Todd Zywicki, commenting on David Brooks, writes:
But it seems to me that it is time to revisit this well and think about
an intellectual defense of freedom that is more than "it delivers the
goods."
an intellectual defense of freedom that is more than "it delivers the
goods."
In response, some commenters start debating whether capitalism really does delvier the goods" and I suppose the claim is harder to defend when unemployment is rising and many industries are struggling. This encourages Bob_R to comment:
I reject the premise that capitalism is currently failing to "deliver
the goods." The whole point of capitalism is to destroy companies like
GM and Chrysler. The whole point of capitalism is to destroy unions
like the UAW that favor older and retired workers at the expense of
younger workers and workers yet to come. The whole point of capitalism
is to destroy the "smart guys" who create defective financial products.
The whole point of capitalism is to punish us for electing a government
that enmeshes itself with the jokers above. The "current
unpleasantness" is a feature, not a bug.
the goods." The whole point of capitalism is to destroy companies like
GM and Chrysler. The whole point of capitalism is to destroy unions
like the UAW that favor older and retired workers at the expense of
younger workers and workers yet to come. The whole point of capitalism
is to destroy the "smart guys" who create defective financial products.
The whole point of capitalism is to punish us for electing a government
that enmeshes itself with the jokers above. The "current
unpleasantness" is a feature, not a bug.
It may not be quite the whole point, But as Milton liked to point out, it's a profit and loss system. The losses are just as important as the profits. This seems to be very out of fashion these days. It will be very interesting to see what the consequences are.
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Russ -
A good insight, but I'd offer one quibble. I don't think "losses" are out of fashion at all. Indeed, I think people are quite happy to let irresponsible companies suffer losses.
The problem comes when reverberations from those losses hurt others that aren't even involved – THOSE sorts of reverberating losses (you can think of them as negative externalities) are out of fashion, and I think you can make a good case that those sort of negative externality losses are not essential at all to capitalism as a system of "profit and loss". Why? Because negative externalities by definition send inaccurate market signals.
In other words, I really wouldn't lose that much hope about capitalism. I think people are completely fine with banks failing, under normal circumstances. The concern is some sort of snowball effect or wage-price spiral. And perhaps we'll overcompensate in trying to prevent that – we may very well overcompensate. But all this I think is very much besides the point of the "profit and loss" system that the vast majority still accept.
viva el capitalismo!!
Right (or left?), Dan. If the whole point of capitalism is to destroy companies like GM and Chrysler, then "capitalist" clearly does not describe the U.S. economy. If the U.S. has a "capitalist" economy, then "capitalism" doesn't mean what Bob_R thinks it means.
Maybe "capitalism" means that states forever bail out capitalists. Yeah. That seems closer to the common usage.
Martin -
Eh. I know you're being a little sarcastic, but we gotta be careful with that logic. If GM and Chrysler collapsed outside of a major recession do you really think they'd be getting this kind of support? And how much support is it, really? Granted, the administration is doing what it thinks it needs to to cushion the Chrysler bankruptcy proceedings – but they're certainly not preventing it from failing!
I think the idea that people who would ameliorate failures that could cause harsh negative externalities somehow reject the "profit and loss" understanding of capitalism is a little disingenuous. Put yourself in our shoes and say you accept the assumption that large negative externalities in a recessionary situation like this one do exist. If you're willing to accept that, what possible relation could the negative externalities bear to the losses associated with the normal operation of capitalism?
Nobody's abandoning capitalism here. Let's not get too worked up about that. Let's at least be fair about why people are supporting these bailouts, and not impute justifications that nobody actually advocates.
" THOSE sorts of reverberating losses"
Could you give an example of such a loss?
Daniel said:
"In other words, I really wouldn't lose that much hope about capitalism. I think people are completely fine with banks failing, under normal circumstances. The concern is some sort of snowball effect or wage-price spiral."
The world is quite interconnected. There is no comprehensive way to entirely disentangle the two. We are interconnected on the way up as well…yet there was little clamoring to slow down the ascent when a few outliers lift all boats.
RE: "Could you give an example of such a loss?"
