Horwitz on the Financial Crisis and Recession

by Don Boudreaux on October 23, 2011

in Country Problems, Myths and Fallacies, Other People's Money, Regulation, Seen and Unseen, The Crisis

Here’s a letter-to-the-editor of a newspaper by Steve Horwitz (which I lifted from his Facebook page):

Letters to the Editor
Watertown Times
260 Washington St.
Watertown, NY 13601

To the Editor,

In his letter of October 23 criticizing George Will’s column on Elizabeth Warren, Mark MacWilliams of Canton repeats a number of fallacies about the recession and financial crisis that should not go unchallenged.

MacWilliams refers to Congress deregulating the financial industries but offers no specifics. In fact, since 1980, Congress has passed four new sets of regulations for every one deregulatory act, and between 2001 and 2008, there were nine new sets of regulation and not one bit of deregulation. Those recent regulations included the Basel capital requirements, which created powerful incentives for banks to sell off the mortgages they originated and buy them back as mortgage backed securities, which they otherwise would not have done.

Contrary to MacWilliams, our current mess was not the result of “predatory capitalism,” but the predictable consequence of government intervention and crony corporatism. Nowhere does he mention the Federal Reserve’s role in pushing interest rates so low that banks were being paid to borrow, nor does he have a word to say about Fannie Mae and Freddie Mac having privileged access to the Treasury to buy up all of the questionable mortgages that banks originated. He also ignores two decades of Congress’s role in mandating that banks lend to marginal borrowers.

MacWilliams needs to ask himself why, if this was really capitalism, banks would make loans to people they thought could not pay them back. If corporations are greedy profit-seekers, why would they risk customers not being able to pay unless they believed that those mortgages could be sold off to government-sponsored enterprises like Fannie and Freddie who would, as they did, get bailed out by the government?

If all the traffic lights in Watertown were stuck on green, we’d hardly blame the drivers for the ensuing accidents. When government distorts the signals and incentives facing producers and consumers, the blame for the resulting disaster should fall on government not the private sector. The crisis and recession are what happens when you put “people before profits.”

Finally, MacWilliams should learn who does assure that his toaster doesn’t explode by actually looking at it. He’ll find the stamp of not a government agency, but Underwriters Laboratory, a private firm that provides quality assurance for appliance makers and consumers. Unlike the government cartel of financial rating agencies that failed miserably last decade, the privately operated UL has decades of success behind it.

Sincerely,

Steven Horwitz

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{ 150 comments }

Greg Webb October 23, 2011 at 3:59 pm

Hear, hear! Excellent letter, Don!

Don Boudreaux October 23, 2011 at 4:00 pm

I agree that it’s an excellent letter. But don’t forget that this one isn’t written by me; it’s written by Steve Horwitz.

Greg Webb October 23, 2011 at 4:10 pm

True that. I should have said, “Excellent letter by Steve Horwitz. Thanks for posting it, Don.”

Robert Fellner October 23, 2011 at 4:30 pm

“If all the traffic lights in Watertown were stuck on green, we’d hardly blame the drivers for the ensuing accidents. When government distorts the signals and incentives facing producers and consumers, the blame for the resulting disaster should fall on government not the private sector. ”

Such a great analogy. Fantastic letter!

Economic Freedom October 24, 2011 at 12:50 am
Invisible Backhand October 23, 2011 at 4:36 pm

Horowitz must have a very narrow definition of ‘deregulation’.

“On April 28, 2004, the SEC voted unanimously to permit the largest broker-dealers (i.e., those with “tentative net capital” of more than $5 billion) to apply for exemptions from this established “haircut” method. Upon receiving SEC approval, those firms were permitted to use mathematical models to compute the haircuts on their securities based on international standards used by commercial banks.”

“Since 2008, many commentators on the financial crisis of 2007-2009 have identified the 2004 rule change as an important cause of the crisis on the basis it permitted certain large investment banks (i.e., Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch, and Morgan Stanley) to increase dramatically their leverage (i.e., the ratio of their debt or assets to their equity).”

http://en.wikipedia.org/wiki/Net_capital_rule

Sam Grove October 23, 2011 at 6:09 pm

Changing rules and granting exemptions does not constitute “deregulation”.

The market regulates by competition, consumer choice, liability, and profit and loss. Government regulation thwarts market regulation by restricting competition, consumer choice, and loss, and often, limiting liability.

Invisible Backhand October 23, 2011 at 6:53 pm

Changing rules and granting exemptions does not constitute “deregulation”.

I knew I would hear this (aka the ‘no true scotsman’ fallacy) but thought it would be from RegardsKen.

James N October 23, 2011 at 6:58 pm

No, you knew you would hear it, because someone was destined to point out where you are wrong, like always.

SaulOhio October 23, 2011 at 9:01 pm

If your so-called Scotsman was born in America to Hopi Indian parents, has never been to Scotland, never even heard bagpipes, but just happens to be wearing a kilt, I’d say he’s no true Scotsman.

If your “deregulation” does not involve a reduction in government involvement in the economy and actually creates more market distorting incentives, then its not true regulation.

Chris Bowyer October 24, 2011 at 1:08 pm

This. “Deregulation” is not “change.” It’s a reduction in government involvement. This is not a logical fallacy, it’s a simple insistence that we use words correctly.

muirgeo October 24, 2011 at 12:53 am

Its just stupid isn’t it IB. These people are not even reasonable. Did you ever see the video of that SEC vote??? It’s so obvious they are OWNED by the bankers.

Observer October 24, 2011 at 12:58 am

You have just discovered regulatory capture. But, do you know how to stop it?

Chris Bowyer October 24, 2011 at 1:09 pm

Ah yes. So clearly the solution is to create more regulations and committees, providing more points of entry along the regulatory process under which bankers can lobby people, right?

Invisible Backhand October 23, 2011 at 7:06 pm

Well if you don’t belie me, how about these guys?

“The global deleveraging that first hit the world economy in mid-2007 and that accelerated in autumn 2008 could not have been possible without the rare coincidence of a number of market failures and triggers, some reflecting fundamental imbalances in the global economy and others specific to the functioning of sophisticated financial markets. Chief among these “systemic” factors were the full-fledged deregulation of financial markets and the increased sophistication of speculation techniques and financial engineering.”

