Here’s economist David Henderson — editor of the splendid Concise Encyclopedia of Economics — on the current financial turmoil. A sample paragraph:
The
best evidence is that the problem was triggered by previous government
regulation combined with an unrealistic belief on the part of many
people that housing prices could only go up. It is important to
understand the cause because, if we do not, we are unlikely to choose
good solutions. Indeed, the US federal government has, for the last few
months, chosen one bad solution after another.
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There are lots of posts on this blog of libertarians that are against any sort of bail out, but none of them seem to be macroeconomists. Also, none of the articles seem to acknowledge that there is a vast macro literature where doing nothing doesn't work (not that they have to agree, but it's odd they don't acknowledge it).
Another odd thing is that the only people that seem to be arguing that the "credit crunch" doesn't exist are non-macro people. Is it simply because they don't know the data? I worry Russ's recent quote is revealing, "There's a claim that commercial credit is frozen — or banks are not lending to each other. That may be true. I don't know anything about it, though." Isn't this as simple as looking at the Ted spread? And many other indicators I'm not aware of, but macro officianados know well.
On the other side of the coin, Tyler Cowen is a GMU economist with libertarian leanings that is either for or not expressly against government action. Is the difference that he is TC or that he has an expertise in macro? [I don't know that he considers himself a macroeconomist, but two publications in Money, Credit and Banking and a monterist pub in JPE is somewhat considerable]
Are there other examples/counter-examples on either side? Either macro people staunchly for doing nothing or libertarian macro people for gov't action? Or macro people that think the credit crunch doesn't exist?
Charlie
"Because so many financial institutions owned securities based on these mortgages– so-called mortgage-backed securities (MBS), the large decline in value of these MBS’s led to large losses for their owners. And because so many of the owners were financial firms that held only a tiny percent of the value of their assets in reserve, even a small percentage decline could, and did, destroy almost the whole value, and sometimes the whole value, of the financial firms that held these securities."
The guy is intellectually dishonest and must believe his readers are intellectually lazy for there were NO regulations that MADE Wall Street invest and leverage so heavily in these wacky products THEY invented.
Buck up… some one tell me which regulation made Bear Stearns go heavy into MBS or which regulation forced AIG at gun point to filler up with CDS's.
Simply rediculous… but that's what ideologies do when backed up against a wall.
I'm not aware of the division in argument between the bail-out and "doing nothing".
Are there lots of proponents for the "do nothing" argument?
Muirgeo,
David Henderson does not say that anyone made firms buy MBSs. Economists understand that people respond to incentives, and that brute force is not the only incentive in the universe.
Henderson's argument is that the implicit government backing of these securities made them more attractive to hold – and therefore, the incentives to create and to buy MBSs increased as a result of such government backing.
You might disagree with Henderson's argument, but you should at least understand what he argues. He's not at all unclear.
Muirgeo, who invented MBS's????
The government did. First, a little history lesson. Mortgage backed securities were originally the old Ginnie Mae pass-through certificates. The VA or FHA packaged up their loans and sold them through Wall Street to little old ladies who wanted more yield.
"You might disagree with Henderson's argument, but you should at least understand what he argues. He's not at all obtuse."
Posted by: Don Boudreaux | Oct 20, 2008 1:11:54 PM
I've been trying to tell him that for two weeks, Dr. Boudreaux. Good luck.
Oh boy Muirgeo, here is a real gem for you:
Right from HUD's website:
Ginnie Mae Securitizes New Class of FHA Refinance Loan with Custom Mortgage-Backed Security
Washington, DC – The Government National Mortgage Association (Ginnie Mae) today announced that it will create a new security backed by fixed-rate Federal Housing Administration (FHA) loans that will refinance loans originated to delinquent borrowers and refinance loans to borrowers with second liens.
"We are proud to support FHA's efforts to assist even more borrowers by providing an efficient securitization vehicle for homeowners with special needs," said Thomas R. Weakland, Acting Executive Vice President of Ginnie Mae. "Securitizing these loans in custom pools provides significantly lower rates for these new borrowers and ensures that investors have access to critical information about these loans."
The new security will be a multiple-issuer pool type under the Ginnie Mae II Mortgage-Backed Securities Program, and will be available for pool issuances beginning December 1, 2007.
