Laissez Faire to Blame?

The thesis isn't sophisticated. An unprecedented proportion of the population wants to retire for an unprecedented duration. We retire by consuming rents, and rents are scarce, so these people bid up the price of entitlement to rents.

Is that a thesis or an observation?

Might it be that they bid up the price of rents rather than the price of entitlement?

How have they purchased entitlements?

I suppose you are speaking of investments, T-bills, etc., as opposed to SS and Medicare.

That would mean they are bidding up the price of entitlements for those who haven't finished buying said entitlements.

Doesn't that also mean they'll be bidding up the price of goods and services?

Marti, specific point had been already made in the listing above (conciseness). Continue on, my son.

The first purpose "protects home values, college funds, retirement accounts, and life savings."

Splendid. It's off to a good start today, then.

Can there be a more idiotic purpose!? This is all very frustrating.

The bailout bill lists four purposes of authorizing the Treasury to purchase securities. The first purpose "protects home values, college funds, retirement accounts, and life savings."

Rudy, If you want to address some specific point, you can do that; otherwise, I can't help you.

Here's Greenspan in '04: "If we have promised more than our economy has the ability to deliver to retirees without unduly diminishing real income gains of workers, as I fear we may have, we must recalibrate our public programs so that pending retirees have time to adjust through other channels."

He's presumably right about promising ourselves more retirement benefits than the economy can deliver, but the problem is not simply confined to public programs, and that's the problem with this bailout.

We're only now entering the retirement of the "baby boom". Until now, they've only been accumulating expectations of rent. From now on, they expect to realize the expectations.

If we simply convert all of these promises, or even a substantial portion of them, into taxpayer obligations (on top of Social Security), rather than allowing markets to signal our unwillingness to bear the rents, the Social Security burden will be light by comparison.

We've just swapped a trillion dollars worth of these promises for taxpayer obligations in a few weeks. We took 30 years accumulating the $2.5 trillion of taxpayer obligations in the "trust fund".

We certainly did have a chat in the past. Besides the fact, simply put, you do comment on topics and I’m able to read them. Politicians may use a sound-bite, but they, too, are pretty long-winded and end up lacking substance and jumping from the topic.

Maybe it's because you haven't found a way to discuss it in the language of people.

The thesis isn't sophisticated. An unprecedented proportion of the population wants to retire for an unprecedented duration. We retire by consuming rents, and rents are scarce, so these people bid up the price of entitlement to rents. What other language would I use?

The best comments typically are short, pithy, and direct on point.

I don't agree. Maybe the best political points are short and pithy, but I'm not a politician. Reality isn't simple.

You ramble, try to cover too many bases, and are very long-winded – it turns into a dull conversation going no-where.

You rarely converse with me, Rudy, so I don't understand your grievance.

I agree, Martin please try to be more concise from now on.

Martin says:

"Newer houses presumably are more valuable than older houses, per square foot, and productivity in home construction presumably has risen, but I don't see any revolutionary innovation in this arena..."

As a general rule older homes were better built (general framing, roof framing) that newer homes.

Again, in general, the quality of brickwork years ago surpasses the brickwork done today.

Most likely due to the need for experienced carpenters (thus increasing labor costs).

Martin,

The best comments typically are short, pithy, and direct on point. You ramble, try to cover too many bases, and are very long-winded – it turns into a dull conversation going no-where.

People fear failure, this fear often prevents them from obtaining success.

The market is a place where people can succeed and fail, and if they fail, they can try again.

I'm not aware of any way to insure against failure.

So why are we obsessing over mortgages when the problem is a shortage of able mortgage payers?

I guess there are those obsessing over mortgages. It's a bit like obsessing over why the dam broke.

I'm more concerned over those who insist in living below dams.

Here, again, you've utterly derailed my attempt too start the discussion by changing the subject to this mindless bickering match between blamers of "the government" and blamers of "the market".

Maybe it's because you haven't found a way to discuss it in the language of people.

The main problems (as I see it) obstructing our finding a way out of this mess (and I'm not referring to the mortgage issue) are:

1. too many are caught up in the US v THEM game.

2. general lack of comprehension of economic reality (production must precede consumption).

3. Lack of comprehension that incentives matter, perhaps most of all.

4. Belief that a GOOD solution may be found in the application of political power.

Spot on Don, spot on! Great post!

Or have modern designs made the old designs obsolete?

