Just last week, David Brooks described many successful politicians (such as Eliot Spitzer) thusly: "their sensitivity synapses are still performing at preschool levels" and they "have an almost limitless capacity for self-pity." Not a pretty picture of people in power.
But reading Brooks’s latest column (in yesterday’s edition of the New Orleans Times-Picayune), I discover that Brooks — with disquieting inconsistency — nevertheless trusts these emotional and ethical dwarves with power to regulate persons’ private choices. I sent this letter in response.
David Brooks notes that "behavioral economists demonstrate every day [that] human beings are powerfully and unconsciously influenced by … ideas and assumptions" that cause them sometimss to make systematic mistakes ("Not a good time to trust the market," March 20). True. But Mr. Brooks himself mistakenly draws the conclusion that this fact justifies government regulation.
The undeniable truth that each of us frequently makes foolish decisions does not justify overriding our freedoms, especially if (as is likely) the same "powerful and unconscious ideas and assumptions" that cause us to err when acting privately will cause us to err when acting politically — and will cause also those persons in political office to err when exercising their power.
For all of their insights, behavioral economists have never demonstrated that political power cures its holders of any of the cognitive ailments that afflict the general lot of humankind.
Sincerely,
Donald J. Boudreaux
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Justifying more and more government regulation seems to be a 'systematic error' people are prone.
If one can not see the results of the failure of a lack of regulation in lending practices that is unfolding before our eyes then indeed insight is an issue.
Bankers, financiers, brokers and fund managers have shown that "free market" buffoonery has hardly a rival even amongst the greatest of political buffoons. And as far as despicably nature … these free market asset bubblologist turned bubble-bursting hand upturned socialist have little rival.
Republicans such as Brooks are the same as Democrats… government regulations and expansions are a perfectly legitimate tool, when they favor Republican causes.
This has always been the case. The only surprising thing here is that people are surprised about this.
now all we need is 12 or 13 four thousand word posts from muirgeo to explain why Don's letter is right wing propaganda.
jpm,
Do you really think the current financial fiasco has nothing to do with the banking industry going from offering standard good old fashioned loans based on good credit to now securitizing, repackaging, using derivatives, hedge funds and finagaling of all sorts with secondary products that were nothing more then complex pyramid ponzi paper pushing schemes.
Did the government come up with all these high risk financial products or was it the free-marketeers… those noble Wall Street wonders who can do no harm because they are of course restrained by the invisible hand of the market.
They prove on a regular basis the bankruptcy of the idea that regulation is always bad and unfettered markets are always good.
Bankers, financiers, brokers and fund managers have shown that "free market" buffoonery has hardly a rival even amongst the greatest of political buffoons. And as far as despicably nature … these free market asset bubblologist turned bubble-bursting hand upturned socialist have little rival.
They prove on a regular basis the bankruptcy of the idea that regulation is always bad and unfettered markets are always good.
The same straw men. Maybe he counts them at night to fall asleep.
Are there more laws today regarding financial markets than there were in the past, or fewer?
Sam,
Your constant yelp of Straw-man is a Straw-man itself. Until the late 1980's, the United States maintained a separation between investment banking and commercial banks. The deregulations that broke that seperation have directly lead to the financial products we see today creating one conflict of interest after another and which now have lead us to the impending collapse we see.
That's no Straw-man that's a specific explaination of a deregulatory step leading to disaster.
Now you have repeated over and over the claim of greater regulation. Implying it has some how been the problem. You've never backed it up with anything specific. Now specifically what increased regulations can be tied to the current problem. When you can't come up with one then please consider your straw-man burnt to the ground.
More to the point it was largely the whole government crusade to get money into the hands of lower income people that caused the whole mess to begin with. When the government pressures lenders to start giving more loans to people who can not reasonably be expected to pay them back, you end up getting a lot of loans to people who can't pay them back.
Not only this, but those same risky loan structures were desirable for more stable borrowers due to being able to buy, repair and resell a house for relatively little money up front.
In all, if the Clinton administration didn't decide that there needed to be more people who owned their homes, and then follow up by deciding that the government needed to promote home ownership no matter the cost, we likely wouldn't have this problem.
