We certainly had a roller coaster 2008 with paradigm-shifting developments in South African politics and global financial markets. Events which otherwise may have been regarded as momentous, such as ghastly terrorist attacks and conflict in various African countries, Mugabe mayhem and intransigence and climate change politics, were overshadowed.
The “transformational” Obama election is one of the most extraordinary political developments of modern times, not because his presidency is likely to change much in practice, but for the obvious possibility that racism, at least in the USA, has disappeared to the point where Martin Luther King’s dream of people being judged by the content of their character rather than the colour of their skin seems to have come true. With race as an omnipresent factor in South African life, it seems as if we are decades from a similar transformation. Yet our current political upheaval may be more auspicious than has been generally recognised.
Personally, I am truly excited by our own potentially transformational political developments. This excitement implies no support for any political formation or politician. On the contrary, I’d be surprised if these developments were to result in significant policy changes. What is exciting is that voting behaviour may finally transcend crude racial stereotyping so that we may be further down the road towards US style non-racialism than could realistically have been predicted a year ago.
A year ago you could look at a crowd of South Africans anywhere and place a safe bet on whites voting DA and blacks voting ANC (or IFP in KZN). Now, suddenly, race is no longer a reliable predictor of party preference. Whites and blacks will henceforth make real considered choices as coloureds and Asians have been doing all along. South Africans are now experiencing a sudden burst of political maturity from voting by rote to voting by choice.
The FMF undertook detailed analyses of the global “meltdown” and “subprime crisis” and pointed out in many papers, articles, speeches and media interviews that the crisis is the inevitable consequence of extreme and sustained government intervention of which the sole purpose was to induce banks into making “toxic” housing loans on an unimaginable scale and then selling them as “securitised derivatives” into a global “secondary mortgage market”. Despite the obvious mischief of government as the necessary and sufficient condition for the crisis, there has been mind-bogglingly misinformed babble about “market failure” being the supposed cause and the presumed need for government intervention to prevent future “unregulated market” excesses.
This sort of nonsense could be expected from uninformed lay people, but the frightening aspect has been people who should know better, including some eminent economists, falling for market failure mythology. The resultant policy response will probably be more serious than the crisis itself because governments are busy prescribing medicine more likely to harm the patient than the disease. The most important underlying asset – at the bottom of the collapsed house of cards – is American sub-prime mortgages. If left alone “the market” probably would have suffered no more than a standard and desirable “correction” in which the effects of interventionism would have been exposed and reversed.
Having studied the matter in great depth, I am optimistic that the falsely vilified market will recover substantially during 2009, not thanks to taxpayer-funded “bailouts”, but as a result of spontaneous market forces. Euphoria with government “solutions” is misplaced for reasons that should be obvious. The popular demand for governments to “do something” enjoys the illusion that governments generate cost-free benefits, which economists call “free lunches”.
“Bailouts” are nothing other than governments shifting wealth from A to B and siphoning off lots in the process. They transfer assets from wealth-producers to wealth-consumers, the net effect being to make countries poorer. That there is a transfer is usually disguised by pseudo-sophisticated means, such as borrowing (which drains the economy of essential credit) and increased money supply (which is a tax on all pre-existing money). None of this suggests that investment banks, hedge funds, rating agencies and other market players are innocent. Their principal error was that they believed the fiction that derivatives were, as the American government and the financial media called them, “implicitly government backed”.
Instead of market failure, what we do have is market triumph over government and private folly. Free market forces finally triumphed over the US government’s determination to perpetuate subprime madness and the private sector’s obscene derivative orgy that followed. The market tried bursting the inevitable bubble repeatedly since the late 1990s, but the US government kept subverting it through profligate Federal Reserve “soft money” policy and political pressure on Government Sponsored Enterprises (like Fannie Mae and Freddie Mac) to flood the market with spiralling “toxic” mortgage credit to “ninja” (no income, no job or assets) borrowers.
Perhaps the most fundamental aspect of all this is that markets out-perform interventionism because of how intolerant they are of mal-investments. They expose and eliminate them rapidly and ruthlessly through “market corrections”. Paradoxically, governments fail because they don’t fail. Government mal-investments – from Concorde to SAA, and rapid transport systems like Gautrain to parastatals of every kind – are perpetuated as net wealth-consuming monuments to political and bureaucratic megalomania.
In short, my analysis suggests that, on the international front, the financial crisis will abate and global markets will recover during 2009 thanks to market forces, though not as expeditiously or fully as might have been had the market been freer. Locally, we will enjoy an historic surge of democratic maturity unprecedented in Africa.
My wish is that 2009 does not set a new Tax Freedom Day (TFD) record. One of the low points of 2008 was the latest TFD in South African history, May 12, a whole month later than April 12 in 1994. With luck and success in our efforts to influence the government, South Africans will start working for themselves instead of to pay government taxes sooner in 2009 that in 2008. Increasing consumption of a nation’s wealth by government is unsustainable and undesirable. During the early years after transition we enjoyed nearly a decade of earlier TFDs thanks to Trevor Manuel’s fiscal and monetary rectitude. May the post-election 2009 government, presumably the ANC with some coalition provincial and local governments, set South Africa back on the path towards government allowing wealth-producing South Africans to enjoy, save and re-invest more of their wealth for the ultimate benefit of all.
By Leon Louw
Executive Director, Free Market Foundation.