Two Can Play This Game

by Don Boudreaux on October 28, 2008

in Current Affairs, Financial Markets, Government Intervention, Myths and Fallacies, Regulation

There’s been a rush to blame free markets, even laissez faire libertarianism, for the current financial crisis.  As Iand Russ — have said before, there are lots of other potential culprits around.  Hastily concluding that the culprit is the free market might be emotionally gratifying for many folks, but it’s an intellectually corrupt conclusion.

Research perhaps will eventually reveal that free markets and deregulation are the main culprits.  Or research perhaps will eventually clear these suspects of most or all such charges.  Time will tell.

In the meantime, anyone wishing to play the childish game of accusing free markets of the financial turmoil should expect something like the following from opponents playing by the same rules:

We now have proof that government is a god that failed — a poverty-inducing and economically destructive institution that humankind should finally learn must be kept on an extraordinarily tight leash, lest it wreak havoc in the lives and on the fortunes of innocent parties.

The facts are crystal clear.  Since the March 24 promise by the Fed to guarantee $29 billion worth of mortgage securities held by Bear, Stearns, the Dow has fallen 34 percent (as of mid-day on October 28, 2008).  Since the September 8th announcement by the U.S. Treasury Department that it will take over Fannie Mae and Freddie Mac, the Dow has shed 28 percent.  Since the October 3 enactment of Uncle Sam’s massive bailout bill, the Dow is down 20 percent.
…..
My priors tell me that all this government intervention is indeed playing a big role in Wall Street’s continuing woes.  But at this point, that’s all I’ve really got: priors.

If, though, someone wishes to assert "No!  The problem is caused by deregulation!" then I accuse that person of having only priors — priors no better or more trustworthy than my own.  And if that person wants to get into a game of post hoc, ergo propter hoc ‘theorizing,’ then I see no reason why the particular post hoc argument stated in italics above is less compelling than the particular post hoc arguments paraded about now so confidently by the anti-market crowd.

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SteveO October 28, 2008 at 1:18 pm

I like to think of myself as a relatively well read and educated individual. I read your post thinking I understand the point, but that the average 18-22 year old student that I know wouldn't understand your use of the term "priors".

Then I decided I wasn't sure *I* understand your use of the term. So, having looked it up in Merriam-Webster's, I'm left with the words of Inigo Montoya, "You keep using that word. I do not think it means what you think it means."

At any rate, there may be a definition that works, but I think the wording undermines your point, when simpler words would suffice.

dave smith October 28, 2008 at 1:54 pm

Prior means preceding in the order of time.

In this instance, it is an abbreviation of the words "prior beliefs."

That is, someone who has a prior belief in government will see free markets to blame for this crisis. This crisis gives such a person an opportunity to reevaluate their beliefs, their "priors", but won't. And the same is true of those whose priors favor markets as the way of organizing econocmic activity.

rpl October 28, 2008 at 1:55 pm

SteveO,

Ever think of checking another dictionary? The one at dictionary.com offers:

–noun
3. (Informal.) a prior conviction.

which clearly fits the meaning Don was trying to convey.

rpl October 28, 2008 at 2:03 pm

Hmm. I think I may have just given myself an inadvertent lesson in thinking before I post. I interpreted "conviction" in dictionary.com's definition as meaning "belief", but on further reflection, I'll bet they meant "conviction" in the judicial sense, which is not the same thing at all.

In another sense, a gaffe like this illustrates the extent to which our priors (in the belief sense) shape our interpretation of evidence. I've done a lot of Bayesian statistics in my day, and in that community it's common to shorten "prior belief" to just "prior". So, with that definition in mind, "prior conviction" seemed obviously synonymous. Similar biases undoubtedly apply when we interpret the real-world effects of our favored (or disfavored) policies.

indiana jim October 28, 2008 at 2:24 pm

Don wrote: "My priors tell me that all this government intervention is indeed playing a big role in Wall Street's continuing woes. But at this point, that's all I've really got: priors."

Don I think you underestimate how easy it might be to confirm. Have a look at the impact of Bush's many talks to reassure "the market" and I'll bet you'll find it drops as soon as he speaks for a minute or so.

Steve October 28, 2008 at 2:24 pm

Some good support for the government failure view: here

nate October 28, 2008 at 2:49 pm

I don't understand. How can further research show that 'the free market' is a culprit? Where is there a free market?