That's happening too. It's not an either/or comparison. Newer houses presumably are more valuable than older houses, per square foot, and productivity in home construction presumably has risen, but I don't see any revolutionary innovation in this arena, on the scale of the thousand-fold drops in the cost of computer memory and processor speeds, network bandwidth and the rest.

But I know that the payroll tax surplus peaked this year, and this peak is not the least mysterious. Newer houses are better then older house, but most of the improvement belongs in the "consumption" category. A newer house doesn't make me much more productive than an older house, except insofar as its more energy inefficient or something.

New homes could make some people more productive, like information workers with home networking who can now work more easily from home, but that's more a function of your proximity to the network than the age of your house. My 30 year old house has broadband.

More to the point, as I look around for a house, I'm finding a lot of newly built homes standing vacant. I see new housing projects half completed with no one working on them. Did the CRA and similar measures contribute to this outcome? I suppose so, but I'm not in the low income housing market.

I tend to buy below my means (or the means I'd have if I were willing to leverage to the hilt), but I'm not looking at 30 year old ranch houses or newly built mobile homes. The condo I just bought was on the market for over a year before it sold, and it had never been occupied before.

Martin,

Or have modern designs made the old designs obsolete? Is the housing industry following the path of the computer industry?

Have we simply built too many houses, or have we built as many houses as we needed for all the children we didn't have?

You seem fond of belaboring the obvious.
There is no thing; government, there are only people and their behaviors.

I belabor the point hoping that someone eventually will engage me in a discussion.

[States] substitute rent collection for production.

Right. States often do so. Less central authorities will too if they can, but they can't so easily, not by themselves anyway.

... it tends to insure eventual failure unless the people find a way to manage it.

Here, again, you've utterly derailed my attempt too start the discussion by changing the subject to this mindless bickering match between blamers of "the government" and blamers of "the market". I'm resisting the "government" blamers here, but I'm not therefore blaming "the market". Do you see how two sides of a bickering match can both be obsessing over the wrong issue? You're spinning your wheels. That's all.

It's a fact that states create rents. States create all rents. States are wholly to blame for rents.

But states don't create rents in a vacuum. The historically unique predicament we face, starting now, is a huge pool of rent seekers chasing a relatively small pool of possible rent payers.

In China, the state is actually directly responsible for this predicament to a degree, because China had a statutory one child policy. It was actually against the law to invest in labor there. That's what raising a child is, an investment in labor.

However, we'd be making a capital mistake simply to blame the Chinese state for the Chinese baby bust, because the U.S. experienced a similar bust, and so did various European states.

But states more generally did contribute to this diminishment of investment in favor of rent seeking. How did they do it? The answer is not "Socialism". The answer is more nearly "Capitalism".

But this Capitalism is not the market.

All the other investments in labor we might make are obviously futile unless we make this one first, and economists from Ludwig von Mises to Julian Simon tell us that human labor is the most valuable resource. It's not the only valuable resource (labor theory of value), but it is the most valuable resource. Most of what we do by as we grow an economy is add value to labor. We make units of labor more productive. The increment of productivity we add doesn't persist without the labor. It's only a labor multiplier.

So why are we obsessing over mortgages when the problem is a shortage of able mortgage payers? Have we really built too many houses, or have we built as many houses as we needed for all the children we didn't have?

DiLorenzo onHamilton's Curse.

Don,

You hit a homer with your above comment. You're the Barry Bonds we look up too. (Without the steroids, of course).

Is this the first time Don or Russ has pounced on our resident physician/social justice champion? If so, it is about flippin' time. Muirgeo is just such an intolerable to read. I'm so glad Don used some bite in his remarks today.

Even when a central authority adds risk, failure still is not simply the government's fault, because real investments are never riskless.

You seem fond of belaboring the obvious.

There is no thing; government, there are only people and their behaviors.

But government tends to collectivize, it legitimizes coercion and many people become enamored of it and believe they can avoid failure via force of arms. They substitute rent collection for production.

Unfortunately, all it does is postpone and socialize failure. In fact, I venture to suggest that it tends to insure eventual failure unless the people find a way to manage it.

I can not help this....I simply can not.

Don,

You forgot to say, "welcome back muirgeo."

:-)

I'm not against the gold miners or against gold mining or anything else. It's just a fact that people lose as well as gaining in free markets. Some of the people who sold supplies and services never recovered their investments either. Others did well. Failure is not simply "the government's fault". Even when a central authority adds risk, failure still is not simply the government's fault, because real investments are never riskless.

