Is Elizabeth Warren the "Keeper of the Secret"? Part II

In a recent defense of Elizabeth Warren's confirmation, Paul Krugman declares that "Elizabeth Warren is Not Jesus," although the fawning descriptions I read of her in the regular emails I receive from Sojourners would tell me that she is at least someone who has spent time at the Right Hand of the Lord.

Krugman does have this revealing point to make, however:

Certainly in my case, while I like and admire Warren, I’m under no illusions that all will be right with the world if Warren does, in fact, become head of the Consumer Financial Protection Board. For one thing, consumer protection is at best a piece of financial reform, and arguably not the most important piece. And Warren is just a good person, not a saint; she’s trying to work within the political limits of the possible, which means that much of what she does falls well short of what we’d like to see done.

But in a way that’s the point: if a basically moderate, reasonable, well-intentioned person with such a good track record can be demonized, there is truly no hope for reform. And yes, defending Warren is an opportunity to fight the anti-reformers on relatively favorable ground: she’s so obviously not a power-mad radical that the venom of the attacks makes the right look as unhinged as it really is.

My general view of politics and policy is that there are no saints and no geniuses; place too much faith in anyone, and you’re bound to be let down. But there are villains, and they need to be fought. (Emphasis mine)

Indeed, that is EXACTLY what Krugman does: demonizes anyone who might think a different thought than comes from his head. Does one think that Ben Bernanke's QE2 ultimately will have a destructive effect? Obviously, you want people to be out of work and to suffer.

Do you think that "stimulus" spending on "infrastructure" might not be a good thing? Then you are a racist who supports slavery. You see, anyone who doubts that inflation is a wondrous and wonderful thing and that the state can spend us into a prosperity cannot possibly have good motives for such thinking, as they represent a way of seeing the world that is unacceptable in Krugman's world.

Yet, beyond all that, why do I have problems with Elizabeth Warren and the whole notion that Frankendodd is not going to lead us into financial nirvana? After all, Warren is intelligent and I have no doubt that she actually is outraged by some of the, well, outrageous lending practices that occurred, especially during the housing bubble. Moreover, I am sure that Warren would like to keep people from being put into a situation in which they lose their homes and possessions due to foreclosure, and there is nothing wrong with that.

The problem Warren faces as the Super Regulator is twofold. First, to use the examples set by Ludwig von Mises, the idea that a bureaucracy can engage in the kind of economic calculation that would enable Warren and her staff to be able to efficiently set out the proper conditions for nearly all loans is beyond her competence or the competence of everyone else. Furthermore, government regulators do not make decisions on whether or not the people involved are, economically speaking, going to be able to move resources from lower-valued to higher-valued uses in a very complex economy.

Now, there actually is a way to help ensure fewer lending abuses: let banks and financial houses actually have to bear the consequences of bad lending decisions. Instead, the "Greenspan/Bernanke Put" always loomed in the background, providing enough moral hazard in the system to ensure that easy money policies of the Fed ultimately would prove to be a disaster.

Instead, we will have the worst of both worlds. First, there will be policies in which the government still is going to try to push the policies of easy credit and home ownership. Credit will be distributed on a political basis.

Second, to try to combat the obvious problems that politically-based lending creates, Warren and her minions will attempt to impose a "One Size Fits All" set of "solutions" on the credit markets. This assumes not only that Warren really has all of the answers, but that she can effectively engage in central economic planning, something that has eluded all other planners in the past.

In his seminal paper, "The Use of Knowledge in Society," F.A. Hayek noted that socialism (or the kind of regulatory apparatus that Krugman endorses) is built upon the premise that central planners have all of the requisite knowledge that is needed to make an economy work. Because that kind of knowledge is decentralized, he argued, in the end the planners will be flying blind and will be unable to direct an economy successfully.

While Warren would be heading an agency and not an entire economy, she obviously would not be the only central planner in Washington. However, she would be overseeing the agency that would set policies regarding lending, who receives loans, what terms, and so on. Don't kid yourself if you believe that she is going to make those decisions on the basis of anything but what would be politically-acceptable in Washington.

Guess what? The last time I checked, government was and is political.