Trumpit October 28, 2008 at 4:03 pm

I think most are blaming underregulated, greed-driven capitalism. Lawrence Sumners said that he doesn't like to attribute negative consequence of capitalism to greed. "Greed is good!" to quote Ivan Boesky. Sumners must never have met failure Richard "$500,000,000" Fuld or criminal Boesky. I believe I would have done a better job than fuld for a mere $100,000 per year. His company went broke, so I'm probably right. He gets to keep all the money he "earned" according to the law. The law is an ass. The rich and powerful must be dispossessed and defeated. The meek, moderate and thrifty shall inherit the earth and treat it & others fairly and with respect. The alternative is more smoking of hundred dollar bills while others starve. What a sick and dysfunctional world you promote. I object!

Lee Kelly October 28, 2008 at 4:21 pm

For almost any theory, the majority of facts can be interprted consistently through its lens.

Finding "confirmations" of our theories is easy and self-gratifying.

Mcwop October 28, 2008 at 4:23 pm

I really hate the term market failure. The market in buggy whips failed some time ago. And it should have failed. If teh market in CDOs fails, tehn maybe it should. Maybe teh governmnet should not prop up these markets.

indiana jim October 28, 2008 at 4:29 pm

Lee,

If Bush's speeches assuring the market isn't correlated with market decline, my hypothesized "confirmation" is refuted.

Sam Grove October 28, 2008 at 4:40 pm

I think most are blaming unregulated free-markets (which muirgeo has assured us have never existed) because they want to.

Who needs facts, what we need are scapegoats.

muirgeo October 28, 2008 at 4:46 pm

OK so the baby is given a loaded gun (unregulated derivatives and CDS) and it shoots itself ($60 trillion dollars of leveraged paper) and is bleeding massively. A pressure bandage ($1 trillion dollar bailout) is applied in the field and the baby is still bleeding.

It's all the pressure bandages fault? It's pretty clear to me where the "post hoc-ing" is occurring.

"Research perhaps will eventually reveal that free markets and deregulation are the main culprits."

A glimmer of sunshine? A ray of truth ? A beaming of an alternate reality? Refreshing to see that alternatives are at least breaking the veil of cognition here.

Methinks October 28, 2008 at 5:26 pm

Research perhaps will eventually reveal that free markets and deregulation are the main culprits.

They'll have to find a free market first. For as long as I've been in this business (and it's a long time), I haven't been able to take a breath without checking with the lawyers first to make sure we're in compliance. Every year there's more regulation and reregulation. I've yet to find any deregulation.

Blaming free markets is fashionable and no proof is required. Especially when the idiots doing the blaming have the double digit IQ's of Trumpit and the Village Idiot. Unfortunately, no intelligence test is required to vote.

Per Kurowski October 28, 2008 at 5:32 pm

I blame the regulators, and as evidence I present what the newly against the markets converted Greenspan, said in the recent hearings of the Congress.

He said “… subprime mortgages pooled and sold as securities became subject to explosive demand from investors around the world…. These mortgage backed securities were originally offered at what appeared to be exceptionally high risk-adjusted market interest rates…. To the most sophisticated investors in the world, they were wrongly viewed as a “steal. …. The consequent surge in global demand for U.S. subprime securities by banks, hedge, and pension funds supported by unrealistically positive rating designations by credit agencies was, in my judgment, the core of the problem….. …When in August 2007 markets eventually trashed the credit agencies’ rosy ratings, a blanket of uncertainty descended on the investment community.”

The credit rating agencies had been around for a long time but it was the bank regulators who when they designed their minimum capital requirements for banks based on the risk assessments of the credit rating agencies, really empowered them with such an immense credibility.

In my book, the market simply said. “If the credit rating agencies are good enough for the regulators they should presumably be good enough for me.”

Don the libertarian Democrat October 28, 2008 at 5:46 pm

I believe that the system of implicit and explicit government guarantees to intervene in a financial crisis like this is the most important cause of our current predicament, but not the only one.

I admire your attitude about looking at the facts to see how they match our theories, and agree with you about this.

Although we can all have our theories about how this came about, there is not enough evidence now to make grand pronouncements, one way or the other.

The are so many current oddities, like currency moves, that we have yet to really sort out.

Lee Kelly October 28, 2008 at 6:02 pm

OK so the baby is given a loaded gun (unregulated derivatives and CDS) and it shoots itself ($60 trillion dollars of leveraged paper) and is bleeding massively. A pressure bandage ($1 trillion dollar bailout) is applied in the field and the baby is still bleeding.