The Global Economic Crisis: Systemic Failures and Multilateral Remedies. Report by the UNCTAD Secretariat Task Force on Systemic Issues and Economic Cooperation

House of Cards October 23, 2011 at 7:17 pm

LOL! UNCTAD, eh?

Yes, when in doubt, call in the United Nations to analyze the problem and solve it. They have such a fine track-record of combining deep insights with objectivity and fair-mindedness. Look at the fantastic work the UN has done with its IPCC assessment of “global warming.” No bias there!

Invisible Backhand October 23, 2011 at 7:27 pm

OK, if you don’t like UNCTAD how about this:

“An interesting and important lesson came from
U.S. banking supervision in 2007-2009. Because of
inadequate surveillance for housing market eupho-
ria, and insufficient supervision for many deriva-
tives, credit default obligations and swaps, big loss-
es (and a potential for much larger losses) developed
in 2008. To prevent a broad financial collapse and
another Great Depression-involving the largest fi-
nancial enterprises-a massive U.S. bailout, guar-
antee, and recapitalization effort was launched in
2008-2009. More than $12 trillion in support was
mobilized by the Federal Reserve, Treasury, and
FDIC. Only a massive effort, with tough “stress
testing” for capital adequacy thereafter, could over-
come widespread panic. By the summer of 2009
focus shifted to the best ways to strengthen over-
sight, supervision, and regulation for gaps in sur-
veillance. Not surprisingly, there were disagree-
ments on details. But few contemplated a return to
drastic de-regulation. Derivatives would require
more supervision, and the Federal Reserve, Trea-
sury, and FDIC needed more active surveillance,
especially against institutions “too big to fail”.

Banking and Financial Institutions Law in a Nutshell, 7e, William A Lovett

Economic Freedom October 23, 2011 at 7:33 pm

And you’re not biased? LMAO! You take the word “biased” to new heights. May you suffer a sunburn so bad that your skin peels off, you suffer a 3 degree burn, and you get a staph infection that nearly kills you. You still won’t get. There is simply no hope for brainwashed librarians.

Invisible Backhand October 23, 2011 at 8:25 pm

OK is this guy biased?:

“MIT economics professor Simon Johnson said on MSNBC’s The Rachel Maddow Show on Wednesday night that Wall Street “blew itself up,” which lead to the “most severe recession since World War II.” The former chief economist of the International Monetary Fund added that the enormous economic damage was “a direct consequence of what the biggest banks did and were allowed to get away with.”

http://www.rawstory.com/rs/2011/10/20/mit-economist-wall-street-created-worst-recession-since-wwii/

Sam Grove October 23, 2011 at 10:00 pm

OK is this guy biased?

Everyone is biased. If your premise is that the government is always faultless, then you must always blame the market.

The problem, of course, is that markets just won’t behave as certain people would prefer.

Incentives matter.

Repeat again and again till a connection is made.

Invisible Backhand October 24, 2011 at 9:57 pm

Sam Grove, you’ve been suckered in by propaganda:

Capitalism needed to be shed of its old pal apartheid, and quickly. Libertarianism was the way to do it. In politics, taught the International Freedom Foundation, there are really only two possibilities. Either you have freedom, or you have government. There is no middle ground worth wasting your time on; it’s either a 1 or a 0; either government interferes in the economy, or it doesn’t. And simply by studying the debacle of communism—a good example of the government option—we can see that “government necessarily screws up anything it touches; individuals do not.” So by 1991, with apartheid tottering over the grave, the IFF was ready to denounce it as another system of government interference in the economy . . . just like socialism! After all, both apartheid and social democracy involved a “top-down system of control of the economy,” one of the foundation’s magazines

…As libertarianism became respectable, so did the International Freedom Foundation. Abramoff turned over the wheel to Duncan Sellars, another Howard Phillips protégé whose politics were even more extreme but whose PR instincts seem to have been considerably more adroit. The IFF’s leadership soon grasped that prestigious Washington institutes don’t put their message across with bullhorns in the street; they get their way in quiet lunchtime conversations. They give out awards. They testify before congressional committees. They send observers to monitor elections. They sponsor visits by foreign dignitaries. They commission studies and place op-eds in newspapers. Thus did the IFF become mainstream.”

Know anyone around here who likes to write to newspapers, Sam?

Sam Grove October 25, 2011 at 5:38 pm

IB

It is well known how Fabian Socialism infiltrated institutions of education to promote socialism.

YOU have been a victim of subtle and not so subtle indoctrination all your life.

SaulOhio October 23, 2011 at 9:08 pm

You have not explained how this change in the capital requirements rule is an actual deregulation, instead of simply a change in the regulation.

If a government imposed price control is too low and causing shortages, an increase in that price is not deregulation. Once market forces require a still higher price due to inflation, the new price will again be to low. The control is still there.

Same for this capital requirements rule. They allowed A FEW firms to apply for an exemption, putting those few with the exemption in a favored position. Or giving them enough rope to hang themselves.

The change in the rule simply allowed firms to change the way they calculate value. It doesn’t change the fact that they have to do so in order to invest in certain securities.

There is no way this is deregulation.

Invisible Backhand October 24, 2011 at 1:18 pm

So, a change in the regulation that lets them do what the regulation didn’t let them do before is not deregulation?

Methinks1776 October 23, 2011 at 10:04 pm

Oh, looky. another cut n’ paste.

Irritable Bowel lives in the complete absence of an original thought. In absence of any thought, really.

muirgeo October 24, 2011 at 12:56 am

IB,

NOTHING matters to these guys. Reality IS NOT AN option. I swear its a God Damn cult here. You can point out the facts and like children they will deny them and say you are wrong out of hand. It’s like we are in the twilight zone.

At this point I am on this board more as study in human psychology rather then anything to do with economics. I swear … they have nothing to add to the discussion. They serve as truly useful idiots for the neo-feudalist of our day.

SaulOhio October 24, 2011 at 5:42 am

Have you ever heard of psychological projection?

Randy October 24, 2011 at 7:03 am

Muirgeo,
Your political class rules. They rule badly. This is reality, and it is the reality that you want me to just accept. Its not gonna happen – and that too is reality.

Randy October 24, 2011 at 7:19 am

Muirgeo,
Its gotten to the point that nearly every comment you make here is some type of insult, and yet you just keep doing it. So even if half of the argument is from the regulars, even if we are a “cult”, you are addicted to seeking out people to angrily disagree with. Seriously, doctor, what does that indicate about your mental health?

