These letters in yesterday’s Wall Street Journal are worth reading:
“The Weekend Interview with Nouriel Roubini: ‘Nationalize’ the Banks” (Feb. 21) once again demonstrates that the credibility of economists is inversely related to their level of celebrity and their proximity to political power. To paraphrase Lord Acton: Celebrity corrupts, and political celebrity corrupts absolutely. Mr. Roubini tells us that markets fail and have failed to clear because of excesses, greed and irrational exuberance.
Amazingly, Mr. Roubini makes no mention whatsoever of the government interventionism that is largely the cause of our current crisis. Was the Federal Reserve’s policy of holding interest rates below the real rate of interest and thereby causing a credit bubble and debt-fueled consumption a market failure? Or was the market failure that market participants did not read F.A. Hayek’s “Monetary Theory and the Trade Cycle“ and divine the peril that was not being signaled through the price mechanism? Or does Mr. Roubini consider it a market failure that lenders were coerced by the government to make mortgage loans that never would have been made based on market-driven underwriting standards? Is the failure of unqualified homebuyers to decline the cheap, no-down-payment loans that lenders were coerced to offer them another market failure? Was it market failure that lenders knew they would never have to suffer the consequences of reckless underwriting when they could dump their rotten portfolio on the taxpayers via the government-backed Fannie Mae and Freddie Mac?
Robert Drane
Lakewood Ranch, Fla.
It is a matter of public record how we reached the point where the idea of nationalizing the banks arose. I doubt even the most cunning and unscrupulous member of Congress foresaw the ultimate prize, when under the guise of minority home ownership, they put us on the path to crisis.
Now picture the likelihood that a Sen. Chris Dodd or a Rep. Barney Frank could pressure loans to be made or withheld, and this without public knowledge of where money is being directed. Political contributions would flow from the chosen back to politicians.
It is not enough to control the federal Treasury. By nationalizing the banks, a huge slush fund, safe from prying eyes will be created. Who needs a dictator when we have the U.S. Congress?
Joel Brandes
Chestertown, Md.
Mr. Roubini totally misses the mark about what Alan Greenspan got wrong. The former Federal Reserve chairman spent a career playing the Wizard of Oz, pulling the levers to set the price of money. As the ultimate master of the universe, free markets were not allowed to set interest rates and properly allocate capital. Far from taking Ayn Rand’s view of the world to an extreme, his implementation was just the opposite — he knew better where to set the price of money. Sadly, now that the wizard has been revealed, we have so many willing to accept his explanation on how free markets let us down. No, Mr. Greenspan, you did.
Dale Meyer
Madison, Wis.
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{ 26 comments }
Don wrote:"the credibility of economists is inversely related to their level of celebrity and their proximity to political power. To paraphrase Lord Acton: Celebrity corrupts, and political celebrity corrupts absolutely. "
Yes and a corollary I would add: the more economists who become political celebrities, the greater resistence that will arise to economic education. The other day I heard, on FOX, a panelist in a discussion talking about how "lots of economists say blah, blah, blah (put in whatever silly economic statement you have heard from a celebrity economist)." Economic celebrities emit noise that interfers with the general ability of people to gain understanding of how markets create wealth.
Ahhh… Government did not force AIG or Merrill Lynch to fill their portfolios with toxic CDO's nor so with any of the other big investment banks. These toxic products were not created by the government they were created by Wall Street. Government did not force the rating agencies to get these assets into peoples retirement funds by fraudulently rating everything AAA. Government did not push destroy the barrier between lending and investment banks allowing the creation of Mega-Too-Big-To – Fail institutions with inherent conflicts of interest. Wall street (the market) did so successfully after 9 major lobbying attempts.
Government did not push for passage of The Commodity Futures Modernization Act of 2000. Banker lobbyist did.
Is there any data as to Roubini's accuracy in general?
Sounds like an educated Joe the plumber who happened to say the right thing at the right time.
Throw enough stones and you'll hit the bulls eye every now and then I'm thinking….
Awesome.
There you go again.
