“It is time for governments to borrow more money,” according to former treasury secretary Larry Summers.  He is not peddling this advice to Greece and Spain, but to countries like the United States and Japan that can still sell long-term bonds at very low interest rates. Summers urges the United States, in particular, to borrow more for “public investment projects” that are presumed to raise the economy’s future output. He offers the hypothetical example of “a $1 project that yielded even a permanent 4 cents a year in real terms increment to GDP by expanding the economy’s capacity or its ability to innovate.”

Even if such promising projects were easy to find, however, that is not the way the current government has been inclined to spend borrowed money. Despite all the rhetoric about “shovel-ready projects,” about 95 percent of the 2009 stimulus bill consisted of government consumption (salaries), refundable tax credits, and transfer payments which, as Robert Barro notes, “dilute incentives to work.”

Summers says, “Any rational chief financial officer in the private sector would see this as a moment to extend debt maturities and lock in low rates — the opposite of what central banks are doing.” Locking-in low borrowing costs would indeed make sense if the money from selling long bonds were used to retire short-term Treasury bills, but that would not involve borrowing more as Summers proposes.

For both government and households, it is certainly more prudent to use borrowed money to finance investments that will yield a stream of income in the future—either actual income (such as toll roads) or implicit income (the benefits from living in a mortgaged home).

Apostles of the Keynesian doctrine, such as Larry Summers, Paul Krugman, and Alan Blinder, invariably use hypothetical public works examples to make the case for more and more national (taxpayer) debt. Keynesian forecasting models, used by the Congressional Budget Office (CBO) to warn of the looming fiscal cliff and defend the fiscal stimulus of 2009, likewise assume the highest “multiplier” effect from tangible government investments.

In the real world of politics, however, Congress and the White House use borrowed money to placate constituencies with the most political clout. Federal spending on investment projects has essentially nothing to do with the huge 2009-2012 budget deficits (only 29 percent of which can be blamed on the legacy of recession, according to the CBO).

The Table shows that transfer payments and subsidies account for 63.8 percent of estimated spending in 2012, while federal purchases account for 28.4 percent. Also, most federal aid to states is for transfer payments like Medicaid.  Within federal purchases, only 7.6 percent of the spending ($152.5 billion) was counted as gross investment in the first quarter GDP report, and two thirds of that was military equipment and buildings. Net investment, minus depreciation, is smaller still.

If borrowing more for investment was a genuine political priority, rather than an academic conjecture, the government could do that by borrowing less for government payrolls, transfer payments, and subsidies.  At best, Larry Summers has made an argument for spending borrowed money much differently, not for borrowing more.

Having one’s read of the law vindicated by the Supreme Court is always a nice feeling, even if I had to wait about a decade.  From 2002 to 2003, I managed the HUD office which administered the Real Estate Settlement Procedures Act (RESPA).

In 2001, prior to my arrival, the legal staff at HUD released a “policy statement” claiming that RESPA’s Section 8(b) prohibited some instances of fees as excessive or unreasonable because said fees would constitute a person “giving or accepting any unearned fees”.  How HUD even knows what is earned or unearned is besides the point, Section 8(b) of RESPA only prohibits fees that are basically split between two or more parties.  As far as statutes go, RESPA is actually quite clear.  That clarity, however, did not stop HUD from taking the convoluted position that one can split or share a fee with one-self.  This was obviously an attempt to create a “reasonable” test for fees where one did not exist.

During my brief tenure at HUD, the RESPA office largely ignored this section of the 2001 policy statement.  The staff there related to me that its inclusion was largely “political” anyway, an attempt to the make the remainder of the policy statement more palatable.  I made clear at the time that the policy statement went far beyond any actual authority in RESPA.  It seems, however, that the trial bar was not willing to let this statement remain dormant, and assembled a class action based upon this erroneous reading of RESPA, leading to last week’s decision, which rejected 9 to 0 HUD’s reading of RESPA.

Dodd-Frank moved the RESPA office from HUD to the newly created Consumer Financial Protection Bureau (CFPB).  It moved much of the HUD enforcement and legal staff as well.  What is not clear is whether the willingness to simply make up law where there is no statutory authority was also left behind.  One of the reasons why I, among others, have strong concerns as to the current structure of the CFPB is this trend of regulators constantly going around the letter of the law.  How are we to hope for respect for the law when those tasked with enforcing it show so little respect themselves.

I sometimes wonder whether journalists have the slightest idea of how capitalism works.

In recent weeks, we’ve seen breathless reporting on the $2 billion loss at JP Morgan Chase, and now there’s a big kerfuffle about the falling value of Facebook stock.

In response to these supposed scandals, there are all sorts of articles being written (see here, here, here, and here, for just a few examples) about the need for more regulation to protect the economy.

Underlying these stories seems to be a Lake Wobegon view of financial markets. But instead of Garrison Keillor’s imaginary town where “all children are above average,” we have a fantasy economy where “all investments make money.”

I don’t want to burst anyone’s bubble or shatter any childhood illusions, but losses are an inherent part of the free market movement. As the saying goes, “capitalism without bankruptcy is like religion without hell.”

Moreover, losses (just like gains) play an important role in that they signal to investors and entrepreneurs that resources should be reallocated in ways that are more productive for the economy.

Legend tells us that King Canute commanded the tides not to advance and learned there are limits to the power of a king when his orders had no effect.

Sadly, modern journalists, regulators, and politicians lack the same wisdom and think that government somehow can prevent losses.

But perhaps that’s unfair. They probably understand that losses sometimes happen, but they want to provide bailouts so that nobody ever learns a lesson about what happens when you touch a hot stove.

Government-subsidized risk, though, is just as foolish as government-subsidized success.