Kristof on crony capitalism

by Russ Roberts on October 27, 2011

in Financial Markets, Gambling with Other's $

Nicholas Kristof in the New York Times:

Capitalism is so successful an economic system partly because of an internal discipline that allows for loss and even bankruptcy. It’s the possibility of failure that creates the opportunity for triumph. Yet many of America’s major banks are too big to fail, so they can privatize profits while socializing risk.

The upshot is that financial institutions boost leverage in search of supersize profits and bonuses. Banks pretend that risk is eliminated because it’s securitized. Rating agencies accept money to issue an imprimatur that turns out to be meaningless. The system teeters, and then the taxpayer rushes in to bail bankers out. Where’s the accountability?

Almost all of the column is superb. Read it. Then go read the comments. Most commenters don’t seem to understand the distinction between wealth that is created by making the pie bigger and wealth that is taken from others merely rearranging the slices of the pie. Not the same thing.

When the next bailouts of creditors are demanded as necessary to help save Main Street, I hope Nicholas Kristof will speak out against them.

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Methinks1776 October 27, 2011 at 8:37 am

Risk is not eliminated when it is securitized, it is more spread out. The banks and everyone else understands that. The banks can’t spread that risk without willing buyers. In 2008, they clearly overestimated demand and got stuck with a lot of risky assets on their books. That can happen to anybody. The real problem is they were bailed out. I can’t believe they wold be willing to do so much size if they didn’t think they would be backstopped.

Greg G October 27, 2011 at 8:43 am

Securitization does spread out risk rather than eliminate it for sure. Sadly it often spreads it from those best able to understand it to those least able to understand it.

Methinks1776 October 27, 2011 at 9:04 am

Um, no.

The Other Eric October 27, 2011 at 9:50 am

Sorry MeThinks, but yes I think Greg’s correct in that simple statement. There is a strange mismatch between public, small buyer perceptions about securities investments (which some seem to confuse with the definition of the term “security”) and the knowing wink, wink from large scale investors who made reasoned bets that no matter how bad the bubble would pop, they’d get supported by bug government subsidies.

I’ve had more than a few conversations with smart people, with serious knowledge about life and the world in general, and yet they confuse risk and probability, misunderstand investments, and honestly don’t get the fundamentals right.

Kristof’s article is wonderful, but it’s not enough by a tanker load.

The Other Eric October 27, 2011 at 9:52 am

That’s either a typo or an Orwellian slip. Bug Government, Big Government… sort of the same thing if you think in terms of infestations.

Methinks1776 October 27, 2011 at 11:14 am

Other Eric,

I agree with your assessment of the average small investor. In their defense, I would add that those same people probably don’t know much about brain surgery either. We all have our specialties.

If the the pass-thrus were sold to small, unsophisticated buyers, then I would agree with you completely (although, I would also say that it’s none of our business if individuals want to take crazy risks). They were not. The securities were sold to investment professionals who have all the skills and education necessary to assess the risks, all the access necessary to probe deeper on issues they didn’t understand and all the ability to just not buy them. The average Joe, an insignificant player in the equity markets, is not a player in the fixed income market.

He may have bought a fund that held pass-throughs like CDOs, but the decision to buy the securities (which ones, in what amounts and at what price) were made by very sophisticated professionals. Not all of those professionals assumed they would be bailed out. For instance, hedge funds didn’t think they would be and they weren’t. Hedge funds tend to swing for the fences for reasons outside of the scope of this reply, but the point is that they didn’t assume or get a bailout and they were and are sophisticated. So were the sovereign funds and foreign banks. These securities were not sold to rubes.

It is true that a buyer of a security is generally less knowledgeable about any security than its creator, but that’s not anything like “less able to understand”. They simply hedge that by reducing their size and bid.

One more point about spreading risk. When all of the risk sits with the bank, it is concentrated. When it is sold off, it is sold off in chunks to multiple buyers, it becomes part of a much larger portfolio. Even if the risk is poorly understood, as long as the security is a small enough portion of the portfolio, it’s not that dangerous.

Observer October 27, 2011 at 11:29 am

The Other Eric, my impression of those “smart” people is that they pretend to understand things that they do not and assume that there is minimal risk because they are caught up in the bubble mentality that real estate prices can never go down.

Even a really smart guy like Issac Newton who, at the time that he was the Exchequer of Great Britain, got out of South Seas investments because he thought they were over priced only to buy back in just before that bubble burst because prices continued to rise after he originally sold those investments. Most of those smart people were willing investors at the time because everyone was caught up in the real estate boom. But, now they just want their money back and are willing to use the political process to do so.

As with everything, the buyer should beware. Don’t buy anything that you don’t understand. And, diversify, diversify, diversify!

Methinks1776 October 27, 2011 at 11:45 am

Observer, what you describe isn’t even a question of knowledge and intelligence, but a question of being able to see the future.

No matter how smart, learned, well intentioned someone might be, he will always be hampered by his lack of clairvoyance – even in the absence of any bubble mentality. Your comment points out something too easily overlooked – the constraints on what is knowable.

Bad outcomes are with us to stay. Knowledge can help us mitigate them, but we will never be 100% immune to bad outcomes no matter how smart, how careful or how wise we are.

Observer October 27, 2011 at 12:25 pm

I wholeheartedly agree, Methinks1776!

muirgeo October 27, 2011 at 4:44 pm

Methinks,

In the year 2007 what percentage of your assetts were invested directly or indirectly in compex financial derivitives?

Methinks1776 October 27, 2011 at 5:17 pm

1218420532575894321853230769324275329537.97632%

Why?

Invisible Backhand October 27, 2011 at 5:19 pm
Methinks1776 October 27, 2011 at 5:45 pm

bekuzz you’re too stupid to understand why I was laughing at you? Okay.

brotio October 28, 2011 at 8:10 pm

1218420532575894321853230769324275329537.97632

What a coincidence! That’s also the number of living organisms on this planet that have a higher IQ than Yasafi!

muirgeo October 27, 2011 at 10:05 am

You’re clearly right Greg. Their profit model is specifically designed around asymmetry’s of information.