So the financial industry is a baby which needs its parental guardian, the government, to keep it from harming itself? The only sense in which this metaphor works is that the financial industury is suckiling $1 trillion from the government's tit.

If the financial industry it currently juvenial, then it needs to grow up. However, it is not going to grow up and be responsible while government keeps protecting it from bruised knees.

muirgeo October 28, 2008 at 6:12 pm

They'll have to find a free market first.

Posted by: Methinks

I wonder if they're are so rare and hard to find is because they are like Dodo birds?

Sam Grove October 28, 2008 at 6:25 pm

More like passenger pigeons.

Geech October 28, 2008 at 6:37 pm

"I wonder if they're are so rare and hard to find is because they are like Dodo birds?"

Are you suggesting that free markets are killed by Malay sailors and made into ceremonial headdresses? Interesting theory, muirgeo.

muirgeo October 28, 2008 at 6:44 pm

Well kinda like Malay sailors who profited on Dodo feathers until there were none. If only they were better regulated we'd have Dodo's and a Dodo feather headdress markets.. now we have neither.

SteveO October 28, 2008 at 6:51 pm

I think we all know who the dodo bird is.

Randy October 28, 2008 at 7:00 pm

As one who believes that the idea of "market failure" is a political construct, of course it was a government failure. People who shouldn't have been gambling in the first place gambled away a lot of their money. The government's "fault" lies in convincing these people that they weren't gambling.

indiana jim October 28, 2008 at 7:03 pm

Today the Dow went up over 10%; if I had to guess I'd have to guess that McCain's odds improved marketedly since yesterday for some reason.

muirgeo October 28, 2008 at 7:14 pm

Blaming free markets is fashionable and no proof is required.

Posted by: Methinks

Likewise, apparently no proof is required to believe that free markets work because not one single free-marketeer here can provide any evidence to support their claim. Your arguments are all prosaic and faith based.

Well actually we all know that's BS as well. Back in the good old days… about 3 weeks ago now… the pages of this blog were filled with innuendo showing less regulated markets were the more efficient (even if they weren't truly free). Now using the same argument that relative deregulation caused this catastrophe is illegitimate because the markets weren't truly free. How convenient for a battered ideology.

muirgeo October 28, 2008 at 7:14 pm

Blaming free markets is fashionable and no proof is required.

Posted by: Methinks

Likewise, apparently no proof is required to believe that free markets work because not one single free-marketeer here can provide any evidence to support their claim. Your arguments are all prosaic and faith based.

Well actually we all know that's BS as well. Back in the good old days… about 3 weeks ago now… the pages of this blog were filled with innuendo showing less regulated markets were the more efficient (even if they weren't truly free). Now using the same argument that relative deregulation caused this catastrophe is illegitimate because the markets weren't truly free. How convenient for a battered ideology.

John V October 28, 2008 at 7:15 pm

Muirgeo,

We don't have a pure free market because it's virtually impossible for far too many to resist the urge to rule others.

We dont have a freer market with enough freedom to be worthy of being blamed for anything because those who govern don't want it….never have and never will.

Methinks October 28, 2008 at 7:25 pm

Muirdiot, you are an idiot.

Thank you for once again regaling us with your infinite stupidity.

Oil Shock October 28, 2008 at 7:32 pm

If one of your kids get shot ( God forbid ), how many of you would want to punish the responsible. I mean the one that gave the loaded gun?

Oil Shock October 28, 2008 at 7:33 pm

Some embeciles think it is okay to give a loaded gun to a child, as long as they are watched very closely.

ROTFL.

Mike October 28, 2008 at 7:40 pm

"Likewise, apparently no proof is required to believe that free markets work because not one single free-marketeer here can provide any evidence to support their claim. Your arguments are all prosaic and faith based."

let's see: life expectancy in the US in 1820 –> apx 30 years. Average income in US in 1820, roughly $2,500.

Today, life expectancy roughly 80 years, average income apx 50,000.

In entire world from dawn of man until 1800, life expectancy varied b/w 22 and 30, and living standards did not improve (global average income in 1820 around $1,000.

What characterized the pre-1820 world? Mercantilism, feudalism, and all manner of -isms that had nothing to do with "freedom."

It was not by the grace of regulation and good government that something changed.

muirgeo October 28, 2008 at 7:42 pm

Muirdiot, you are an idiot.