Randy October 24, 2011 at 8:08 am

Just one more, Muirgeo, and then I’m done. This is from the movie Firefly. Young River Tam in response to a question from a fellow student as to why anyone would resist the “progressive” regime of the movie:

“People don’t like to be meddled with. We tell them what to do, what to think, don’t run, don’t walk. We’re in their homes and in their heads and we haven’t the right. We’re meddlesome.”

In my experience, people either get this instinctively or they don’t, and those who don’t have a reason not to. So go, and find your reason.

House of Cards & Economic Freedom October 24, 2011 at 9:25 am

I am on this board more as study in human psychology rather then anything to do with economics.

Given that you know nothing about economics, it’s a wise policy.

Sam Grove October 23, 2011 at 10:03 pm

In California, electricity markets were supposedly “deregulated”.

There were still plenty of rules, controls on retail prices, and a Public Utilities Commission (a regulatory body) overseeing things, and they kept calling it “deregulation” when it obviously was no such thing.

muirgeo October 24, 2011 at 12:58 am

Sam you ignorant SOB. Look up the Enron rule you idiot. You people are so lost and so dangerous.

Observer October 24, 2011 at 1:00 am

Muirgeo, you are a silly propagandist.

Sam Grove October 24, 2011 at 1:31 am

You obviously do not know the meaning of the word “deregulation”.

It means the removal of regulations…REMOVAL.

It’s worthless to remove some and not others if they form a balanced structure; for instance, regarding electrical markets in California, wholesale pricing was deregulated while retail pricing remained regulated. The result of such unbalanced regulation is inevitable should wholesale prices rise.

It is critical for market regulation to function that all aspects of an industry be subject to that regulation and competition be unrestrained. This has not been the case with the so-called “deregulation” of the electrical power industry in California. All all times it was substantially regulated, and the distribution of electrical power held by a government granted monopoly.

A deregulated industry is one where all government regulations regarding that industry have been removed.

Randy October 24, 2011 at 7:07 am

“Dangerous”, says Muirgeo, as if his support of fascism isn’t…

Invisible Backhand October 24, 2011 at 1:23 pm

You obviously do not know the meaning of the word “deregulation”. It means the removal of regulations…REMOVAL.

Deregulation is the removal or simplification of government rules and regulations that constrain the operation of market forces.

(wikipedia)

The reduction or elimination of government power in a particular industry, usually enacted to create more competition within the industry.

(investopedia)

1. deregulation
What American political conservatives believe is best for the American economy, especially in the industry of finance, even though it is best known for delivering excessive profits during periods of economic growth, high unemployment once the economy stalls, and ever-widening levels of economic inequality. It also makes white-collar crime much easier.
(urban dictionary)

Fred October 24, 2011 at 2:38 pm

IB – exactly what deregulation happened under Boosh Teh Grate Deregulater?

Libtards like yourself often mention the repeal of Glass-Steagall. That was on Clinton’s watch.

What is this deregulayshun under Boosh?

As far as I know tens of thousands of new pages of regulayshun were added under Boosh.

That’s not deregulayshun.

Economic Freedom October 24, 2011 at 12:53 am

Your thinking is backwards and needs to be realigned. You also have 4 flat tires.

http://www.treehugger.com/files/2011/10/proof-global-domination-few-corporations.php

Observer October 24, 2011 at 12:57 am

You are a flay-headed propagandist.

Darren October 24, 2011 at 3:43 pm

Changing rules and granting exemptions does not constitute “deregulation”.

Wouldn’t the use of increased leverage be permitted if the regulation was removed entirely? If so, one could call that deregulation even if the regulation itself was not removed.

kyle8 October 23, 2011 at 4:39 pm

I used to work with ISO, Industries Standards Organization for manufacturers.

They are much much tougher than government regulators, Their only sanction is that they can fail to give your product an approval, but that means that most international buyers, most large businesses, and all government agencies will not buy your product. That is a more powerful incentive than a mere fine.

House of Cards October 23, 2011 at 5:57 pm

Interesting.

Traditional emulsion film (Koda, Fuji, Ilford) used to be rated with an ASA number to designate its sensitivity to light (so-called “film speed”). Later, the rating standard was changed to an ISO number. Later still, it was changed to something called an EI number (“Exposure Index”).

Though the test-beds were different, I believe the final results were similar: i.e., an ASA 100 was similar to an ISO 100 and an EI 100.

House of Cards October 23, 2011 at 5:58 pm

“Koda” = “Kodak”

Chuclehead October 24, 2011 at 12:29 am

I have worked with ISO and UL, and I would say UL was the more workable of the two, at least until they meshed their standards with CSA. You could actually get the different Lab locations to compete for your business, and although it would not effect cost, it would effect certification times. The people were conscientious, but also wanted to work with you to get your product or organization approved.
I have run into countless government regulations that are actually counterproductive to the stated goals, enforced by surly and unconstructive officials.

Nikolai Luzhin, Eastern Promises October 23, 2011 at 4:52 pm

Steven Horwitz makes this really stupid argument, “MacWilliams needs to ask himself why, if this was really capitalism, banks would make loans to people they thought could not pay them back.”

The answer is absolutely yes, for they did it. The people who made the loans weren’t bad on the basis that the loans would be paid back. They were paid merely for making the loans

Greg Webb October 23, 2011 at 5:03 pm

And, what idiots paid them for making these loans? Why the federal government did through Fannie Mae and Freddie Mac? And, why did Fannie Mae and Freddie Mac buy such poor quality loans? Because their political handlers told them to increase their investment in loans that were considered subprime because they were to borrowers who could not afford to buy those homes. Incentives matter. Even government incentives. Take away the incentive and you avoid the problem.

Chris Bowyer October 24, 2011 at 1:13 pm

Exactly. At SOME point, this attempt at an explanation has to come up against a group of people acting wildly against their own self-interest all at the same time.

I love how not lending to unqualified lenders was “redlining” in the 70s, but now it’s “predatory lending” when you do. They’re brilliant polemicists, you’ve gotta give ‘em that.

Darren October 24, 2011 at 3:45 pm

They’re brilliant polemicists, you’ve gotta give ‘em that.

