WWRD? (What Would Reagan Do) – Part 1

Are you better off than you were two years ago? For most people, the answer is no. Compared to two years ago, more people are unemployed, the credit markets are still a mess, businesses are still being stymied by further federal regulation, and the global community has no idea what we stand for with our foreign policy.

What if we could roll the clock back? Roll it back a little more than two years to September 2008. At that time, the United States was at one of our more critical inflection points. We had military actions in both Iraq and Afghanistan, our southern border states were seeing a serious uptick in crime being committed by illegal aliens, the economy was starting to stagnate, and we had a looming credit crisis. Over a series of postings, we’ll address how Reagan would have addressed each of these issues. What Would Reagan Do?

The Credit Crisis

Reagan was a true believer in the free market. He believed in capitalism, American businesses, and most importantly the American people. Reagan knew that one of the key mechanisms of the free market is to correct imbalances that occur in the exchange of goods and currency. If you ever had any doubt about Reagan’s belief in free markets, look at how he handled the stock crash on “Black Monday”, stock market collapse of October 19, 1987. On that day, the stock market dropped by over 22%. Keep in mind that is nearly double the percentage drop that occurred in October 29, 1929 that is widely believed by Liberals as the trigger of the Great Depression. Over the next several days following that Black Monday in 1987, the stock market further deteriorated to bottom at a 28% loss compared to the highs two months prior. The naysayers began to predict the beginning of the next Great Depression. The press, the Congress, and the talking head pundits all were calling upon the Federal Government to take action to “save the economy”.

What did Reagan do? NOTHING. Although Reagan did not know at the time what caused the crash, he knew the market would correct itself. Later we learned the crash was caused by the combination of programmed trading and the fact that the vast majority of the market understood that the prices of all stocks, whether they were good or bad, were being artificially driven higher by frenzied buying. The stock market was extremely overvalued. Investors were like a mouse caught at the top of a precarious pyramid of crystal goblets, and they wanted down. They also knew that the trip wasn’t going to end well. When the market started to correct, the falling prices and trading volumes triggered programmed trading to sell even more stock which triggered more programmed trading and so on. The collapse was as dramatic as it was unnerving. Without knowing the exact cause, Reagan knew the crash was caused by a market imbalance. An imbalance that men created, and the free market was correcting.

As a result of Reagan’s inaction, did the next recession or depression ensue? Nope. The widely predicted cataclysmic economic collapse never occurred. We did not see large numbers of businesses fail, nor a signification increase in unemployment, nor a permanent flight of investors to bury their money in mason jars in their back yard. In fact, investors returned to the market in an orderly fashion over the next couple of years. Why did this free market process work without the government intervening and bailing out companies? Without government manipulation or interference, individuals were able to identify opportunities in the market and buy good assets at reasonable prices, buy marginal assets at low prices and let bad companies fail! The market was able to work the way it should.

So what would Reagan have done with the credit crisis of September 2008? Again, NOTHING. He would not have provided a TARP bailout for the investment banks and mortgage loan companies. There would not have been strong-arming of companies (like Bank of America or Wells Fargo) to force them into purchasing other failing companies or into taking government bailout money that they didn’t need. The banking and finance institutions would have triaged their way through the credit crisis with the healthy companies emerging stronger, the marginal organizations losing their unprofitable fat, and the poorly run entities going away or being acquired by others at a “market driven” price. Yes there would have been some pain. Excess eventually leads to pain.

Even with the continued squawking by pundits, Reagan would not have provided bailouts for GM and Chrysler which also would have meant no bailout for the auto unions. Thus the government would not have had new-found leverage to enact regulations and to empower an Auto Czar to force the auto companies to build additional so-called green cars, like the Volt, that the American people weren’t asking Detroit to produce. What did green cars have to do with the credit crisis anyway? Oh I forgot. Our current regime believes you should never let a good crisis go to waste.

Through filing bankruptcy, Chrysler would have renegotiated their agreements with the unions and other suppliers. Chrysler would have emerged stronger and competitive. Of course, GM would have also filed for bankruptcy. GM would have closed down several divisions (which they did anyway), sold off some divisions to raise cash (possibly Cadillac) and emerged out of bankruptcy a much, much smaller company. The lesson for GM, Chrysler and the unions would have been that the auto industry must produce the cars the public actually wants to buy and must regularly trim their cost structure to remain competitive in the global economy.

As a result the American economy would have emerged much stronger than Europe and the Far East because our process would have punished the poor performers and proportionately rewarded the good performers. Resources and liquidity would have been naturally channeled to the strong performers with the best prospects for providing a return on investment to equity holders. Systematically credit liquidity would have improved over time because investors, without the fog and circus mirrors of government manipulation, would be able to more easily identify where there were new-found opportunities in the market. Opportunities for equity market to pick the winners and losers, rather than the government.

So what else would Reagan do? We’ll cover those topics in subsequent posts but I can assure you of one thing that Reagan wouldn’t do. The Gipper wouldn’t drive a Volt…

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3 Responses to WWRD? (What Would Reagan Do) – Part 1

  1. Great stuff, Trent. Though I usually ask, What Would Milton Friedman Do?

  2. jim parker says:

    SSBN658 was the nuclear submarine I served on from 1968 to 1973…. USS Vallejo.

    Reagan would raise the debt to 4 times what is is today ….. just like he did by the time he left office as president. He was a puppet/actor for the bankers and oil boys.

    • Trent Derr says:

      Jim,

      Thanks for your service. During Reagan’s 8 year term, the debt increased on a percentage of GDP basis by 21% which isn’t close to doubling let alone 4 x’s. Clearly Reagan’s focus was improving GDP growth, lowering inflation, lowering interest rates, and raising employment (all of which he successfully did).

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