Interview with Russ Roberts

Forgot to mention....

I caught Friday's 20/20 episode with Russ and Walter. EXCELLENT. I'm writing it to CDs and sending a copy to everybody I know who hasn't seen it.

Bill, I agree with you. That's why free markets don't promise economic stability and endless prosperity for everyone. They merely promise that each plebe will get to direct his own life and make his own decisions and that has a lot of value. If it didn't the flow of human capital would not be from command economies to relatively liberal economies, it would be the other way around.

Unfortunately, I also think that people don't realize that they sell liberty too cheaply and buy stability to dearly until it's too late. And, it seems to me, that every generation must learn this lesson anew.

Russ said, "There is another lesson, and I think this is much more of a fantasy if not a utopian point: It would be nice to think that we've learned the lesson that we can't have everything we want. We can't have infinite housing ownership with no money down and no consequences from it. Both the private and public sector gave in to that. Individuals gave in to that. Lenders gave in to it. It's a nice thought; it's not a realistic one. It'd be nice if we could learn that lesson. It's very hard to learn. We want to find ways to make other people pay for what we want, and that's a very unhealthy situation."

Socialists blame the predatory lender side, libertarians blame the overconfident public regulator side, but it seems to me the basic problem is that every human's nature is flawed, and nothing on earth will fix it. Even free markets at best align selfish motive with the common good, but are imperfect in dealing with the lying cheat who will show the good and hide the evil that lies within every one of us. The "lesson that we can't have everything we want" is not just very hard to learn. To permanently learn this lesson is impossible. Therefore won't we will always have bubbles and crashes?

I'm a big fan of simplification, because the world is inherently complex to grasp, and to grasp it in any way, you have to simplify. But in this case I think simplification is leading us to confusion about what the cause was and how to get out of it.

As a financial markets participant with a front-row seat to this mess, this is absolutely dead-on, and exactly my approach. This isn't "Gordon Gekko went nuts again and had to sell his East Hampton estate." There is that aspect, but much of the underlying fault lies with perverse government incentives and failed regulation which lead to overextension and bad risk evaluation and decision making.

If this were a simple matter of unregulated markets, then Sarbanes-Oxley (response to Enron corporate malfeasance) in conjunction with Eliot Spitzer would have prevented all of this. They didn't.

But the real cost is, to me, that we will lose the goose that lays the golden eggs -- which is our unbelievably flexible and powerful financial system. We have -- until recently -- had the best capital market in the world. We look across both the stock market down to venture capital to angel investing -- the opportunity to find financing for great ideas was really unparalleled in the United States. That right now is at a standstill. If it does not come back, we will all be poorer for it.

This is very true Russ, although that innovation will go elsewhere (it already has, to some degree, see offshore hedge funds, particularly energy-based), and will continue to be productive, now that we have a truly global financial system (as we just proved). Some of that will continue to filter into our system, but as regulation tightens in the financial system, much opportunity will be lost.

We currently still do have the largest, most liquid financial resources and capital markets on the planet, backed (distressingly) but the full faith and credit of the US Government, which, to this point, has never failed or defaulted. That still counts for something.

"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 evidenced by the Ted spread?

Terrific good sense. I sent a link to several people who desperately need some.