No. They just have conveniently short memories.

kyle8 October 23, 2011 at 5:08 pm

You seem to make arguments that automatically denigrate your own position. The argument you make is valid, but it was done because GOVERNMENT WAS MEDDLING IN THE MARKETPLACE!

But strangely enough you always seem to want more government meddling. Maybe next time they will get it right eh?

Economic Freedom October 23, 2011 at 8:12 pm

You talk like a broken record and a simpleton.

Invisible Backhand October 23, 2011 at 8:14 pm

kyle8 is in his dotage.

James N October 23, 2011 at 8:24 pm

You showed him!

SaulOhio October 24, 2011 at 5:46 am

That’s because he is talking down to your level.

Krishnan October 23, 2011 at 7:36 pm

Re: Nikolai – Amazing – Banks being paid to make the loan. Next, you will tell me the banks willingly risked their capital (i.e. money) – for example they willingly lent say $150,000 to make say $3000. Next you will tell me that the Government had nothing to do with what the Banks did – that the banks, decided that since they will make say $3000 on a loan of say $150,000 – they did not care what happened to the $150,000 – they were willing to lose their money – and kept losing money ,,,

Do you want to buy the Brooklyn Bridge from me? I can sell it to you real cheap – real cheap.

Nikolai Luzhin, Eastern Promises October 24, 2011 at 5:45 am

Krishnan

Banks do not make loans.

The people who run banks make the loans

They made trillions in bad loans because their compensation was not tied to whether the loans were good or bad, only to whether they were made.

Alan Greenspan, the running dog of Ayn Rand, testified before Congress that he was completely wrong about everything, that his entire intellectual framework, and yours, was wrong and especially his thought the people who ran the banks would not steal in this fashion

SaulOhio October 24, 2011 at 5:51 am

Talk about exaggerating what Greenspan said. He said that he had make A mistake. A MISTAKE. Singular. There is no way to interpret that as saying his entire intellectual framework was wrong.

Not that Greenspan had been acting on Ayn Rand’s philosophy, or a free market ideology. Now while lowering interest rates to 1% in 2002. That is absolutely counter to any free market ideology out there.

Nikolai Luzhin, Eastern Promises October 24, 2011 at 9:27 am

watch the testimony

Greenspan admitted he was totally, completely, and entirely wrong

GiT October 23, 2011 at 5:27 pm

“unless they believed that those mortgages could be sold off to government-sponsored enterprises like Fannie and Freddie who would, as they did, get bailed out by the government?”

One wonders what in particular requires them to depend on a GSE buying up the mortgages, as opposed to normal old private firms. Both bought ‘those mortgages,’ and both were bailed out. (Of course, the GSEs were bailed out after first themselves bailing out private banks in 2007.)

It’s hard to see how an expectation of a government bailout is uniquely tied to the GSEs when ‘too big to fail’ has had such success for the banks.

muirgeo October 23, 2011 at 7:00 pm

Horwitz should give it up. The rest of the thinking world understands what happened and they are tired of silliness like his shilling for banks.

The banks lobbied and got EVERYTHING they wanted regarding legislation and they ARE the FED. They leveraged 1 trillion dollars of bad loans over 60 times and stuck the world with the clean up and we continue to bail them out to this day. The FED has loaned them 16 trillion dollars since the collapse. Which we only know of because senator Bernie Sanders forced an audit.

Anyone interested in listening to a real thinker on these issues go to Michael Hudson’s web site and read his articles and listen to his speeches

For starters listen to his 2005 podcast predicting the housing crisis and then go back and look at what was being blogged here and on Horwitz sites.

http://michael-hudson.com/category/speeches/

Real Estate: Growth, Crash, or Soft Landing?
December 16, 2006

Invisible Backhand October 23, 2011 at 7:13 pm

Over the last decade, the Office of the Comptroller of the Currency (OCC) completed an ambitious effort to expand the types of financial services that national banks may provide. Through a set of regulatory decisions with enormous economic and political consequences, the OCC allowed banks and their subsidiaries to compete with insurance companies and insurance agents—both among banks’ archrivals—by selling insurance and annuities and to some extent by underwriting insurance. The OCC has also allowed a national bank’s subsidiary to underwrite municipal revenue bonds—once an activity within the exclusive domain of secu
rities firms—by inviting national banks to apply to the OCC for permission to conduct through their subsidiaries activities which the parent banks themselves could not conduct.

But the effects of the OCC’s liberalization extended even beyond radically altering the regulatory field on which financial services providers compete. No less importantly, the OCC’s actions also helped prompt equally significant liberalizing decisions by the Federal Reserve Board (“the Fed”) relating to permissible conduct by bank holding companies (as opposed to banks and their subsidiaries).

Anotherphil October 23, 2011 at 8:24 pm

Expanding authorized activities is not deregulation. Any bank that entered insurance-would find itself subject to state insurance regulators.

But, being as the principle issue with banks was mortgages-a traditional line of business that HAS NOT had any deregulation, but saw an increasing level of government involvement for three decades-how does an expansion of bank powers to include sales of insurance products relate to the idiotic narrative you posit?

Are you so mentally deranged and detached from reality that making an “argument” that is the rhetorical equivalent of a chimpanzee throwing feces seems probative to you?

Methinks1776 October 23, 2011 at 10:06 pm

Give the wretch credit. He not only learned to cut and paste, but he’s learned how to bold as well.

Greg Webb October 23, 2011 at 10:11 pm

He is a veritable Albert Einstein.

Fred October 23, 2011 at 8:40 pm

The government has abused its power by favoring the rich, the corporations, and the well connected.

The solution is to give more power to the government so it can, in the name of The People™, take control of the rich, the corporations, and the well connected that control it.

That makes total sense. Giving more power to a bunch of corrupt lawyers who are in bed with the rich, the corporations, and the well connected will suddenly cure them of their corruption and cause them to represent the people who elected them instead of the people who funded their campaigns.

Brilliant!

If you are retarded.

James N October 23, 2011 at 8:42 pm

Here I took the liberty of pointing you in the right direction.

http://www.rhlschool.com/reading.htm

James N October 23, 2011 at 8:43 pm

My link is for muirgeo.

Sam Grove October 23, 2011 at 10:05 pm

The banks lobbied and got EVERYTHING they wanted regarding legislation and they ARE the FED.