The idea that bailing them out is the only problem is also unfounded. The next scheme will come again and make some shysters rich selling snake oil to some unsuspecting people. Before we had bailouts we went from one boom and bust cycle to the next. One we had legislation that separated commercial and investment banking the problems went away.

There are some very good economist who will tell you there is NO need for most of these products suggesting they should be illegal. The people who defend them clearly have a vested interest.

Ghengis Khak October 27, 2011 at 11:41 am

Yea, problems went away during the Glass-Steagall period. It isn’t any more complicated than that.

No need to worry about those 10 year-to-year GDP declines, none of which could have been part of business cycles, that occurred during that time frame (1944, 1945, 1946, 1953, 1957, 1973, 1974, 1979, 1981 and 1990).

Observer October 27, 2011 at 11:12 am

Then, why are they “willing buyers”?

Observer October 27, 2011 at 11:14 am

Greg G said, “Sadly it often spreads it from those best able to understand it to those least able to understand it.”

Why would anyone be a “willing buyer” of a security that they do not understand?

Observer October 27, 2011 at 11:15 am

These questions were meant for Greg G as noted above. Not sure why they posted in the wrong place.

Greg G October 27, 2011 at 11:38 am

Observer

Because they do not realize that they don’t understand it until much later. And a lot of these “sophisticated buyers” were not nearly as smart as they thought they were and a lot of them had principal agent conflicts that kept them buying because they were well paid to be buyers for those who understood even less.

Methinks1776 October 27, 2011 at 11:55 am

In other words, because people make mistakes. Genius.

Greg G October 27, 2011 at 12:06 pm

The point is not that people make mistakes. It is that they make a lot more mistakes when they have less information and less intelligence than the people they are trading with. And they make a lot more mistakes when they are trading with other people’s money instead of their own.

Methinks1776 October 27, 2011 at 12:09 pm

I see. So, your argument is that the people who were buying these assets were just dumb. Dumb enough to convince other people to handle their money.

Greg G October 27, 2011 at 12:20 pm

Actually, I didn’t say or mean “just” dumb. I referred to a principal agent problem and a problem with asymmetry of information. But it is much easier to argue against “just dumb.”

It was once believed in good faith that securitization would reduce systemic risk. Now its’ effects look much less predictable.

Observer October 27, 2011 at 12:41 pm

Greg G, the buyer must always beware when anyone is trying to sell him something. It does not matter who is doing the selling. The seller always knows more than the buyer even if it is a relative or friend doing the selling.

That is why buyers must educate themselves and buy only goods and services that are appropriate for them. You would not buy a home without an appraisal, a home inspection, and getting to know something about the home, the neighborhood, and the local market for that type of home. It is the same for securities and everything else for that matter.

If you choose not to get properly educated, you should not expect someone else to bail you out if you incur a loss. We all learn this lesson at one time or another.

The problem is that some would use the political process to get others to share in the loss resulting from their poor decision making. Yet, I can assure you that they would not have shared their gains had the investment made money.

Methinks1776 October 27, 2011 at 12:43 pm

How many decisions do you make where you have as much information as the party with whom you’re transacting?

By your logic, you should never buy the services of a plumber, a mechanic a doctor, a lawyer, a gardner, a hairstylist or any other professional because you don’t know as much as they do.

Asymmetric information is part of every day life and virtually every decision. No matter how smart or stupid you are.

It was once believed in good faith that securitization would reduce systemic risk. Now its’ effects look much less predictable.

That’s like saying you’re not sure insurance works. It does. insurance spreads risk – the same as securitization.

The problem with securitization is the risk shifting courtesy of government. When a third party is able rob innocents to make you whole if you should lose, you have every incentive to pile on risk, irrespective of an agency problem.

txslr October 27, 2011 at 2:04 pm

What the behavioral finance types too often miss is that the failure of individuals to behave in Bayesian rational ways does not lead inexorably to inefficient markets. People are sometimes stupid, but that doesn’t mean that markets will always lead to stupid equilibria.

Regarding information asymmetry, the impact is the kill markets a’bornin’, not to generate superior returns to those with information. If someone offers to sell you a bag full of something for $100, and he knows what’s in it, will you buy? Of course not (well, some people here might, but leaving them aside…). How low do they have to go before you would buy it? Well, if they know what’s in the bag and you won’t, their willingness to sell is an indication that you shouldn’t buy, so no transaction is done and there is no market.

Finally, note that these rapacious bankers who were taking advantage of people who didn’t understand what was in those pools, kept a bunch of them for themselves and lost a bunch of money.

The asymmetric information argument is going nowhere.

Greg G October 27, 2011 at 4:32 pm

You guys are arguing as if I am saying there should be perfect symmetry of information. I am not saying that. What I am saying is that the opacity in the system has increased rapidly in the last 15 years of financial “modernization.” And that is a big problem.

How is an investor to properly research off balance sheet vehicles and derivatives whose existence may not even be disclosed or understood by most professionals? For God’s sake, many of the CEO’s in these TBTF companies didn’t understand this stuff themselves and didn’t know what was going on in their own companies. Your solution is for the little guy to do more homework or not invest?

By the way, I am not arguing against the need for all investors to use caution and do their homework. I invest very cautiously for myself and the four other family members whose money I manage. We have not been much hurt by the downturn and are not in need of any kind of bailout. Even so, I think the average investor is not getting nearly as fair a shake in this country as he used to.

Jon October 27, 2011 at 4:41 pm

Information has always been something of an issue. Our economic models are often based with the assumption “perfect information”; that both buyer and seller know as much as possible about the product and no one knows more than the other. You can see problems with lemon markets in autos, homes, and baseball players (a paper was written not to long ago dealing with the lemon market in regards to the last issue. It was written by an economist of such brilliance, such candor, such…well, let me put it this way: I wrote the paper :P ). That’s why we get laws such as Lemon Laws or, in the case of MLB, mandatory physicals.

However, in cases, those laws generate more problems. Take, for example Lemon Laws. Lemon laws increase the transaction costs for businesses dealing with used cars (litigation costs, increased scrutiny of cars, etc). These costs are passed onto the consumer in the form of higher priced cars (although the quality of cars is, at least in theory, higher). This prices poorer consumers (the ones who generally go after used cars) out of the market.

