A Recipe for (Much) Greater Risk

Thomas joins a long list of liberals who are desperate to evade the fact that their demand for an end to discrimination in lending led -- shockingly -- to a great deal of indiscriminate lending -- which in turn led to the housing bubble, the bursting of that bubble, and the subsequent financial crises. To hide their complicity in creating this mess, they’ve turned to an argument that is so silly it’s almost embarrassing to have to refute it. The argument goes like this:

Greenspan was a fan of Ayn Rand and advocated laissez-faire capitalism.

Therefore, the period of Greenspan’s tenure as Chairman of the Federal Reserve -- from 1987 to 2006 -- was a period of “deregulation” and laissez-faire policies.

Therefore the financial problems that developed during this period are the result of “deregulation“ and laissez-faire policies -- proving the need for greater government regulation.

This argument is every bit as nonsensical as saying that since Hitler once expressed admiration for the policies and practices of the Catholic Church (which he did), it follows that his tenure as Germany’s Furher from 1934 to 1945 was a period of Catholic policies and practices -- and that, therefore, the Holocaust and World War II are the results of Catholicism and prove that Catholicism must be wiped out.

Laissez-faire capitalism (LFC) is not whatever an advocate of laissez-faire capitalism happens to do when he gets in a position of power. It is, rather, a specific type of social-economic system having specific characteristics. Under LFC, there is a complete separation of state and economics, with government having no power to intervene in economic affairs unless a crime such as fraud or unilateral breach of contract has occurred.

This means that under LFC, there is no fiat money supply -- no central bank with the arbitrary power to expand or contract that fiat money and to dictate reserve levels to a fractional-reserve banking system -- no cartel of government-approved ratings agencies and no Securities and Exchange Commission forcing all issuers of investments to use those ratings agencies -- no banking regulators dictating the terms and conditions of loans -- no Community Reinvestment Act using government force to compel indiscriminate “subprime” lending -- no government-sponsored entities like Freddie and Fannie to create a secondary market for those loans -- no Congressional Committees holding hearings to insure the banking industry is making loans to minorities, whether they are qualified borrowers or not -- no “national goal of expanding home ownership“ to be pushed and pursued by the head of the Executive Branch of the government -- no Federal Government bailouts of failed businesses -- etc.

Thus, the fact that Greenspan once advocated laissez-faire capitalism is utterly irrelevant. LFC does not now exist in the U.S. Nothing even remotely close to LFC exists in the U.S. Nor has there been any significant move toward LFC in the U.S. -- we’ve moved steadily and continuously away from LFC and toward welfare statism, socialism and fascism ever since 1913, with only an occasionally slowing of the movement under Presidents like Harding, Coolidge and Reagan.

From the moment he accepted the position of Chairman of the Federal Reserve, Greenspan was a willing and active participant in the government’s massive economic interventions and manipulations that created the housing bubble and the subsequent banking crises -- in other words, Greenspan became an active and energetic statist who believed the government could, and should, “manage“ the economy. The advocate of laissez-faire capitalism abandoned it in favor of its opposite.

Observe that when these interventions appeared to be working -- as during the Clinton years -- no one hailed Greenspan for “practicing laissez-faire policies“. To the contrary, he was praised for his masterful manipulation of the money supply and interest rates. It was only when one of Greenspan’s policies blew up -- only when his loose money policy made it possible for the Democrats to insist on their “affirmative action lending program” which lead to the housing bubble and our current crises -- only then, when they needed a scapegoat, did they begin to paint Greenspan as the free market champion who screwed everything up.

Yes, it’s true as Thomas claims that Greenspan “blew off warning signs” about the bubble -- but this is not evidence that what Greenspan was doing was laissez-faire or “deregulation” -- it is, rather, evidence of Greenspan’s commitment to government “management” of the economy. Congressman Barney Franks also “blew off warning signs”; does Thomas expect us to believe that Franks was also “deregulating” the economy?

The whole “deregulation” claim is preposterous and the Democrats, including people like Thomas, know it. That’s why you have not seen a blizzard of legislation being introduced by the Obama administration to re-implement all the regulations that allegedly got “deregulated” out of existence during this mythical period of laissez-faire. The entire claim is just a smokescreen to keep the American people confused while these looters figure out how to make the most out of the crises they created.

Thank you Michael for reading that more in depth. Frank's description of both Greenspan's views and actions is absurdly oversimplified, and he doesn't even understand what LFC actually is.

Some additional random thoughts:

A man who turns out to be a dedicated fan of Ayn Rand, that Nietzsche of the boardroom? A man who blows off warning signs because, in his perfect theoretical universe of rational markets, the only really systemic problem is government itself?