"The creation of this new security is an example of how Ginnie Mae helps to expand access to affordable housing for borrowers by linking the capital markets to the nation's housing markets," said Weakland.
Ginnie Mae is a wholly owned government corporation within the U.S. Department of Housing and Urban Development. Ginnie Mae pioneered the mortgage-backed security (MBS), issuing the very first security in 1970. An MBS enables a mortgage lender to aggregate and sell mortgage loans as a security to investors. Ginnie Mae securities carry the full faith and credit guaranty of the United States government, which means that, even in difficult times, an investment in Ginnie Mae is one of the safest an investor can make.
http://www.hud.gov/news/release.cfm?content=2007-10-16.cfm&CFID=5166365&CFTOKEN=25261362
-Mike Farmer
"I'm not aware of the division in argument between the bail-out and "doing nothing".
Are there lots of proponents for the "do nothing" argument?"
If you scroll down this month on Cafe Hayek, you will find several pieces advocating "doing nothing" or put differently, no government intervention the market can sort it out on its own. There are pieces such as this one by Walter Williams and Russ Roberts.
Charlie
Charlie, David Henderson did not advocate "doing nothing".
Destroying the institutions and regulations that create the perverse incentives that led to the current situation is certainly something.
Now that we are on the topic of doing nothing, here is an interesting post at Mish's Global Economic Analysis
Oil Shock, thanks for that link – love it. It would be really funny if they invited Jim Rogers to that party.
-MnM
Don Henderson wants to remove certain regulations, because he thinks they are bad, but he is not offering a competing solution to resolving the credit crunch. This is obvious, because he doesn't think there is a credit crunch. There is nothing in the article to suggest that without removal of these regulations are necessary to resolve the crisis (or Henderson's argument non-crisis).
Charlie
If subprime, residential mortgage lending is The Cause of The Problem, why did the original bailout bill entitle the Treasury Secretary also to buy commercial mortgages and "related securities" and why did the final bill remove any limitation on securities the Secretary may buy and why has the plan expanded from repurchasing mortgage backed securities to buying shares in major banks? What did mortgage backed securities have to do with Worldcom, Enron, LTCM or even AIG, not to mention the too-small-to-notice, billion dollar bond that my former employer sold to finance its own purchase by an investment bank?
Henderson writes, "When the values of those houses fell and went below the amount of the mortgages, lenders often foreclosed on borrowers."
I doubt it. Lenders foreclose when borrowers stop paying, not when the borrowers' equity heads south.
Henderson writes, "Some blame greed, some blame deregulation, and some blame government."
All three are trapped in a dualistic, political game. It's either the greedy Republicans or the busybody Democrats. So what if it's neither, or what if these political stereotypes don't capture the essence of the problem?
Henderson writes, "… an unrealistic belief on the part of many people that housing prices could only go up."
Buyers of billion dollar mortgage backed securities never believed that house prices could only go up, even if some individual home buyers did. The billion dollar bond buyers and the sellers of default swaps and similar derivatives rather believed that their lackeys in the Congress would back the securities.
Henderson writes, "You cannot explain why something changed by pointing to something that is constant."
Government meddling is also constant. This analysis simply generalizes the "greed" while specifying the "meddling". A political pundit on the other side of this rhetorical divide could as easily argue the reserve. The argument is facile.
Henderson writes, "But there is no obvious connection between this 1999 deregulation and the problems that later happened in the housing sector."
Credit default swaps and other derivatives contributed to the demand for mortgage backed securities by the burgeoning (and unprecedented) market for retirement income, and there is no obvious reason to believe that problems are confined to the housing sector. There are many reasons to doubt this presumption.
Henderson writes, "There is, however, an obvious culprit. That culprit is regulation."
Blaming "regulation" is like blaming "gravity". Regulation certainly isn't new or unique to this scenario.
Henderson writes, "The Community Reinvestment Act and the Home Mortgage Disclosure Act should be repealed. Also, Fannie Mae, Freddy Mac, and the other GSE’s–all of which create moral hazard–should be disbanded."
I don't know how repealing the Home Mortgage Disclosure Act addresses any problem. Why fold this act into the mix?
Disbanding all GSEs suits me, but focusing exclusively on the Community Reinvestment Act is incredibly myopic. Looser mortgage lending is a symptom, not The Problem. The buyers of these securities wanted "safe investments" providing reliable income. Ignoring their demands is the most political act of rationalization I can imagine.