My point, Greg, is ultimately everything comes down to “Buyer Beware.” On both sides of the equation.

txslr October 27, 2011 at 4:52 pm

I’m just saying that asymmetric information is not a good explanation for what happened because asymmetric information leads to markets failing to form, which was clearly not the case for CDO’s or CDS’s. You need to distinguish between different levels of knowledge and/or differences of opinion on the one hand and asymmetric information and the associated economics (e.g. signalling) on the other.

Bank CEO’s may not have understood CDO’s (although the concept is really quite simple) but I doubt that the average integrated oil company CEO completely understands hydro-cracking or gravel-pack completion techniques either. So what?

Regarding CEO’s forming SPV’s and not disclosing them, that’s accounting fraud and people go to jail for that. Different issue.

As for the little investor, if he is trying to beat the market by applying superior knowledge then he has no right to complain when it turns out that he has none. If he isn’t, he should diversify, adjust his debt and equity holdings for risk tolerance and hang on.

Methinks1776 October 27, 2011 at 5:10 pm

Greg G,

What you’re trying to say is that evil banks ripped off rubes. You just can’t find a way to say it in a way that will stick.

Just because a CEO isn’t paying attention to what’s going on in his company or doesn’t know how some of the structures in his company work doesn’t mean nobody does. It doesn’t have to be understood by “most professionals”. The professionals who don’t understand pay the professionals who do to explain it to them. That’s why banks and investment firms have big research departments.

Once again, these complex instruments were not sold to little guys. But, even if they were to be sold to the little guy, then yes, it would be the little guy’s job to understand wtf he was buying before he bought it. It’s not the issuer’s job to hold Joe Average’s hand and protect him from his own ignorance. Do you buy complex medical equipment? No? Is that because you don’t know how it works? I’ll bet it is. I don’t think your wife would trust you to take the Fraxel laser to her face.

Even so, I think the average investor is not getting nearly as fair a shake in this country as he used to.

What do you mean by that?

Darren October 27, 2011 at 5:33 pm

Your solution is for the little guy to do more homework or not invest?

Well, sure. It’s not like he has anything better to do.

Greg G October 27, 2011 at 7:52 pm

No Methinks, I did not say, or mean, that the banks are evil. That is you projecting again.

Methinks1776 October 27, 2011 at 10:57 pm

Right, Greg G. You don’t know what you mean. That’s obvious.

ettubloge October 27, 2011 at 9:04 am

This is a rare coherent argument read by NYT readers. Most of the time it is the same old misrepresentation that government handouts = capitalism. Then they can argue that more regultaions are needed.

Kristoff’s piece may open the eyes of some NYT readers to the necessity of failure being part of the risk on any business.

Next topic should be competition, then prices, then profits (see Walter Williams yesterday), then … Maybe there is a fighting chance.

Corey October 27, 2011 at 9:22 am

The commenters on the nytimes.com site are starting to scare me a little bit. Go read the comments on this story.

http://www.nytimes.com/2011/10/27/world/asia/china-imposes-new-limits-on-entertainment-and-bloggers.html?hp

I’m genuinly shocked by the amount of commenters finding agreement with the CCP. Either the country is a lot more diverse than I previously thought or something has really changed in the American psyche as a result of the reccession.

Seth October 27, 2011 at 10:30 am

They’ve had more time to think about it.

Nikolai Luzhin, Eastern Promises October 27, 2011 at 9:30 am

Any student of FDR knows why we have the comments we do

Everyday I try to read his First Address as President

So, first of all, let me assert my firm belief that the only thing we have to fear is fear itself—nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance. In every dark hour of our national life a leadership of frankness and vigor has met with that understanding and support of the people themselves which is essential to victory. I am convinced that you will again give that support to leadership in these critical days.

* * *

True they have tried, but their efforts have been cast in the pattern of an outworn tradition. Faced by failure of credit they have proposed only the lending of more money. Stripped of the lure of profit by which to induce our people to follow their false leadership, they have resorted to exhortations, pleading tearfully for restored confidence. They know only the rules of a generation of self-seekers. They have no vision, and when there is no vision the people perish.

My task here is to remind the blogger here that, “They know only the rules of a generation of self-seekers. They have no vision, and when there is no vision the people perish.”

Randy October 27, 2011 at 9:52 am

I have a vision. It has nothing to do with politicians or the visions of politicians, and I wish they would all just shut up.

Nikolai Luzhin, Eastern Promises October 27, 2011 at 10:38 pm

Randy, you are a real class act, a self-seeker in the worst sense of the phrase

Methinks1776 October 27, 2011 at 10:44 pm

And you are a moron who seems to have forgotten how to navigate to another website. I say “forgotten” only because I’m trying desperately to be polite to an unworthy animal like you, Luzha.

The Other Eric October 27, 2011 at 10:05 am

FDR was a true master of “us against them.” He used the false dichotomy throughout his career, reapplying the “them” to anyone who stood against his authority. Whether trying to gut the Constitution, pack the Supreme Court, or plan every aspect of the economy, FDR used English translations of Bukharin (which he borrowed from, pardon the term, liberally) and pinched class warfare memes from Huey Long.

That you have the arrogance to try and suggest you can instruct the blogger, from a position of ignorant bias, is remarkable to many of us, but lost on you.

Do yourself a cognitive favor and re-read FDR’s first inauguration address as if it were given by, say, Alexei Rykov in 1928. The speech is about supporting your leader, no matter the social or historical consequences. Read the history of totalitarian regimes in the late 20s and early 30s and re-read your hero’s speeches. Please.

Nikolai Luzhin, Eastern Promises October 27, 2011 at 10:16 am

reading your rant, it is apparent you need a lot of instruction

and your right, President Roosevelt passed way in April 1945 away leaving us in some totalitarian regime with Harry Truman as President.

we will start with lesson 1.1

Being such an expert on the Constitution, what do you think of Lincoln’s Emancipation Proclamation? Was such Constitutional or Unconstitutional? And, by the way, what you think of Lincoln?

Slappy McFee October 27, 2011 at 11:00 am

I’ll take your obvious bait.

Lincoln was a war monger and a tyrant.

Chucklehead October 27, 2011 at 11:46 am
Slappy McFee October 27, 2011 at 12:06 pm

Couldn’t agree more with Mr Densen.