Posted by: Methinks

Yeah… I'm a stupit because I don't believe in what you choose to believe in based on faith.

muirgeo October 28, 2008 at 7:50 pm

We dont have a freer market with enough freedom to be worthy of being blamed for anything because those who govern don't want it….never have and never will.

Posted by: John V

Yeah we don't have a free market like you would argue for because when we get them 90-95% of the people aren't happy with it. A system that works for 5% or less of the people is not a practical system. That's why in the modern civiized world they don't exist. Been there done that… no thanks.

It would take a hell of a saleman to honestly sell what you want to more then 5% of the people.

It's like you're sitting in front of a 100 people crowd telling them about this great idea on how to divide dinner. You tell them 5 of the people can eat all the food they want then the other 95 can have the scraps. And they are supposed to think you have a great idea?

Methinks October 28, 2008 at 7:54 pm

Yeah… I'm a stupit because…

Oh, there are so many reasons and so many ways in which you are an idiot. Your inability to spell "stupid" is just one of the ways your idiocy manifests itself. But just one of many many many.

Methinks October 28, 2008 at 8:00 pm

Yeah we don't have a free market like you would argue for because when we get them 90-95% of the people aren't happy with it. – Useful Idiot

But, idiot, you said we don't have one and never had one! So how could 95% (or any percentage of the population) be unhappy with something that doesn't exist and has never existed? Or do you make a similar habit of hating Santa and the Easter Bunny and for similar reasons?

I know you won't understand these next words (as you don't understand any words) but I'll try anyway: Don't bother replying. The only thing you will do is provide more evidence that you're an intractable moron. This is the lesson we have all learned in the past two years of you publicly smearing your stupidity all over the comment section.

Methinks October 28, 2008 at 8:01 pm

If one of your kids get shot ( God forbid ), how many of you would want to punish the responsible. I mean the one that gave the loaded gun?

he shoots, he scores.

muirgeo October 28, 2008 at 8:04 pm

Some embeciles think it is okay to give a loaded gun to a child, as long as they are watched very closely.

ROTFL.

Posted by: Oil Shock

That WOULD be imbecilic. Kinda like assuming private credit rating agencies could oversee and self regulate OTC derivatives … only a dope would think that could work.

Yeah best not to even give the baby the loaded gun. Baby only gets a pacifier from now on and a BPA-free one at that.

MnM October 28, 2008 at 8:12 pm

Muirgeo, do you not see how often and how blatantly you contridict yourself? This is silly.

First you say that free-markets don't exist, then you say that when we had them 95% of the poeple didn't want them? Ummmm, okaaaaay…

"Yeah… I'm a stupit because I don't believe in what you choose to believe in based on faith."

Posted by: muirgeo | Oct 28, 2008 7:42:49 PM

…Irony, defined.

LowcountryJoe October 28, 2008 at 8:13 pm

Oh snap! Not another spin on the muir-go-round. All this talk of pressure bandages and 60 trillion dollar leverages is so alarmist. Ducktor, the cummulative value of all the loans used to provide a mortage on all homes not owned outright might be 60 trillion but that does not mean that all home values will be going to zero or that everyone will suddenly default on the mortgage loans [at least not like the flakey so-called victims that you stick up for in these instances of non honored contracts and foreclosures].

Please, Ducktor, get your own pressure bandage and firmly place it over your soup-cooler [or your keyboard]. Better yet, scrap the pressure bandage and make it a Huggies (or similar diaper) to place over your mouth…you don't know your subject and yet you are talking way too much shit!

muirgeo October 28, 2008 at 8:17 pm
Oil Shock October 28, 2008 at 8:20 pm

BIG BROTHER IS WATCHING!!
BIG BROTHER IS WATCHING!!

Methinks October 28, 2008 at 8:49 pm

Oh no, LCJ, he's far too pre-occupied with mastering ebonics (see post @8:17 pm) to distract the homies from his white man moobs to apply anything to anyone. For that, the children of California can be grateful.

I can only imagine what sort of single digit IQ offspring he's foisting on the rest of us.

Unit October 28, 2008 at 9:27 pm

Muirgeo's solutions always involve giving more power to the bureaucrats. His goal is to centralize power in the hands of a few inept government officials.

indiana jim October 28, 2008 at 9:48 pm

Yep, the Drudge page shows McCain rising and Obama sinking among likely
voters with the margin too close to be significant. If McCain goes up
among likely voters another 2% and Obama falls another 2%, expect another
10%+ day for the Dow.

vidyohs October 28, 2008 at 9:49 pm

Balls, Bullocks, and Balderdash! Those who seek to blame free markets for the financial woes of today are mental midgets pursuing a mental midget theology.

