Macroeconomics and Market MeltdownBy Thomas E. BrewtonBig government, abetted by Keynesian macroeconomics, fostered today's  macro meltdown in the financial markets.Collectivism in the Federal government since the 1930s New Deal is  paralleled by the emergence in financial markets of giant, multi- national financial institutions.  Both reflect the detached, numbers  only, view of socialistic regulators who deal in large abstractions  called "the economy" and "the workers."As Stalin is reputed to have said, one death is a tragedy; a million  deaths is just a statistic.  Make it big enough, and it can be made  to seem in the best interests of society.Stalin's detachment applies to the process of pooling thousands of  individual debts  – home mortgage loans, automobile notes, etc. –  into a single large debt package.  Implicit is the idea that, even  when a whole class of debt is highly risky, putting enough of them  together will somehow mitigate the riskiness of any one of the  components.  Risks of default may be high in any one of the  underlying pooled obligations, but aggregating enough of them into a  single statistical vehicle presumably cancels the risk of individual  components.Macroeconomics is the Keynesian thesis that specific prices and wage  rates don't matter, that it is sufficient to look only at averages of  prices and wages for the whole economy.  And, in that picture, the  ultimate determinant of employment and economic activity is Federal  deficit spending, the perennial Democratic Party "solution" to every  economic slowdown.  Closely allied is the theory that the Federal  Reserve can control inflation and the level of economic activity by  fiddling with interest rates.In contrast, traditional economics looks to the free market to  readjust interest rates, prices and wages that have become too high  in individual companies and segments of individual industries, fully  aware that average wages and average prices are meaningless in re- establishing economic equilibrium.  History repeatedly demonstrates  that individual people and enterprises are far better at judging  prices and wages than any elite group of economists or state-planners.The 1920-21 recession was as severe as the start of the Depression in  1929-30.  With little government interference, the 1920-21 recession  was ended in less than a year via the historical processes of  lowering wage rates and materials prices until businesses could again  produce goods at a profit.  It is to be noted that there were many  thousands of different adjustments of prices and wages, varying from  industry to industry and from company to company.In baleful contrast, the macroeconomic approach of Presidents Herbert  Hoover and Franklin Roosevelt pressured businesses to keep wages up,  with the result that production costs remained too high for  businesses to resume profitable production.  Unemployment remained in  excess of 15% for ten years.The appearance in 1936 of John Maynard Keynes's "General Theory of  Employment, Interest, and Money" made macroeconomic theory orthodoxy  among the socialist intelligentsia in Franklin Roosevelt's  administrations.  Since then, three generations of students have been  taught that Keynesian macroeconomics is the appropriate analytical  tool to understand the dynamics of our economy.  Those students,  since the 1980s, have transformed banking and investment analysis  into a numbers-only abstraction of averages that disregards  underlying risks in the individual transactions that now are rolled  up into huge pools of securitized debt.Bankers historically were schooled to judge first and foremost the  personal character of their borrowers, then to determine whether the  requested loans could reasonably be repaid from cash flow of the  business. Banking and investment since the 1980s has been  increasingly divorced from knowledge of the underlying assets and  increasingly focused on law-of-large-numbers abstractions in which  the underlying economic reality is out of sight.In the commercial real estate field, for example, as recently as the  1970s, institutions financing office buildings, shopping centers,  apartments, industrial warehouses, and hotels were staffed with  people who had lived through one or more economic recessions, people  who therefore were keenly aware of potential risks in property  locations and property types.  Prudential InsuranceCompany, then the largest real estate lender, had more than 60  offices in every part of the country with loan officers who knew  every detail of their territories and details of every investment.By the early 1980s, hyperinflation created by President Johnson's  Great Society deluge of welfare entitlements spending had wrecked the  balance sheets of S & Ls and insurance companies.  S & L depositors  withdrew their savings from 4.5% savings deposits, and insurance  company policy holders borrowed full cash values of their policies at  the contractual 5% rates, both groups reinvesting in short term money  funds that were paying interest rates around 12% to 14% per annum.This started the rapid agglomeration of financial institutions,  changing S & Ls from local institutions that knew their territories  into giant organizations lending nationwide.  They were staffed  mostly by young people in their 20s who had never lived through down  markets.  And those inexperienced lending officers were asked to lend  in much larger individual deals, at a fast pace.The same scenario was repeated in insurance companies, investment  banks, and commercial banks.Most of the young people taking jobs in those huge financial  organizations were schooled in computer analysis and creation of  abstract financing techniques, which meant that too many of them  never left their offices and knew little or nothing about the  underlying business or real estate projects they were financing.The diffusion of the Keynesian macroeconomic mindset thus set the  stage for recent unraveling of complex, computer-constructed  investment vehicles in which it is impossible to determine the real  economic bases of the millions of individual transactions comprising  them.Thomas E. Brewton is a staff writer for the New Media Alliance, Inc.  The New Media Alliance is a non-profit (501c3) national coalition of  writers, journalists and grass-roots media outlets.His weblog is THE VIEW FROM 1776http://www.thomasbrewton.com/