I talk about the mess and the bailout on Reason.tv

by Russ Roberts on October 8, 2008

in Government Intervention

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{ 23 comments }

hutch October 8, 2008 at 11:39 am

I loved the video. My only comment/bone to pick is when you mentioned how eliminating earmarks will only save the nominal amount of the earmarks: $17B. Obviously, more than just earmarks will need to be cut if government is going to get serious about spending (unlikely, to be sure), but isn't the true budgetary cost of earmarks much higher than just the amount of the earmark?

The bailout bill passed on Friday is a perfect example, something you alluded to at the beginning of the video — it's full of sweeteners. If not for all of the added goodies included in the bill, I'm sure it would have passed by a much smaller (maybe not at all) amount. So was the cost of the add-ons the $100B or whatever or the full cost of the bill?

Earmarks are, as you know, a political currency used to buy votes. If bill sponsor A can't write a $1 million spending earmark for my district, I might be much less likely to vote for his bill.

Jim Gannon October 8, 2008 at 12:36 pm

Russ,

Fantastic video! I'm sending this to everyone who's asked me what happened. Thanks for saving me lots of time :)

Jim

Trumpit October 8, 2008 at 1:02 pm

You state that the bailout will encourage more imprudent risktaking in the future leading to lower standard of living for the next generation. LOL. That's was the cause/reason for the bailout. I took an upper division math class and on the 1st exam the professor drew a big circle to make fun of my circular proof. I don't particularly like it when professors make fun of their students, but the point was driven home to me nevertheless.

MnM October 8, 2008 at 1:10 pm

Russ, I think perhaps you need a post on the importance of incentives. Some people just don't get it.

muirgeo October 8, 2008 at 1:34 pm

"When People say they want to get money out of politics I say make government less powerful… it works like a charm."

Examples? And pragmatically how do we make the government less powerful when the full might of Wall Street and its lobbyist is doing everything to prevent us from making it less powerful.

Do you think lowering interest rates, capital gains cuts, the Taxpayor Relief Act, loosening lending standards ect were not all exactly what Wall Street wanted?

You spent from 0:00 to 3:25 talking about "government" fouls ups ( I'd say much of which were Wall Street favors) then you spend from 3:25 to 3:29 mentioning "… along with some innovation in securitization…". The problems mentioned in the first 3:25 minutes could not have caused the collapse if the securitization you spent 4 seconds talking about never happened.

We need to make bribery of public officials illegal and punishable by jail time. Money is NOT free speech… corporations are not people. As long as those two ideas are protected as liberties we'll keep complaining and arguing about chickens and eggs.

" I want to see power decentralized… pushed down to us and away from them."

Me too!

Sam Grove October 8, 2008 at 5:31 pm

And pragmatically how do we make the government less powerful when the full might of Wall Street and its lobbyist is doing everything to prevent us from making it less powerful.

You and I know the answer, an educated electorate.

muirgeo October 8, 2008 at 7:33 pm

You and I know the answer, an educated electorate.

Posted by: Sam Grove

And it doesn't help when the media is controlled by massive corporate conglomerates who put profit above news and control the message to their favor.

Unit October 8, 2008 at 8:19 pm

"We need to make bribery of public officials illegal and punishable by jail time." – Muirgeo.

Yes, but I would punish only the public officials.

maximus October 8, 2008 at 8:25 pm

"We need to make bribery of public officials illegal and punishable by jail time."

Bribery is illegal, at least in my country. Not sure where you live. Oz maybe? If you mean "influence peddling" then please say so.

muirgeo October 8, 2008 at 11:31 pm

Well what lobbyist do is bribery once removed. It's still bribery.

Anyone as an individual should have access or a chance to lobby or petition their representatives but no exchange of money however remote should be allowed and no conflict of interest should be allowed.
I'd actually go as far as to say if you want to be a politician you have to agree to have all discussions and meetings that involve public policy open to the public. No wheeling or dealing behind close doors when you are doing the work of the public.

Also there should be a strict limit on political donations. $10 to at most $100 dollars per person per campaign including the candidate own money and noting else. Campaigns should not be adventures in the free market and money makers for all sorts of interests from the media to advertisers.