When you get right down to it, government attempting to change the incentives involved in personal economic decision making almost always results in unintended consequences as there is usually far more involved in any given personal situation than is easy to recognize from inside a congressional commitee room. In this case it was a failure to recognize that pushing for low interest rates as a means to support low income earner's ability to buy more house for their income resulted in everyone being able to get more house for the money. Prices increased drastically, and the expected market fluctuations occured.
I haven't claimed increased regulations. I asked if there were more or fewer regulations.
You keep talking about some free market as if that was what we have in our financial institutions.
If you can show that these institutions have been deregulated in any real sense and not just assertions in the media, then I will cease the straw man charge.
I still recall quite clearly the media charges of electricity 'deregulation' not that long ago when obviously there had been no deregulation at all, they merely changed a the rules about wholesale prices while leaving the entire regulatory structure quite intact. This is not, to free market advocates, 'deregulation'.
For deregulation to occur and a free market to become a reality, the entire regulatory structure must be taken down and the regulated businesses left entirely subject to market forces without any protection, subsidy, political regulatory body, etc, other than the prohibition of force and fraud that apply equally to everyone.
I know that if an industry is regulated by 3,286 rules and one of them is altered, you and the media will cry "deregulated", "free market failure", etc.
This is merely the creation of a straw man to attack, giving the public the impression that the failures of the regulatory environment are the fault of 'the free market'. And that's exactly what happened during California's 'energy crisis'.
Sorry ducky, but no one cares about your straw armies anymore. Screw off.
Come on, there are some people here that work in the financial markets. How many rules, laws, regulations, reporting requirements, govern the finance industry? Does anyone even know?
Muirgeo, have you any idea how many laws, rules, and regulations are on the books? Have you any idea of the extent of the Federal registry?
If you go to the library and look up the codes for California, you will find shelves of books containing these governing edicts.
It was the electrical industry in the first place that called for regulation. This was to establish their 'natural' monopoly and guarantee profits in exchange for government oversight.
Muirgeo,
a similar credit crisis happened in Sweden in the nineties.
This is an issue of poor regulation or under regulation clear and simple. I'm not saying more regulation but better regulation. The "marketeers" have shown over and over that they get into trouble when left to their own and the American public frequently pays the bill.
JUAN GONZALEZ: Could you talk about the role of major banks in this whole process? I did a story in the New York Daily News last week about the role of Credit Suisse First Boston in repackaging these loans in the securities industry, and they actually had a whole division called their NINA department—“No Income, No Asset” loans that they were repackaging.
KEITH ERNST: Right. One of the interesting stories here underneath all of this is how these mortgages came about in the first place. You know, we like to think, or I think most Americans think, that mortgages are made by banks and depository institutions, but especially in the subprime market that’s not the case. They’re largely made through state-chartered finance companies that don’t have any bank deposits, and so they don’t have any bank regulators.
Where do they go for their money? They go to Wall Street. So Wall Street will supply them the money to make the loans, will buy the loans from these lenders, and then will repackage them into securities and sell them to investors. Now, again, in principle, that’s fine. It can make low-cost capital available to families who need mortgages. The problem comes when the insatiable appetite builds for more and more mortgages and lenders get reckless with regard to the quality of the mortgages they’re originating.
AMY GOODMAN: Keith Ernst, what kind of regulation, federal regulation, is there of this, and also local regulation?
KEITH ERNST: Right. You know, Amy, the regulators are really—they’re just scrambling to catch up now. What we’ve seen is the federal regulators just this spring have come out with proposed subprime lending guidance that would require lenders to insure that borrowers can afford their mortgage when those payments jump up, so not at the initial introductory rate, which is only going to be in effect for two short years, but at the fully indexed rate, the rate that’s going to apply after the introductory period is over. And we think that’s a tremendous step forward.