Yes – if AIG fails because of it's irresponsible hedge fund division, the ability to pay a host of other insurance claims are jeopardized. Maybe the people that took out a policy with them deserve that, but the general fear caused by such a circumstance would cause everybody to second-guess their insurers and become incredibly risk averse. Economic activity would contract and people would suffer losses completely unrelated to whether AIG, in another situation, would deserve to fail.
It's a signaling system, someone once said.
The most profound signals are profits and loses.
Obama, the Treasury, the Congress & the Fed and the state governments are taking shotguns to the signaling system of American capitalism.
Note that the views you praise here are not inconsistent with Akerlof and Shiller's notion of capitalism as a game.
Daniel said:
"…the general fear caused by such a circumstance would cause everybody to second-guess their insurers and become incredibly risk averse. Economic activity would contract and people would suffer losses completely unrelated to whether AIG, in another situation, would deserve to fail."
In a boom, this could be rephrased as:
"…the general optimism caused by such a circumstance would cause everybody to have great faith in their insurers and become incredibly less risk averse. Economic activity would expand as people invest heavily and people would get rich completely unrelated to whether AIG, in another situation, would deserve to succeed."
I suppose the collapse of GM and Chrysler would be a major recession, and yes, I think they'd want a bailout and would likely get one under almost any circumstances, for the same reason that we keep throwing money at incredibly costly but useless weapons systems.
Well, the financial sector is getting a lot more.
I agree. We're not abandoning capitalism, because capitalism is all about protectionism and bailouts. It always has been. Capitalists don't want free markets.
Daniel Kuhn wrote:
Nobody's abandoning capitalism here.
True. Capitalism was abandoned — destroyed, actually — long ago, beginning around 1913, when the last of free banking was destroyed with the creation of the Federal Reserve and the imposition of a fiat money supply controlled by that Fed.
Since that point in time, what has existed in the United States is a "mixed economy", with continuously-diminishing elements of freedom mixed with continuously-growing elements of statism in the form of fascist controls and regulations on business and economic activity as well as socialist welfare-state looting and redistribution-of-income schemes.
It is true that a whole host of non-government entities and players have helped urge on this destruction of freedom. Lots of big businesses have lobbied for regulations to strangle their competitors — labor unions of all sorts have lobbied for regulations that permit them to coerce higher-than-market wages. "Special interest group warfare" — as Ayn Rand called it — is an inevitable result of government having the power to regualate the economy and dispose of the citizen's money, against their will.
But the main point is that what exists in the U.S. at this time is not capitalism. Capitalism does not feature, among other things:
1) Capitalism does not feature fiat money.
2) Capitalism does not feature a central bank — the Fed — with total control over that money, with power to expand it or contract it at will — with the power to dictate interest rates and enforce capital requirements for fractional-reserve banking that leverages commercial banks at 20-to-1, investment banks at 50-to-1, and government-sponsored entities at 1000-to-1.
3) Capitalism does not feature bank regulators that enforce legislation like the Community Reinvestment Act, the Fair Housing Act, the Equal Credit Opportunity Act, the Community Development and Regulatory Improvement Act and the American Dream Down Payment Act — just to name a few of the significant financial regulations that impact the housing market, where the recent troubles began — regulations which banking regulators can and did use to pressure lenders to make billions in loans to people who, under capitalism, would not have qualified for those loans.
3) Capitalism does not feature government-sponsored entities, like Freddie and Fannie and Ginny Mae, that create secondary markets to help encourage nervous lenders to continue making shaky loans. Nor does it feature federal agencies like the Federal Department of Housing and Urban Development (HUD), the Federal Housing Authority (FHA), the, the Federal Housing Enterprise Oversight Office and the Federal Home Loan Bank — all of which were created because those selfish, stingy lenders wouldn’t give money to people they suspected would not pay it back.
4)Capitalism does not feature a government-controlled cartel of investment rating agencies, which all issuers of securities are required by law to use — and which are still in business, and whose "services" are still being forced on the investment community, even after these ratings agencies disastrously rated securities containing sub-prime loans as "AAA".
5) Capitalism does not feature “bailouts” of failed companies in the form of taxpayer-financed loans or loan guarantees — bailouts that insure the incompetent remain in business to further waste capital and further bleed the taxpayers..
6) Capitalism does not feature government-takeovers of failed companies, with government intervening to head off bankruptcy.