Hey everybody, muirgeo has discovered regulatory capture.
Too bad he doesn’t know what to do about it.

Observer October 23, 2011 at 10:09 pm

:)

muirgeo October 24, 2011 at 1:04 am

Sam,

We could have a debate about what to do about regulatory capture and I’d have you backed into a corner of illogic in 3 or 4 posts.

Observer October 24, 2011 at 1:14 am

Muirgeo, you said, “Sam, We could have a debate about what to do about regulatory capture and I’d have you backed into a corner of illogic in 3 or 4 posts.”

LOL! I have no doubt that in 3 or 4 posts of your illogic that you would think that you had Sam backed into a corner. But, in the real world, Sam’s logical arguments would send you to the mat, which happens a lot to you at Cafe Hayek..

Sam Grove October 24, 2011 at 1:35 am

Coming from someone who is unable to grasp the critical role of incentives in human behavior, I’m quaking in my flip flops…not.

Fred October 24, 2011 at 8:32 am

Obviously the solution to regulatory capture is more power to the regulators.

If given enough power, the regulators can control those who captured them and bring power to The People™.

The way to give power to the many is to concentrate power with the few.

Brilliant!

If you’re a moron.

brotio October 24, 2011 at 12:03 am

The banks lobbied and got EVERYTHING they wanted regarding legislation – Yasafi Muirduck

In case you didn’t know it, TARP was passed by a Democrat-controlled congress. Among those who voted for it were noted socialist stalwarts Nancy Pelosi, Diana DeGette, Bawney Fwank, Sheila Jackson-Lee, Charles Rangel, and Debbie Wasserman-Schultz. All of these people are at least as regressive as you (although none are as profoundly stupid).

House Democrats voted 172 – 63 in favor of TARP; House Republicans voted 108 – 91 against TARP.

It is amusing that you waddled around Boston Common with a bunch of regressive stooges, protesting those who accepted a government handout, while remaining silent about the Democrats guilty of doing the handing-out.

muirgeo October 24, 2011 at 1:08 am

Yep and Clinton signed the free trade acts, China’s most favored nation and the repeal of Glass Steagall and the Commodities and Futures Modernization Act. I don’t care about party I care about policy.

It’s just more examples of the power of these wealthy elites to buy almost all of our politicians.

Ron Pau and Bernie Sanders extreme political opponents both don’t see lobbyist for hire and both don’t take pac money.

Observer October 24, 2011 at 1:16 am

Wow! You really haven’t a clue, do you?

brotio October 24, 2011 at 2:18 am

So, why are you blaming banks and Tea Partiers for gifts to the banks from Democrats?

Sam Grove October 25, 2011 at 5:41 pm

I don’t care about party I care about policy.

Yet your icon is a saint in the annals of the Democratic party.

SaulOhio October 24, 2011 at 3:23 pm

muirgeo: One hint: They lobbied for LEGISLATION. How much of that legislation was actual deregulation, and how much of it was favors, controls on their competitors, maybe relaxing controls on themselves but not their competitors, subsidies, loan guarantees, more loans, lower interest rates, and so on and on and on?

Darren October 24, 2011 at 3:50 pm

The banks lobbied and got EVERYTHING they wanted regarding legislation and they ARE the FED.

Right! It’s not like elected officials and regulators had any choice in the matter. People just don’t understand what pressure they are under.

muirgeo October 23, 2011 at 7:02 pm

Here’s Horwitz’s past writings;

http://myslu.stlawu.edu/~shorwitz/Papers/pubs.htm

Find anything in there predicting the coming housing collapse… but he’s a big blowhard from his Monday Morning Quarterback chair…and incredibly he is still WRONG.

SaulOhio October 24, 2011 at 6:01 am

He writes nothing specifically about the housing boom and bust, probably because he was aware of other Austrians doing it, and he had nothing to add because that was not his area of expertise. However, if you had read any of his work, you would see the general outlines of the boom and bust in his general principles:

“This paper makes use of insights from Austrian economics, public
choice theory, and the new institutional economics to argue that inflation imposes costs by undermining the
coordinative properties of the price system. Not only are there the direct costs of increased economic error, but
actors also divert resources away from direct want-satisfaction into attempts to either prevent or cope with the
increased degree of uncertainty inflation imposes. These resource costs are best understood from a comparative
institutions perspective, as traditional measures of economic well-being, such as GDP, cannot distinguish between
exchanges that directly satisfy wants, and exchanges that are attempts to correct or prevent utility-diminishing
activities. The analogy between these coping costs and rent-seeking behavior is explored.”

Rent seeking behavior like selling mortgages to GSEs, buying MBSs, and house flipping.

Invisible Backhand October 23, 2011 at 7:18 pm

Oh wow, I saw this in his review of Liberal Fascism:

Although Goldberg does permit himself a few moments of over-the-top
liberal bashing, his book is for the most part a work of serious scholarship

kyle8 October 23, 2011 at 7:56 pm

of course you don’t think so, but in fact Liberal Fascism is a very well researched book, nor does it make charges that Goldberg cannot back up.

Invisible Backhand October 23, 2011 at 8:12 pm

However dubious Goldberg’s views on these issues, they are at least matters of opinion. By contrast, he makes a large number of outright errors on historical matters.

http://mises.org/daily/2871#_ftnref2

Please note this review is from mises.org

Methinks1776 October 23, 2011 at 10:07 pm

Gasp!

Greg Webb October 23, 2011 at 10:12 pm

Apparently, Irritable Bowels is now fraternizing with the enemy!

Invisible Backhand October 24, 2011 at 2:21 pm

I can’t help noticing that kyle8 has abandoned this thread and is continuing on in newer threads.

Krishnan October 23, 2011 at 7:43 pm

This interview Eric Schmidt did with the WaPo is very illuminating in the difference between business (private) and the Government (Story cited first by Crovitz in the WSJ)

http://www.washingtonpost.com/national/on-leadership/googles-eric-schmidt-expounds-on-his-senate-testimony/2011/09/30/gIQAPyVgCL_print.html

Anotherphil October 23, 2011 at 8:03 pm

Funny, it was Liberal Facism that prepared me for all of Jew-bashing that’s been on display with the Contaminate Every Street Crowd..

Steve Horwitz October 23, 2011 at 8:44 pm

Cafe Hayek has just the nicest, most considerate, gentlemanly commenters I’ve ever seen.