Nikolai Luzhin, Eastern Promises October 27, 2011 at 7:46 pm

It is amazing how delusional you all are—can’t you do better than, “that damn that Lincoln, he was so much smarter than us, he made us fire the first shot.”

“It is interesting to compare Lincoln and his treachery in causing the Southern “enemy” to fire the first shot at Fort Sumter, resulting in the Civil War, with Roosevelt’s similar manipulation causing the attack on Pearl Harbor and America’s entry into World War II.”

you all are sick sick puppies

Dan H October 27, 2011 at 12:08 pm

I heard a compelling argument once that went like this: With industry booming in the North and the need for cheap labor on the rise, there was a market for smuggling slaves to the North (much like the market for getting immigrants across the border). On the basis of state’s rights (the very argument the South used to keep slavery), northern states were already refusing to enforce fugitive slave laws. Essentially, if you made it to the north, you were free. Had we let the South go, Slaves would have matriculated northward thanks to a lucrative smuggling market. Eventually, the supply of slaves would be so low in the South, the price of a slave would have skyrocketed. Unable to afford new slaves, many plantation owners would have had no choice but to begin freeing them and paying them.

So I often ask myself: how many people would have died if we had just let the invisible hand take over? Well, less than died in the bloodiest war in American History. Besides, there were already many strong abolitionist movements growing. Robert E. Lee was quietly opposed to slavery, and his wife and daughter ran illegal schools to educate slave children and funded efforts to free them either by route to the North or transport to Liberia.

Jon October 27, 2011 at 2:22 pm

Right, Dan. Paul Krugman actually made a compelling argument about a month ago in his blog to that point. I’ll try to find the link and post it here.

Nikolai Luzhin, Eastern Promises October 27, 2011 at 7:48 pm

the only problem is that what you write isn’t true. The fugitive slave laws were being vigorously enforced and Dred Scott had deprived slaves of any potential of living in freedom

Greg G October 27, 2011 at 8:47 pm

Wow. I’m kind of new on this blog. I always knew that the argument in favor of slavery was a libertarian one but I didn’t expect to see it still alive in any form. Is there really a consensus here that Lincoln was a tyrant and should have just permitted slavery in the name of liberty?

txslr October 27, 2011 at 9:02 pm

Greg G.,

You always knew wrong. The most fundamental precept of classic liberalism is that every person owns the product of his own labor. The libertarian’s ideal society is minimally coercive, which means no slavery. The “peculiar institution” only existed in the United States because governments (state and federal) were willing to use their powers of coercion to support the expropriation of people’s labor. A minimally coercive government would not have done so and slavery would have failed.

The argument about the Civil War and Lincoln is not about the morality of slavery, but about the best means of ending it. It is a legitmate issue – most countries ended slavery without widespread violence, but the United States fought a war that likely resulted in nearly 1 million dead.

Might slavery have been ended with less violence? Is it immoral to ask the question?

Ken October 27, 2011 at 9:05 pm

Greg G,

Perhaps you should reread Dan H’s comment. At no time did he argue “in favor of slavery”. He was commenting on how best to end it. Big government types always prefer force and violence. What’s a couple hundred thousand lives, eh?

You should also check your history if you think government “permitted” slavery, when in fact the British government codified it, despite loud protests from colonists. Slavery had been a New World institution from the beginning (hundreds of years) and ended 82 years after liberation from Britain. While you look at history and the end of slavery, why do you ignore the half million dead? Have you never thought to yourself this could have ended better? Could there have been a different way? Or are you happy with the misery of so many dead?

Dan H’s comment gave a plausible solution to ending slavery in a peaceful manner, but like a good jackass, you claim it’s a libertarian defense for the existence of slavery. Reading fail.

Regards,
Ken

Jon October 27, 2011 at 9:35 pm

There’s a great article that Krugman blogged about about how slavery was way too expensive to maintain and was beginning to fall apart in the South long before the Civil War erupted. I cannot seem to find it, but it’s worth a read.

It is an undisputed fact that capitalist societies, even when they ave slavery to begin, move towards the abolition of slavery, usually through peaceful means. Inversely, societies that have lots of top-down control inevitably move towards slavery. The record of history is crystal clear on this matter: Britain, Northern US, Europe, etc. Inverse: Nazi Germany, USSR, Communist China (pre-1970), North Korea, etc.

The reason for this is simple: societies that rely on the free market (prices as a determining factor) find that slavery is much more costly than beneficial. Inversely, in a command-and-control economy, whatever is decided is needed, workers are employed for such a purpose, regardless of their feelings.

Greg, I know you are a good guy and we are both warriors for truth, but in this case, I must take a staunch position opposite of you.

The Other Eric October 28, 2011 at 1:50 pm

You can’t and won’t respond to what I wrote– which is supported by historical and political documentation.

Instead you use the tactic of a televangelist trying to change the topic.

Weak.

Darren October 27, 2011 at 5:39 pm

That address sounds like a long-winded way of saying “Trust me.” Nothing new.

Greg G October 27, 2011 at 9:08 pm

txsir

There are self described libertarians of every possible variety. There were libertarian arguments for and against slavery.

How long would you be willing to be enslaved to postpone violence?

txslr October 27, 2011 at 9:26 pm

Please refer me to the libertarian argument that supports slavery. I have never seen one.

How many people are you willing to kill to speed up the end of an injustice?

Greg G October 27, 2011 at 9:37 pm

txsir

The libertarian argument in favor of slavery was a property rights argument. The slave was property that the slave owner had a right to own. I understand that this is not your position but that was the argument that the slaveowners used. They often claimed their liberty was being infringed on by those attempting to end slavery by any means.

If the North had allowed the South to leave the union there was no prospect for the end of slavery anytime soon after that. How many more people would you have been willing to see die in slavery to avoid the carnage of war?

Jon October 27, 2011 at 9:38 pm

It’s a perversion of the “pursuit of property” principle. I have the right to own property, I bought this slave and he is my property. It exists, but is a perversion of the principle.

Nikolai Luzhin, Eastern Promises October 27, 2011 at 10:32 pm

txslr

Lincoln didn’t kill anyone to end slavery. He used force to suppress treason against the United States, which is a capital offense under the Constitution these dodos claim to know so much about.

