bubble that was fueled by easy money and loose lending practices.” He warned:

Asset bubbles are harmful for the same reason high inflation is: Both create misleading price signals that lead to a misallocation of economic resources and sow the seeds for an inevitable bust. The unwinding of today's housing bubble is not merely an academic question; it is likely to inflict real hardship on millions of Americans.

Ted Forstmann, a private equity pioneer, also foresaw the financial crisis in a July 5, 2008,
Wall Street Journal
interview. He pointed first to an increase in the money supply that changed the incentives of financial institutions. After making the same loans they normally would based on reasonable risk assessments and expected rates of return, banks “have tons of money left
6
. They have all this supply, and the, what I would call ‘legitimate' demand—it's probably not a good word—but where risk and reward are still in balance, has been satisfied.” So “they get to such things as subprime mortgages, okay?” Forstmann says he does not “know when money was ever this inexpensive in the history of this country. But not in modern times, that's for sure.” In fact, at the peak of the bubble, real interest rates were actually negative.

THE GREEDY LEADING THE GREEDY

T
HE SECOND HALF OF
this tale is the bureaucratic symbiosis between politicians and key players in the home mortgage financing industry, particularly Countrywide Financial and the government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac.

Politicians aggressively enforced and expanded federal housing policy goals, effectively encouraging financial institutions to give loans to the unqualified. A social agenda of home ownership at any cost helped sustain an unsustainable housing bubble fueled with easy money and credit. After all of the bipartisan moralizing about promoting home ownership and after trillions of dollars of economic losses and personal destruction, actual home ownership quickly returned to its premania level. Indeed, a recent release by the U.S. Census Bureau
7
found that the homeownership rate in 2010 was 67.1 percent—precisely the same rate as 2000. Political agendas aside, markets will eventually clear, leaving a trail of folly behind.

FreedomWorks and many others had warned Congress for years about the danger its twin monsters Fannie Mae and Freddie Mac were creating. As far back as March 9, 2000, we joined a coalition working “to shine the light of public scrutiny on the nation's two largest GSEs [government-sponsored enterprises], Fannie Mae and Freddie Mac,” and set out “to educate our grassroots activists to the fact that these government-sponsored enterprises have exposed taxpayers
8
to trillions of dollars worth of risk.” By September 10, 2003, the House Financial Services Committee was forced to call a hearing on the potential danger presented by the GSEs, but nothing came of it. The comments that day by Rep. Barney Frank (D-Mass.) sum up the position of too many: “The more people . . . exaggerate a threat
9
of safety and soundness, the more people conjure up the possibility of serious financial losses to the Treasury, which I do not see. I think we see entities that are fundamentally sound financially and withstand some of the disastrous scenarios.” Barney Frank, of course, went on to become the chairman of the committee responsible for overseeing the GSEs.

But we stayed at it and in 2006 named Fannie and Freddie among the Top 10 Welfare Queens in the country, warning, “Remember the S & L banking scandal
10
from the 1980s? If the real estate market tanks today, taxpayers could be on the hook for billions once again. It's time for Freddie and Fannie to grow up and cut the cord from Uncle Sam's pocketbook.” By early 2008 Congress was talking about a housing bailout. We responded with a Web site called AngryRenter.com for activists to voice their opposition to letting the housing market sort itself out.

When the housing bailout bill morphed into the Wall Street bailout, the downside for taxpayers grew. Again, we said let the market work itself out. That's what markets do. Once the price of something gets to the point where someone wants to buy it, they do—and no sooner. So long as the government tried to artificially keep housing prices up, there would be more houses for sale—more supply—than demand and the market wouldn't clear. The answer wasn't more government manipulation of the housing market. It was less.

The political process should have produced a rational, bold response, starting by unwinding the many government mistakes that created the housing bubble, repealing the various laws and regulations specifically designed to put people into homes that they could not afford and creating a more reasonable approach to how investment firms were monetizing various risks. We could scrap the Community Reinvestment Act and break up Fannie and Freddie, putting the pieces back in the private sector.

If liquidity and the availability of capital were an immediate problem, the tax on capital gains could be repealed, along with other tax provisions that punish savings and capital accumulation. A flat tax does all of this in one fell swoop. And finally, the various distortions in corporate accounting hurriedly drafted during previous legislative panics could be repealed, starting with Sarbanes-Oxley.

Most important, policies should have been designed to let the market work, not to attempt to artificially prop it up. The policy mistakes of the past dozen years could not be corrected without some pain. The only question left to decide was who would feel it. Markets do not work without allowing mistakes to be corrected and losses incurred. Bad actors on Wall Street or Main Street should suffer the financial losses produced by their bad bets and carelessness. Such losses, just like profits in good times, are vital to the functioning of markets. As then BB&T CEO John Allison noted in a September 2008 letter to Congress, “Corrections are not all bad
11
. The market correction process eliminates irrational competitors. There were a number of poorly managed institutions and poorly made financial decisions during the real estate boom.”

Sadly, Washington did not focus on the fundamentals. With a lame duck in the White House and a bitter election to determine the next president and political control of Congress, lawmakers focused on the expedient rather than the efficient. A major roadblock to change is the necessity for sitting committee chairmen to acknowledge their own mistakes and repeal their favored programs. So Congress defended the failing government-sponsored entities Fannie Mae and Freddie Mac while crafting a taxpayer-funded bailout to avert any turmoil in an election year. Even more surprising, when the Senate passed sweeping financial legislation in May 2010, reforms of Fannie and Freddie were specifically rejected despite the utter failure of these bankrupt entities and their role in the financial meltdown.

Government intervention into private enterprise of this magnitude always creates what monetary economist Gerald P. O'Driscoll Jr. calls “crony capitalism.” This philosophy, he says, “owes more to Benito Mussolini
12
than to Adam Smith. . . . Congressional committees overseeing industries succumb to the allure of campaign contributions, the solicitations of industry lobbyists, and the siren song of experts whose livelihood is beholden to the industry. The interests of industry and government become intertwined and it is regulation that binds those interests together. Business succeeds by getting along with politicians and regulators. And vice-versa through the revolving door.”

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