Please. I’ll defer to the Rand experts on this one – this is insane oversimplification. And government was most of this problem – driving lending, creating moral hazard, etc. Only idiots (Mr. Frank, both of them) can miss this.

According to a Washington Post interview earlier this year with Brooksley Born, the former head of the Commodity Futures Trading Commission, in 1996 Mr. Greenspan "explained [to her] there wasn't a need for a law against fraud because if a floor broker was committing fraud, the customer would figure it out and stop doing business with him."

Brooksley Born: Here’s her CV, from the gushingly amateur WaPo article: "Before taking office, Born had been a high-octane attorney, an American Bar Association power player, a noted advocate of feminist causes and co-founder of the National Women's Law Center."

Gee, I wonder what her political leanings are?

She’s the Elaine Garzarelli of clueless activist lawyer/regulators.

As economist James K. Galbraith has pointed out

James K Galbraith is not an economist. Neither was his father, a speechwriter.

they [Fed chairmen] are usually chosen "from among people who are close to the banking industry and to the financial sector." They can hardly be expected to be enthusiastic regulators of the same.

And this differs from our political regulator class how, exactly? So it’s better if we select “disinterested” politically connected regulatory busybodies (from industry, probably the exact same gene/talent pool) whose agenda is to win influence from politicians? Or a full-blown career bureaucrat completely unaware of the private sector?

Good lord, this Frank is a moron...

"Greenspan became an active and energetic statist who believed the government could, and should, “manage“ the economy. The advocate of laissez-faire capitalism abandoned it in favor of its opposite."

Absolutely and the public proof of this is in the regular manipulation of the economy through raising and lowering the "interest rate". I believe though MS, you, I, and others here know his "management" went far beyond just interest rates.

It is scary just how ignorant people are of their government. Thomas Frank is certainly no exception. He as so many others are ignorant or intentionally blind to the unparalleled unchecked corruption of the Congress, so consequently the other two branches are corrupt as well.

Appoint one big regulator. Oh yeah, really a workable solution to the corruption that is inevitable in the big regulator.

In the name of blind unquestioning faith in the Constitution and the rule of law we Americans have been electing representatives, and Senators now, for over two hundred years and sending them to D.C. only to dump them into the world’s biggest cesspool of gross corruption the world has ever known. Even if that representative, or Senator, you elected ran on a platform of clean government and reform, when he gets to D.C. he is dumped into that cesspool and becomes corrupt as he inevitably must or he is a one term representative and goes home quietly and meekly when his term is up. That cesspool says to him, do things our way and you will be able to appear to be reasonably effective here and you’ll stand a good chance of being re-elected. Do not cooperate, fight us, and we will do everything we can to make sure you are a one termer, and we will make sure you will likely never again hold public office even if it means trumped up ethics charges and a railroad to jail.

Everyone believes that the constitution guarantees equal representation. Talk to any man in the street about congress and he will tell you that his representative actually represents him, and on an equal footing with all the other representative, but maybe you will find a rare man on the street that is aware of the committee system and realizes that his representative has to play politics to get his ideas to the floor for a vote. I’d bet anything that you could not find one single individual stopped at random on the street of any city or town in America that is aware that one single member of a house of Congress can effectively stop all others in that house from voting on an issue that goes through his committee. Of course I speak of the committee chairman.

Do we know that for a fact? Yes we do. William Weld, nominated by Clinton to be ambassador to Mexico, was totally derailed in the Senate by one man, Jesse Helms, chair of the Senate Foreign Relations committee, who disliking Weld refused to allow that appointment to clear the committee and be sent to the floor for a vote. He defied the president and all of the Senate in doing so. Equal representation? See Art 1, Sec 5, para 2, first phrase, “Each house may determine the rules of its own proceedings”.

Equal representation? They took that right out of your hands didn’t they? Oh yeah.

So your state elected a new senator or representative in a legal election or possibly in the case of the senator, an appointment to fill a vacancy. That is constitutional, right? It is your state and your choice should be seated in the house to which you selected him, right? You have the uncontested right to your choice of representation, right?

Wrong! The house decides, and as seen several times in our history, most recently regarding the state of Illinois, in its appointment of Roland Burris, saw its choice of senator having to undergo hoop jumping for the seated senators in order to obtain their approval to be seated himself. Where in the constitution does it say that a particular house can override your election and selection? Oh yeah, Art 1, Sec5, para 2, first phrase, “Each house may determine the rules of its own proceedings”.

Equal representation? They took that right out of your hands didn’t they?

The constitution makes no exception for a government official to be protected from the laws of that are made, does it? Oh yeah. Art 1, Sec 5, para 2, first phrase, “Each house may determine the rules of its own proceedings.” Seems to have been a pretty easy task to write those “rules of its own proceedings” so that them that make the law do not have to live by that law.