Congress could have simply financed mortgage loan guarantees for low income borrowers or racial minorities by selling Treasury securities or even through taxation in the first place. If it had, the buyers of mortgage backed securities wouldn't have received the promise of higher interest rates, so the rent seeking capitalists preferred the MBS approach. Heads they win, tails the taxpayer loses.
Focusing on the CRA simply ignores this dynamic, like it's all about the pressure to lend in low income communities. Congress could easily have sponsored this lending otherwise without satisfying a growing demand for income yielding securities. Ignoring this demand when accounting for the politics is simply incredible.
Why focus exclusively on the demand side of this credit equation? What happened to the supply siders?
Henderson writes, "Now, though the US government has put itself even more in the role of central planner of credit markets, do not be surprised if the financial crisis lasts for years rather than for the few months it likely would have lasted had the Feds stayed out."
The problem is a glut of rent seekers searching in vain for income yielding securities sufficient to meet their unprecedented demand. Yes, this problem will persist. It will persist for a decade or more regardless of anything the government does, aside from simply creating the securities from taxpayer obligations.
Bob Murphy Critiques Tyler Cowen & Paul Krugman
Excellent article.
Anna Schwartz on the current "crisis" and her judgment of the Fed's handling of it.
Martin,
Surely the extent to which, and the ways in which, government intervenes in the economy changes far more often and significantly than does human greed. Government regulation emphatically is not a constant in the same way that human self-interest is a constant.
Actually, if you ask me this problem was primarily becuase of two items:
1) Too easy on the monetary policy by the fed post 9/11
2) Mark to Market (marking assets down also works in the reverse).
Mark to market did two things. As asset prices rose, balance sheet gains lead directly to increases in a firm's equity, which was used to lend even more money. As the housing market dropped, so did bank equity levels, and they had to deleverage, causing a selling of these assets. As that selling hapened all at once teh pricing levels collapsed, causing more mark to market losses, and more selling etc… etc…
Yes, I believe it was that simple, and an accounting rule that has assets based on a cash flow/credit quality model, which keeps principal values more stable may have avoided this whole mess on the way up and down.
The real problem was the implicit government guarantee that it would intervene in a financial disaster. This did not force anyone to invest anything, but it led them to risk more than they would have in other circumstances.
However, if you believe that these implicit, in my mind explicit, guarantees were in place, causing people to invest differently than they would have otherwise, then you are bound to helping these investors in the current situation. That's the nature of a guarantee.
Going forward, these guarantees need to be either explicitly rejected or explicitly determined.
Mcwop,
Marking assets to market doesn't create problems. What you describe is a feature of every portfolio and only becomes a problem in presence of leverage. Allowing firms to mark to model means that they have wide latitude in how they mark their portfolios. This leads to firms overmarking their books, thus understating leverage. Since the higher the leverage, the smaller the change in the value of the assets is required to markedly impact the value of the portfolio, a levered portfolio is a portfolio with both amplified earnings and losses. As you point out, MTM lead to inflated equity in the good times, but not marking the book to market on the way down allows banks to carry too much leverage as the market deflates.
As credit spreads tightened to historic lows, leveraged was increased to increase returns on portfolios. I think rather than MTM, leverage was a much bigger problem – although, they aren't unrelated either. Getting rid of MTM only decreases the transparency of portfolios and leads to wilder speculation about the value of the assets. It could lead to a perceived problem even when their isn't one.
Here's a piece from the WSJ which proposes that Basel II might be a bigger problem. If I'm not mistaken, Per Kerkowski has also made a similar argument in the comment section of this blog.
Don,
The extent to which and the ways in which government intervenes in the economy are part and parcel of human greed. It's not like greedy capitalists are "outside the government" while the champions of poor, urban minorities are "inside the government". This division is absurd. I suppose the Lords of Christendom were all about protecting the poor in the name of Jesus from the comfort of their castles too.
You coulda fooled me. Government regulation is as common as property, because property is government regulation.
Government regulation is a manifestation of human self-interest, and capitalists influence this regulation most, not least. By "capitalist" here, I don't mean a follower of some utopian creed. I mean someone governing lots of capital. It's no accident that the chief architect of this intervention is a former CEO of Goldman Sachs or that Warren Buffet is its chief cheerleader.