7) Capitalism does not feature massive labor regulations such as the Equal Employment Opportunity Act and the agency that enforces it — the EEOC; or the Americans with Disabilities Act; or the Occupational Safety and Health Act; or the Family Medical Leave Act; or the state laws mandating Workman’s Compensation Insurance; or the state laws mandating Unemployment Compensation Insurance.
Capitalism does not feature a justice system under which the accused is presumed to be guilty and must prove his innocence in a court where there are no rules of evidence and where the accused is denied the right to a trial before a jury of his peers, but is instead tried before a government bureaucrat, whose decision is final and may not be repealed. Yet any businessman accused of wrongdoing under any of these labor regulations is put into precisely the position described above and is denied even the basic civil rights guaranteed to someone accused of shoplifting — or of murder.
9) Capitalism does not feature “anti-trust” legislation under which every businessman is automatically guilty of a violation, no matter what he does, if the government wishes to prosecute him. Under anti-trust law, charging the same price as one’s competitor can be considered proof of “collusion“; charging a higher price than one’s competitor is considered proof of “gouging“; and charging a price lower than one’s competitor is considered proof of “unfair competition” — all of which can get one fined or sent to jail.
10) Capitalism does not feature a coerced, nation-wide planned “retirement” system under which an arbitrarily-defined percentage of one’s income is seized — with a matching seizure of one’s employer‘s profits — beginning at an arbitrarily-determined aged and continuing throughout one’s entire adult life until an arbitrarily-determined age after which an arbitrarily-determined percentage of the seizures are returned to the victim for an arbitrarily-determined period of time.
11) Capitalism does not feature corporate welfare programs, like the billions of dollars given to farmers who are paid not to produce or who are guaranteed prices — all paid for by taxpayers who don’t have, and cannot afford, the lobbying power that such corporations or interests can bring to bear.
12) Capitalism does not feature an income tax and welfare system that rewards the lazy, the incompetent, the shiftless, the foolish, the ignorant and the just-plain-no-good by providing them free economic goods and services, paid for by seizing the earnings of the most rational, most productive, most responsible, most creative and most entrepreneurial members, with the extent of the seizure the magnitude of the punishment that is meted out standing in direct proportion to degree one practices the virtues of rationality, productivity, responsibility, creativity and inventiveness.
13) Capitalism does not feature a “code of Federal Regulations” — now 75,000 pages in length — that dictates the details of virtually every aspect of our financial and economic life — a set of regulations that has steadily increased under every president and which, at present, would stretch for over 1.5 miles if its pages were laid end to end — 1.5 miles of double-columned, small print, both-sides-of -page regulations.
14) Capitalism does not feature a government with departments designed to interfere, intervene and overrule the market in housing, transportation, healthcare, education, energy, mining, agriculture, labor, and commerce.
15) Capitalism does not feature a government in which the actions of the aforementioned departments are amplified by more than one hundred federal agencies and commissions, the most well-known of which include, besides the IRS, the FRB and FDIC, the FBI and CIA, the EPA, FDA, SEC, CFTC, NLRB, FTC, FCC, FERC, FEMA, FAA, CAA, INS, OHSA, CPSC, NHTSA, EEOC, BATF, DEA, NIH, and NASA.
As this quick overview of our current system shows, whatever else one may argue about, the claim that what exists in the U.S. today is capitalism is ludicrous beyond belief — fully as ludicrous as the corollary claim that said non-existent capitalism is to blame for this “financial crises”.
Capitalism is dead — long dead. What you are witnessing is the self-destruction and failure of the fascistic regulatory/welfare state that killed it — a fascistic regulatory/welfare state that, in its death throes, is being vastly expanded in one last desperate attempt to loot whatever else can be looted from the remaining productive American taxpayers.
Martin wrote:
"We're not abandoning capitalism, because capitalism is all about protectionism and bailouts. It always has been. Capitalists don't want free markets."
That’s nonsense, Martin. The meaning of the term “capitalism” does not change because those participating in what’s left of the system are advocating destroying still more of it.
If the police and judges stopped enforcing the law — and instead began advocating allowing more and more criminals to go free, that would not mean that the term “law enforcement” now means, “not enforcing the law”. “Law enforcement” is a term which, like “capitalism”, has a specific meaning that is not a function of what those participating in the system happen to advocate at any one time.
