Jefferson vs. Hamilton

Let me preface this post by saying that I’m sure Joseph Ellis has forgotten more about American history than I know. That knowledge may well have armed him with a greater understanding of human events and put him in position to better evaluate the proper role of government, which was the subject of his 8/9/09 editorial in the LA Times.

In it, Ellis states that Jefferson's view of limited government (which I share) is “increasingly anachronistic” and goes on to state ”It became abundantly clear that government power was necessary to regulate the swoonish swings of the marketplace.” He favors instead a Hamiltonian view “which presumes that there is a collective public interest that only government can serve.” He goes on to give several examples, one of which I’d like to discuss:

“In the ongoing banking crisis, to take another example, the removal of government regulations permitted major banks to assume unconscionable amounts of debt, much of it in the form of toxic investments that still remain on the books. It has been obvious that the banks needed to be temporarily nationalized to force them to purge bad debts from their portfolios. But fear that the stock market would interpret this course as creeping socialism has prevented such straightforward action. So we are still waiting for many of the same self-described financial wizards who created our fiscal mess to get us the rest of the way out of it.”

If only those pesky limited-government types hadn’t impeded the government from exerting an appropriate control over banks! This view, however, ignores several factors that were in play in the recent banking crisis:

1. Easy money from the Federal Reserve. If the Federal Reserve doesn’t stem from the Hamiltonian (vs. Jeffersonian) view of the world, then nothing does.
2. The Community Reinvestment Act. In this gem, the government forced the banks into lowering credit standards, which made mortgages riskier.
3. Fannie Mae and Freddie Mac. Again, a government creation that contributed to the problem (and brought to you from the Hamiltonian world view).

In each of these cases, government action contributed to the problem. For Ellis, however, the only culprit is Wall Street, and the only solution is Government.

As it happens, I’m reading a biography of Hamilton right now (by Chernow). Perhaps when I’m through, I’ll gain a greater understanding and appreciation of the Hamiltonian view. I suspect, however, that I’m not the only one who would benefit from understanding the other side.