Martin,
Surely the extent to which, and the ways in which, government intervenes in the economy changes far more often and significantly than does human greed. Government regulation emphatically is not a constant in the same way that human self-interest is a constant.
Posted by: Don Boudreaux
And that explains why Fannie Mae / Ginnie Mae and CRA were around for so long without a major collapse. When the rules changed the greed was unleashed.
We had the same thing with the Savings and Loan Crisis and prior to the Depression.
The internet is great because I can go back and read the NYT and see who said what and when they said it.
Experts from Soros, to Buffett, Brooksley E. Born, the 57-year-old head of the Commodity Futures Trading Commission, Edward M. Gramlich, 68, a former Federal Reserve governor and many more called this disaster waiting to happen years ago and were rebuffed by the "deregulationist" with Greenspan leading the charge.
Believe what you all want but I can read a paper and I can read history.
Believe what you all want but I can read a paper and I can read history.
This is not in dispute. Your inability to process the information is the problem.
Since we are on the topic of doing "something" or nothing. here is another hilarious article from Bill Bonner.
The rest here
From methinks post
"To understand why, one first has to understand the nature of the current "credit market disturbance," as Ms. Schwartz delicately calls it. We now hear almost every day that banks will not lend to each other, or will do so only at punitive interest rates. Credit spreads — the difference between what it costs the government to borrow and what private-sector borrowers must pay — are at historic highs.
This is not due to a lack of money available to lend, Ms. Schwartz says, but to a lack of faith in the ability of borrowers to repay their debts. ….The basic problem for the markets is that [uncertainty] that the balance sheets of financial firms are credible."
So even though the Fed has flooded the credit markets with cash, spreads haven't budged because banks don't know who is still solvent and who is not. This uncertainty, says Ms. Schwartz, is "the basic problem in the credit market. Lending freezes up when lenders are uncertain that would-be borrowers have the resources to repay them. So to assume that the whole problem is inadequate liquidity bypasses the real issue."
….
But "that's not what's going on in the market now," Ms. Schwartz says. Today, the banks have a problem on the asset side of their ledgers — "all these exotic securities that the market does not know how to value."
"Why are they 'toxic'?" Ms. Schwartz asks. "They're toxic because you cannot sell them, you don't know what they're worth, your balance sheet is not credible and the whole market freezes up. We don't know whom to lend to because we don't know who is sound. So if you could get rid of them, that would be an improvement." The only way to "get rid of them" is to sell them, which is why Ms. Schwartz thought that Treasury Secretary Hank Paulson's original proposal to buy these assets from the banks was "a step in the right direction."
"all these exotic securities that the market does not know how to value."
"all these exotic securities that the market does not know how to value."
"all these exotic securities that the market does not know how to value."
"all these exotic securities that the market does not know how to value."
Of course the Libertarian answer is "The devil made me do it!"
Thanks Ms Schwartz for confirming the problem as I've suggested all along.
Toxic assets created by wall Street caused it to crash in on itself with out adult supervision AND now the market continues to flounder NOT because of regulation, not because of GSE's or CRA's or poor people or predatory borrowers or Reverend Wright or even Bill Ayers but because none of the Free Marketeers knows what the other Free Marketeer is holding because they are holding Crap Toxic Assets (CTA's) they were allowed to create in their Financial Genetically Modified Products Labs.
I'm quite proud of myself as being on record as independently making this claim on this very blog. (To re-iterate my claim was that the frozen credit market was itself a sign of a market failure. When the market doesn't trust itself because it knows it's a cunning thieving conniving thief… you have a market failure.
Methinks…just one more thing;;
"all these exotic securities that the market does not know how to value."
Hehehe!
Muirgeo, the market has been valuing these securities all along. You may not like the value, but the market has been valuing these.
See one such story about investors willing to buy distressed assets:
http://www.dallasnews.com/sharedcontent/dws/bus/stories/092808dnbusdistressed.1aafd4f.html
You can get more perspective here:
http://www.thenorth.com/apblog4.nsf/0/231DF62A5022B68E852574D50075E65F
"If you scroll down this month on Cafe Hayek, you will find several pieces advocating "doing nothing" or put differently, no government intervention the market can sort it out on its own. There are pieces such as this one by Walter Williams and Russ Roberts.