Excellent commentary, Mr. Smith.
Wow, Michael! That may be the best post I've ever seen! May I quote you to all my friends?
Bravo, Michael!
Business failure, under capitalism, is the road to success:
http://cms.bsu.edu/Academics/CollegesandDepartments/MillerCollegeofBusiness/MajorsProgramsDepts/Departments/Economics/ResearchandCommunityImpact/FacultyResearch/FacultyPublications/~/media/44DCD489313847818CC4E5D5C61F66CE.ashx
Usually, long posts are bad posts. But your post was very well done, Michael.
How is this: capitalism with losses is evil, capitalism may only produce super good and constantly good results. Anything surprising?
I mean we have a culture (recent laws are evidence to that) that doesn't want too much competition (or they get uncomfortable) or even hurt feelings due to being better than the next man (participation trophies). In this climate it is not surprising that the idea of gains and LOSSES is not very appealing to people. They wanna be sheltered from anything bad happening.
I am living in Europe, where this kind of feeling (and political correctness steming from it) are even wider spread than in the US. It is all in all not a very healthy culture and we only see the first fall-offs of this socialized group-think culture.
Because culture always drives politics in a certain way.
Michael Smith,
Good post, except for one little wrong conclusion, capitalism is not being killed, and it made my comment redundant but I'll make it anyway.
Capitalism is nothing but a tool. A tool to use to turn privately owned profits into larger profits through privately owned investments.
That people misuse a tool is always a problem. My ex-wife once destroyed a perfectly good wood chisel by using it as a screw driver on a highly torqued screw. The fact that the screw remained in the machine and the chisel was broken was not the fault of the chisel.
What we see happening in America today is not the fault of capitalism, it is the people who misuse the tool.
This is possible because, like my wife, most people are ignorant of the tools available and how to use them.
It seems that the more powerful the ignorant fool, the more they misuse and destroy the tools. My ex-wife's ignorance did not discourage me from buying another chisel, nor in demonstrating to her the difference between a chisel and a screwdriver.
The idiots in D.C. can do what they want, the braindead media people can talk about it anyway they want, the learned in the halls of academia can dissect it and pontificate on it all they want; but, I practice capitalism every day, I did yesterday, I will today, and by God, no one will stop me from doing so tomorrow.
Capitalism can not be killed, because you wear it like skin, and breath it like air. If humans did not make the attempt to profit on everything we did, we would have failed as a species and become extinct long ago.
And, of course, let me add that it is an act of supreme stupidity to attempt to punish the tool, denigrate the tool, and abolish the tool.
What if the tool's name is muirgeo?
Daniel – Or AIG would have sold its healthy insurance business to a solvent company to raise cash to pay for the mistakes of the other division. Allowing capitalism to move such insurance policies out of the control of a company that was so irresponsible in one division might improve the chances that a policyholder will be paid on a claim. Any other examples?
max – re: participation trophies, I agree.
It's not surprising that a society that protects kids from the agony of defeat in little league games doesn't want its adults to have to deal with pain either. I think the two are related.
Seth -
RE: "Daniel – Or AIG would have sold its healthy insurance business to a solvent company to raise cash to pay for the mistakes of the other division."
That works too. I threw up that example quickly and was a little concerned about it's relevance. I'm not trying to justify individual actions – just pointing out that we're really being ingenuine if we pretend that calls for intervention against losses in this environment signal some sort of aversion to any losses.
RE: "Allowing capitalism to move such insurance policies out of the control of a company that was so irresponsible in one division might improve the chances that a policyholder will be paid on a claim."
Well, right. Trust me – the owners and managers that acted so irresponsibly have lost out. They aren't the ones directing AIG right now.
RE: "Any other examples?"
Not any specific examples. The problem with systemic risks is that a single example isn't what people are concerned about. If it's only a single example, then who cares? Let them fail! And many banks have failed insofar as they've been acquired by other banks – so it's not like the government is swooping in to rescue everyone. I would just caution that it makes zero sense to look at a government that doesn't want a series of major banks to fail in one week and conclude that somehow they're opposed to letting businesses fail in general. That's a very obtuse way of looking at the situation – isn't it?