Equal in the eyes of the law? They took that right out of your hands didn’t they?

Compensation for elected members of each house? Pshaw man, just write the “rules of its own proceedings” so that no one has to vote on that. Rig the system so a recommendation on pay raises is sent to the congress by the president and if not voted down the pay raise automatically goes into effect. Gosh guys, no has to be seen voting for a pay raise. Neat, huh? Art 1, Sec 5, para 2, first phrase, “Each house may determine the rules of its own proceedings.”

Healthcare? They aren’t gonna have your healthcare.

Financial dealings? Play the stock market? They have their own rules now, don’t they, but you’ll to prison if they catch you using their rules. “Each house may determine the rules of its own proceedings.”

Honest and above board? They took that right off the table didn’t they?

We could do this all day long and still not run out of the ways congress demonstrates its utter contempt of you the people, and the ways in which they screw you while using you like a cash cow.

All of this crap is out there on the table in plain view of we the people and only a rare few actually look at it and see it for what it is.

It is not your government and never has been.

And Frank Thomas thinks he can find a Czar that will not be just as corrupt? The sheer stupidity of it.

Here's a quick critique of the rest of Frank's piece:

It's an absolute joke.

Fools like Mr. Frank (both of them), muirgeo, Obama, Timmy Geithner, even Mary Schapiro, believe that “more bigger is better” and that competing regulators can somehow sort out this mess.

This sentence

In fact, if the Democrats do their job, it [financial regulatory reform] can just as easily become a platform for addressing the greatest issues of them all.

is patently stupid, silly, unrealistic, ignorant, and any other synonym for childishly naïve you can conjure.

Imagine a car mechanic who enforces emissions standards, but doesn’t have any clue about the actual mechanics or structure of the car itself. They can tell you in great detail how many ppm over the enforceable limit your vehicle emissions are and what the traffic rules are, but they have little or no idea about what the car spews, what causes it, what other systems or inputs might contribute, or anything else about the car.

That’s the SEC. And Treasury. And, to a large degree, the Fed.

So Mr. Frank’s (both of them) solution is to create a larger more powerful version of this, and staff it with more lawyers, albeit decentralized.

Yeah, that’ll work great.

And speaking of the Fed, Zerohedge does a pretty good job of pointing out just how useless and dangerous the Fed's central planning is.

http://www.zerohedge.com/article/quantitative-e...

Your letter makes no sense, there already is essentially "one big regulator," the government. And true to your political ideologies, you do not like government. Fine. But, it is remarkably naive to imply that the financial markets are not dominated by those who greedily crave authority, through dollars, over others. Your argument boils down to the fact that you don't want to be told to play nice, you know with ethics and morality (supposed conservative values). You have no legs to stand on to call somebody childish.

"Your argument boils down to the fact that you don't want to be told to play nice"

Actually, I believe his argument is that all humans are flawed ("inept or dishonest"), including participants of financial markets, and that's reason enough not to appoint someone slave master.

"But, it is remarkably naive to imply that the financial markets are not dominated by those who greedily crave authority, through dollars, over others."

Dominate? Really? Who are these people and how have they come to dominate the markets? I'd like to know. We might be able to make a lucrative business in exposing them and their tactics.

jlr,

Actually, there are a number of regulators, many of them having nothing to do with the government. Of course there used to be more.

One of the main problems with government regulation is that it attacks prudence and attempts to insulate people from risk. This of course means that more and more weight is put on the thin reed which is the government; government regulation breaks down what we might call "prudential diversity."

Sir,

Do you implicitly trust your elected officials every minute of every hour of every day? Does that not sound naive?

Plus, Prof. Boudreaux has never stated in my recollection that he does not like government. I would find it hard to believe that you or anyone else could tell me otherwise.

By one big regulator, I'm assuming he's discussing the aspect of amalgamating all the financial regulatory institutions. Secondly, never bring up the term conservative on libertarian, libertarian-leaning blogs, or even this Hayek( a sell described "liberal"). It makes you look like you're trying to bring modern politics into this.

Great letter. Too Big Not to Fail.

I agree with the view in the letter.

Also, "independent" regulators are merely political tools. They are independent only when the sailing is smooth and politicians aren't paying attention.

The problem is, any appointed regulator will be tasked to "do" something.

What is appropriate in many cases is to do nothing at all.

But, would the Regulator be living up to the requirements of his position were he simply to allow the market to self-correct?

If so, then why have such a regulator in the first case?
.

One Big Regulator who used to be an executive for Goldman Sachs no doubt.