Martin Brock October 8, 2008 at 11:36 pm

Russ makes his case well in this video, but he never addresses the point Kling raised on EconTalk when he said, "I'm not sure what made investors willing to buy these securities." Kling didn't address it either.

Russ also doesn't address a fifty year record for the ten year Treasury, yielding 3.5% with a CPI over five percent. This real yield is probably an all time record. Inflation was lower much lower in '58 and also lower when the yield dropped so low in '03.

When yields fall so low, increasingly risky credit is practically inevitable, and the low yield isn't simply about the Fed. The S&P 500 dividend yield is also low. It was a few weeks ago anyway.

More precisely, yields are so low because investors reach so deeply into the risk distribution, and they must do so because the competition for a yield is so fierce at this time.

Why? The answer seems obvious. If Kling isn't sure, he should at least be willing to speculate long enough to formulate a hypothesis. The payroll tax surplus peaked this year, signaling a peaking supply of the rent relative to the entitlement to it. Capital markets are reaching a similar peak. Ignoring the demography here is simply incredible.

The government did not "rob" us of our retirement savings by making us lend money to trailer trash. We chose to lend money to trailer trash, because we were desperate for a yield, and we couldn't find one we liked anywhere else.

muirgeo October 9, 2008 at 1:10 am

"I'm not sure what made investors willing to buy these securities."

I agree Martin. That was the most significant statement in his discussion.

It's the elephant in the room. They used to be illegal now they aren't.

I'd also like to see the free market defenders explain just how any government program or rules forced AIG's hand. They self detonated as far as I can tell.

maximus October 9, 2008 at 2:11 am

"Well what lobbyist do is bribery once removed. It's still bribery."

That's why closet jack-booted thugs like you don't get to decide the rules.

Babinich October 9, 2008 at 5:39 am

There are good lobbyists and bad lobbyists.

Lobbyists have a function; in the best case they have specialized knowledge on an issue and they present this information to others in order to make an informed decision.

The enablers of bad lobbyists are bad politicians.

Martin Brock October 9, 2008 at 6:44 am

It's the elephant in the room. They used to be illegal now they aren't.

Again, if we simply focus on the legalities, we're missing the point. Suppose unregulated default swaps didn't exist. Suppose the CRA didn't exist. Suppose FNMA didn't exist. We'd still have the largest lot of would be retirees, relative to workers, seeking rents in history, the largest by a long shot.

So without mortgage backed securities of dubious value, we'd have driven up the price of real estate and entitlement to mortgage yields anyway. We might not have driven it precisely as we have, but we'd have driven it up. Or we'd have driven up the price of entitlement to corporate dividends (share prices), the price of corporate bonds, the price of gold, the price of tulip bulbs or whatever.

Because the problem is not simply too much money from the Fed or too much greed on Wall Street or too little regulation of it all. The problem is too much expectation of retirement income, and the problem certainly is not confined to the Social Security system.

We were going to lose the $2 trillion in "retirement savings" somehow anyway, because we never really had it in the first place. And we would have found a way to delude ourselves into believing we had it anyway with or without FNMA.

When labor is the most valuable resource and rising productivity is largely a labor multiplier, simply building more houses doesn't really "save" adequately. Only raising children to live in the houses and work from them can "save" adequately. We didn't raise the children, and we can't go back and change that now. We can't simply expect to substitute Chinese children either.

So we'll retire less than we expected. That's not a problem. It's an opportunity. But we can't take advantage that we refuse to see.

Martin Brock October 9, 2008 at 6:46 am

We can't take advantage of an opportunity that we refuse to see.

Akos Beres October 9, 2008 at 12:39 pm

A quick point on lobbyist. If you would like to observe the alternatives for government without lobbyist just read a report on any developing countries' government or try to do business in any of those countries. You certainly wouldn't have to ask favors from the government officially or worry about lobbyists but you'd have to pay off government officials or influential locals under the table whose only moral constraint is that "corruption is bad and is illegal" (That obviously doesn't work.) Not saying the lobbyist and the institution itself is the best solution but at least it recognizes the need and creates legal framework to Russ' point that any government relative to its country's economy has a lot of money at their disposal and people are really interested how the government disburses those funds.

