Speaking Words of Wisdom

It is instructive at this point to note one of the prime differences between essentially anti-Statist forums, and essentially Left-Statist ones; while a Left-Statist may not make much headway on an anti-State forum, they are generally welcome to continue to do so.

Today's announced bailout of Greece goes to show just how little Hayek truly understood the nature of Capitalism.

Certainly there was no desire in Germany or France to provide Greece a bailout. I profoundly doubt either nations political leaders will have any political benefit out of this.

But the "free markets" around the world are full of rational persons who decided they wanted some of the wealth of the German and French governments. So these free markets acted in such a way that they created incentives for the leading EU economies to bail out Greece. And once the plan was announced the free markets responded favorably.

And if Germany and France had stuck to their guns, well in time free markets can so attack the prosperity of nations to make bailouts a matter of national security to bailout.

The idea that somehow these massive governments spending money and these massive markets can be divorced in anything but the most idealistic terms is just silly. The two are the same thing. The people who run the markets also run the states, decide the people in power, and insure that the state is in place to back up their interests.

No nation has ever, or ever will, give itself to the radical ideology of a Hayek. That is because Hayek's theories are only the justifications of a certain moment in neo-liberalism when investment bankers wanted to remove large classes of the population from being secured by the state.

Sickofhayek,

Your logic appears to lack consistency. First, you seem to decry the actions of Governments as pertains to the Greek bailout, arguing that "the market" somehow demanded them. If this market to which you refer is the generic one---the constructs in which investors undertake exchange--- isn't it an indication of the weakness of governments capicity to formulate policy independent of assumed desires of the aforementioned actors, or is it specific players within "the market" which hold such sway. I suspect that Goldman and Citi (among others) are the rent seeking culprits in your scenario, in which case these governments are not simply being aware of the economic impact of their intrusions, but rather, have been corrupted by a few actors in a very large world. Either way, it examplifies the extent to which government is corrupt and the markets, dis-functional--- certainly no refutation of Hayek there.

It's disutility aside, the Franco/German bailout of Greece was decided by the need of these regimes to support the EEC, and comcomitantly, the Euro; a decision I believe they will regret very soon as the remaining PIGS less G, come to the trough. They, like we, are attempting to kick the problem down the road. It won't work in either case.

Divorcing governments from markets is indeed a difficult thing. Each arise in a natural order, the former for security and the latter for wealth production and have, in rare instance, functioned quite well. Issues arise when they interact. Governments in search of regulatory power install controls, mostly at the behest and direction of actors within the market. These actors seek to acquire competitive advantage or insurance against loss and, in suceeding, hinder and constrain the functions the market exists to provide. I see no reason to renounce markets because men manipulate governments into interfering on their behalf. I look to the rule of law to prevent such exegencies but, alas, modernity has little regard for that quaint notion. Solutions today seem to be focused entirely on the state, a condition I find particularly irrational given how we got here and, more importantly, the imminent collapse of the corporatist/welfare economies.

I'm not quite sure what "wanted to remove large classes of the population from being secured by the state" means, but I'm for it. Seems like the NAZI's were all about securing large classes of the population and I think we can agree, that didn't turn out very well. If you feel there is some security which is provided by the state I hope you aren't around when it enevitably goes to war and, if you happen to be, that you're deemed unable to carry a gun. Wars are pretty ugly things. They also fall under the purview of governments.

"Government is the negation of liberty." (Ludwig von Mises)

Muir is that you?

Bruce Yandle’s article mentions the basic elements required to understand what really happened:

1. Biased credit ratings do more than mislead investors; they can also bias the amount of capital required by financial institutions.

2. Regulatory reliance on ratings makes the rating agencies the de facto allocators of capital in our system.

3. With the regulatory recipe for capital specified by ratings provided by the three rating agencies, mortgage bundlers had powerful incentives to mix subprime mortgages with enough AAA paper to yield a AA or, even better, an AAA outcome. The raters’ regulatory role probably increased the demand for subprime mortgages that could be bundled, mixed, and matched in consolidated debt obligations, a new Wall Street product that could be sold in global markets with AAA ratings.

Yet Yandle completely misses out on the truth, when he titles his article “Lost Trust: The Real Cause of the Financial Meltdown”.

The Real Cause of the Financial Meltdown was of coursed “The Lost Mistrust” of the markets and that resulted from regulators setting up a system built on the amazingly naïve principle that risks could be measured, without the measuring impacting the risks. What happened thereafter was only doomed to happen.

When Yandle writes: “Of course, when mortgage-default rates went through the roof, AAA took on a new meaning—or, rather, lost all meaning” he again indicates not understanding an iota about the cause and effect relations that brought on the crisis. That “mortgage-default rates went through the roof” was a result of the fabrication of AAA-rated products to be sold in global markets.

Of course the final detonator of the crisis was lost trust. “Indeed, the 2008 disruption is probably the only one that resulted from a sudden breakdown of assurance mechanisms—the generators of trust— rather than from action taken or not taken by misguided central bankers.”… but the reason for the crisis being so bad, is that the general trust level had been artificially elevated, by the regulators, to a level probably not seen since the darkest middle ages….

“More than $1.3 trillion in U.S.-originated mortgage-backed securities suddenly had uncertain value”. Unceartain”? Absolutely not, they had a very certain zero value.

“Hayek sees trust-forming rules as resting between instinct and reason in the spectrum of bases for human action.” Absolutely… but I am sure Hayek would scream out in his grave if he knew what a little mutual admiration club of financial regulators concocted in order to fulfill their boudoir dreams of a world with no bank defaults. Hayek would be the first to remind us that in order for the financial systems to adequately allocate capital… a very healthy dose of mistrust is a must.

In January 2003 the Financial Times published a letter in which I wrote: “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic error to be propagated at modern speeds.”… but the world decided it was better off trusting blindly in what the regulators were up to in Basel. And, incredibly, it still does.

The "Lost Trust" article is very informative. It should be required reading for all the leftists who have tried to blame the financial crises on the "gutting of regulation" and an imaginary return to "laissez-faire" capitalism.

If I could "like" the title of this post, I would. Nice subtle reference.