Charlie"
I think they are talking about not bailing out, but if you asked any of them what needs to be done, they'd have a couple of suggestions. There's a difference between doing nothing to bail out failing banks with tax-payers' money and doing nothing about the financial troubles.
Here is more Muirgeo on valuing CDOs:
[A]t the end of the first quarter of 2008, the Company held an investment in a commercial real estate collateralized debt obligation (CRE CDO) which had been depreciated $209 million from its inception to date, including $160 million in the first quarter of 2008. The investment is currently producing approximately $8 million per quarter of cash flow but its current fair value determined in accordance with GAAP is $11 million due to a lack of liquidity in the financial markets for CDO investments which has caused investment spreads to widen. However, the Company anticipates realizing its $220 million investment on settlement or maturity based on its assumptions of future credit losses, which includes a recession over the life of the investment.
via ACAS' Form 10-Q filed May 6, 2008.
More on something for nothing….
Texas Straight Talk
Farmer,
Here is the alternative Austrian Bail Out Plan, as suggested by Mark Thornton.
let's say that a steel producer sells steel to a bunch of car manufacturers, who in turn produce cars. Then, after the cars have been produced and sold to car dealerships across the country, we discover that some of the steel had too much carbon and, as a result, a bunch of those cars will explode in an accident, but there's no easy way to tell which cars are good and which ones are crap. As a result, no dealership can sell any cars. Do we blame the car manufacturers for building "exotic" repackagings of steel with three-letter acronyms ("CAR"), or do we blame the steel manufacturer for selling crappy steel?
Wall Street did what any manufacturer does — it took a raw material (MBSs sold by Freddie and Fannie) and turned it into assets that people want to buy. As it turns out, some of the raw materials were crap. Whose fault is it? Shouldn't the blame rightly rest on the companies that produced the crappy raw materials?
The ONLY WAY that Wall Street could have bought the $1T or so of Mortgage Backed Securities offered by Freddie Mac and Fannie Mae was to repackage them as "exotic securities." There was nowhere close to $1T of demand for products with the payment characteristics of MBSs. But, there was $1T of demand for products with other payment characteristics.
-Mike
"I think they are talking about not bailing out, but if you asked any of them what needs to be done, they'd have a couple of suggestions. There's a difference between doing nothing to bail out failing banks with tax-payers' money and doing nothing about the financial troubles."
Trying to argue the libertarian alternative is "doing something" is a little bit silly. It's like going to too doctors one says, "oh, you need surgery," "the other says, don't worry it will go away on its on, and by the way, you should eat healthy and get some exercise." The libertarian plans are no bail-out of any kind, plus we should deregulate. But they always say to deregulate and many people for the bail-out would prefer deregulation of some form or another, so in that sense it is not an alternative plan.
None of the people I mentioned have argued that deregulation is a necessary part of recovery, though they all see it as beneficial.
Charlie
Poor analogy Chris. If you are a quality conscious maker of goods and services, you will check on the quality of the ingredients that are going into the final product/service you are making.
Wallstreet is at fault, they were so intoxicated with easy money, that they couldn't see the risk. When the going was good with this fraud, they kept most of the profit, and now it is time for them to own up and take most of the losses.
Root cause analysis will show that there was a scheming Fed that was flooding the world with liquidity – a euphemism for inflation. This is the root of all evil. By distorting interest rates, which is the price of money, they create perverse incentives in the economy. Modern bailout ( Keynesian ) and Money pumping ( monetarist ) economic fantasies had the bankers so intoxicated in the belief that they are protected from any downturn, they partied hard with OPM(opium)
If you go to a Keynesian doctor with a papercut on your finger, he is likely to surgically remove your entire limb, and impose a ban on papers less than 1 inch of thickness.
-Mike
I realized I talked around your point a little, lumping it in with another commenter, when it is a different point.
The libertarian/Hayekian solution is that you don't need a solution. The market should redeploy resources as the interest rates demanded for risky assets rise and for less risky fall relative to them. Losers take their lump and winners redeploy their additional assets. The libertarian solution is that anything devised by government will likely do more harm than good.
I don't think I am misrepresenting their position at all, though I'm certain their are nuances among different individual people.