Reading my critics’ name calling and ill-mannered attempts at not-even-close-to-serious arguments makes me long to spend time in a classroom of 7th grade boys as I think they’d have more of substance to say, and say it more maturely than you guys.

Greg Webb October 23, 2011 at 9:02 pm

LOL! Steve, Cafe Hayek, like many other blogs, has a persistent infestation of leftist trolls. Don’t take it personally or let it drive you away. They only call you the worst of names when they know that you are right and they are wrong.

Ken October 23, 2011 at 9:05 pm

Enjoyed your presentation at Liberty and the Art of Teaching this summer, Professor.

Never mind them: They’re trying to shout down their own consciences.

muirgeo October 24, 2011 at 1:13 am

You are an Ideologue and nothing more. You are in complete denial of reality.

I listened to very educated people on both sides of this issue and your side is clearly putting ideology over reality and the facts.

I challenge you to tell me how a NINJA loan ever gets made in the days prior to when banks could not pass them along as securitized derivatives.
Who’s been on the Fed boards but the big bankers? Who’s been in the treasury but the big bankers. Yeah the government did the wrong thing because the government and the bankers are one and the same.

Observer October 24, 2011 at 1:18 am

You, muirgeo, really are an idiot.

muirgeo October 24, 2011 at 1:25 am

Yeah of course I am because that’s because you can’t manufacture a cogent reply to the facts I laid out… so yeah I AM the idiot. Thanks Observer…real good junior.

Observer October 24, 2011 at 11:11 pm

Hohoho, Muirgeo! What facts did you state? It looks lke your normal personal attacks, conclusory statements, and silly conjecture. And, by doing so, you make my case for your being an idiot.

Anotherphil October 24, 2011 at 9:32 am

“I challenge you to tell me how a NINJA loan ever gets made in the days prior to when banks could not pass them along as securitized derivatives.”

THEY WEREN’T in any great amounts. The whole reason NINJA loans were made, was to avoid asking ANY questions (income, wealth) that were covariant with race or geography. Funny, how this took off right after Henry Cisneros and the rest of the greedy politicians decided to start grading banks on CRA compliance and issuing quantified lending goals to assure the direction of capital to “disadvantaged” (e.g., their constituents) areas.

Then after a Boston Fed study charging insidious racism, the decided to avoid sany question of “redlining” and “disparate impact” discrimination which were the prior indignities contrived by the left against banks a couple decades back- in their ever present tactic of applying some specious and superficial legality in their never ending quest to appropriate wealth (they don’t understand, create, develop, or conserve).

For small and regional banks, CDO’s were a godsend. When the government forces you to spend time to meet purely arbitrary criteria created to curry favor with political constituencies, under the threat of adverse REGULATORY action (bad CRA score, with its implications) and potential civil litigation (from “Reverend” Jesse Jackson, et al) thus creating the toxic financial assets-then you are surprised when loan portfolios are poisoned?

By the way, securitized assets are not derivatives-they are unit trusts.

The energy expended in the futile attempt to maintain a conviction in the myth of omnipotent, benevolent government is a fascinating symptom of deeply troubled personalities and we thank you for your unceasing effort to provide countless hours of entertainment.

House of Cards & Economic Freedom October 24, 2011 at 9:35 am

And muirgeo will next say:

“End the Fed! End the Fed! End the Fed! Keep government out of banking, and bankers out of government!”

We knew you’d see it our way.

Observer October 24, 2011 at 11:12 pm

Well, whan Muirgeo says that I will happy take back my comment that he is an idiot.

SaulOhio October 24, 2011 at 10:39 am

Did those derivatives even exist before GSEs started buyingmortgages and creating those derivatives?

Jim October 24, 2011 at 1:25 pm

Steve,

Just a stunning letter and beautifully written.

Anotherphil October 23, 2011 at 8:45 pm

@Inveterate Blowhard

OK is this guy biased?:

“MIT economics professor Simon Johnson said on MSNBC’s The Rachel Maddow Show on Wednesday night that Wall Street “blew itself up,” which lead to the “most severe recession since World War II.” The former chief economist of the International Monetary Fund

Are you trying to establish objectivity by employment by the IMF or his appearance on Raging Madcow

Justin P October 23, 2011 at 11:12 pm

Appeal to authority fallacy, although I think most liberals think being on Marrow gives him more street cred than working the IMF. I know #OWS does.

muirgeo October 24, 2011 at 1:16 am

No Justin its called appeal to the real world outside your window…

Anotherphil October 24, 2011 at 9:35 am

Behold the lunacy, its real.

muirgeo October 24, 2011 at 1:15 am

Well yeah except that Wall Street DID blow itself up along with the western economy…. other then that good post brother.

Simon Johnson and Rachel Maddow both have themselves firmly planted in the real world. YOU have a faith, a cult like belief that doesn’t square with reality at all.

Anotherphil October 24, 2011 at 9:36 am

Oh, look Muirbot discovered a new word to repeat-cult.

SaulOhio October 24, 2011 at 1:59 pm

How did it blow itself up? If you inflate a car tire to 10 times its rated pressure, you can’t claim it blew itself up. You did it. When you inflate a market with super low interest rates from the Fed and mandates and subsidies from GSEs and HUD, you can’t claim the financial market blew itself up.

steve October 23, 2011 at 8:46 pm

1) Bear Stearns rule.

2) Making MBS acceptable collateral for repos.

3) Exempting derivatives from clawbacks in the 2005 BK law.

4) You really dont need GSEs to create a banking crisis. See Europe.

5) If you believe in incentives, follow the money trail.

Steve

muirgeo October 24, 2011 at 1:18 am

Yeah thats the other thing that is so illogical about their claims that our housing policy was the problem… Europe and Iceland act… didn’t have any such housing rules… but they did contaminate themselves with our worst invention ever… toxic financial product developed by the private banking and finance system.