Mr Roubini, who has had his 15+ minutes of fame, is now exploiting it, as he should. He's off-base with his nationalization comments, but that would take about 7 pages. Some thoughts -
1) Mr Greenspan, who does bear some responsibility here, is taking too much blame: The people who should never have qualified for loans at the low rates, would have qualified under any hypothetical high rate scenario. If the Fed hadnât been so easy for so long, Fannie & Freddie would simply have lowered credit standards further to underwrite the volume of mortgages desired by Mssrs. Frank & Dodd (who were driving Fan & Fred & much of the "American Homeownership Dream" crap, along with the Bush Administration). If the resulting securitized higher rate mortgages had been too stinky or too expensive for the investing public, Fan & Fred would simply have stuffed them into their own bulging portfolios.
2) More muirgeo misconceptions (these are common, and repeated by the clueless media, so I'll address some here, not for his benefit) -
a) Government did not force AIG or Merrill Lynch to fill their portfolios with toxic CDO's nor so with any of the other big investment banks. Government did encourage the lending, and the securitization as a means of pass-thru risk intermediation/pooling, so yes, government certainly did play a role in this.
b) These toxic products were not created by the government they were created by Wall Street. The products themselves are not toxic, the underlying assets & revenue streams were, and those were driven by loosened lending standards, at the direction of government.
c)Government did not force the rating agencies to get these assets into peoples retirement funds by fraudulently rating everything AAA. The ratings agencies, given oligpoloistic power by government regulation, based those ratings incorrectly on the assumption that these loans were implicitly, if not explicitly, guaranteed by the government (backing of GSEs, who themselves were backed by G – government), so government most definitely did play a role here.
As you can see, most of the drivel repeated by muirgeo & the uninformed media is based largely on inaccurate or incomplete evaluations of the evidence trail, most of which leads back to government in some way.
Was there Wall Street culpability here? Aboslutely, and Dick Fuld, Alan Schwartz, & the rest are complete morons for not knowing what was on their balance sheets, or in their capital positions. It is flatly false to state that government played no role in the financial destruction.
Mesa Econoguy,
Do you think it was the minorities' fault?
The worst interview I've seen in a while.
This guy is a macro rock star? Please.
I'm guessing that the forthcoming book from Wiley, a collection of essays by Stern School professors, is going to be a group-think dud, maybe a C+.
Predicted number of references to Mises and Hayek: 0. Hope I'm wrong on this, but not holding my breath.
TL, I think it was governmentâs fault, and Wall Streetâs fault.
âMinoritiesâ (and others who participated) were simply responding to market incentives.
Of course it was largely the government's fault, and anyone as smart as Roubini knows what role the government played — it's greed for recognition and inclusion to the center of power which causes his silence on that aspect of the problem. They all talk about capitalist greed but it's only a smoke screen to avoid detection of their own greed for prestige and acceptance, and possible fortune. It's pathetic.
To paraphrase Nasim Taleb and Jim Rogers:
Keep in mind that had Bear,Lehman and everyone else lost their shirts on Long Term Capital Management, that the whole lot would have felt more inclined to proceed more cautiously. (No quantitative risk measures/too big to fail nonsense)
Oh well, at least we have the internet to commiserate about the depression….
Mesa Econoguy on Mar 1, 2009 @ 6:31:11 PM
"Was there Wall Street culpability here? Aboslutely, and Dick Fuld, Alan Schwartz, & the rest are complete morons for not knowing what was on their balance sheets, or in their capital positions. It is flatly false to state that government played no role in the financial destruction."
Well said…
Some firms made bad choices as this article points out:
http://www.realclearmarkets.com/articles/2009/02/the_sec_killed_wall_street_on.html
We should never forget that government played a role; let's not allow the public officials culpable obfuscate the truth.
Since the presidency of Teddy Roosevelt, we have had a progressive form of government given a fairly free hand by the citizenry that the political process would work in the long term interest of the nation.
Among other policies brought into being at the instigation of "progressive" interests:
1. An Ever expanding bureaucracy involved in almost every economic activity in the U.S.
2. Involvement in WWI with the progressive promise that it would be a war to end all wars.
3. Certain political protections for unionized labor at the expense of consumers and the long term viability of various industries.
4. Extensive political entanglement in the finance industry.
5. Minimum wage laws which priced black labor out of the market.
6. Prohibition with the ensuing growth of organized crime followed in its repeal by drug prohibition.
7. Extensive violation of constitutional restraints on government.
8. Anti trust law which has been utilized to protect incumbent business interests.
9. A central bank which has devalued our money in order to finance a growing empire.
10. The Great Depression which was brought to us by fiscal policies which created a bubble followed by monetary deflation and extended by the forced consumption of the New Deal begun under Hoover and extended by FDR.