The Confederates choose to die to keep slavery. No one made them form armies and navies and start the War and get shot and killed.

The reason we had a War is because the Cause would not accept a non-violent end to Slavery.

The crap about being anti-violence is crap. This blog prays that the Cops bust the heads, or worse of Occupy Wall Street. Hence, all the projection. These are sick sick wacko people

txslr October 27, 2011 at 10:55 pm

Greg G,

That is an argument, but it is not a libertarian argument. The class of slave owners was not–could not have been–libertarian. The animating first principal is that every person is entitled to the fruits of their own labor. Show me how to get from there to a defense of slavery and you win a cookie.

Your assertion that there was no prospect for the end of slavery in the absence of war is just that; an assertion. I am under no logical or empirical imperative to accept it, so it makes a poor foundation for an argument. The fact is that slavery had ended in the rest of the western world already, and without massive slaughter. That the forces that had caused its demise elsewhere might have ended it in the South is hardly an outlandish hypothesis. Indeed, Jefferson Davis himself seriously considered ending slavery in the south as the war turned against the Confederacy as a condition for gaining support from Britain. One can easily imagine pressures forcing abolition even on the Confederacy.

Your position is an absolutist one – there is no cost too great to bear to speed up the abolition of slavery. Nearly a million people died in the war to end slavery, and many of them were forced by a corrupt draft into service – another form of slavery. To weigh the costs of the alternatives is consequentialism where it is unavoidable and not contrary to the principals of libertarianism.

Greg G October 27, 2011 at 9:15 pm

Ken

I realize that Dan H is not personally in favor of slavery. And in answer to txsir, I don’t think it is immoral to ask if it could have been ended without violence. I just think that to ask the question in those terms is to view it in a utilitarian way, not a libertarian way.

Greg G October 27, 2011 at 9:54 pm

Jon

I agree that it is a perversion of the principle. And I expect that everyone on this blog will agree with that. But it still seems odd to me to call Lincoln the tyrant while thinking it would have been more consistent with libertarian principles to continue to enslave people to avoid war. I understand the argument but I don’t see how it is a libertarian argument. It seems to me to be a utilitarian argument.

And I still think you need to think about how long you would have been willing to be enslaved to avoid the tyranny of Lincoln described in Chucklehead’s link.

Nikolai Luzhin, Eastern Promises October 27, 2011 at 10:23 pm

Greg G

You don’t get it. This blog, Libertarians, the Tea Party, Conservatives, Rush followers, the GOP, none of it is honest. It is all code for The Cause. The common connection between everyone who blogs “Libertarian” here is that they want to roll the clock bag to Charleston, South Carolina, December 31, 1860

They come right out and say it, Lincoln, our greatest President, was a tyrant. NO ONE CALLS THE WRITER A TROLL OR WANTS TO SILENCE THE EXPRESSION IN ANY WAY

Email the bloggers and ask them to ban the writer. They won’t even respond, for s/he is a fellow traveler for The Cause

Methinks1776 October 27, 2011 at 10:41 pm

“NO ONE CALLS THE WRITER A TROLL OR WANTS TO SILENCE THE EXPRESSION IN ANY WAY”

Speak up. I can’t hear you.

Jon October 28, 2011 at 10:12 am

Greg, you do pose a great moral question: is it unethical to allow a sin (such as slavery) to continue and run its natural course, or is it better to use another sin (war) to fix the issue?

In other words, how long is too long?

I want to give you a good answer to this question, but I’m going to have to meditate on it and get back to you.

As for the tyrant Lincoln thing: the TL;DR answer is this: during the War (not before), Lincoln suspended several rights allowed in the Constitution, including habeus corpus and installed martial law in Washington DC. There were also insistence of the army used to break up peaceful anti-war protests. Personally, I am hesitant to call Lincoln a tyrant, but that is where the argument comes from.

Nikolai Luzhin, Eastern Promises October 27, 2011 at 10:33 pm

bull shit. Don H. is a racist at best, who has wet dreams of owing slaves and would piss on the grave of the tyrant Lincoln if he could read a map and get to Springfield, IL

Methinks1776 October 27, 2011 at 10:40 pm

Oh he has dreams of “owing slaves”, does he? Do tell, you giant cesspool of nonsense.

Nikolai Luzhin, Eastern Promises October 27, 2011 at 10:45 pm

Greg G

You are as wacky as the rest. There is no debating about what it took to end slavery. The South could have surrendered any time it wanted to end slavery. The Clause preferred to die so that people could own slaves.

People around here talk about the evils of government. The Confederacy was the most evil gov’t in the History of Man until out shined by Hilter and Stalin.

Methinks1776 October 27, 2011 at 10:55 pm

Now, by “The Clause” are you referring to Santa?

Greg G October 27, 2011 at 11:23 pm

Just checking? Is there no one else on this entire blog that wants to challenge the idea that Lincoln was a tyrant? Is that really the consensus here?

Greg G October 28, 2011 at 6:57 am

txsir

Slaveowners got “from there to a defense of slavery” simply by defining slaves as not being persons with any rights the white man was bound to respect. Where is my cookie?

Greg G October 28, 2011 at 7:56 am

By the way, that same logic (slavery would have gone away on its’ own without a war) could be used to support the Tory position in the American Revolution. After all the British did eventually free their other colonies peacefully in most cases. And the oppression of high taxation wasn’t quite as bad as being literally kept in chains.

So do you guys who think fighting to end slavery was a bad idea also think that fighting for American independence was a bad idea?????

Greg G October 28, 2011 at 9:14 am

Awkward silence here.

Methinks1776 October 28, 2011 at 9:52 am

yeah. I guess txslr got sick of you and your inane proclamations.

Greg G October 28, 2011 at 10:04 am

Isn’t that convenient?

Jon October 28, 2011 at 10:13 am

Greg, you do pose a great moral question: is it unethical to allow a sin (such as slavery) to continue and run its natural course, or is it better to use another sin (war) to fix the issue?

In other words, how long is too long?

I want to give you a good answer to this question, but I’m going to have to meditate on it and get back to you.