Greg Webb October 24, 2011 at 11:45 am

George, I previously explained that the EU financial crisis was caused by certain member states borrowing to much in order to support fiscal follies by those governments. Why do you continue to espouse leftist ideology?

steve October 23, 2011 at 9:04 pm

Bill Black notes that regulators were not willing to enforce laws that were on the books. A wave of liar’s loans, subprime loans, started in the early 90s in California but was aborted when regulators, rightly IMHO, recognized these as fraudulent and stopped them.

http://neweconomicperspectives.blogspot.com/2011/10/anti-regulators-are-job-killers.html#more

Steve

John Harmon October 23, 2011 at 10:32 pm

Please, Mr. Horwitz, send this to the Rockford Register Star. It is known locally as the “Red Star”. Their editor will demand you “source” your evidence of course. We all are permitted our own opinions, they are permitted their own facts. Like the fellow you replied to.

muirgeo October 24, 2011 at 12:51 am

“MacWilliams refers to Congress deregulating the financial industries but offers no specifics.”

Horwitz

Gramm-Leach-Bliley Act and The Commodity Futures Modernization Act of 2000

“MacWilliams needs to ask himself why, if this was really capitalism, banks would make loans to people they thought could not pay them back.”

Horwitz

Jesus Christ! This is supposed to be a professor of economics? Maybe they took these bad loans because after deregulation they could make money securitizing them into opaque financial derivatives. The professor here is in denial along the lines of what we see with creationist and intelligent design pushers… yet he is teaching at supposedly respectable schools. Its just outragous!

Observer October 24, 2011 at 12:55 am

Muirgeo, you are being disingenuous again.

Methinks1776 October 24, 2011 at 7:38 am

That would imply he has the slightest inkling of a clue.

He’s been trolling for 6 years and it’s been the same for six years. He’s learned nothing new because morons are incapable of learning.

Observer October 24, 2011 at 11:42 am

Methinks1776, I used to believe that the vast majority of us were in that great big bell curve when it came to intelligence. I used to believe that leftists were emotionally vested in their ideology and that is why they said stupid, illogical things. But, after reading muirgeo’s posts, I am convinced that I was wrong and that some people are simply morons.

muirgeo October 24, 2011 at 4:26 pm

And still none of you is able to respond to my challenge of explaining how a bank would make such bad loans if they could’t be repackaged and securitized.

Clearly them being able to do so leveraging a trillion dollars of bad loans 60 plus times was the problem.

You guys ignore the facts and claim I’m the irrational one. It’s clearly not the case. You guys clearly need to deny reality.

Observer October 24, 2011 at 11:21 pm

There you go again, Muirgeo. What challenge? The government created incentives for banks to lower their lending standards for low the moderate income folks so that they could buy homes. Then, the government instructed Fannie Mae and Freddie Mac to increase their ownership of those types of loans in order to free up more funds for the bankers to lend more money to people who were not creditworthy so they could buy homes.

Chelsi November 9, 2011 at 9:34 am

Normally I’m against killing but this article slaughtered my iognrncae.

aymudkyj November 9, 2011 at 12:55 pm

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armbnzcira November 12, 2011 at 6:34 am

xgSlmT extynirdbwfd

Ken October 24, 2011 at 1:01 am

muirgeo,

In fact, since 1980, Congress has passed four new sets of regulations for every one deregulatory act, and between 2001 and 2008, there were nine new sets of regulation and not one bit of deregulation.

Guess you didn’t get to this part did you? Or did you simply ignore it since you didn’t like what it said?

Not really surprising.

Regards,
Ken

Observer October 24, 2011 at 1:04 am

Ken, muirgeo doesn’t read. That is inconvenient for a flat-headed propagandist.

muirgeo October 24, 2011 at 1:23 am

Of course when I ask you or Mr Horwitz to name ONE specific additional regulation that was a major factor in the financial collapse you won’t be able to come up with one that makes any sort of explanation as the fact about deregulating financial derivatives.

You just think like the simple minded dolls that you are that 4 regulations to 1 means regulations must be the problem even though most of those new regulations likely were related to Homeland Security and had nothing to do with finance. There is NOT one regulation you can point to that significantly added to our problems and I know that because I understand NOTHING significant would get passed the Wall Street lobbyist who were writing ALL of the policy.

Ken October 24, 2011 at 1:52 am

FDICIA (1991), CRA (1994) are among “specific examples”. Examples you have been given time and again, yet choose to ignore.

In addition to these there are literally hundreds, if not thousands, of “guideline” regulations written to ease lending practices, such as “A Study of the GSE’s Single-Family Underwriting Guidelines”, which resulted in substantive alterations to their guidelines and developed new affordable loan products with more flexible underwriting guidelines.

Regards,
Ken

Anotherphil October 24, 2011 at 9:39 am

Go read the federal register-do your own work.

Observer October 24, 2011 at 11:39 am

Muirgeo, Ken answered your silly conclusory statements and proved your wrong yet again. Anotherphil correctly points out that you need to start doing your own work by reading the Federal Register rather than merely regurgitating leftist propaganda.

muirgeo October 24, 2011 at 4:29 pm

NO Observer HE DID NOT. I’ts a fact that the majority of subprime loans were outside the pervue of CRA and other government mandates. They were made volutarily by brokers and securitized voluntarily all the way up the change to CDO’s and CDS’s that blew up the system. Sam HAS to lie to try towin the debate. Lying does NOT change the facts it simply proves Sam is a lliar and un-interested in the truth.

Sam is uniformed.. he repeated a lie he heard else where that I can clearly prove it wrong.

Ken October 24, 2011 at 4:50 pm

muirgeo,

Subprime mortgages were only one portion, not even the majority, of toxic assets that tanked the housing market.

Regards,
Ken

Ken October 24, 2011 at 5:02 pm

muirgeo,

I, also, note that you completely ignore FDICIA to focus only on the CRA. Even when focusing on the CRA, your focus is so narrow as to distort understanding of even that act.

Regards,
Ken

Observer October 24, 2011 at 11:27 pm

Hohoho, Muirgeo! I said Ken responded to your silly conclusory statement and proved you wrong yet again. But, you incoherently called Sam a liar. Sam is not a liar and neither was he part of this conversation. There has been only one liar in this conversation Muirgeo and it has benn you.

brotio October 25, 2011 at 2:32 am

Sam is uniformed

Sam!

What uniform are you wearing?

muirgeo October 24, 2011 at 1:37 am

We are on the brink of seeing Europe melt down because the global banking and finance industry has refused to allow any regulations fix the problems that lead to the collapse and you dummies are still blaming Barney Frank….