And I'm not defending "the government" or blaming "the market" either. This dichotomy is a diversion. Regardless of the merits of laissez faire capitalism, whatever that is specifically, we can't understand this problem in terms of any simple distinction between "laissez faire" and "regulation", because this distinction simply ignores other relevant factors unique to our time and place, like the incredible pressure that so many new rent seekers place on the market for rents.

Suppose you and I and a banker are the only people on Earth, and we're all the same age. Land is plentiful, but you and I borrow gold from the banker to buy tools. I buy some of these tools from you. You buy some of the tools from me. You build houses. I grow corn. I buy a house from you. You buy corn from me. I buy other produce from you. You buy other produce from me. The banker buys produce from both of us, using interest we pay him on our loans. Ultimately, we both produce enough to repay the banker and also to purchase some of the banker's gold.

At the end of our lives, I have gold, you have gold and the banker has gold, but none of us can retire, because we're all old at the same time.

If we also have families and raise children, we might rent our homesteads to the children, but if only I have a wife and if we produce only one child, all of our gold can't enable us to buy enough entitlement to rent from this one child to keep us all. We can all lend all of our gold to the child, but he won't therefore produce what we'd like to consume.

We'll bid up the price of rents (and thus bid down their yield) until we have from the child only what he'll produce for us.

The supplies and services only increased the losses of the miners who didn't profit.

That may well be, but the people who sold supplies and services did OK and often became the locus of settlement.

How many people went to California to sell supplies and services to gold miners?

The supplies and services only increased the losses of the miners who didn't profit. A loss doesn't imply that government made anyone misbehave. Of course, lots of people struck it rich in the gold rush, and central authorities don't deserve credit for that either.

All the talk of government making them do it only strengthened the case for this bailout. It provided cover. I suppose we'll have a careful accounting of how much "toxic paper", bought by the Treasury, came from Freddie and Fannie and how much of the paper backs residential home mortgages and how many of these mortgages were subprime and how many of the subprime mortgages conformed to CRA and similar requirements.

Bets on the value of these mortgages vs. the value of all securities bought? I'll wager much less than half.

And when this tally is in, it'll appear on page 37 of the Wall Street Journal, bottom left corner, beside the obituaries.

Meyerson: "It's not just investment banks that have fallen by the wayside in the recent carnage; it's the ideology of unregulated capitalism..."

Actually, what's happening is that the spin doctors of the left are desperate. They're replaying the FDR myth that they've spent the last several decades implanting through their ministry of education in hopes that the propaganda will override what people are seeing - the collapse of Progressivism. This is just the beginning, and it is fitting that a hardcore leftist like Obama is likely to be in office as the rest of the dominos begin to fall.

Two things happen to me when I hear lately that someone claims that free markets and/or capitalism have failed.

1. First, I get upset and my BP jumps 50 points.

2. I quickly realize that the persons profoundly ignorant, a liar, or both.

... if it did it was very spotty and restricted to those frontier areas of the nation that had yet to feel the yoke of federalism.

I was gonna say that.

Not to continue off topic (he lied), but thanks to Rationalitate for the intelligent comments about heroin.

(It should be said, though, that heroin and fentanyl mixtures can be dangerous even for high-tolerance addicts. Buyer beware!)

Laissez-faire?! Hilarious. I've seen nothing that could be mistaken for Laissez-faire in the financial industry in my entire career. The OTC derivatives market - which is so scary now - grew out of circumventing regulations. The more regulated the industry becomes, the more opaque, less understandable and more scary the products to circumvent them will become. The people who are regulated are far brighter than the regulators. As the banking lobby did with this bailout bill, the regulated will ensure that any new regulation will benefit them at the expense of moms & pops and any bailouts necessary because of more government intervention will also be paid for by moms & pops. On that, you can rely.

Muirgeo,

Before you pronounce on economic history you should learn some. There was no "long depression" from 1873 through 1896. There was deflation of the general price level caused by substantial economic growth combined with a (relatively) stable money supply - by which, I mean here, a supply of money that did not grow as fast as the growth in real output.

You're out of your league, sir. You speak without knowledge.

Martin - the last time this country had laissez faire was around 1870. So yes, it's been quite dead in this country for a long time.

Posted by: Crusader

HURRAH!!! Someone finally pointed to a time when we had a lazy fair economy. OK lets see what that was like.

Long Depression from 1873 - 1896 (which included the panic of 1893)

followed by the panic of 1907, a major recession from 1918- 1921 and finally the Lazy Fair master creation the GREAT DEPRESSION 1929- 1939.

