Lessons From Egypt For The American People
“Cairo, US Blindsided by Revolt” was The Wall Street Journal’s headline on its analysis of what led up to the Egyptian crisis.
“We were caught by surprise.” Israeli Finance Minister Yval Steinitz told the same newspaper in a separate interview.
As I reflected on the demonstrations in Egypt and followed the news of the events that followed, it occurred to me there were two vital lessons for the American people that have been overlooked.
The first is that the entire notion the United States can pursue an independent monetary policy is a dangerous and erroneous conceit.
The surge in food prices that has contributed directly to the uprisings in Tunisia, Egypt and other countries throughout the Middle East can be traced directly to the Fed’s parochial effort to stimulate the domestic economy with an inflationary monetary policy.
Food prices as reflected on the CRB food index are up 36% in the past year – including an 8% advance in the month of January. The UN’s FAO Food Price Index rose 3.4% in January alone, and now stands at its highest in real and nominal terms since 1990. Rising food prices are not given much weight in the calculation of the US consumer price index, but they’ve created havoc in the lives of millions of people throughout the world.
Fed Chairman Ben Bernanke’s position that it is up to each country to protect itself from the Fed’s inflationary ignores this simple fact: The dollar is at the center of the international monetary system. Many currencies, including the Egyptian pound, are linked to the dollar. As a result, when the Fed’s easy money policies drive the value of the dollar down and the dollar price of commodities up, it contributes directly to monetary and political instability throughout the world.
The costs of an inflationary monetary policy aimed at stimulating employment are far greater than any temporary benefit to the American people. The resulting rise in commodity prices is stoking resentment against the US and providing an opening for radical Islamists – who promise food and shelter for all – to seize power.
The Fed’s decision to ignore the international implications of its actions is tantamount to willful negligence. It puts America’s vital interests at risk, reduces our soft power, and produces economic and political instability within our sphere of influence.
The second lesson is those who serve in our government are no more able to anticipate the future in their immediate area of responsibility than are the rest of us.
Two of the best intelligence agencies in the world with access to Egyptian officials, the US State Department with a long and important presence in Egypt, to say nothing of the Egyptian government itself were all unable to anticipate the crisis now unfolding in this extraordinarily important nation of 80 million people in the heart of the Middle East.
That what is happening in Egypt was a surprise does not mean those who failed to forecast the uprising are incompetent. Instead, it shows the hubris of those who claim competent and well-informed government officials and public servants have the power to anticipate the future.
Yet, this premise underlies most calls for increased government regulations, from health care to financial services.
For example, new federal regulations of financial services put even more power in the hands of a few public servants rather than dispersing power among market participants. This centralization of power implicitly assumes that those who work for government are less fallible than those who work in the private sector, and therefore can be trusted to foresee and avoid the next financial crisis.
But, as the Egyptian crisis demonstrates, this is an illusion. Government officials are not more capable than anyone else in anticipating or controlling the future. As former British Prime Minister Tony Blair writes in his memoir, A Journey: My Political Life, the financial crisis was not caused by a lack of regulatory oversight. “We didn’t spot it…it wasn’t that we were powerless to prevent it even if we had seen it coming; it wasn’t a failure of regulation in the sense that we lacked the power to intervene. Had regulators said to the leaders that a huge crisis was about to break, we wouldn’t have said: There’s nothing we can do about it until we get more regulation through. We would have acted. But they didn’t say that.”
As a result, the government’s promise that it can prevent future crises actually has the opposite effect. This promise, backed up by thousands of pages of regulations, undermines the natural risk aversion and skepticism of market participants by creating the illusion of a risk-free future. This is what happened when government sanctioned rating agencies tranquilized investors throughout the world into believing that various “tranches” of mortgage backed securities were AAA credits when in reality they carried far higher risks. The result was a financial crisis that threatened the entire banking system.
Markets may be no better than public servants in this regard. But, with markets, risks are dispersed. When those who make bad decisions are not bailed out but bear the consequences of their actions, markets quickly self correct and impose just sanctions on the imprudent and greedy. That is why the bursting of the tech bubble did not cause a financial, economic or political crisis.
Imagining that public officials are endowed with special powers to see the future and protect us from the vicissitudes of life is a license for tyranny, no matter how well intentioned or ostensibly benevolent its foundation. In this moment, Benjamin Franklin’s warning rings true: “They who can give up essential liberty to obtain a little temporary safety, deserve neither liberty nor safety.”
We ignore both of these lessons from Egypt at our peril.