Eventually this is gonna get bad enough even tenured professors and doctors of medicine and paper pushing wall street jerks are gonna feel the bite as we all re-learn the lesson and value of a civil society and the dangers of pushing the liberty /individualism extremism bulllshit a bit too far.

brotio October 24, 2011 at 3:10 am

You pray to Mother Gaia to sweep those of us who disagree with you away in a tidal wave of crude as you rant and rave for a civil society.

Anotherphil October 24, 2011 at 9:42 am

There’s something psychotic about ranting about “civil society”, while being unable to think of something more creative and less crude than the common reference to bovine excrement.

Adam Baum October 24, 2011 at 9:46 am

Your version of “civilized society” always leads to goose-steps and gulags.

Greg Webb October 26, 2011 at 1:08 am

Hmmmmm! Why do those who advocate for more intrusive government always falsely accuse those who advocate for individual freedom of being Nazis and fascists, which are groups that advocated for more intrusive government while pretending that it was for the good of the people? Don’t they recognize their fellow goose stepping and gulag building socialists?

Observer October 24, 2011 at 11:32 pm

Muirgeo, you are rambling incoherently again. Europe is not about to melt down. The EU may fall apart because responsible member stares (I.e., Germany) do not want to pay for the fiscal follies of the irresponsible member states (I.e., Greece, Italy, Ireland, Portugal, Spain, Belgium, etc.). But, that would be a good thing and not a tragedy. It would prove the idiocy of the European elite and their dream for a united Europe.

Nikolai Luzhin, Eastern Promises October 24, 2011 at 6:12 am

News from Europe:

According to one of the wires, the common sense of the Greek people is working for them. The rioters in the streets are forcing a major haircut on bond holders. Peonage just isn’t all that popular.

“A senior German banker close to the talks said the banks had offered to take a 40 percent “voluntary” writedown but governments were demanding they write off 60 percent.

This is much more than a 21 percent net present value loss agreed with investors on July 21 and some officials question whether it can be achieved voluntarily, or only through a forced default that would trigger wider market turmoil.

“It’s a poker game until Wednesday,” one negotiator said.

A Reuters poll of economists — many of them from European banks — showed last week they expected private investors would have to shoulder losses of around 50 percent.

IOW, after exhausting all other choices, the European democracies are starting to do the right thing.

That leaves this blog totally useless. According to the Austrians, the rich Germans were never supposed to take a haircut. What happened?

Sam Grove October 24, 2011 at 12:46 pm

According to the Austrians, the rich Germans were never supposed to take a haircut.

Citation?

Greg Webb October 26, 2011 at 1:03 am

Nope. The rich Germans will either kick Greece out of the monetary union, or require strict austerity measures on the Greek government, or both.

Slappy McFee October 24, 2011 at 9:41 am

While I enjoyed Mr Horwitz’s letter, I have found that the discussions of regulation vs deregulation to be quite facile. It was the likely hood of government bailouts that was always the issue.

Over or under regulated, the losses were always going to be shared amongst the plebes.

Paul Marks October 24, 2011 at 10:25 am

This work by Steve Horwitz is the best short letter I have read on this subject.

steve October 24, 2011 at 2:56 pm

It would have been nice if he substantiated his claims with citations. It would also help to clarify what he considers a regulation. It appears he does not consider the 2005 BK act a regulatory act.

Steve

Leonardo T. B. October 25, 2011 at 11:05 am

When I hear these desperate callings for “more regulation” I muse what people think a 3.000+ page regulation code like Dodd-Frank will do to the the banking industry, what people think it’s going to happen with little credit unions and deposit banks. The outcry for more regulation will only bring about more concentration and systemic risk to an industry that is already plagued with perverse incentives and moral hazard.

The only regulation the banking sector needs is bankruptcy. Bad economic science designed to justify vested interests has blurred the limits between “insolvent” and “illiquid” to the brink of ridiculousness. You can’t even call capitalism a system where profit and loss lost its meaning.

Yes, there’s a load of corrupt, buccaneer, ruthless investment banks out there, but for the sake of institutional and social evolution the creditors of these establishments MUST bear their losses, doesn’t matter how painful it will be.
You cannot use taxpayers money to guarantee a refund to everyone that has been caught in a scam. You can only charge wrongdoers for possible fraud and let everything else take its course.

Bilwick October 25, 2011 at 4:52 pm

If they knew anything about economics, they wouldn’t be “liberals.”

vonmises2012 October 26, 2011 at 12:42 am

After reading comments for a very long while, I’m compelled to comment on the Balella idiocy. I can’t believe after posting all these years he is still so uninformed and committed to a failed thesis. George must have calcium on the brain.

TokyoTom October 26, 2011 at 8:28 am

Let’s face it: our financial sectors is a massive, stinking mess, resulting proximately from rampant moral hazard encouraged by government laws and regulations – chiefly, the deposit insurance that substituted Government and .taxpayers’ pockets for oversight by depositors who no longer considered that they were putting their money at risk.

The central role of ‘government’ does NOT. however, eliminate the responsibility of men and women in various institutions that took advantage of incentives to maximize personal gain while shifting risks and losses to others.

In this, I have to disagree strongly with Steve, who seems to want to hold only ‘Government’ responsible. Emphatically No – to increase responsibility we must not simply restore risk, but also demand better behavior and call out those whose actions are shameful.

The relaxation of leverage standards much discussed above took place only because investment bankers who had got public – and thus were playing largely with public investors’ capital and not their own – wanted to load up on risk, the better to reap massive profits during the bubble and downloading risks to shareholders (in addition to risks deliberately played off to insured banks, Franie and Freddie, and to other market participants giddied by the bubble).. They all played this game so well that they made billions in bonusses, even as they made their own institutions so opaque that they could no longer measure each other’s counterparty risk and brought each other crashing down. Lehman’s CEO Fuld, who made over $100 million annually in compensation and bonusses in each of his last few years, is just one example.

Those who sought, took advantage of and approved of this nonsense, and then sought and approved of bailouts ALL richly deserve and NEED our strongest condemnation.

None of this “We can’t blame drivers for accidents, because Government messed up the signals” for me.

Tom

FWIW: http://mises.org/Community/blogs/tokyotom/archive/2009/03/04/when-will-tom-woods-and-other-quot-free-market-quot-intellectuals-have-second-thoughts-about-limited-liability.aspx

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