Martin Ingall October 9, 2008 at 5:09 pm

Russ Roberts. A voice of reason in the vortex swirling down the crapper. I take Russ' mild agita to be from his having played the role of Moishe Beadle in economic terms. Cheers to a superstar in one of the best economics departments in the country and the world. Single malt, anyone?

Martin Ingall October 9, 2008 at 5:13 pm

Cheers to a voice of reason in the vortex swirling down the crapper. Dr Roberts is a true superstar in one of the finest economics departments in the country and the world. I take his mild agita to be from his having played the role of Moishe Beadle in economic terms. Single malt, anyone?

Sam Grove October 9, 2008 at 7:42 pm

I'd also like to see the free market defenders explain just how any government program or rules forced AIG's hand. They self detonated as far as I can tell.

We don't have to explain that particular, what needs explaining is why anyone thinks it's the governments job to bail them out.

At the root of all this has been the delusion that we can fake reality via political power.
The problem has been developing for decades.

The market tried to give it's feedback to entities that took excessive risk and the government interfered with the feedback.

Feedback is crucial to proper functioning in any system. The political class, supported by their believers, has attempted to cheat reality with taxes, protections, subsidies, rules, regulations, and credit/monetary expansion, thereby interfering with market feedback mechanisms.

It's akin to driving by watching a delayed video view of the road before us.

Helder October 9, 2008 at 8:04 pm

I'd also like to see the free market defenders explain just how any government program or rules forced AIG's hand. They self detonated as far as I can tell.

muirgeo, your problem seems to be that you put all these different small things in all these small drawers and try to see them all as independent, simple and not related. The economy is a complex system where everything is related to everything. When you push button A, you never know how the elements of the system will behave. That's one of the reasons why free market defenders abominate government intervention, because it creates artificial noise that inteferes with the markets feedback and consequently the decisions that the agents take are misguided by that noise. That's how AGI and everyone else went bust. Bad decisions taken on bad information (feedback).

Martin Brock October 10, 2008 at 8:50 am

Russ says, "[Many state actions] along with some innovation in securitization on Wall Street, which had some very good things about it, unfortunately have put us in our present predicament."

Here's my problem with this spin. Even though Russ throws a bone to the other side of the political divide, he's still on one side of it, because he's focused obsessively on the "government" vs. "market" dichotomy. Muirgeo is on other side of this ideological gulf telling us that greedy "markets" are the problem, while Russ tells us while "Wall Street" played a role, they were mostly useful innovators unfortunately misled by "the government", the ultimate root of all evil.

Stop it. It's about the rent seeking, but rent seeking didn't materialize in the last decade, and it's not particularly concentrated in one party or the other, and it certainly isn't absent on Wall Street. On the contrary, Wall Street is the focus of rent seeking as much as D.C. We buy and sell entitlement to rents on Wall Streets, and the lords of Wall Street are very intimate with the lords of D.C. Often, they're the same people. Certainly, they are in this scenario.

But more to the point, we're now confronting consequences of a demographic imbalance that we've also known was coming for decades, and now that it's upon us, we're deeply in denial. This imbalance can't be "the problem", in our imaginations, because neither the lords of D.C. nor the lords of Wall Street can do anything about it, and they didn't really create it either.

Social Security Surplus

This chart just peaked, because the supply of a particular rent just stopped growing faster than the demand for it. The rent itself is still growing, because it's an arbitrary imposition that's difficult to escape, but entitlement to the rent is now growing faster and will continue growing faster indefinitely.

The chart isn't so important because Social Security is the problem. It's important, because the obligations and benefits of the Social Security system are widely accepted, for now, so the chart effectively measures a change that must exist throughout financial markets as well and not only in the market for mortgage backed securities. The system polls our capacity to pay rents and our demand for them.

An unduly burdensome rent on my house is more easily escaped. I can leave the house and find another or even build my own, with a little help from my friends, unless statesmen simply find a way to impose the rent otherwise, by converting my previously high house payment into a taxpayer obligation for example.

Sam Grove October 10, 2008 at 8:26 pm

IOW, debts/credits/entitlements have accumulated beyond our projected ability to fulfill them.

The important thing people need to understand (aside from the existence of the problem) is that politicians will not be able to alter that and will likely worsen the situation if they keep trying to fix it in the usual manner.

The problem is always people attempting to defer responsibility for their fates to someone else.

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