11. The Korean war, begun under Truman (D).
12. The war on rice farmers in Vietnam under Kennedy (D), and Johnson (D) and The Great Society under Johnson.
13. An opposition party that, for the sake of electoral success, has long since adopted the major principle of progressive government, that political power can do good if wielded by the "right" people.
Yes, thanks to the progressive form of government, we have much to be unthankful for.
It's no wonder "progressive" like to rewrite history to relieve themselves of blame for the mess that progressive government has got us into.
We don't have to accept their faux narrative.
Progressivism, under both Democrats and Republicans, has brought this country once again to fiscal disaster.
Intentions alone are not sufficient to produce worthy results, and that is all they have, their intentions.
Government did not push for passage of The Commodity Futures Modernization Act of 2000. Banker lobbyist did.
George, the point has been made clearly many times. It's the ability and authority of government to manipulate the market, FOR ANYBODY'S BENEFIT, that brings the lobbyists to the centers of power.
IOW, government interventions in the market make it more profitable for industry to lobby congress than to improve their productivity.
Labor often supports this lobbying because their jobs are at stake as well.
Your comment illustrates that you have not gotten the point. You seem to think we free marketers don't understand your point, but it is obvious to us that you have not got at the root of the problem.
Of course businesses, and other moneyed interests, being as they are manifestations of human action, respond to incentives and threats. This the nature of the human beast.
The only thing that can be done about this is to remove the opportunity in its entirety.
But you don't like the answer because the superficiality of your interpretation of the problem leads you to a superficial solution: special interests influence politics, so just make it illegal.
Not gonna work.
Sam,
I see your point but it is irrelevant. Government must intervene in the markets. That or you can have anarchy. There ARE no other choices of any practical nature.
Governments must supply courts, a treasury and defense at the bare minimum. If that were all it were to provide in the modern complex economy we would have grinding poverty and inequality you couldn't imagine… such that NO population of 90% or more would stand for it. Why should they?
You seem to think a minimalist government would have the cream rise to the top and be most efficient. I suggest the frauds, the cheats and schemers would profit more then those on Wall Street already do now leaving the good honest hardworking behind. Your middle class life style is more a creation of FDR then of any other president and it is now threatened by the return of the Economic Royalist. Neither of us is for serfdom but each is convinced the other has the quickest road to it. I think we've already been down your road… hopefully we are on to something better.
Government must intervene in the markets…or you can have anarchy.
I disagree with both of your contentions.
1, that government must intervene, and 2 or you will have anarchy. This is your recurrent straw man.
I make the distinction between regulation of economic activity and prohibition of fraud and violence. You seem to be unable or unwilling to make the distinction.
Prohibiting fraud and aggression and enforcement of contracts insures against anarchy while the practice of government intervention creates problems that lead to calls for further intervention until there is economic collapse and a breakdown of all social order.
Throughout history we see that an out of control state destroys social order.
The greatest destroyer of social order is a specific function of the state: war making.
There are other activities of the state that lead to such disruption, and usually tied to war making, is a central bank enabling the political class to destroy the wealth we create in wars, empire, and producing economic chaos.
You seem to think a minimalist government would have the cream rise to the top and be most efficient.
No, I think a minimalist government would keep the high functioning sociopaths from gaining arbitrary power over the rest of us.
Your middle class life style is more a creation of FDR then of any other president and it is now threatened by the return of the Economic Royalist.
Wealth is created by those who labor to produce it, not by politicians.
I think we've already been down your road.
We've been through this so many times that I have ceased wondering at the intellectual dishonesty that allows you to mouth such an absurdity.
We are already close to the serfdom that you fear and we were brought here by the past 109 years of progressive, interventionist, economic regulating government which has enabled the political class to loot the wealth which should have been ours.
.. hopefully we are on to something better.
I won't be holding my breath.
Yes, Obama voted for those bailouts.
I don't see much of a change in our course.
ahhh
sorry
You seem to think a minimalist government would have the cream rise to the top and be most efficient.
No, I think a minimalist government would keep the high functioning sociopaths from gaining arbitrary power over the rest of us. You are really stuck in the hierarchical model.
Your middle class life style is more a creation of FDR then of any other president and it is now threatened by the return of the Economic Royalist.