Seth -
RE: "It's not surprising that a society that protects kids from the agony of defeat in little league games doesn't want its adults to have to deal with pain either. I think the two are related. "
And to reiterate the sentiment I stated above – "we're really being ingenuine if we pretend that calls for intervention against losses in this environment signal some sort of aversion to any losses". Not that the kids deserve the damn trophies – I agree with you on that. But I wouldn't read quite as much into it.
Michael Smith, Bravo.
Daniel,
The problem comes when reverberations from those losses hurt others that aren't even involved – THOSE sorts of reverberating losses (you can think of them as negative externalities) are out of fashion
The reverberations from the losses resulting from government intervention make the reverberations from market losses. Market losses teach lessons and lead to better, more prudent behaviour. The market is self-correcting, self healing. Government intervention is a permanent stagnation – a hardening of the arteries – which sickens the whole country and makes it less flexible and more fragile. If the latest financial crisis has taught you nothing else, it should have taught you that. What will save us from government?
…make the reverberations from market losses seem like a cakewalk.
Methinks – Well said!
"Trust me – the owners and managers that acted so irresponsibly have lost out. They aren't the ones directing AIG right now." -Daniel
Nor would they be if government hadn't intervened.
Methinks -
RE: "Market losses teach lessons and lead to better, more prudent behaviour. The market is self-correcting, self healing."
Usually, yes. My point is to make the distinction between cases where market losses are caused by imprudence (in which case, so be it) and cases where losses are caused by the imprudence of others. We ignore the distinction at our own peril.
RE: " If the latest financial crisis has taught you nothing else, it should have taught you that. "
Haha – right back at you.
Seth -
RE: "Nor would they be if government hadn't intervened."
Right… my point is that quite a bit of market discipline has been preserved. The difference is that with government intervention, you ameliorate losses to people who were not at all imprudent.
Moral hazard cuts both ways, people. Bailing out those who have acted imprudently makes them more likely to act imprudently in the future. I've never once denied this problem. BUT – failing to bail out people who have acted prudently but have been hurt by the imprudence of others makes them less likely to engage the market at all in the future. Russ is glossing over this distinction and assuming that nobody is willing to live by the law of market discipine any more. Russ is just plain wrong about that, and even if he disagrees with the policy he'd do well to acknowledge exactly why these firms are being bailed out.
Then again, I've heard a lot of people on this blog say they don't even believe externalities exist – so maybe there's not much hope for this argument.
Daniel,
Your distinction is utterly meaningless because to "correct" the losses of people who had nothing to do with the crisis the government must confiscate (create more losses!) from people who also had nothing to do with the crisis but maybe didn't lose as a direct result of the crisis. So, you're advocating making a bad situation worse and corseting the whole system in barbed wire. Bravo.
I've often wondered if you believe your own BS sometimes but I think you do.
Capitalism delivers the goods because it is right:
"The moral justification of capitalism does not lie in the altruist claim that it represents the best way to achieve “the common good.” It is true that capitalism does—if that catch-phrase has any meaning—but this is merely a secondary consequence. The moral justification of capitalism lies in the fact that it is the only system consonant with man’s rational nature, that it protects man’s survival qua man, and that its ruling principle is: justice."
http://aynrandlexicon.com/lexicon/capitalism.html
Theists who favor capitalism should not reject Ayn Rand out of hand because of her indictment of altruism. Understand what is meant by "altruism" before you assume that its practice is virtuous.
Methinks -
RE: "Your distinction is utterly meaningless because to "correct" the losses of people who had nothing to do with the crisis the government must confiscate (create more losses!) from people who also had nothing to do with the crisis but maybe didn't lose as a direct result of the crisis."
Right – this is a political economy argument, not a complete economic efficiency argument that I'm making. I think there's a good economic efficiency case to be made (ie – growth in the absence of intervention will be lower than the admittedly depressed growth as a result of the confiscation and intervention), but I'm not going to go into detail about that argument now. Suffice it to say, that (1.) there is a distinction between these two kinds of losses and it's important, and (2.) you're right, some "confiscation" may be required (although "confiscation" is a very loaded word that's not very analytically helpful… taxation is perfectly legal, so "confiscation" isn't really a good word for it).