My point was mainly that most of the people with strong libertarian positions on the crisis, also, happened to be people that weren't macroeconomists. Whereas, macroeconomists with libertarian leanings tend to be more cautiously positioned or for the bailout. I offered Tyler Cowen as an example, but if I'm allowed to extend beyond GMU libertarian, I could add Mankiw, Feldstein, Taylor, Cochrane, and probably with a bit of research many more.
Charlie
Oil Shock –
What if the raw ingredients are guaranteed by the US government to be 100% safe? Manufacturers commonly have other parties take on product liabilities risk.
The root cause was clearly reduced lending standards. It used to be that you had to put 20% down on a home, spend no more than 28% of your monthly income on your house, and no more the 35% going toward debt at all. The idea behind those things was to protect the bank if housing prices fell. We got rid of them, housing prices fell, and the bank was unprotected. All the Wall-Street three-letter acronyms only changed who was holding the potato when the music stopped; they didn't get rid of that potato.
Your example was a car maker. If you are a libertarian maker of cars, it should raise your eyebrows that government is guaranteeing the quality of something. Government guarantee or not, it is your reputation at stake, in case something goes wrong. Go wrong they did in the financial markets and government guarantees are not bringing back the trust.
Yes government may take the immediate liabilities of something going terribly wrong, but it can't repair your reputation.
My problem with this formulation is not that I think "it's all the government's fault" while "Wall Street" is sancrosanct. My problem is your paternalistic idea of Government as some kind of "adult" telling childish Wall Street how to behave properly.
In fact, the line between Government and Wall Street is as blurry as any I can imagine, so expecting one to correct the other is incredible. Henry Paulson is the fatherly wise man in this version of events, yet he was a Wall Street Baron only a few years ago. You expect some wiser father figure now to replace him? Why?
But the "adults" in D.C. know?
Allowed to create? If my father allows me to create toxic substances and to do harm with them, isn't he responsible? Where is the all knowing oracle who'll sort it all out? That's Barak Obama?
No. You're as mistaken as the capitalist lackeys. It's not even about "market discipline" really, because this formulation has the same paternalistic ring. Market organization is preferable to the systematic decrees of central planners, but the "market discipline" idea suggests some process of weeding out the wise lords of capital from the unwise. I don't understand market organization this way.
Monkeys typing memos could make the decisions that the Barons of Wall Street make, and the monkeys would do better than central planners, as long as they win only when they decide profitably and lose when they decide poorly.
We're in trouble now because the well groomed, well spoken, well read, highly degreed, distinctively titled monkeys are winning regardless.
Simply human psychology. People do not want to be told that it's their fault. It's always someone else's fault.
Martin – the way I take it from you is that the person who wins is the one who knows best how to screw another in the regulatory process. Do you think there is any place in our nation for free, honest competition?
All these government grantees are just one step closer to all-out socialism. Why even bother any more with the pretense of capitalism if there can be no losers?
Charlie,
We may never know if leaving the crisis alone would have been better — only time will tell if the bail-out has a successful outcome. If the bail-out/rescue efforts complicate the problem we can at least wonder whether free market solutions might have been more preferable.
As for macroeconomics and the choice between the bailout and doing nothing, I believe that the bailout is a symptomatic solution to a symptomatic problem and the "doing something" would entail fundamental changes in how government interferes with private enterprise. My point is that many people who disagree with the bailout are most likely in favor of fundamental solutions to the fundamental problems — at least I'd like to think so — I can't imagine they are in favor of doing nothing at all and ignoring the problem, because you can't favor allowing the free market to take care of it when the market is not free.
Why do you take it from me this way? I don't necessarily regard either regulation or competition as "screwing" anyone. One is hardly possible without the other. "Competition" conventionally implies a game, and a "game" implies rules. I hardly know what an "unruled competition" could be like. Certainly, nothing we ordinarily call "capitalism" is unregulated.
I'm not sure what "honest competition" means. I have no problem with competition, and I don't care whether we call it "honest" or not. People at a competitive disadvantage presumably perceive competition as "dishonest", but some people are always at a competitive disadvantage. Perfectly "fair" competition is practically impossible. It's just a fanciful idea we learn in school, a useful fairy tale, like some "justice" we imagine after death.
Ideally, a more profitable organization adds more value to resources than a less profitable organization, where "value" is measured by something like an election enfranchising producer/consumers in a marketplace for finished goods. That's what matters. The competition is between these organizations as much as it is between the organizers.
