By The Daily Progress

Published: February 15, 2009

There’s reason to be optimistic about the economy.

But about the federal government … well, that’s a different story. If Washington were a stock, it wouldn’t be performing too well right now.

Those are two conclusions to be drawn from a broad-ranging discussion The Daily Progress recently held with Edwin T. Burton, a University of Virginia economics professor who possesses a well-rounded portfolio of experience in business, academia and government.

Mr. Burton is exasperated by the gloom-and-doom pronouncements of some politicians and members of the media. The drumbeat of bad news has persuaded the average American that we’re diving into a depression.

Not so, he says. Several financial markers — such as unemployment — have stayed above recession levels even as doomsayers are trumpeting collapse. He also sees some signs of recovery in housing markets — including our own.

Mr. Burton says this is “a bread-and-butter recession,” nothing extraordinary — or, at least, it could be if government would stop making strategic mistakes.

Early mistakes included the bailout of Bear Stearns, the loss of which would have caused hardly a ripple, he says. This early discipline might have prevented or moderated later problems with larger companies.

The general rule of free markets is sound: The system enforces its own checks and balances. But government has prevented the system from working.

Government bailouts have several ill effects. First, they shield companies from the consequences of their greed or bad judgment, perverting economic justice.

And this in turn encourages lack of discipline by other companies. Why be careful with investors’ money if you know the government is going to rescue you with taxpayers’ money?

Other impacts are more subtle. Propping up troubled firms’ devalued assets has had the perverse effect of preventing sales — and sales are needed to get money circulating again to revive the economy.

Remember, this crisis largely rides on the problem of speculative or leveraged purchase of assets. Brokers kept buying “up,” often borrowing in order to afford bigger and “better” deals. Sellers “flipped” assets, making money by raising prices and selling to the next guy hot to make a deal.
Such prices were unsustainable. Eventually, the Ponzi scheme had to collapse.

But government money injected into companies that made such deals now artificially sustains prices and prevents them from falling to a natural level.

This means no one knows what assets are legitimately worth.

A company protected by government bailout may have no incentive to sell assets. And a company looking to buy, if it’s smart, is not going to purchase something without having a good idea of what the asset is worth.

Which leads us back to that optimism/pessimism dichotomy. Mr. Burton says “these assets probably have more value than people think. I think most of ’em are pretty good — but no one knows because they’ve never been permitted to trade.”

Let government get out of the way, and the marketplace would reveal the answer.