Daniel,
Where is your evidence that intervention results in better growth than non-intervention by government?
there is a distinction between these two kinds of losses and it's important,
There's a distinction between losing because you made bad decisions or bad luck and losing because government has decided you're going to lose. There's an important distinction between those two kinds of losses and we ignore them at our peril.
although "confiscation" is a very loaded word that's not very analytically helpful… taxation is perfectly legal,
No, splitting semantic hairs is what's not analytically helpful. It's obvious the government can make virtually anything legal, so who cares what means it uses to accomplish its ends? The government will punish the prudent by forcibly taking away their property by means it makes perfectly legal to gift to the the imprudent and those who didn't do their due diligence before engaging in activity with the imprudent. There. Is that enough lipstick on that pig for your liking?
Daniel I would take a different tack from Methinks on why your distinction is meaningless. Losses a person experiences due to the imprudence of others requires that the loser first rely on others not to be imprudent. This reliance is itself imprudent, and thus the losses in your second category are no different from the losses in your first category.
You may be right that to fail to classify losses as you have is done at our peril, but that is only because the people with the most guns are likely to make and act on such distinctions. It is not because of any actual difference between the two.
"although "confiscation" is a very loaded word that's not very analytically helpful… taxation is perfectly legal, so 'confiscation' isn't really a good word for it" -Daniel
Consfiscation is the correct word. Look it up.
"BUT – failing to bail out people who have acted prudently but have been hurt by the imprudence of others makes them less likely to engage the market at all in the future."
I still haven't seen a good example of such people. Also, I disagree. It sends accurate market signals. It's not prudent of me to buy insurance from a company with an imprudent operations.
I agree with Kevin's and Seth's assessment (there's a shock).
The cascade argument Daniel is making results from counterparty risk. If you don't do due diligence on your counterparty are you really losing through no fault of your own? If you do your due diligence but don't hedge, are you really losing through not fault of your own?
Just to provide an illustration to Seth's final sentence, there's the case of Goldman Sachs. Goldman was a counterparty to AIG and was uncomfortable with AIG's cavalier attitude toward risk. Thus, Goldman took out insurance against its exposure to AIG. Goldman made more money from its hedge against AIG than it did from the bailout of AIG (Goldman was paid in full on the CDS contracts it held with AIG as counterparty, courtesy of the taxpayer).
The losses taken by people who failed to understand the risk their were taking, do their due diligence and to adequately diversify are sad. But not nearly as sad and destructive as forcing losses on people who did do all of those things.
Methinks -
RE: "Where is your evidence that intervention results in better growth than non-intervention by government?"
Google "countercyclical fiscal policy". I'm not saying there aren't alternative opinions. I'm not even making this point primarily. My point is that there's a distinction that Russ is glossing over. That is true completely independent of whether intervention works or not.
RE: "There's a distinction between losing because you made bad decisions or bad luck and losing because government has decided you're going to lose."
Certainly – it would be at our own peril to ignore the considerable losses associated with government actions.
RE: "The government will punish the prudent by forcibly taking away their property by means it makes perfectly legal to gift to the the imprudent and those who didn't do their due diligence before engaging in activity with the imprudent."
You have bizarre understanding of the words "punishment" and "gift".
Kevin -
RE: "Losses a person experiences due to the imprudence of others requires that the loser first rely on others not to be imprudent. This reliance is itself imprudent, and thus the losses in your second category are no different from the losses in your first category. "
This makes much more sense, and I would agree with it. I don't think there's an obligation at all to help AIG claimants for example (although still probably a good idea to guarantee those claims, there is no obligation). I'm concerned with people that don't even have a choice – workers that lose their jobs because of a ripple effect caused by frozen credit markets. Are you saying it was imprudent of them to even engage in the labor market in the first place? I'm talking about the wider negative externalities associated with a banking crisis – not my imprudent decision to trust AIG with my money. But yes, I do agree with your general point and think it's much better said than Methinks's point.
Seth -
Well I'll be damned! Confiscation specifically means "seizure by the government"! I ALMOST take it back… but this begs the question – what is the definition of "seizure"???
"Seizure" has multiple definitions… including both "to take posession of by legal process", as well as "to lay hold of suddenly or forcibly".