This is a fanciful interpretation of what FDR did, an interpretation based entirely on the perception of those who saw only the surface.
Wealth is created by those who labor to produce it, not by politicians.
I think we've already been down your road.
We've been through this so many times that I have ceased wondering at the intellectual dishonesty that allows you to mouth such an absurdity.
We are already close to the serfdom that you fear, and we were brought here by the past 109 years of progressive, interventionist, economic regulating government which has enabled the political class to loot the wealth which should have been ours.
.. hopefully we are on to something better.
I won't be holding my breath.
Assume the premise that the government facilitates wealth, given that it takes capital from citizens and uses it in an efficient manner to create or produce more wealth for its citizens. Think about that premise….
Its obvious contradiction is that the government should then use all the nations wealth to make it as wealthy or productive as possible. Of course, this will remove the price mechanism from markets, and therefore the profit incentive for entrepreneurs. This is basic. If I dont know how to price my product, how will I know how to maximize my profit. And if I cannot maximize profit, why should I get into the market in the first place. (I will forgo the moral hazard of government taking all profit in the first place, simply because its another seemingly obvious point…)
Now, you may state that the government should tax some, but not all, or tax the wealthy but not the poor, or confiscate a little here or a little there. All these proceeds should be enough to help the government in its wealth creation. You see a bright new dam that has been built with this seized capital. But, what everyone seems to miss, is what is the opportunity cost? What is unseen, that is. What could that capital have been doing if it were left in my or your pockets? Could I have invested some cash in a new software company that makes killer video games? Or how about using my money to pay off all that debt that I accumulated while in my own roaring 20s? Well, the government has its spiffy dam, but I get the proverbial shaft.
Ultimately, the government creates and produces nothing. Its as simple as that. No good or service is created by the government that has consumer demand. Hey if it could, maybe the profit would ease the country debt by the trillions….
Oil Shock to muirgeo….
Muirgeo, if you had any integrity, you wouldn't have used these following words in that order : Hoover doing NOTHING ( nada, zero, zilch ) for 3 years.
What is the point of you posting here? Do you have even an amoeba sized opening in your mind to see the opposing point of view? How long have you been coming here? Could you post 10 major areas where this blog has altered your point of view? I bet you couldn't. "
Muirgeo's answer……
Crickets chirping….
Quote from muirgeo: "Wall street (the market) did so successfully after 9 major lobbying attempts."
Oh, the poor government. They were lobbied 9 times. The pressure was unbarable. All that special interest money. All the under the table perks and favors. You can't imagine the terrible burden of it all. The government had to relent. The government had to interfere in the market so their bribers could take advantage of it's power. Those bad old special interests made them do it.
Quote from muirgeo: "Government must intervene in the markets. That or you can have anarchy. There ARE no other choices of any practical nature."
Wait a minute I thought it was Wall Street's fault. You mean government interferes because there is no other choice?
Isn't more likely that you're not capable of thinking outside your collectivist, centrally controlled, egalitarian paradigm? Your mommy/daddy government is run by the same corrupt people that have been running governments for all of history, yet you can't seem to learn the lesson.
It is ironic that some commentators here are criticizing the free-market for creating out of control derivative securities like CDS and CDO's and the like. Do they not forget that Fannie and Freddie were created to buy mortgages and then to package them up into MBS for sale into secondary markets themselves? This was decades before the rise in popularity of these things.
To make it clear, the government CREATED institutions to produce the sorts of products that regulators supposedly could not get ahead of. And then supporters of governments plead ignorance when we point out that the regulators responsible for looking at the banks surely knew enough about derivatives to know what was going on.
Again, without socializing the losses from these wacky products, then we would not be having to have this discussion today. The "stick" of the market would have beat all of these stupid banks into extinction already.
"Government must intervene in the markets…or you can have anarchy."
-Muir
"I make the distinction between regulation of economic activity and prohibition of fraud and violence. You seem to be unable or unwilling to make the distinction."
-Sam to Muir
Sam, this is an argument muir has made many times. As I've said before you could cut and paste responses to his past comments and no one would ever know.
Is there any way to remove Mr. Muirgeo's comments from this thread…or, all threads?
It's fairly apparent that he has no dog in this hunt. I come here to review the comments of those who can shed light on the problems we face, only to find that too much time is spent dealing with the straw men introduced by Mr. M.
.
Did I post or did I not?
I did use preview the second time. I did, I did.