But it’s coming too late for many families. Many families are finding that their mortgages are resetting and are in trouble now. You know, that’s at the federal level. We’ve got that regulatory action. Congress is looking into bills to protect borrowers from these sorts of practices and also from other sorts of predatory lending practices, like putting borrowers in loans with abusive back-end prepayment penalties that can cost thousands of dollars if they try to refinance, you know, the month before these payments reset, while they can still—while they’re still current and can afford their mortgage, and other similar abuses. And in the states, they’re starting to take a look and ask, “How can we really help protect the borrowers in our backyard?”
The rapidly growing trade in derivatives poses a "mega-catastrophic risk" for the economy and most shares are still "too expensive", legendary investor Warren Buffett had warned. In the year 2003.
The dangers were recognized by intelligent investors and economist years ago. Greedy investors and ideologues have still not admitted to the problems.
Do not assume that regulations are always created to hamper an industry. Quite often they are created with industry 'input' to hamper competitors.
It's all in the incentives.
This is pitiful. It will be days before muirgeo gives us even the minimum word count this blog requires
"The "marketeers" have shown over and over that they get into trouble when left to their own and the American public frequently pays the bill."
Yeah, the public really should stop doing that. It occurs to me that all the regulation has really accomplished exactly the opposite of what was intended. It has given the public the idea that investing is safe – that the return is guaranteed and that a high risk is just a promise of enormous returns. Regulation is no substitute for due diligance. Not doing the homework is stupid, and stupidity should be painful.
…make that "diligence"… never seem to get that one right on the first try.
Muirgeo, for someone who has in the past claimed to oppose corporate welfare, I'm surprised to see you defend it in this context.
Financial regulation, like most regulation, is a tool used by established players to discourage and hamper new players.
Waste and disruptions occur in all dynamic systems, but they are still preferable to static systems where little progress is achieved. Unregulated markets stumble
occasionally, but left to themselves they will recover. Government intervention typically prolongs or worsens the disruption, or hastens the next one.
Those points have been made to you before, but where I'm surprised is that in the financial sector especially, subsidies and bailouts so obviously go to large corporations that I'm miffed you should be in such veneration.
Poor or good, regulation creates incentives for industry to affect regulation. The incentives are inescapable.
Quoting people who accept the same mercantilist premises that you have accepted only proves that there are others who, having similar mercantilist/progressive precepts, share the same conclusions.
Why feed the Muirgeo troll? There are people with opposing positions willing to engage in thoughtful dialogue, acknowledging the arguments of the other side, and developing a clearer view of how and why they see things differently. In other words there are thoughtful people opposed to free markets and free trade who are willing to engage in PRODUCTIVE argument. Muirgeo isn't one of those people, however. He takes lazy potshots to provoke responses, nothing more. If people stop responding, he'll get bored and go away, and we'll have fewer of his long posts to scroll past.
George,
You have been handed perhaps the greatest opportunity you will ever have to make a compelling case for greater regulation, yet you're unable to muster a single, specific recommendation. Nor can you point to any record of your own cautioning against subprime lending in the period 2001-2003.
Amidst all the sputtering and frothing which characterize your posts is the evidence that you really don't understand any of the economic processes you criticize, in your own words, "securitizing, repackaging, using derivatives, hedge funds and finagaling of all sorts with secondary products…" The closest you come is with your risible claim that the problems are due to the separation of commercial and investment banking.
Your criticisms are emotional, and this is why you must resort to conspiratorial claims of plutocratic manipulation of the world's finances, or, more childisly, name-calling.
Bolony Jeff,
I've quoted Former Fed chairman, professors of economics and finance wizards like Warren Buffett all predicting this fiasco 3-4 years ago. But because business and monied interest put their men in positions to write the rules this is what you get.
Ok, let’s be very clear here. No amount of regulation would have prevented the housing bubble, nor would it have prevented another Bear Stearns.
Contained within market participation is the incentive to remain a going concern. This survival instinct could theoretically have assisted Bear Stearns (more than it did), however given the highly-leveraged structure of investment banks, liquidity crises can strike numerous ways at nearly any time.
Stating we need more regulation to prevent this is a fundamental ignorance of how investment banking and capital markets work.