So I somewhat back off of what I said… I'll now say only that "using the word 'confiscate' may be somewhat misleading because it might make some people think that it is theft or illegitimate."
RE: "It sends accurate market signals. It's not prudent of me to buy insurance from a company with an imprudent operations."
This isn't the situation I'm talking about… see my response to Kevin.
Methinks -
Yes, to a certain degree it's just a matter of counterparty risk.
But what about a wage-price spiral that's set off by a ripple of counter-party risk in the banking sector. Is THAT counterparty risk too because workers chose to associate themselves with an economy that was supplied credit by that banking sector?
The counter-party risk argument can be made ad infinitum. I'm not arguing that there is a bright red line dividing who is imprudent and who is unlucky. I'm just making a very basic negative externalities argument. Does counter-party risk negate any negative externalities? I don't think so, personally.
Goodnight all
Daniel,
But what about a wage-price spiral that's set off by a ripple of counter-party risk in the banking sector.
Interesting about that since prices were rising and wages weren't keeping up. Assuming the wage/price spiral is actually real, you would further have to assume that the government can be precise enough to control it WITHOUT worse externalities. Where has that ever happened?
Is THAT counterparty risk too because workers chose to associate themselves with an economy that was supplied credit by that banking sector?
Funny you should mention credit…..
In the absence of government regulation and laws forcing them to lend to people who are uncreditworthy, they don't. How do we know they don't? Because regulations and legislation was required to force them to lend to these people. So did the banks extend all this credit or did the government extend it with the banks as its vehicle?
And who stoked the demand for credit? Look at what happened to demand for all loans (not just mortgages) after the central bank lowered the interest rate to (at the time) a historic low. It didn't just happen here. The credit bubble around the world began when central banks around the world heavily cut the interest rate following 9/11 to prevent a recession by stoking inflation.
Now, government is using the crash of the bubble it worked hard to create to claim that leaving the market to its own devices is unacceptable and too risky (yeah, because that's what caused this) and it absolutely must step in to prevent anyone from making prudent decisions because they won't be rewarded.
So, why should prudent workers who didn't take on excess leverage and saved for a rainy day be made to pay for those who didn't? Why should prudent retirees be wiped out in favour of workers who are less prudent and who have more time to save for retirement? These people are the "forgotten man" in your analysis.
I think they're not forgotten, actually. I think it's more appropriate to call them "the conveniently ignored".
If we're trading externalities, I'll trade the market's for the government's any day. I told you why.
why are html tags no longer working on this site?
"Google "countercyclical fiscal policy"."
I asked you for an example where this "countercyclical policy" has ever produced a result better than not engaging in it. I thought I was pretty clearly asking for empirical evidence.
"workers that lose their jobs because of a ripple effect caused by frozen credit markets."
What about if those workers only have a job because of the credit bubble? The freezing up of credit was in response to too much credit being extended in the first place. Are you saying that the credit market should not be able to correct if the correction causes some loss of employment? What about the people who will lose their jobs because the additional taxes imposed to pay for these government bailouts (you pick the sort – extending credit to a poor credit risk at below market rates is a bailout) reduces the return of that business? Are you saying that it's imprudent for these workers to engage in the labour market in the first place? The government has spent trillions and has been unable to fix the employment problem.
Your whole argument can be summed up thusly: when you lose because government decides you lose, it's fine and better than when you lose because of bad luck or bad decisions.
"What if the tool's name is muirgeo?
Posted by: John | May 13, 2009 8:22:56 AM"
muirduck and his sycophant Gil, are not tools, they are toys, playthings.
The difference is that with government intervention, you ameliorate losses to people who were not at all imprudent.
An awful lot of people have been imprudent, they voted for Democrats and/or Republicans when they should have been paying closer attention to goings on. They should have been acquainting themselves with economics, etc.
Now we are all being punished by the consequences of widespread economic ignorance and political naïveté.
Sam,
There are also an "awful lot" of people who voted their wallet in the short run. For example, the union workers who work for the railroad. They have gotten and are getting what they voted for: payback. Laid off workers have been recalled to refurbish old railroad cars, despite insufficient demand to make them profitable to use.