As for the tyrant Lincoln thing: the TL;DR answer is this: during the War (not before), Lincoln suspended several rights allowed in the Constitution, including habeus corpus and installed martial law in Washington DC. There were also insistence of the army used to break up peaceful anti-war protests. Personally, I am hesitant to call Lincoln a tyrant, but that is where the argument comes from.

txslr October 28, 2011 at 11:12 am

Sorry Charlie. No cookie for you. First of all, it is not generally acceptable in normal discourse to redefine terms to make your argument. Or perhaps I should simply give you your cookie, except that I define cookie as a swift kick in the shin – too bad for you!

Secondly, the argument made by the slaveholders was that their slaves were not capable of thriving as free citizens and so it was better for them to live under the control of superior decision makers – the class of slave owners. The libertarian position is that all men have a natural right to the fruits of their own labor. Nothing in there about “all men who are smart enough, according to my lights” having a natural right.

So the slave owners’ position was that, when people are not judged capable of making good decisions on their own it makes sense for the government to sanction removal of their liberties so that they may be guided or controlled – ultimately through the application of the government’s monopoly on the initiation of organized violence – for their own good.

That, my friend, is not libertarian. Unless, of course, you decide to define Elizabeth Warren as libertarian.

Greg G October 28, 2011 at 11:17 am

txsir

I realize that slaveowners did indeed make the argument that you describe. Are you denying that they also claimed that they had a property right to own slaves? I want a real cookie.

Methinks1776 October 28, 2011 at 11:37 am

txslr: Secondly, the argument made by the slaveholders was that their slaves were not capable of thriving as free citizens and so it was better for them to live under the control of superior decision makers – the class of slave owners.

txslr:So the slave owners’ position was that, when people are not judged capable of making good decisions on their own it makes sense for the government to sanction removal of their liberties so that they may be guided or controlled – ultimately through the application of the government’s monopoly on the initiation of organized violence – for their own good.

Exactly like modern-day American “liberals”. No wonder they’re so desperate to smear.

txslr October 28, 2011 at 12:05 pm

“Are you denying that they also claimed that they had a property right to own slaves?”

Certainly not. But property rights are not exclusively the philosophy of libertarians. I read this morning of an OWS person complaining that someone had stolen her laptop – HER laptop. She believes in property rights, ergo she is a libertarian? In the USSR you could be arrested for property crimes, so the communists were libertarians?

Spot the fallacy:

Libertarians believe in property rights.
Joe believes in property rights.
Therefore, Joe is a libertarian.

BTW, I define a REAL cookie as TWO swift kicks in the shin.

Ken October 28, 2011 at 1:45 pm

Greg G,

You did not claim that Dan H was personally in favor of slavery. You claimed “that the argument in favor of slavery was a libertarian one”, which of course is a false one. You cite Dan H’s comment, where he describes a peaceful way to have ended slavery, somehow, as proof that the argument favoring slavery is a libertarian one.

Libertarianism is about liberty. Slavery is about eliminating a person’s freedom. In other words slavery and the polar opposite of libertarianism.

In short, your comment was slanderous. It was just a bald faced lie.

Regards,
Ken

Greg G October 28, 2011 at 5:21 pm

I know that no one on this blog believes that slavery is compatible with libertarianism. I know that everyone here believes that the southern slaveowners were no true libertarians.

My point is that self identified libertarians come in every variety. There are right libertarians, left libertarians, libertarians who support abortion, libertarians who oppose abortion, libertarians who think this is a Christian country, libertarians who do not think of this as a “Christian” country etc. Even on this blog I’ll bet we couldn’t explore the specifics of which taxes and services and regulations are compatible with libertarianism for long at all before the broad consensus about how much you all hate government would shatter into bickering over where tyranny begins.

Regardless of how you see them, slaveowners viewed themselves first and foremost as fighting for their own liberty which they saw as including the “right ” to own slaves. The fact that they also made the lame argument that slavery was good for the slaves does not change that.

Methinks1776 October 28, 2011 at 5:29 pm

I know that no one on this blog believes that slavery is compatible with libertarianism.

Yeah. You’ll also find nobody on this blog believes in the Easter Bunny either. What can I say, Greg G? We’re just a pack of heretics.

And, of course, a “libertarian” has any combination of characteristics most convenient for your narrative. Keep dreaming, Greg. Never let silly old reality or inconvenient logic stand in the way of nurturing your delusions! You just keep torturing the data until you confirm your bias, man!

Peace out.

a_murricun October 27, 2011 at 9:56 am

Rearranging the pie (existing wealth) creates no wealth. Only enlarging the pie (adding to existing wealth) creates wealth.

muirgeo October 27, 2011 at 10:12 am

The audit of the fed shows the TARP was just the tip of the iceberg with $16 trillion more free loans going out since from the fed to the big banks while individual homeowners get nothing… because that would be socialism.

And now the Congressional Supercommittee is meeting behind close doors day and night with paid lobbyist making sure their exempt from any cuts.

These are the reasons for OWS. They are more than legitimate and IMO when you denigrate them or put them down you are guilty of siding with the polical elite ruling class.

Slappy McFee October 27, 2011 at 10:59 am

In case you might pay attention this time, I will attempt clarify for you once again. The $16T from the Federal Reserve WAS Socialism.

It just wasn’t the Socialism that the OWS wanted. (but then again, it actually was the Socialism that OWS wanted, they just don’t have the critical thinking skills necessary to see that)

Fred October 27, 2011 at 12:11 pm

$16 trillion more free loans going out since from the fed to the big banks while individual homeowners get nothing

Clearly that is the fault of the big banks and their evil corporate masters, and not the fault of the fed or government policy.

These poor poor policy makers have no choice but to do what the lobbyists say. No choice at all. They don’t have enough power.

If only they had more power and more money at their disposal!

Then they could tell the lobbyists to pound sand!

Then they could take all those assets from the big banks and give them to the homeowners where they belong!

Then they could magically make all these debts go away, fix the economy, create jobs, and give everyone free unicorn semen to use as hair gel!

Power to the bureaucrats!

Darren October 27, 2011 at 5:45 pm

If only they had more power and more money at their disposal!

That’s the solution! Make all offices for life, then give each congressman a stipend of $1 billion each year to spend as they please. Voila! No more lobbyists. Congress really can tell those lobbyists to go pound sand. They can even pay them for it.