Limiting derivatives is another form of limiting capital formation and innovation – and some ways are very risky. These risks, when understood and properly priced, carry little to no additional systemic risk
Warren Buffett has zero clue about how derivatives work (or currency trading – he lost $1 billion betting against the dollar a few years ago). So I wouldn’t go around quoting Warren Buffett to anybody who knows what they’re doing in the financial markets.
Warren Buffett understands 1 thing: Graham & Dodd (very useful, but about 1/16th of the financial picture). If it’s not in their book, he doesn’t get it.
Buffett is not someone to emulate or look to for financial advice.
Muirgeo classically thinks that stability is a desirable aspect of an economy, and like far too many people thinks that a temporary economic problem like this (which, as others pointed out, was partially caused by government incentives) is a permanent problem needing a government solution.
But what markets do best is to undermine stability (y'all know, Schumpeter, Hayek, yadda yadda–apparently Muirgeo doesn't bother to read the literature) in a process of creating new wealth.
So lenders and borrowers made bad decisions–what's the best way to deter future bad decisions? Let them suffer the consequences of their mistakes. Far too much foolish behavior goes on in our markets because people expect to not have to pay the cost of mistakes, thinking government will bail them out.
This is a great blog, but muirgeo's persistently illogical argumentation diminishes my enjoyment substantially.
"Bankers, financiers, brokers and fund managers have shown that "free market" buffoonery has hardly a rival even amongst the greatest of political buffoons."
You may want to watch a little more History Channel. Which evil broker or fund manager rivals Kaiser Wilhelm or Czar Nicholas, to name only a couple political buffoons?
I refuse to discuss anything with ducky until he apologizes for his endless bs sessions and straw armies. Until then, I'll gladly converse with the rest of you.
Beautifully said, Mesa.
Stating we need more regulation to prevent this is a fundamental ignorance of how investment banking and capital markets work. – Mesa
and so it follows for the ignorant who also happen to be incredibly stupid, that because they don't understand something, it must be changed.
It is eerie that I have said the same thing about Warren Buffet – almost verbatim.
Consider that he calls derivatives "weapons of mass destruction" which neither he nor "anybody else understands". Yet, a few years ago he made a lot of money (I forget how much – $250 million, I think) in currency derivatives. He claimed that he made so much money because the derivatives were "wildly mis-priced", creating an arbitrage opportunity which Buffet just couldn't pass up. For that to be true, we have to believe a guy who doesn't understand derivatives can suddenly price them so well that he can recognize massive theoretical edge that NOBODY else recognizes in one of the tightest, most liquid derivatives markets. In reality, Buffet established a directional position which randomly went in his favour. Either Warren is too stupid to understand the difference between arbitrage and a directional position or he's a liar. Neither one is a reason to respect his opinion on anything outside of the fairly useless DUPONT analysis and other tedious and mostly useless tools of fundamental analysis laid out in Graham Dodd.
methinks – I take it you work in the financial industry and have an MBA. I couldn't understand a thing you said.
muirgeo,
YOu do realize that the government has been securitizing, repackaging, and using derivatives through Fannie Mae, and Freddie Mac for about 30 years.
Oh, and I am being kind just to say 30 years, as these organizations are much older than 30 years.
Nice try, Paris, but the "Don't feed the trolls" sign hasn't worked yet here.
Muirgeo is actually quite brilliant…at drawing replies from earnest types who can't really help themselves. Muirgeo is so good, in fact, that I'm convinced he/it's a creation of Don or Russ to spur exchanges on this site.
Ok, let’s be very clear here. No amount of regulation would have prevented the housing bubble, nor would it have prevented another Bear Stearns.
Mesa Econguy
Such a statement requires some basis in factual evidence. Do you have any.. or am I to take this on your word only? Why were there only about 500 bank failures post FDR and as many as 5,000 just during Reagans reign? Why has there been no housing bubbles since prior to the last Great depression? I'd argue because oversight stablizes the economy without hindering growth.
Regulation is a fact of markets. That point was made in the EconTalk podcast with Tyler Cowen. Seems to me we might as well insist on good regulation and quit pretending there is some ethical moral ideological advantage to deregulation or industry lead "regulation".