Wow isn't that grand?

So why are the free marketeers denying this bust in the cycle? Lazy fair is all about boom and bust... creative destruction. It's and admitted part of their philosophy. They were creative enough to come up with the term creative destruction. The people in the past realized that's not how they want their economy to work. The modern people are no different. If they understood this about lazy fair economics they would not choose leaders who promote it. It's unstable, inefficient and destroys any hope for a middle class by massively increasing economic and political inequality.

The only reason anyone believes in it is because they are super wealthy and want to control others with their massively accumulated wealth and political power that ALWAYS goes with it. Or the other reason to believe in it is because like any other cult those favorable to lazy fair have infiltrated the media, the books and magazines. They infiltrated politics and created massive networks of lobbyist and "think tanks" to inculcate the remainder of the population that believing as they do is to be virtuous.

" Absent Fannie and Freddie -- absent government manipulation of the housing market -- would there have developed the excessive diversion of capital into the housing stock?"

George Will

Does George Will not know of the housing bubble and collapse of 1927 that preceded that Great Depression? No Fannie or Freddie to blame back then.

Again, mortgage backed securities didn't boom until after the passage of The Gramm-Leach-Bliley Act (GLBA) in 1999 and of the Commodity Futures Modernization Act of 2000.

Fannie Mae has been a round since 1938.

But at least the failed gold miners didn't socialize the cost of their effort.

How many people went to California to search for gold? How many ultimately found enough gold to justify the cost of the trip?

How many people went to California to sell supplies and services to gold miners?

I get where you're coming from, but don't sully the name of heroin in order to prove a point about economics! Heroin is a very demonized drug, but the truth is, if the heroin doesn't have anything nasty in it (i.e., just lactose, sucrose, and whatever other safe fillers dealers put in), and the buyer knows the dosage, it's very difficult to overdose on heroin alone. You need at least ten times the regular dose (whatever that dose might be for you). Most deaths from "heroin overdose" are more accurately classified as deaths from mixing heroin with either alcohol or benzodiazepine (either consciously or subconsciously, if the product was adulturated).

The reason fools can make a claim that laissez faire markets and economy is a failure is that they know that the vast majority of our nation are doofuses and have no clue as to what laissez faire means.

Furthermore, they know that that self same majority will make no effort to find out.

Crusader,

"Martin - the last time this country had laissez faire was around 1870. So yes, it's been quite dead in this country for a long time.

Posted by: Crusader | Oct 5, 2008 1:42:11 PM"

It is dubious if laissez faire even existed in 1870, and if it did it was very spotty and restricted to those frontier areas of the nation that had yet to feel the yoke of federalism.

Absent Fannie and Freddie -- absent government manipulation of the housing market -- would there have developed the excessive diversion of capital into the housing stock?

There would have been obsessive buying and selling of capital, because an unprecedented lot of us expect to consume what only 2.5 more of us will produce 20 years hence. This expectation impels us to buy capital ... or at least to buy "capital".

In theory, in a free market, we buy capital because we expect to add more value to the capital than the previous owner.

When so many of us expect to consume the yields of capital, is this theory really operative? I doubt it. We're just buying whatever's out there with hardly a care, because we don't know the first thing about what we're buying. Would we do it even if governments didn't bail us out? Sure we would.

How many people went to California to search for gold? How many ultimately found enough gold to justify the cost of the trip? The government makes us do it? Hardly.

Does some law of economics imply that so much reorganization of productive resources necessarily increases productivity as much as we expect, in proportion to the dollars spent buying the same capital over and over again?

Even if productivity increases, are the real producers necessarily selling valuable equity faster than the "security" artists are selling beautiful promissory notes of dubious value? Do I really know the difference?

No, I don't. Rumsfeld doesn't know what he doesn't know, and that's his problem. I know what I don't know, and I know there's a hell a lot of it.

But I don't want a bailout. I want to remain productive long enough to provide well for myself and my family, and I don't want my children burdened with heavy rents imposed by statesmen, because I may need them also to provide for me.

Because I'm a conservative, not a Capitalist, and I'm a liberal, not a Socialist, and no one in Washington D.C. represents me at all.

Martin - the last time this country had laissez faire was around 1870. So yes, it's been quite dead in this country for a long time.

... a partial list of the many government interventions that have paved the path to this crisis.

So Meyerson is mistaken, because laissez faire collapsed a long time ago.