Jon October 27, 2011 at 2:20 pm

Anyone else think it’s ironic that the guy with a picture of the patriarch of one of America’s first political familial dynasties is lecturing about a ruling political elite?

brotio October 28, 2011 at 11:23 pm

Yes, but St Franklin of Roosevelt was a Righteous Ruler (HT: Yasafi Muirduck) who only interred those Americans of Japanese heritage for their own good, and only allowed those homesteaders to starve rather than let them eat the hogs he ordered slaughtered because you have to break a few eggs to make an omelet.

Anyway, it’s not like those Japs were Real Americans and deserved the same Constitutional rights as White Americans; or that those homesteaders were ever going to amount to anything. Don’t get the impression St Franklin idolized Joe Stalin and referred to him as Uncle Joe, or something.

Chucklehead October 27, 2011 at 10:26 am

The economy is not a pie, but a bakery.

Richard W. Fulmer October 27, 2011 at 10:47 am

Very nicely put!

Methinks1776 October 27, 2011 at 11:20 am

ooooh. Nice!

Don Boudreaux October 27, 2011 at 11:27 am

Yes indeed!

Jon October 27, 2011 at 2:18 pm

That has got to be one of the best statements ever made here

Darren October 27, 2011 at 5:46 pm

Call OSHA!

Curious October 27, 2011 at 10:49 am

“…wealth that is created by rearranging the slices of the pie.”

No wealth is created when rearranging the slices of the pie.

Rick Hull October 27, 2011 at 10:54 am

Agreed. Depending on your perspective, though, the wealth “appears” (or disappears).

Russ Roberts October 27, 2011 at 2:47 pm

Agreed. I have re-worded the post accordingly.

Mark T October 27, 2011 at 11:42 am

In reaction to the statement that “taxpayers rushed in to bail out bankers” I posted the following comment.

Taxpayers did not rush in to bail out bankers. The TARP has been repaid by banks. Taxpayers paid nothing, and if any of them had, it likely would have been a cohort consisting mainly of the top 10% of income earners who benefit the most from the financial system anyway. Please stop repeating populist folk tales.

Whotrustedus October 27, 2011 at 11:58 am

The bank bailouts are a lot more than the direct payments of TARP. They include the buying of their toxic assets by the Federal Reserve, the ultra low rate funds available to them via the Federal Reserve discount window, the Federal Reserve quantitative easing, the indirect payments through AIG, etc. And while the TARP direct payments have been paid back, these institutions got access to capital that was not available to anyone else. All of that feels like a bailout to me.

Greg Webb October 27, 2011 at 12:23 pm

Those are bailouts. Also, I would add the stimulus programs, which bailed out state and local governments as well as political cronies pretending at business with politically-correct goods and services.

Chucklehead October 27, 2011 at 3:50 pm

In addition, since they received the new fed money first, it had higher value than the money used to pay back the loan. The loans were paid back from profits earned from the treasury spread between T-bills and Fed rate.

Curious October 27, 2011 at 12:59 pm

Mark, are you saying that the banks bailed themselves out?

Chucklehead October 27, 2011 at 11:56 am

“Likewise, Mohamed El-Erian, another pillar of the financial world who is the chief executive of Pimco, one of the world’s largest money managers, is sympathetic to aspects of the Occupy movement. He told me that the economic system needs to move toward “inclusive capitalism” and embrace broad-based job creation while curbing excessive inequality.”
Here comes the propaganda part of the argument. Spend two thirds of your argument with self evident truths, then when you have people following you, try to slowly turn that corner.
“too much inequality can harm the efficient operation of the economy.” In particular, he says, excessive inequality can have two perverse consequences…”
Using the force of the state being used for crony capitalism is wrong but we must use the force of the state to make outcomes more equal? I am not buying it.

Greg Webb October 27, 2011 at 12:52 pm

Mr. El-Erian can immediately begin helping to reduce inequality by giving his savings and a large portion of his annual income to charitable organizations. His does not need to wait for government. Watch what they do, and don’t listen to what they say. For actions talk and bullshit walks. It appears Mr. El-Erain is walking.

Methinks1776 October 27, 2011 at 1:01 pm

Did you say El-Erian is a pillar and the CEO of one of the largest rent seekers? That’s all I need to know. Whatever he said. Sign me up!

Methinks1776 October 27, 2011 at 1:07 pm

He told me that the economic system needs to move toward “inclusive capitalism” and embrace broad-based job creation while curbing excessive inequality.”

I don’t know what “inclusive capitalism” is, but it sounds warm and fuzzy and I like warm and fuzzy things. The average reader will read into it whatever they read into “hope ‘n change” in 2008.

The whole job creation with curbs on inequality is awesome (especially now that El-Erian, clearly the new Pimp of Pimco, is already extremely wealthy). So, the deal is you take all the risks and put in all the work to build a company which creates jobs and congresscritters will decide how much of the wealth you create you get to keep in order to make sure you don’t make significantly more than the people who were just sitting on their hands waiting to see if you’d create a job for them. Sounds like a great deal. Where so I sign up?

Chucklehead October 27, 2011 at 12:23 pm

From the comments:
“Looking down the road, our country is headed for a clash of systems – a Capitalistic system and a Socialistic system. What we must strive to create is an entirely new system that utilizes the best of each of these two existing systems, thus avoiding any disastrous clash.
The essential elements that must be considered in this inevitable process is first the total recognition and acceptance of the basic concept of the Common Good. The second is the acceptance of the absolute need for social and economic justice for the members of our society – individually and as a whole.”
What could possibly go wrong? A political system determining what is the common good, and what is social and economic justice? To me, the results of free exchange IS economic justice, but I expect to others it involves dollar signs. $$$.

Darren October 27, 2011 at 5:50 pm

What we must strive to create is an entirely new system that utilizes the best of each of these two existing systems, thus avoiding any disastrous clash.

Ah. A kind of like a ‘third way’.

Methinks1776 October 27, 2011 at 1:46 pm

Peter Schiff visits OWS in Zucotti Park. Good stuff.

http://www.youtube.com/watch?v=UGL-Ex1CD1c&feature=player_embedded#!