The goal of market capitalism is the discovery of more profitable organizations. We don't need extraordinarily wealthy people, in the conventional sense, to create this competition, but insofar as larger, more authoritarian firms sometimes win the competition, opportunities exist for authorities to organize resources more for their exclusive benefit.
This opportunity has little to do with the benefits of market capitalism. I don't call this exercise of authority "dishonest", but John Locke essentially did, and he is the father, maybe the grandfather, of classical liberalism. I have some reverence for his usage, but I only believe that authorities exercise authority in their own interests. If we don't want some authorities organizing vast resources for their exclusive benefit, we must alter their authority. That's all.
I only assert that this particular exercise of authority contributes little if anything to the utility of profitable organizations, so I see little benefit to constructing forcible propriety this way, and I therefore favor reforms on the grounds that other organizations are more useful.
I understand how proprieties developed this way historically. That's a separate question. Government is responsible, but the typical dichotomy between Government and Market is nonsensical in this regard. A capital market is a market in the forcible proprieties established by government definitively. The whole idea of a capital market without a government forcibly regulating choice is simple nonsense. It's oxymoronic. Nothing of the sort has ever existed or could ever exist.
I'm quite proud of myself as being on record as independently making this claim on this very blog. – Village Idiot
I'm quite proud of myself for being on record for diagnosing mental illness on this very blog all along. Every day you return to prove me right.
My point was mainly that most of the people with strong libertarian positions on the crisis, also, happened to be people that weren't macroeconomists. Whereas, macroeconomists with libertarian leanings tend to be more cautiously positioned or for the bailout. I offered Tyler Cowen as an example, but if I'm allowed to extend beyond GMU libertarian, I could add Mankiw, Feldstein, Taylor, Cochrane, and probably with a bit of research many more.
Charlie, I'm not a macroeconomist but macroeconomists can be wrong. We don't know. What we do know is that any "bailout" comes at a very heavy price to liberty and future economic growth. What we don't know is if the price of the marginal amount of stability we may get from a bailout is too high. What those performing the bailouts don't focus on at all is minimizing the cost while maximizing the benefits – that's apparently not the job of congress, the Fed or Treasury. "Doing SOMETHING" (i.e. anything) is. We are risking a lot for very little return and we know this because Paulson already told us that the point of the TARP was not to enter into positive expectancy trades. So far "doing something" has entailed taking money out of some pockets and putting them into others and changing incentives as we do so.
The basic problem is actually very simple = we lent too much money against an overestimated future production at interest rates that didn't compensate us for the risk taken. We now know that a large portion of this money will never be repaid. Nothing the government does will change that. In fact, the only real hope we have is to increase future production. Governments are notoriously poor at that, otherwise command economies would have worked.
I can only speak for myself, not all libertarians. I think that millions of decision makers, through trial and error on much smaller scales, can come up with better solutions than a few guys at the Fed and Treasury. And allowing that process to take place, that is doing something.
We don't need extraordinarily wealthy people, in the conventional sense, to create this competition,
What does that mean? Isn't "extraordinary wealth" subjective? I live in the NYC area and you live in Georgia. I can almost guarantee that our definitions of "extraordinary wealth" are very different for that reason alone. Also, you fall into the role of the central planner when you make statements like "we do or don't need…" You may need one thing. Another person needs another. Every person requires a different amount of return and a different amount of wealth to undertake the same activity due to a myriad of factors you couldn't possible conceive of. Why not allow every individual to decide just how much wealth he "needs"?
You're getting dangerously close to Soviet laws that stated that no family, regardless of size, had a right to more than 9 square meters of living space.
Perfectly "fair" competition is practically impossible.
Why not?
Certainly, nothing we ordinarily call "capitalism" is unregulated.
"We" don't call anything anything. Nothing you call capitalism is unregulated. What I regularly call capitalism is.
The basic problem is actually very simple = we lent too much money against an overestimated future production at interest rates that didn't compensate us for the risk taken.
Posted by: Methinks
No actually it's simpler then that; you lent money you did not have.
You implied you had it… but you didn't. Pretty much you lied… but you used some very fancy math and complex equations to make your lies look big and important… but they were lies non the less.
And don't tell me about risk. You didn't risk anything but other peoples money.
