Haku Mo‘olelo

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Within all societies there is a natural mistrust of government and a belief that the government governs best when it governs least. It's a populist belief on which Ronald Reagan was able to draw in becoming one of the most popular presidents of the last third of the 20th century.

In his first inaugural address, Reagan let loose with a one-liner that the country's taxpayers bought into:

"In this crisis, government is not the solution to our problem; government is the problem."

As with all aphorisms, it is simple, succinct, easily understood. It is also wrong, but no one in 1981 would have been able to dispute what millions of voters wanted to believe. Today, millions of voters may be beginning to understand the error in Reagan's theory of government. While he denounced government as an elite group determining for society what is best for society, he proceeded to establish an elite group that determined what is best for society.

Reagan appointed Alan Greenspan as chairman of the Federal Reserve, establishing a 20-year legacy on the throttle of the U.S. economy fueled with a free market, anti-regulation philosophy.

Greenspan's reputation even won over the Clinton White House, which resisted efforts of Brooksley Born, chairwoman of the Commodities Futures Trading Commission, to establish regulatory oversight of derivatives trading. Greenspan, Treasury Secretary Robert Rubin and the Republican-dominated Congress in 1998 eliminated any authority the commodities commission had over derivatives trading, by which time Born had left anyway.

Derivatives are contracts sold as securities that "contain" assets - such as bundled mortgages of uncertain value because they are based on unconventional loans that are leveraged against expected gains in value of the underlying assets.

New York Times writer Peter S. Goodman reports that Greenspan still defends derivatives but says now that the brokers putting them together "got greedy." ("Taking a Hard Look at a Greenspan Legacy," Oct. 8, 2008, The New York Times.)

What Greenspan as an advocate for free market policies apparently doesn't acknowledge is that free market theory expects people to be greedy. Free market theory assumes that individuals act in their own interest and will act to build wealth when they can increase their gain or lower their cost - even if it's at the expense of a neighbor.

For the most part, the theory works. If a manufacturer who develops a successful product increases the price, it can open the market to a producer of a similar product able to provide a lower price. But there need to be some controls if the lower-cost producer cheats on materials, quality or labor costs - as occurred with products made in China and with derivatives in which risks are deeply hidden in bundles of rotten loans that appeared to be unspoiled.

The risks of derivatives are well beyond comprehension of the average citizen setting aside a piece of every paycheck in an IRA account. The catastrophe that has struck the world's economy is a result of major banks and investment brokers failing to understand the risks they were taking in trading mortgage loan derivatives. If Goldman Sachs didn't perceive the risks, how would anyone?

That's the problem with the simplistic approach offered by Reagan in denigrating government's ability to protect public interest. There were within the Congress and the administration in Washington individuals who questioned complex derivatives schemes. Government regulatory oversight might have slowed if not blocked the spiraling escalation in bundling of high-risk loans.

But a government relying on ideology that government can't be trusted isn't going to provide oversight.

The Reagan ideology neglects a reason for having government - to police the society so an unequal faction does not take advantage of a less equal neighbor. Society needs police officers because members of society are greedy enough to take from their neighbors by force or fraud.

When individual citizens cannot trust the neighborhood police officer to protect their rights and property, then society degrades into gangs striving for power over opposing gangs.

By the same token, if individual citizens can't rely on the government to protect their rights and property from dishonest or just incompetent mortgage brokers and investment advisers, the financial marketplace degrades into gangs striving to build wealth on the losses of their neighbors.

Government isn't the problem. The problem is achieving a balance of regulation that protects the citizens from fraud while allowing free market forces to operate.

* Edwin Tanji, city editor of The Maui News, can be reached at citydesk@mauinews.com. "Haku Mo'olelo," referring to a story writer, appears every Friday.