Those who anticipated a job or enhanced job security via the "lemon socialism" that Obama loves to promote as "hope" voted for the man with the plan.
Yes, this is short-sighted on their part, and this is where your lack of education comes in. Yes it means, I think, that these folks have high discount rates.
Also Sam,
The other bunch who voted for Obama in large numbers was the young folks. Again a group who have a higher "rate of human impatience" or discount rate than the average person.
And Obama is playing to this group by behaving like them: he is borrowing like a naive college student to major and then go on to grad school majoring in education (with the "hope" of becoming a teacher in the socialistic school system; this will land her/him job security, pension at age 54 or 55, medical benefits, and summers off). Again, Obama is borrowing to "invest" in "lemon socialism;" that is, public sector activities that cannot sustain themselves. This is not to say that they young people who go into teaching are evil; no they are naive. The do not understand that the absence of competition and market set wages dooms socialized schools just as surely as it dooms socialized medicine. Were vouchers issued and parents allowed to vote with their feet, competition between schools for voucher dollars would quickly alter the landscape. Union wage schedules that reward science, math and physics teachers the same way as english and history teachers would vanish at surviving schools (of course this would eliminate the shortages of physics teachers and the surplus of social studies teachers; demand and supply would operate).
The problem with socialism or course, as the famous expression goes, is that: "you run out of other people's money."
Methinks -
RE: "In the absence of government regulation and laws forcing them to lend to people who are uncreditworthy, they don't. How do we know they don't? Because regulations and legislation was required to force them to lend to these people."
Woah – are we getting into CRA issues now? Because I don't defend those policies at all. Just to be clear. I was saying that simply living in the United States of America and working in this economy puts you at risk of these sort of externalities. Would you file being born into American society as a counter-party risk? I think that's stretching the idea of counter-party risk pretty thin.
RE: "Interesting about that since prices were rising and wages weren't keeping up. Assuming the wage/price spiral is actually real, you would further have to assume that the government can be precise enough to control it WITHOUT worse externalities. Where has that ever happened?"
Wage-price spirals only happen under certain conditions of price-level expectations (ie – we saw it in the 70s, but shouldn't expect to see it all the time). The point is it's a non-linear process with certain expectation threshholds that set it off. Government intervention to stop it will certainly have negative consequences. Exhibit A: the recession of 1981 (for the inflationary case). Exhibit B: large public debt in the 40s (for the deflationary case).
RE: "Your whole argument can be summed up thusly: when you lose because government decides you lose, it's fine and better than when you lose because of bad luck or bad decisions."
Please reread me – I don't think anything close to this.
Sam -
RE: "Now we are all being punished by the consequences of widespread economic ignorance and political naïveté."
Concerns about economic ignorance and political naivete in this forum??? Oh, this is wonderfully ironic!
"Would you file being born into American society as a counter-party risk? I think that's stretching the idea of counter-party risk pretty thin."
No more thinly than you're stretching it. You want to redistribute assets from a group that has lost less to a group that has lost more simply because you have jurisdiction over these two groups of people. How is that different from your example of losing through no fault of your own?
Yes, yes, we agree that we are at risk for all sorts of externalities – not all of them resulting from living here. Some of them result from living in the world. But let's not pretend that you're not prescribing a "hair of the dog" remedy: "I think there's a good economic efficiency case to be made (ie – growth in the absence of intervention will be lower than the admittedly depressed growth as a result of the confiscation and intervention)…some "confiscation" may be required."
You advocate robbing Peter to pay Paul, thus worsening an externality you're trying to fix and changing incentives. How is this reasonable?
"Woah – are we getting into CRA issues now?"
Not just CRA issues, but I bring this up because the crash was largely brought on by poor decisions which were mandated by the government to fix perceived market failures. The inevitable crash lead to more externalities which will now have to be fixed by creating even more externalities. What has your intervention fixed? How is the system more sound and more flexible (part and parcel, really)? What has happened to incentives?
Actually, what never fails to gall me is how the Fed is desperately trying to create incentives for exactly the most imprudent behaviour that lead to this credit bubble in the first place.
Let's assume you don't support any of these policies. How will you stop them if the government's job is to "fix externalities" and there are plenty of special interest groups screaming that they are victims of some manufactured market failure or another.