Chucklehead October 27, 2011 at 2:34 pm

That is Must See Reason TV

Greg Webb October 27, 2011 at 3:36 pm

Peter Schiff does a great job! The interviews are interesting to say the least.

muirgeo October 28, 2011 at 2:07 am

Yeah at 1/4th the way through he says the 50′s were so successful because we had lower taxes…

muirgeo October 28, 2011 at 2:17 am

He lied at 3/5 ths of the way when e said Warren Buffet’s B-H paid 35% taxes on its profits.

I give him lots of credit for doing that but I’m not sure how selective his editing is. I’d like to see him discuss things with some one who is a little better informed than those on the video.

Methinks1776 October 28, 2011 at 7:33 am

You may have noticed he was talking to Barry’s (Obama’s) Kids in Zucotti Park. That’s as informed as they get.

txslr October 27, 2011 at 2:17 pm

Frankly, I am doubtful about these arguments that bankers sat around thinking “Let’s take huge risks! We’ll be bailed out by the government!” Maybe, but I don’t think so.

The problem, it seems to me, is that government guaranteeing the depositors removes the critical role lenders play in monitoring and controlling the risk activities of banks.

Equity is a call option on the assets of the firm, whose value (as in all options) increases with the volatility on the assets. In a normal firm the debt-holders limit through bond covenents and access to debt markets the levels of risk the firm can take on in an attempt to increase shareholder value.

If you guarantee that the debtholders will get paid, they don’t bother to monitor and limit. In time the management will be rewarded by the shareholders for increasing the risk of the firm, which shifts business risk onto the guarantor – the U.S. government and the taxpayers. Management will, indeed must, ramp up the risk to maintain competitiveness in the equity markets. Sooner or later the whole thing must collapse because option value increases monotonically in volatility.

The initial problem was not some sort of criminal enterprise between bank managers and government, it was the government acting to protect depositors and to stem bank liquity crises, which is to say, bank runs.

Jon October 27, 2011 at 4:50 pm

Txslr,

I think you are correct in that bankers did not have government bailouts in the front of their minds, but I do think it may have been in some back corner of their minds, subconsciousness, if you will.

txslr October 27, 2011 at 5:08 pm

Maybe so. It’s hard to prove either way. But it isn’t really necessary for bankers to have thought about bailout to explain the problem in any event. If the government decided to guarantee the debt of doodad manufacturers you would expect to to see the same phenomenon. Doodad makers who levered up would get higher equity returns, which would result in pressure to follow their lead. Same thing for riskier asset investments. To the extent that they all found themselves ramping up risks in similar ways (which, since they are all doodad makers, they very well might) they would all become subject to the same set of risks, which would bring them all to their knees at around the same time.

Nothing new here – think S&L crisis. The reason the government guarantees the debt of financial institutions like banks and S&L’s and not doodad makers is that financials are subject to a positive feedback issue – as long as no one runs to the bank to get their money out it is in everyone’s interest to do the same. Once a few people start pulling their deposits, though, it suddenly switches. Now it is in everyone’s interest to get to the bank soonest and get their money out, which means that the bank fails.

The government tried to deal with the problem by guaranteeing deposits, which has just created a different kind of mess.

Jon October 27, 2011 at 5:11 pm

Right, I agree with you. I’m just saying that perverted incentives play on us whether we realize it or not.

Insurance, for example. I don’t consciencly think “I have car insurance, so I’ll drive more reckless.” But I bet I do.

Nikolai Luzhin, Eastern Promises October 27, 2011 at 8:07 pm

“deposit insurance” is absolutely essential to commerce, but it need not be of private bank deposits.

deposit insurance for banks, credit unions, thrifts is a huge windfall, the value of which is given away by taxpayers.

people desiring insured accounts should be able to deposit funds with the Fed (and draw on them) directly.

such deposits would bear little or nominal interest

txslr October 27, 2011 at 8:29 pm

Funny, but it seems like there was commerce prior to deposit insurance.

Nikolai Luzhin, Eastern Promises October 27, 2011 at 8:08 pm

lenders play in monitoring and controlling the risk activities of banks

this would be an impossible task for depositors and horribly inefficient

txslr October 27, 2011 at 8:32 pm

Nonsense. That’s the way it works in every other industry. The government didn’t step in because monitoring was “inefficient”. It stepped in to stop bank runs.

And it’s not like the government has done a bang-up job of monitoring banks either.

Nikolai Luzhin, Eastern Promises October 27, 2011 at 10:50 pm

txsir

writes, Nonsense. That’s the way it works in every other industry. The government didn’t step in because monitoring was “inefficient”. It stepped in to stop bank runs.

1) banks runs happen because people cannot look at the banks’ records and tell what they mean. Banks used to publish statements. There is even one classic Depression example of a small bank that published every loan and stopped a run, but obviously that is very inefficient.

you don’t have to monitor ATT’s books to buy telephone service from ATT.

boy are you dense.

txslr October 28, 2011 at 10:58 am

Buying telephone service from ATT is not lending ATT money. If I buy phone service from ATT and they go broke I take my phone and go to Verizon. If I loan money to ATT and they go broke I lose my money.

Apparently what you know about finance could be engraved on the head of a pin with a chisel.

Ralph Lucas October 27, 2011 at 5:12 pm

There is a great analysis, with the same conclusion but some interesting suggestions for remedies, from Andrew Haldane of The Bank of England here: http://www.bankofengland.co.uk/publications/speeches/2011/speech525.pdf

vidyohs October 27, 2011 at 9:15 pm

“The system teeters, and then the taxpayer rushes in to bail bankers out. Where’s the accountability?”

I didn’t bother reading the comments. I just wanted to ask when the taxpayers rushed in to bail bankers out?

I am sorry but that is bullshit.

Vuk October 28, 2011 at 6:50 pm

The taxpayers didn’t rush to save the bankers, those who they voted for did this for them.
The agents (politicians) are representatives of the principals (voters) and, in a democratic system, they do what they believe the principals want or what the principals should want (for their own good to coin the typical paternalistic argument)

Commission Escape Review October 30, 2011 at 12:49 pm

Capitalism on its very nature is actually good but if handled by the wrong people it is the worst.. It has already paid off and i hope that everybody learns something from that.

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