With apoligise to "freedom"lover, James Hanley, mcwop, jpm and any others who might have wasted their time reading this rather then simply voluntarily skipping past it.
That is a statement of fact.
This was a bubble, and there will be others, so we should prevent them, too, right?
Ok, what will they be? The mobile home market? Screws? Leftover Space Shuttle Parts? Jesus on toast on EBay?
Regulation always promises to rectify damage and prevent past events from occurring again. It does nothing to prevent future occurrences.
Do you understand any of this muirgeo? You must some, because you continually fight the last war yourself.
Muirgeo, you have no idea what they will be, nor can you control them. That is the point.
Doctors love to think they’re in control (most aren’t), and every single comment you make here belies that arrogance.
I don’t go around telling you that the important metabolic splitoff point in glycololysis is fructose-1,4-bisphoshphate, the shunt into TCA (Tricarboxylic Acid) cycle, nor do I tell you the most commonly broken bone in the body is the clavicle.
I’m a hell of a lot closer to what’s happening with our current capital markets and economic situation than you are, so I suggest you shut up and listen.
Bank Failures:
FDR administration, post-Glass Steagall: hundreds
1930s Canada, no interstate banking regulations: 0
Dumbass.
Mesa needs to do much more than he has to get that minimum word count up, but why does he have to insult the medical union.
Regulation always promises to rectify damage and prevent past events from occurring again. It does nothing to prevent future occurrences.
Do you understand any of this muirgeo? You must some, because you continually fight the last war yourself.
Posted by: Mesa Econoguy
Yeah I understand what you are trying to say. I'm saying the facts don't bear out your position.
WHEN WAS THE LAST MAJOR HOUSING BUBBLE?
Not yelling just emphasis on a questtion I'd like you to answer.
WHAT’S THE NEXT BUBBLE, MUIRGEO? YOU CAN TELL ME, I’M A DOCTOR!!!
WHY DON’T YOU PREVENT IT NOW, MORON? YOU”RE SO SMART, GO ON, PREVENT IT……
Muirgeo refuses to acknowledge government participation in these markets.
Somethings going wrong? Assume it's the market at fault, never political interventions.
Summation of muirgeo's perspective.
businesses = bad guys
politicians and bureaucrats = good guys
Sounds good and confirms progressive/lefty presumptions.
You interrupted me breaking in my brand-spankin-new Stratocaster for this?
Good Lord…..
Mesa,
I suspect the next bubble is in commodities.
I understand you are more knowledgeble on these issues… but throw me a frickin bone here… give me a reason to agree with your proposed treatment. Can you imagine a doctor telling you take the medicine he prescribed and to STFU DA I'm the expert here don't question me??? I think your defensiveness suggest I'm onto something.
Jpm:
The Wolf (Harvey Keitel, Pulp Fiction):
“Gentlemen, if I am curt, it is because time is of the essence.
Now, please, clean the fucking car.”
Gee muirgeo, since the last time I was in hospital I had to do your job (and I got it right, tho not the surgery part – unpleasant surprise there).
Commodities are deflationary right now idiot, see gold:
http://www.bloomberg.com/markets/commodities/cfutures.html
Air came right out once our (equity) market recovered.
Dude, you’re so damn clueless, I don’t even know where to begin.
If the “investor demand” explanation is right, then commodities are a bubble. You should get out now.
And if the “supply” explanation is right, then the world economy is in deep trouble and pace the 1970s, commodities offer almost the only protection against what is going to hit us.
john.authers@ft.com
john.authers@ft.com
?
There’s one single commodity?
What the hell are you talking about?
Trades like May Wheat?
Oct Pumpkins?
Feb Roses?
What is this idiot saying?
Counterargument (which dumbass didn’t read, but took me 2 seconds):
“Tim Lee, of pi Economics, dismisses the commodities “bubble” as “simply a reflection of a speculative shift of funds”. Implicitly, they are betting on stagflation – recession in the US and rising commodity prices.”
Bingo.
That’s why theair came out, dumbass.
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