Earlier, Methinks said, Since the higher the leverage, the smaller the change in the value of the assets is required to markedly impact the value of the portfolio, a levered portfolio is a portfolio with both amplified earnings and losses.
I remember my father making a point about the stock market crash in 1929 and stock leverage. I thought the outcome of that was a limit put on buying stock on margin. Fast-forward 80 years and it seems the root of the problem is leverage again – this time in housing.
I'm curious, because Methinks statement above seems so sensible, how can leverage greater than 50% be consistent with any sound economic policy, libertarian or otherwise? Are free markets incompatible with limiting leverage in all areas of finance to <50%? And would libertarians find this offensive?
By "in the conventional sense", I mean "wealth" as an entitlement to consume rather than an entitlement to invest. Most of the wealth of the very wealthy is not consumed, any more than Henry Paulson will personally consume the $700 billion he now governs. I don't want Paulson governing it, so I don't advocate central planning.
I also don't want Paulson entitled to organize vast resources for his exclusive use regardless of his other titles, either Treasury Secretary or CEO of Goldman Sachs or anything else. This position doesn't make me a "central planner" in the socialist sense, because "socialism" describes a system of authority to organize capital, not a system of entitlements to consumption.
Wealth is subjective, but "market price" is nonetheless meaningful. What I'll pay for something is not what you'll pay for the same thing, but a good has a "market price" regardless, and this price is not what you or I will pay.
Our definitions probably aren't so different. The numerical values we assign to things can differ more. You'll pay twice or three times what I'll pay for the same living space, for example, but you then might perceive me as more wealthy, rather than less so, even if you nominally earn more.
Well, I'm playing Monarch, i.e. I propose to change the rules of the game. We can't discuss the rules of the game otherwise.
I'm not playing central planner in the "socialist" sense, because I don't propose to limit a capitalist's entitlement to organize capital profitably, only to limit his consumption. In fact, I propose radically to increase a capitalist's entitlement to organize capital, while limiting his entitlement to consume. Authority is far less centralized in the game I imagine than in the game we're playing now.
That's true, but no individual needs 10,000 square feet of private living space, regardless of the price of the real estate. It just isn't ever true that an individual human being needs so much private living space, but constructing so much living space does require the labor of many people. I prefer that these people labor to produce other things for one another. Limiting consumption this way does not enforce equality. It limits forcible inequality.
Classical liberalism was always about limiting forcible inequality. States are always about creating forcible inequality and never about creating forcible equality. Political rhetoric can portray the motives of statesmen otherwise, but that's only because statesmen are liars or perceive some advantage in throwing bones to the poor or pandering to ideological egalitarians.
No person needs a private castle to undertake any activity. This need doesn't exist under any circumstances. Only statesmen build private castles. Sometimes, in some historical contexts, statesmen building castles perceive a rhetorical advantage in describing themselves as "not statesmen", but I don't take the words of statesmen very seriously.
Why not allow Saddam Hussein his golden toilet fixtures in his Presidential Palaces? Better uses of the resources exist, and I don't like the idea of Saddam Hussein's authority to use them so under the circumstances. I prefer that these resources be freed of Hussein's authority to organize them so. Even if Hussein were a less viscious tyrant, I would still prefer it.
Because real playing fields are never level. The world is full of hills and valleys.
Well, you may call an activity subject to a dizzying variety or regulations "unregulated" if you like. I just don't see the point.
I posted this to David Hendersons post. We'll see if he responds.
Here is the reason for the crisis as explained by Robert Reich. It also explains why the bailout isn't helping. It's not a problem with regulation. The market players don't trust each other because of the very products they invented to deceive each other. THAT IS A MARKET FAILURE and the regulations you point to had little to do with the big picture.
From Robert Reicjh blog
"Why? Because the underlying problem isn't a liquidity problem. As I've noted elsewhere, the problem is that lenders and investors don't trust they'll get their money back because no one trusts that the numbers that purport to value securities are anything but wishful thinking. The trouble, in a nutshell, is that the financial entrepreneurship of recent years — the derivatives, credit default swaps, collateralized debt instruments, and so on — has undermined all notion of true value.
Many of these fancy instruments became popular over recent years precisely because they circumvented financial regulations, especially rules on banks' capital adequacy. Big banks created all these off-balance-sheet vehicles because they allowed the big banks to carry less capital."