That there are many mental midgets as a result of government education is understandable.

Muirduck, trumpit, nunya, et. al, sisters-under-the-skin.

sethstorm October 28, 2008 at 10:16 pm


We now have proof that Wall Street is a god that failed — a poverty-inducing and economically destructive institution that humankind should finally learn must be kept on an extraordinarily tight leash, lest it continue to wreak havoc in the lives and on the fortunes of innocent parties.

Well, if you wish to pile it on the government, how about not discounting what role Wall Street played? They took advantage of what influence they had with the government. The taxpayers were only close if they were significant shareholders(and part of the problem).

Of course, all is good when you can throw the losses on Main Street and call it a "free market". Doubly so when you quote Schumpeter when people complain of their losses. Even more when you bless tax havens as morally correct and demonizing the regulators who pursue.[/sarcasm]

In short, Main Street sees revenge and a very good time for which it can be exacted.

Methinks October 28, 2008 at 11:36 pm

Seth,

Your ignorance is astonishing – not as astonishing as Muirdiots, but you're getting there. "Wall Street" is not an institution. It's a catch all term used by idiots – a.k.a. journalists – for all that goes wrong, making your intended cleverness not clever but just dumb.

You don't even know what you mean when you say "Wall Street". Enron, was an energy company. WorldCom was a sleazy telecom and so was Qwest. But when they blew up due to the fraud their officers perpetrated, they became "Wall Street" scandals.

Your post is proof that you don't know what a Wall Street firm is or what it does. Similarly, you have no idea what "Main Street" is and neither to do the dumbasses on TV who spoon feed these terms to you.

I'll tell you something I doubt you'll understand now, but you may one day. Financial institutions – whether investment banks or hedge funds – produce liquidity. It's a product we take for granted and it can't be seen, you can't smell it and you can't touch it. But, when it disappears, so does the ability of entrepreneurs to raise capital and jobs and prosperity dry up. So, if you want to kill financial institutions in some sort of act of revenge for the dumbasses in government bailing out the dumbass institutions who took too much risk, go ahead. It'll be you paying the price for that.

Notice one more thing. The "lightly regulated" hedge funds which everyone feared as a "shadow banking" system and which were supposed to present so much systemic risk didn't end up presenting any risk at all. Hedge funds have been blowing up left and right without bailouts (thank God) without bringing down the whole system. It was the heavily regulated investment and commercial banks that crashed and burned the "system".

John V October 28, 2008 at 11:47 pm

Muirgeo,

You make no sense (big surprise):

You quote me saying that we don't have Freer Markets because:

"those who govern don't want it….never have and never will."

but then you follow this truthful statement with:

Yeah we don't have a free market like you would argue for because when we get them 90-95% of the people aren't happy with it. A system that works for 5% or less of the people is not a practical system. That's why in the modern civiized world they don't exist. Been there done that… no thanks."

So we never had them, never will. You agree. Mind you, I'm talking about absolute purity here. I'm talking about market structure with enough freedom to be all-around basically free enough for "free markets" to be a seriously considered as a culprit problems. But then you follow with a statement talking about WHEN we had them…even though you just admitted we never had them. (???)

I also said that we don't have them because those who govern don't want them…never have, never will. And who governs?? The top end of that 5% you think are the only ones who gain from free market…but I just said we don't have them because that group DOESN'T want them.

It's right there and you keep dodging it.

muirgeo October 29, 2008 at 1:26 am

If McCain goes up
among likely voters another 2% and Obama falls another 2%, expect another
10%+ day for the Dow.

Posted by: indiana jim

Wow…yeah because if only we had a Republican president the Dow would be doing much better. Smokin some good stuff hey?

21 Jan 1993 DOW 3400 Clinton takes office
21 Jan 2001 DOW 9800 Clinton leaves office Bush takes office
21 Jan 2009 DOW 9000 Bush leaves office Obama takes office
21 Jan 2017 DOW 20,000 Obama leaves office….. Clinton takes office

Sam Grove October 29, 2008 at 1:44 am

It was the heavily regulated investment and commercial banks that crashed and burned the "system".

Hmmm, does regulation coordinate business failure into systemic crises?

That is, businesses are always failing in a pattern that might be described as noise.

By attempting to regulate business, the noise is brought together into a crisis node because political interventions cause coordinating signals that lure businesses into collective response patterns.

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